Documentof The World Bank FOR OFFICIAL USEONLY ReportNo: 222CREDIT INTHEAMOUNT OFSDR32MILLION (US$47 M L L I O NEQUIVALENT) TO THE REPUBLIC OF HONDURAS FOR A RURALINFRASTRUCTUREPROJECT June 6,2005 Finance, Private Sector and Infrastructure Department Country Management Unit for Central America Latin America and Caribbean Region This document has a restricted distribution and may be used by re performance of their official duties. Its contents may not otherwise be dis Bank authorization. CURRENCY EQUIVALENTS (ExchangeRate EffectiveApril 29,2005) Currency Unit = Lempira 18.83Lempiras = US$1 US$1.51209 = SDR1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AMHON Honduran Association of Municipalities CABEI Central American Bank for Economic Integration CAS Country AssistanceStrategy CDD Community Driven Development CEA Cost EffectivenessAnalysis CNE Nacional Energy Commision (ComisidnNacional de Energia) CONASA NationalCouncil for Water and Sanitation (ConsejoNacional deAgua y Saneamiento) CRA RegionalEnvironmental Council (ConsejoRegional Ambiental), mancomunidadinSanta Barbara) DGC GeneralRoads Directorate DRA DemandResponsiveApproach EA Environmental Assessment EIRR Economic Internal Rateof Return ENEE NationalPower Company (EmpresaNacional de Energia Electrica) ERSAPS Regulatory Agency for Water and Sanitation Services (Ente Regulador de Sewicios de Agua Potabley Saneamiento) FHIS Honduran Social InvestmentFund FOSODE Social ElectrificationFund , GAUREE Autonomous Generation and Rational Use of Electrical Energy (Generacidn Auto'noma y Us0 Racional de la Energia Elkctrica) GEF Global EnvironmentalFacility GOH Governmentof Honduras IBRD InternationalBank for Reconstructionand Development IDA InternationalDevelopment Association IDB Inter-American Development Plan IHAH Honduran Institute of History and Anthropology IDB Inter-American Development Bank ILO InternationalLabor Organization INE National StatisticsInstitute JICA Japan International CooperationAgency M&E Monitoring andEvaluation MCN Municipal Core Network MEs Community-Based Micro-Enterprises MSE Micro and Small Enterprise Vice President: Pamela Cox Country Managermirector: Jane Armitage Sector Manager: Makhtar Diop Task Team Leader: Dana Rysankova FOROFFICIAL USEONLY MOI Labor-Intensive Methods (Manode Obra Intensiva) NGO Non-Governmental Organization NPV Net PresentValue OES Social Electrification Office (Ofcina de Electrifcacidn Social) O&M Operations and Maintenance PCU Project Coordination Unit PEDM Municipal Development Strategic Plan (Plan Estrate'gico deDesarrollo Municipal) PIR Proyecto de Infraestructura Rural - Rural Infrastructure Project PRODDEL National Program for Decentralizationand Local Development PRSP Poverty Reduction Strategy Paper PV Photovoltaic QAT Quality Assurance Team RED Road Economic Decision Model RIAP Rural Infrastructure Action Plan SANAA National Water and Sewerage Utility SERNA Ministry of Natural Resourcesand the Environment SGJ Ministry of Governance and Justice SOPTRAVI Ministry of Public Works, Transport and Housing TA Technical Assistance TAS Water and Sanitation Technicians (Te'cnicosdeAgua y Saneamiento) TTC Travel Time Costs TOM Operationa and Maintenance Technicians (TBcnicos de Operacidn y Mantenimiento) UMA Municipal Environmental Unit (UnidadMunicipal Ambiental) USAID United States Agency for International Development UTI Inter-Municipal Technical Units UTM voc Municipal Technical Unit Vehicle Operating Costs WSP wss Water and Sanitation Program Water and Sanitation Sector WTP Willingness to Pay This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. HONDURAS HNRURALINFRASTRUCTUREPROJECT PROJECT APPRAISAL DOCUMENT LATINAMERICA AND CARIBBEAN LCSFT Date: June 6,2005 Team Leader: DanaRysankova Country Director: Jane Armitage Sectors: Roads andhighways (40%);General SectorManagermirector: MakhtarDiop water, sanitation andflood protection sector Project ID: PO86775 (30%);Power (30%) Lending Instrument: Specific InvestmentLoan Themes: Rural services and infrastructure (P);Infrastructure services for private sector development (S);Decentralization (S) Environmental screeningcategory: Partial Assessment Safeguardscreening category: Limited impact Global Supplemental ID: PO90113 Team Leader: Dana Rysankova Lending Instrument: Specific InvestmentLoan Sectors: Renewable energy (100%) FocalArea: C-Climatechange Themes: Rural services andinfrastructure SupplementFully Blended?: No (P);Infrastructure servicesfor private sector development (S) For Loans/Credits/Others: Total Bank financing (US$m.): 47.00 BORROWER/RECIPIENT 8.OO 0.00 8.00 INTERNATIONALDEVELOPMENT 37.70 9.30 47.00 Borrower: REPUBLIC OF HONDURAS Honduras Responsible Agency: Fondo Hondureno de Inversion Social ColoniaLomas de Toncontin i Comayaguela Tegucigalpa Honduras Tel: 234-5231Fax: 234-5255 Project implementation period: Start July 8,2005 End: December 31,2009 Expected effectiveness date: December 30, 2005 Expected closing date: June 30,2010 Does the project depart from the CAS incontent or other significant respects? Ref. PAD A.3 [ No Does the project require any exceptions fromBank policies? Ref. PAD 0.7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risksrated "substantial" or "high"? Ref. PAD C.5 [XIYes [ ]No Does the project meet the Regional criteria for readiness for implementation? Ref. PAD D.7 [XIYes [ ] N o Project development objective Ref. PAD B.2, TechnicalAnnex 3 The project development objectives are (i) improve access, quality and sustainability of to infrastructure services (roads, water & sanitation, and electricity) for the ruralpoor inHonduras; and (ii) develop capacities and enabling environment for locally-drivenservice provisionand to planning. Global Environment objective Ref. PAD B.2, TechnicalAnnex 3 NIA Project description [one-sentence summary of each component] Ref. PAD B.3.a, Technical Annex 4 The project has four components, covering all stages of the locally-drivenprocess of infrastructure services provision: (i)planning and prioritization; (ii)infrastructure service delivery; (iv) localcapacity buildingand institutional strengthening; and (v) monitoringand evaluation. Component 1- Support participatory local planningfor integrated infrastructure service delivery (US$l.3million) This component will finance the costs of consultants, workshops, and studies to (i) rural prepare infrastructure diagnostics ineach mancomunidad; (ii) expand and complement the existing local development plans with infrastructure projects through a participatory process; (iii) establish mechanismsandproceduresfor approaching the infrastructure issues inan integrated manner 11 .. among the sectors and localities; and (iv) provide follow up support and monitoring of the overall planningprocess ineachmancomunidad. Component 2 - Znfrastructure ServiceDelivery ( ~ $ 4 0 . 2million) ~ The project will finance technical designs, feasibility studies, civil works, goods, equipment, andservices relatedto the localprovisionof ruralinfrastructure, including: a) Upgradingof ruralroadnetworks under the municipalresponsibility and establishment of sustainablemaintenance arrangements; b) Rehabilitation, expansion or construction of new water and sanitation systems and facilities inruralcommunities; c) Electrificationof ruralcommunities through: (i) extension of the national power grid; (ii) offgrid systems, usinglocalrenewable energy resources; and (iii) establishment of a National Solar PV Market Program; and d) Strengthening of localinfrastructure service providers. Component 3 - Local Capacity Building and Policy Development TA (US$3.5 million) This component will finance consulting services, training, goods andother TA to enhancethe capacity of implementing agencies andkey stakeholders on the local level (UTIs and communities) and the central level (FHIS and sectoral agencies). The main objective of this component is to enhance local capacity to plan and implement decentralized, integrated rural infrastructure programs, usingthe spatial (territorial) approach, contributingto the decentralization and local capacity buildingobjectives of the Government. Component4 - Project management, monitoring and evaluation (US$2 million) The project will be coordinated by FHIS.The project will finance FHIS's project-related staff, operational costs related to management and coordination activities, and the M&E system. Which safeguardpolicies are triggered, if any? Ref. PAD 0.6, TechnicalAnnex 10 - Environmental Assessment - InvoluntaryResettlement - Indigenous Peoples - CulturalProperty Significant, non-standardconditions, if any, for: Ref. PAD C.7 Boardpresentation: None. Loadcredit effectiveness: The following are conditions for Credit effectiveness: (a) FHISSubsidiary Agreement hasbeen executedonbehalf of the Borrower andFHIS; (b) FHIShas adoptedthe Operational Manual interms and scope acceptableto the Association; iii (c) Participation Agreements havebeen executedon behalf of FHISand eachof the Participating Sector Agencies. Covenants applicable to project implementation: The conditions of disbursements for RIAP's subprojects for each mancomunidad are the following: (a) FrameworkAgreements betweenFHISandparticipating mancomunidades are signed, (b) UTIsof mancomunidadesare adequately staffed, ' The condition of disbursementfor the Solar PV Market Program sub-component: Effectiveness (c) UTIsfinancial managementarrangementsare satisfactory andoperational. of GEFco-financing. ~ i v HONDURAS RURAL INFRASTRUCTUREPROJECT CONTENTS A.STRATEGIC CONTEXT AND RATIONALE .................................................................. 1 1 Countryandsector issues . ..................................................................................................... 1 2 . Rationalefor Bank involvement ........................................................................................... 3 3 3 B PROJECT DESCRIPTION ..Higher levelobjectivesto which the project contributes ................................................... .................................................................................................. 4 1 Lendinginstrument . ............................................................................................................... 4 2.Proposedproject developmentobjectiveandkey indicators ............................................ 4 3.Project components ............................................................................................................... 5 4.Lessonslearnedandreflectedinthe projectdesign ........................................................... 6 5.Alternativesconsideredandreasonsfor rejection ............................................................. 7 C.IMPLEMENTATION ........................................................................................................... 8 1.Partnershiparrangements .................................................................................................... 8 2.Institutionalandimplementationarrangements ................................................................ 8 3.Monitoringandevaluationof outcomes/results ................................................................ 10 4.Sustainability ........................................................................................................................ 10 5.Criticalrisks andpossiblecontroversialaspects .............................................................. 12 6.Credit conditions andcovenants ........................................................................................ 13 D APPRAISAL SUMMARY . .................................................................................................. 14 1.Economicandfinancial analyses ........................................................................................ 14 2. Technical............................................................................................................................... 14 3.Fiduciary ............................................................................................................................... 14 V 4. Social ..................................................................................................................................... 15 5. Environment ......................................................................................................................... 16 6. Safeguard Policies ................................................................................................................ 16 7. Policy exceptionsand readiness .......................................................................................... 17 Annex 1:Country and Sector or ProgramBackground .......................................................... 18 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ..................32 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ..................33 Annex 3: Results Framework and Monitoring ......................................................................... 35 Annex 4: Detailed Project Description ...................................................................................... 41 Annex 5: Project Costs ................................................................................................................ 54 Annex 6: Implementation Arrangements .................................................................................. 55 Annex 7: FinancialManagement and DisbursementArrangements ...................................... 69 Annex 8: Procurement ................................................................................................................ 75 Annex 9: Economic Analysis ....................................................................................................... 80 Annex 10: Safeguard Policy Issues ............................................................................................. 91 Annex 11:Project Preparation and Supervision .................................................................... 108 Annex 12: Documents inthe Project File ................................................................................ 110 Annex 13: Statement of Loans and Credits ............................................................................. 111 Annex 14: Country at a Glance ................................................................................................ 112 MAP@) Mapof Honduras-HON33418 vi A. STRATEGIC CONTEXT AND RATIONALE 1. Countryandsector issues Honduras i s the second largest country inCentral America with a territorial extension of 112,492 square kilometers and apopulation of about 7 million. With a gross national income per capita of US$1,013 in 2003, it i s the third poorest country in Latin America. An estimated 70.5 percent of the populationlive below the poverty line, while 52 percent live inextreme poverty. Poverty: Poverty and inequality are widespread andreflect the gap between city and countryside. Roughly one-half of the population resides in rural areas, where the incidence of poverty i s almost 77 percent, versus 56 percent inurban areas. Extremepoverty, while declining nationally, has actually increased in rural areas by about 10percent (although this i s mainly attributable to the devastating effects of Hurricane Mitch in 1998). Inequality, as measured by income per capita, is also high and further reflects the rural-urban divide. Duringthe last decade, inequality grew by 3 percent, with rural areas accounting for the entire increase. These facts underscore the urgent needto develop programs targetedat improvement of the rural areas. Poverty Reduction Strategy: The Government of Honduras completed its Poverty Reduction Strategy Paper (PRSP) in October 2001. The strategy i s structured around six pillars and three cross-cutting themes (see below). Table 1:PRSPpillars Decentralizationprocess: As in many other developing countries, the Honduran Government recognizes the limits of the centrally driven service delivery model. The recent drive towards decentralization started in 1990 with a municipal law that conferred local service delivery responsibilities and fiscal autonomy to the country's 298 local governments, and established a fiscal transfer of 5 percent of the annual budget to the municipalities. The trend towards decentralization was further reinforced by the PRSP, which underscored the role of the local government inits poverty reduction strategy. Rural infrastructure: Infrastructure services are one of the key areas to be delegated to municipalities. Improving access to infrastructure services has been one of the Government's priorities during the past decade, but the steady progress was temporarily reversed by Hurricane Mitch (especially in the water and sanitation and road sectors). Still, considerable progress has been achieved in the past 15 years, with national coverage reaching 83 percent for water, 78 percent for sanitation and 68 percent for electricity. Similar progress has been achieved in the 1 The gap i s especially striking for the electricity sector- Urban-rural gap(access) only 38 percent of the rural population has access to loo 8 Uiban electricity, compared to 95 percent in urban areas. In addition, available information from surveys and sector 6o studies point to quality and sustainability issues, 40 particularly in past water & sanitation and road 20 investments. The absence or low quality of these 0 Water Sanitation Electricity infrastructure services in rural areas seriously constrains Access: In all sectors, access becomes more difficult as more distant, isolated and dispersed communities needto be connected. These are the most difficult users to serve, as they represent a twin challenge of low capacity to pay and high service provision costs due to remoteness and dispersion. In many cases, this will require a use of more adequate technologies and service provision businessmodels. Quality and sustainability: Past investments have often not dedicated sufficient attention to quality of the service and its sustainability. As a result, for example, most of the rural water systems require urgent rehabilitation. The Government's recent reforms at transferring more resources and responsibilities to the local level aspire to create better incentives for local governments to pay adequate attention to sustainability. It is necessary, however, that these resources andresponsibilities be matchedwith adequatecapacity. Local caoacitv: Rural infrastructure service delivery (except for rural roads) has traditionally been the responsibility of the central government. In some cases (such as FHIS), communities were involved inthe projects, but there has been less interaction with the local governments. As a result, there i s a lack of technical capacity at the local level for planning, design, implementation and supervision of ruralinfrastructure projects. Coordination and synergies: Each of the three infrastructure sectors has its own particular institutional framework for rural investments, with no coordination mechanism. The focus on local integrated service provision offers an opportunity to bridge these different approaches, and improve development impact inexploiting synergies from ajoint delivery of several services. 'There is growing evidencethat infrastructure is one of the key determining factors for the economic growth of rural areas. For example, the Bank's recentPro-Poor Growth Study (2005),analyzing experiences of 14countries inthe pastdecade demonstratesthat insufficient access for poorer householdsto infrastructure services (particularly electricity and roads) hasconstrainedthe ability of rural householdsto tap into country-wide higher growth rates, particularly innonagricultural sectors. The experienceof Bangladeshand Vietnam specifically shows how unequal access to infrastructure and markets has concentratedthis income growth amongrural householdsin well-connected areas. 2 Aware of the above issues and limitations, the Government is interested in finding innovative approaches to tackling rural infrastructure service delivery in an environment of ongoing decentralization. 2. Rationale for Bank involvement The proposed Rural Infrastructure Project aspires to develop an integrated approach to address the abovementioned issues. Its key features are (i) a multi-sector, spatial approach with the objective to maximize cross-sectoral synergies and development impact; (ii) focus on locally a driven planning and provision of infrastructure services, working with associations of municipalities (mancomunidades); (iii) attention to sustainable service delivery as opposed to infrastructure investments alone; (iv) the introduction of new service provisionmodels and pilots to increase access for the rural poor and enhance quality and sustainability; and (v) strong attention to localcapacity building. The combination of a sectoral approachwith abroader decentralization agendais quiteuniquein Honduras. It is, however, a promising mechanism to confront the complexity of infrastructure service delivery issues. The Bank is well suited to embark on this challenge, thanks to its combined experience with rural infrastructure projects, social investment funds, and decentralization. In addition, in the past few years the Bank has developed many innovative approaches to expanding access to quality infrastructure services to the poor, and applied multi- sectoral approaches (e.g. Bolivia Decentralized Infrastructure for Rural Transformation, Chile Infrastructure for Territorial Development Project) and learned valuable lessons, which are applied in this project. The project also benefits from experiences gained from a recent rural roads project financed by the Bank in Guatemala, working directly with mancomunidades. Finally, the project will benefit from synergies with a parallel, Bank-financed, urban integrated development project inHonduras (Barrio Ciudad). 3. Higher levelobjectives to which the project contributes The proposed project will support PRSP Pillar 2: Reducing Rural Poverty (fostering access to basic infrastructure services in poor rural areas) and the cross-cutting theme of Decentralization (building capacities of the local governments for local infrastructure service provision). The project will also directly contribute to Millennium Development Goal 7: Ensure environmental sustainability by halving the proportionof individuals without access to improved water sources by 2015. The project is consistent with the Country Assistance Strategy (CAS), discussed on June 24, 2003. The original project amount established in CAS was US$ 60 million. This amount would cover investment in approximately eight mancomunidudes. However, in the course of the project design, the Government and the Bank decided to adopt a phased approach, involving and strengthening mancomunidades in a gradual way, reflecting the relative institutionalcomplexity of the project and its novel features promoting decentralized delivery of ruralinfrastructure. On basis of institutional assessments done during the project design, it was decided that the project could absorb six mancomunidades,inwhich new delivery models will be developed and evaluated. The project amount was correspondingly reduced to US$ 47 million. Ifsuccessful, afollow up operation will beprepared, involvingadditional mancomunidades. The next CAS discussion, scheduledfor FY 06, will reflect this option. 3 B. PROJECT DESCRIPTION 1. Lendinginstrument Specific Investment Credit 2. Proposedproject developmentobjective and key indicators The project development objectives are (i) improve access, quality and sustainability of to infrastructure services (roads, water & sanitation, and electricity) for the rural poor inHonduras; and (ii) to develop capacities and enabling environment for locally-driven service provision and planning. Table 2 Key Indicators Access Localcapacity strengthening Kmof roadspassablethroughout the year under UTIsoperatingwith trained technical staff and sustainedmaintenance. adequatebudget. Percentof population ineach targeted Infrastructure works successfullyprocured and mancomunidadwith improved access to water and completedunder the supervision of UTI"s. sanitation (with cost recovery mechanisms inplace). Percentof users understandingand complying with Percentof population ineach targeted their obligations in water and electricity systems. mancomunidadwith electricity service, provided Numberof small scaleprivate serviceproviders with adequatequality and sustainability intarget operating satisfactorily. areas. In addition, the project's monitoring and evaluation (M&E) system will measure the progress towards achievement of final outcomes -- Living standard improvements (see Annex 3). The project will be developed in six mancomunidades (voluntary associations of municipalities), starting with CRA (in the department of Santa Barbara) and CHORTI (in Copin). Keeping in mind municipal fiscal constraints (counterpart funds and maintenance needs), the number of mancomunidades was chosen to balance the objectives o f (i) territorial equity (attempt to reach as many regions as possible); and; (ii)achieving a visible development impact in each mancomunidad. The first two mancomunidades were selectedbased on the combined criteria of poverty, human development index, economic development potential, infrastructure gaps and degree of institutionalcapacity. The same criteria will be used for the selection of the remaining four mancomunidades. Table 3 MancomunidadesCRA and CHORTI: Key Indicators: 4 The project's direct impact on these two muncomunidudes canbe summarized as follows: , Roads: Rehabilitating 420 kilometers of municipal core network would, improve access for about 200,000 people. Additional benefits would follow from smaller programs of spot improvement, secondarytranches, Kil6metro Municipal and the implementation of a ruralroadmaintenancemicroenterprisepilot. 0 Water & Sanitation: The project would provide water services of acceptable quality to about 6,800 householdsinthe two mancomunidades, including 4,700 who would receive improved services from existing deteriorated systems and 2,100 who would be supplied through new systems. Access to water with acceptable quality would improve from 62 percent to 67 percent (in the absence of the Project, access would decline to 53 percent, due to the deterioration of the systems) 0 Electricitv access: Connections to 4,500 new households would benefit directly over 22,000 persons. Indirect benefits would include the electrification of schools, health centers, community centers, productive uses etc. Access would grow from 33 percent to 38 percent. 3. Project components The project has four components, covering all stages of the locally-driven process of infrastructure services provision: (i) planning and prioritization; (ii)infrastructure service delivery; (iii) local capacity building and institutional strengthening; and (iv) monitoring and evaluation. Component 1 - Support participatory local planning for integrated infrastructure service delivery (US$1.3 million): This component will finance the costs of consultants, workshops, and studies to (i) prepare rural infrastructure diagnostics in each mancomunidud; (ii) and expand complement the existing local development plans with infrastructure projects through a participatory process; (iii)establish mechanisms and procedures for approaching the infrastructure issues in an integrated manner among the sectors and localities; and (iv) provide follow up support and monitoringof the overall planningprocessineach mancomunidud. Component 2 -Infrastructure Service Delivery (US$40.2 million): The project will finance technical designs, feasibility studies, civil works, goods, equipment, and services related to the local provision of rural infrastructure, including: a) Upgradingof rural road networks under the municipalresponsibility andestablishment of sustainablemaintenancearrangements; b) Rehabilitation, expansion or construction of new water and sanitation systems and facilities inrural communities; c) Electrificationof rural communities through: (i) extension of the national power grid; (ii) offgrid systems, using local renewable energy resources; and (iii) establishment of a National Solar PV Market Program; and d) Strengthening of Iocalinfrastructure service providers. Component 3 -Local Capacity Building and Policy Development TA (US$3.5 million): This component will finance consulting services, training, goods and other TA to enhance the capacity of implementing agencies and key stakeholders on the local level (UTIs and communities) and the central level (FHIS and sectoral agencies). The main objective of this component is to enhance local capacity to plan and implement decentralized, integrated rural 5 infrastructure programs, using the spatial (territorial) approach, contributing to the decentralization and local capacity buildingobjectives of the Government. Component4 -Project management,monitoring and evaluation (US$2 million) The project will be coordinated by FHIS. The project will finance FHIS's project-related staff, operational costs related to management and coordination activities, and the M&E system. 4. Lessons learned and reflected inthe project design The project will apply some innovative features based on the latest research findings and past experiencesinBank rural infrastructure projects: Multisectoral approach to infrastructure planning and delivery. There i s evidence that development impact rises significantly with a larger number of infrastructure services provided. For example, a recent study of Peru shows that the combined effect of access to two services (water and telephone in this case), leads to a 38 percent increase in rural household income, compared to the sum of individual effects of these two services, reaching only 11percent. In order to maximize development effect, therefore, joint service provision i s recommendable. Similar conclusions are being derived from a broader, asset-basedanalysis of rural development for H~nduras.~ Spatial (territorial) approachto local development. Figure 2: Local Development Framework Honduras, like many other developing countries, is moving toward the decentralization of public services, including infrastructure. As in many countries, these services traditionally were provided by a mixture o f (i) central sector agencies; (ii) local governments; and (iii)social investment funds under community driven development (CDD) principles, with limited interaction between the three approaches. The spatial approach aims at integrating these mechanismswithin acertain territory (mancomunidad in this case), spurring efficiencies in planning, provision and monitoring of rural infrastructure services. The project will draw on the Bank's recent work in this area, such as a Local Development Framework Paper4, which provides guidelines for better integration of the traditional service delivery methods within the spatial approach to support improved service provision, empowerment, governance and private sector growth. Enabling environment/ coordination. One of the challenges of decentralized service planning and provision i s how to establish effective linkages with the nation-wide sector planning and strategies. This i s especially important for some network industries, such as infrastructure. The project will facilitate interaction between the local and central government levels to ensure that EscobalandTorrero, 2004. The forthcoming Drivers of SustainableRural Growthand Poverty Reduction inCentral America (Honduras Case Study) advocatesthe "move from geographically untargetedinvestmentsin single assets to a more integratedand Feographicallybasedapproachof asset enhancement with proper complementarities". Linkingcommunity Empowerment, Decentralized Governance,and Public ServiceProvisionthrough aLocal DevelopmentFramework, 2005 6 the local development experiences feed into the sectoral policies and successful models can be replicated and scaled up at the national level. Inclusion of the localprivate sector in serviceprovision. The provision of basic services inrural areas through local communities or through municipalities has increased local ownership and capacity, but it has not always solved the basic problem of the lack of sustainability and poor service quality. This promotes a culture of dependency, tied up funds needed for system expansion in system rehabilitation and ultimately undermines full ownership by the communities, since they continue to call on outside assistance for rehabilitation. (This i s particularlythe case inthe water & sanitation sector.) There are a number of successful examples in which local private entrepreneurs were involved in the operation and maintenance of rural infrastructure systems. Local private entrepreneurs tend to have a stronger incentive to maintain and even expand systems and to collect tariffs, and have often proven highly imaginative in designingsolutions tailored to local realities. However, political leadership at the local level and some targeted technical assistance in contract management are essential to making such a new approach successful. Local capacity building. It has been acknowledged that the lack of local capacity i s one of the main risks for reforms involving a transfer of responsibilities for infrastructure provision to local levels. Efficient and sustainable provision of infrastructure, with adequate quality, i s often a task beyond the local capacity, and, without an appropriate TA, it may lead to: (i) delays in implementation; (ii) distortions in sub-project selections (avoiding more complex projects); (iii) higher costs: and/or (iv) quality and sustainability problems. Therefore, local capacity buildingi s one of the Project's key objectives andcomponents. 5. Alternatives considered and reasons for rejection Targeting individual municipalities rather than mancomunidades. The project considered targeting individual municipalities, but eventually the mancomunidades were selected as the key implementation partners, given that: 0 The mancomunidades constitute larger territorial units (as opposed to the individual municipalities), more suitable for territorial development approach for infrastructure service delivery; some of the infrastructure sectors, such as roads or electricity are network industries, andcan be delivered more efficiently in a larger territorial setting. 0 There i s an opportunity to create adequate capacity in the Inter-Municipal Technical Units (UTIs) for infrastructure service provision in a more efficient manner (it would not be feasible or economic to create the same capacity at each municipality). Increasing the number of sectors to be addressed by the project. Consideration was given to include irrigation and telecommunications but these options were soon abandoned. Despite some common features, each infrastructure sector has its own set of issues and different policy, institutional and regulatory frameworks. Lumpingthese sectors together inevitably increases the project's complexity. Therefore, in the case of Honduras, a decision was made to limit the intervention to a maximum of three sectors (electricity, water and sanitation androads). Even so, due to the fragmented structure for infrastructure planning in Honduras, this will require involvingeight agencies at the national level. Project coordinationand implementation options. The initial idea was to create separate project implementation units under each sector to be addressedby the project. This option was discarded 7 as it would not be conducive to a coordinated effort among the three sectors. The government decided to appoint FHIS as the overall project coordination agency, mainly becauseFHIS: (i) has experience with multi-sector projects; (ii) i s one of the Government's key agencies supporting the decentralization process; and (iii)has developed recent experiences of working with technical units of municipalities andmuncomunidudes. C. IMPLEMENTATION 1. Partnershiparrangements The Rural Infrastructure Project is closely coordinated with the Central American Bank for Economic Integration (CABEI), which i s providing parallel financing of about US$15 million. Inaddition, GEFco-financing (partial blend) of US$2.4 millionis sought. The Project i s coordinating closely with other donors working with FHIS (particularly KfW), those active in the three infrastructure sectors supported by the project (IDB, KfW, USAID, GTZ), and those active in the two selected mancomunidudes CRA and CHORTI (such as USAID, JICA and the Finnish Development Cooperation). The project also draws on the knowledge gathered through the Donor Roundtable on Water and Sanitation. Additional EU financing (Program GAUREE)of US$240,000 i s available for financing micro-hydro projects. 2. Institutionalandimplementationarrangements Implementationstructure The Project's implementation structure has five key building blocks: (i)FHIS; (ii) muncomunidudes; (iii)communities; (iv) infrastructure services providers; and (v) sectoral agencies. The project, in its majority, will be implemented by mancomunidudes under a close supervision of FHIS. Mancomunidades will be in charge of developing their Rural Infrastructure Action Plans (RIAPs), in which they will prioritize their sub-projects, and contracting out and supervising these sub-projects up to a certain ceiling (US$250,000 per sub-project). For this task, they will receive substantial TA from FHIS, sectoral agencies and specialized consultants. Mancomunidades will also contract infrastructure service providers to operate and maintain the constructed systems. Inmany cases, these operators will be local small and micro-enterprises or communities themselves, which will also require substantial training in technical, commercial andother relevant aspects of their enterprise. Sector agencies will accompany the project onboth strategic and implementation levels to ensure consistency of policies and approaches and to provide technical assistanceon sector specific issueswhere needed. FHIS is a social investment fund. Throughout the 199Os, FHIS has been the principal Government agency for financing small-scale civil works in the social sectors. In line with the Government's decentralization agenda, the role of FHIS has recently been changing, from the implementer to the facilitator of the local development projects, focusing on technical assistance to the local governments for the planningandprovision of services at the local level. FHISwill haveoverall responsibility for project implementation and coordinationat the national level. FHIS will sign Framework Agreements with participating muncomunidades, and will supervise muncomunidudes intwo key areas: 8 (i)development of Rural Infrastructure Action Plans (RIAPs), following guidelines inthe Operational Manual and those developed by the Ministry of Interior and Justice for municipal strategic development plans (PEDM); and (ii) procurement,implementationandsupervisionofsub-projects.Althoughthe design, sub-projects will be selected by mancomunidades, FHIS will also screen the projects to ensure that they meet minimum eligibility criteria, with the assistance of sectoral agencies, where needed. FHIS will provide TA to mancomunidades by contracting a consulting firm (or firms), individual consultants and sectoral agencies. Participation Agreements will be signed with the sectoral agencies, specifying their roles and responsibilities in the project, including for TA provision to mancomunidades and small infrastructure services providers. Mancomunidades: There are 298 municipalities in Honduras. Most of them are small (56 percent have populations of less than 10,000). To overcome the size constraint, many municipalities opted to form mancomunidades, which are voluntary associations of municipalities, with a separate legal entity and often a specific purpose (local development, environmental protection etc.) There are about 50 mancomunidades in Honduras, at different degrees of institutional development. The project will support six mancomunidades, starting with CRA (SantaBarbara) and Chorti (Copan). Mancomunidades will be in charge of the preparation of the Rural Infrastructure Investment Plans (RIAPs - see Annex 4, component 1 for details), in a participatory manner, following Operational Manual guidelines, and with technical assistance from FHIS. RIAPs will be based on the municipal strategic development plans (PEDM), which are long-term development plans (10-12 years) that all municipalities are already required to prepare, under the guidelines and supervision of the Ministry of Interior and Justice. Mancomunidades will also be responsible for decisions about service provision models (with corresponding guidance from FHIS and sectoral agencies) The technical units of the mancomunidades (UTIs) will be responsible for the execution of RIAPs, including procurement (up to their certified level -- US$250,000) and supervision and monitoring of the sub-projects. UTIs will also play an important role in providing TA to small scale infrastructure service providers and overseeing service quality and sustainability. Substantial TA will be available to UTIs from FHIS, sectoral agencies and specialized consultants. Communities: The communities will actively participate in all project stages: (i) planning and sub-project prioritization; (ii)selection of technologies and service provision standards and models; (iii) civil works; (iv) operation and maintenance of the community-owned smaller systems; and (v) monitoring and evaluation. Therefore, it i s necessary that the communities be well informed and trained to make educated choices and contribute effectively to the Project's impact and sustainability. Communities may be directly contracted for some smaller works, where justified under the Bank guidelines and complying with procedures in the Operational Manual. These works would include, for example, smaller water and sanitation systems (under US$50,000, following FHIS's successful experience), smaller and simple rural road rehabilitation works (also under US$50,000), and community microenterprises for rural road maintenance. Some community organizations or microenterprises will also operate water and sanitation andoffgrid electrification micro-gridsystems. 9 Infrastructure serviceproviders: With the exception of ENEE, most of the infrastructure service providers will be local and small (communities, NGOs, microenterprises, etc.). The project will provide technical assistance to these newly created service providers. Special attention will be paidto the development of new, more sustainable serviceprovisionmodels. Sectoral agencies: Sectoral agencies will be involved at two levels. At the strategic level, an advisory committee will be established, consisting of the Ministry of Presidency, the Ministry of Interior and Justice, AHMON (association of municipalities), and the sectoral agencies. In addition, at the operational level, the agencies will sign Participation Agreements with FHIS, in which their role and responsibilities will be specified. These responsibilities will vary across the sectors, reflecting different institutional arrangements, but, in general, will include: (i) coordination mechanisms ensuring consistent approaches and complementarities between the present project and the projects implemented directly by the sectoral entities; and (ii) technical assistance sectoral agencies will provide to FHIS, UTIs and small-scale infrastructure service providers for design, implementation and operation and maintenance of the infrastructure systems. The projects will finance consultants and goods needed to strengthen the sectoral agencies to enable them to fulfill effectively their roles established in the Participation Agreements. 3. Monitoringand evaluation of outcomes/results A monitoring andevaluation (M&E) systemwill be establishedto measure: (i) towards progress the achievement of project's physical outputs; (ii)progress towards the achievement of intermediary and final outcomes and impact; and (iii)compliance with the established procurement, financial management and social and environmental safeguards procedures, including an assessment of the extent and effectiveness of community participation in the sub- project selection, design and implementation. The M&E system will be managed by FHIS through its M&E unit. Implementation will rely on FHIS M&E specialists, strengthened by sectoral specialists in the participating sectoral agencies, and other experts as needed. To the extent possible, monitoring will be delegated to UTIs. The information will be analyzed and evaluated by FMS in coordination with sectoral agencies and mancomunidades and serve as an input for the examination of the implementation approaches and their fine-tuning. The impact evaluation will be carried out as far as possible jointly with other Bank-financed operations implemented by FHIS, in order to learn about common impacts as well as differences in outcomes. 4. Sustainability Sustainability i s a cornerstone of the overall project strategy to ensure the quality, continuity and reliability of the infrastructure services that will be put inplace. The extent to which the services are sustained depends on a number of factors, including: (i) financial viability; (ii)adequate service delivery models, including inparticular service provisionby the local private sector, (iii) technical design and service quality; (iv) social acceptance of the models; (v) local capacity; and (vi) enabling policy/regulatory/institutional frameworks. The project's design aims at addressing these issues. Proper attention to sustainability i s important, given the legacy of sustainability problems in each sector (see Annex 1). To enhance sustainability, the Project will pay attention to the following key areas, among others: 10 Development of new delivery models, involving private service providers (mainly micro and small enterprises, MSEs); Mechanisms for recovery of O&M costs through tariff collection; Menu of service provision models, technical solutions and service standards to match better particular demand patterns in rural areas (such as lower cost solutions for poor/dispersed householdsetc.); Tariffs inline with the localwillingness to pay ; Establishment of incentives for mancomunidades and municipalities for adequate maintenance of the roads to be rehabilitated by the project; Enhanced community participation, consultation andtraining; Strengthening of the capacity of communities and local governments to be able to: (i) make informed choices about the service provision; (ii)operate systems in their ownership, and/or; (iii) superviseprivate sector service providers; Improved link between local service provision and national sectoral programs and policies, establishing enabling policy, regulatory and institutionalframeworks; Developing sustainable mechanisms for TA provision for local governments, communities and small scale service providers; Establishing a more structured relationship among local governments, community organizations, and sectoral agencies, with the common goal of improved service delivery. 11 5. Critical risksand possiblecontroversialaspects RiskRating RiskMitigationMeasures 4thMitigation The main mitigation measuresinclude: S 0 Clear responsibility division among all key stakeholders specified inframework and participationagreements 1 Capacity buildingat all levels of project implementation 0 Monitoring and evaluation to detect early warning mplementation. signals 0 Focus on improved coordination among the three sector! and between the local and national level. The design of the project recognizes that capacity buildingi s a time-consuming process andthat the final project's outcome i s not the speed of the infrastructure investment, but sustainable M M S 2hange of local The local development concept applied inHonduras targets M xiorities after the medium-term to avoid frequent priority changes. The municipa :lections will affect strategic development plans are developed for 10-12years, and x-oject once validated by the Ministry of Interior andJustice, these plar implementation become a basis for development assistanceto municipalities (thi reduces incentives to ignore the plans by new administrations). 12 M nt Plans, andthe first infrastructure plans preparedin HORTI. The process will be monitored carefully, volving community organizations inits monitoring and ation. Mancomundiades that are found to breach the lines for the community participationwill be penalizedin S city to undertake the proposed projects. The bottom-up inthe Advisory Committee will M ement of micro and small enterprises (MSEs) inO&M in S N M 6. Credit conditions and covenants The following are conditions for Credit effectiveness: (a) FHIS Subsidiary Agreement has been executed on behalf of the Borrower and FHIS; (b) FHIS has adoptedthe Operational Manual interms and scope acceptableto the Association; (c) Participation Agreements have been executed on behalf of FHIS andeach of the Participating Sector Agencies. 13 The conditions of disbursements for RIAP's subprojects for eachmancomunidad are the following: (a) Framework Agreements betweenFHIS and participating mancomunidades are signed, (b) UTIs of mancomunidades are adequatelystaffed, (c) UTIsfinancial management arrangementsare satisfactory and operational. The condition of disbursementfor the Solar PV Market Program sub-component: Effectiveness of GEF co-financing. D. APPRAISAL SUMMARY 1. Economic andfinancial analyses Due to the demand-based nature and characteristics of the multiple, relatively small sub-projects that will be financed, an ex-ante economic or financial rate of return analysis for the overall project i s not feasible. Since this i s a framework-type of project, the eligibility criteria, proceduresand methodologies for evaluation and screening of subprojects have been determined and are included in Annex 9. In addition, economic analysis of the first year sub-projects to be financed in the mancomunidades CRA and CHORTI i s included. The evaluation follows the current common practices ineach sector. The evaluation of individual sub-projects will follow either a cost-benefit or cost-effectiveness methodology, depending on the sub-projects' nature and unit costs. Unit cost thresholds are established for each sector and mancomunidad (Annex 9). The detailed methodology for sub- project evaluation (to be applied by FHIS) will be described inthe Operational Manual. 2. Technical The technical features of all sub-projects are quite simple, all technologies used are tested, and no major technical difficulties are foreseen. The technical designs and the choice of service standards will be adapted to the particular conditions of the rural communities that.will be served. The main challenge i s in setting adequate quality standards for rural infrastructure provision. The high service provision costs, low consumption and low capacity to pay of rural areas require technical and regulatory approaches with flexible standards to match local demand, particularly for remote and dispersed households. The project will help to design and introduce these more flexible low-cost technical solutions and service provision models. 3. Fiduciary FHIS will be the central Government agency responsible for project implementation. It will manage the Special Account and transfers to the mancomunidades, based on the financing needs of the Rural Infrastructure Action Plans. FHIS will receive monthly reports on budget execution and project implementation from each mancomunidad. FHIS will also be responsible for the preparation of quarterly reports (Financial Monitoring Reports, FMRs) and for submitting quarterly disbursements to the Bank. The project will be implemented by the mancomunidades (up to their certified levels). The flow of funds will result intransfers from the Special Account to the mancomunidades. Funds will be usedto finance local sub-projects includedinthe Rural Infrastructure Action Plans (RIAPs) 14 An evaluation of financial management capacity has been carried out. Assessments of FHIS as the central implementing agency and the mancomunidades of CRA and CHORTI were completed. Both FHIS and the mancomunidades were found to meet the Bank's minimum requirements. No further actions are therefore required prior to project effectiveness. The Project will, however, provide training to FHIS and mancomunidades to strengthen their financial managementcapacity. Procurement for the proposedproject would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Assessment of the procurement capacity of FHIS, CRA and CHORTI has been completed. The assessment reviewedthe organizational structure for implementingthe project and the interaction between FHIS and the mancomunidades. FHIS will be in charge of the procurement and contracting activities for contracts exceeding US$250,000. The UTIs of the participating mancomunidades will carry out procurement of works for sub-projects inthe RIAPs with a value of up to US$250,000. Certain smaller works in water and sanitation and road sectors (up to UD$50.000) can be contracted to the communities (following Bank procurement guidelines and specific requirements established in the Operational Manual). All the procurement and contracting activities executed by the mancomunidades will be under close supervision of FHIS untilthe mancomunidades "graduate." 4. Social As part of project preparation, a social assessment was carried out, which examines local demographic and socio-economic conditions, current levels of infrastructure and access to services, and the status of implementation of local municipal development plans (PEDMs). A social strategy was built into the project design to ensure full participation of key stakeholders, including municipal governments, civil society organizations, and community members throughout the preparation, design, implementation and monitoringand evaluation of the project. Since the Project focuses mostly on rehabilitation and access expansion, one of the key characteristics of the interventions under the Project is the low impact of works in the three sectors. Given their limited scale, none of these interventions is expected to cause family displacements. Nevertheless, an involuntary resettlementpolicy framework was prepared for the (improbable) case of the needfor resettlement. Some communities include indigenous people (small percentage), and consequently, an indigenous policy framework was designed to ensure early participation from these communities, in accordance with their social and cultural characteristics, and to maximize their 15 benefits. Finally, given the high archeological potential of the country, the Honduran Institutefor Anthropology and History was consulted and a safeguard policy on cultural property was developed, in the event of finding sights that might appear of significant cultural significance during the project implementations. All requirements related to these safeguards, as well as those related to environmental policies will be incorporated into the Project Operational Manual. All project activities requirethe implementation of capacity buildingactivities at the community level. The content of the capacity building plans will be designedby the UTIs with support from FHIS, according to the needs of specific subprojects. 5. Environment Given the technical characteristics of the works and the small scale of the subprojects, no significant environmental impacts are foreseen. In general, the subprojects will consist of rehabilitation, improvement and maintenance works, which will generate positive environmental impacts, as they seek to improve the quality of life and physical environment in poor rural communities. In this perspective, the project has been classified as "Category B" according to World Bank Operational Guidelines. However, with a view to ensuring the social and environmental sustainability of the project and to comply with the Environmental Safeguard Policy [OP. 4.011, a Conceptual Framework for Social and Environmental Management was developed, and a package of subprojects to be financed during the first year of project implementation was evaluated. The detailed content of the Conceptual Framework and the results of the social and environmental evaluation for the subprojects to be financed during the first year are summarized inAnnex 10. The Framework was designed to be applied at three levels depending on the level of socio- environmental risk of the subprojects. Inthe case of Category 3, highrisk projects, SERNA will be responsible for review and approval of the subproject. For Category 2, moderate risk projects, the Environmental Management Department of FHIS will be responsible for the review and approval of the subproject. Category 1subprojects will be handled by municipal environmental units (UMAs). A vast majority of sub-projects identified and prioritizedinCRA and CHORTIto be financed under the project are Category 1 and 2. One of the most important issues faced by municipalities i s the insufficient capacity and scarce resources to manage natural resources and to apply a consistent environmental framework to socio-economic activities that fall under their jurisdiction. Specific guidelines to develop a plan for strengthening environmental management were, therefore, included in the Conceptual Framework. 6. Safeguard Policies Safeguard Policies Triggered by the Prpiect Yes No EnvironmentalAssessment (OP/BP/GP 4.01) [XI [I NaturalHabitats(OP/BP 4.04) [I [XI PestManagement (OP 4.09) [I [XI CulturalProperty(OPN 11.03, beingrevisedas OP4.11) [XI [I InvoluntaryResettlement (OP/BP 4.12) Ex1 E l 16 Safeguard Policies Triggered by the Project Yes No IndigenousPeoples (OD 4.20, being revisedas OP4.10) [XI [I Forests(OP/BP 4.36) [I [XI Safety of Dams (OPBP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [I [XI 7. Policy exceptionsand readiness There are no policy exceptions and the Project is ready to be implemented. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties' claims on the disputed areas 17 Annex 1:Country and Sector or ProgramBackground HONDURAS: Rural Infrastructure Project 1. Country and sector issues Poverty Honduras i s the second largest county Graph 1. Central America GDP per capita comparison in Central America (after Nicaragua) US$ with a territorial extension of 112,492 ym ______________________ ___________________ square kilometers. It has a population 4Mo 3ow of about 7 million (second after 1wo _ _ _ _ _ _ _ - _ - - -- - Guatemala), with an annual population (ow growth rate of approximately 2.7 0 M t a RIC. P m n m El O.lr.dor Gua1m"a Hondur" Nluragua 1992 2002 National Extremepoor I 47.4 I 45.2 All poor 69.9 63.3 Urban Extremepoor 39.9 27.2 All poor 61.6 55.5 Rural Extremepoor 53.9 All poor 76.5 Infrastructure access Improving access to infrastructure services has been one of the Government's priorities during the past decade, but the steady progress was temporarily reversed by Hurricane Mitch, affecting particularly water and sanitation and road sectors. Still, considerable progress has been achieved in the past 15 years, with national coverage reaching 83 percent for water, 78 percent for sanitation and 68 percent for electricity. Similar progress has been achieved in the road sub- 18 sector, particularly through improved maintenance of the official network, which has resulted in 83 percent of paved roads (and 70 percent of the official network, both paved and unpaved) in good or fair conditions. TableNo. 2 Water, Sanitation,Electricity I 1990(%) 1997 (%) 2004 (%) Water coverape .... ~..~ . I73 II92 _ - II83 _ _ ~ . - Sanitation coverage 66 83 78 Electricity coverage 35 50 68 Nevertheless, access in rural areas remains inadequate. Graph 2 indicates highly uneven Yo Graph 2: Urban rural gap (access) - access to services between urban and rural 100 KI Urban I population, with the most noticeable gap in I electricity coverage (95 percent versus 38 80 percent). Although the rate of access for water and 60 sanitation i s higher in rural areas, these indicators 40 mask low levels of quality and sustainability. According to SANAA, 90 percent of water 20 services at the national level are intermittent, 0 operating six hours a day on average. Less than 44 Water Sanitation Electricity percent of water services include chlorine disinfection and sanitary monitoring--and surveillance i s extremely weak. If access to safe water and sanitation were included, these indicators would be much lower. Inaddition, many of these systems require urgent rehabilitation to be able to continue providingservice. Inthe roads sector, the situation is also quite deficient. The extensive network of municipalrural roads constitutes about 52 percent of the entire road system of the country. Given that rural roads, in general, belong to the unofficial network, very little data are available. Nevertheless, it i s estimated that most of these roads are in poor condition with a large percentage of them becoming impassableduringthe rainy season. There is growing evidence that infrastructure i s one of the key determining factors for the economic growth of rural areas. For example, the Bank's recent Pro-Poor Growth Study (2005), analyzing experiences of 14 countries in the past decade, demonstrates that insufficient access for poorer households to infrastructure services (particularly electricity and roads) has constrained the ability of rural households to tap into country-wide higher growth rates, particularlyinnonagricultural sector^.^ The absence and low quality of these infrastructure services inrural areas inHonduras seriously constrain the potential for economic and social development (access to markets, schools, clinics, productivity improvements, improved health and social conditions etc.) and compounds the problems of isolation andpoverty of the rural population. The experiences of Bangladesh and Vietnam specifically show how unequal access to infrastructure and markets concentrates income growth among rural households in well-connected areas. 19 Decentralization Process As many other developing countries, Honduras has recognized the limits of the centrally driven service delivery model. The drive towards municipal decentralization started in 1990 with a municipal law that conferred key service delivery responsibilities and fiscal autonomy to the country's 298 local governments, and established a fiscal transfer of five percent of the annual budget to the municipalities. The trend towards decentralization was further reinforced by the 2001 Poverty Reduction Strategy Paper (PRSP), which underscored the role of local government inthe poverty reduction strategy. The Government's framework for localdevelopment, as stated in the National Program for Decentralization and Local Development (PRODEL), includes decentralization of public services and infrastructure as one of the key strategic areas. The funding provided by transfers, however, i s not sufficient to cover all local infrastructure needs, donor financing of infrastructure investments will therefore still be required (the development assistance, however, will be channeled primarily directly to municipalities, on basis of their priorities establishedinthe Municipal Strategic Development Plans. Municipal finances: Despite the trend toward decentralization, most public spending inHonduras remains centralized. In 2002, 30 percent of the municipal governments' total revenues were fiscal transfers from the central government. Among smaller and poorer municipalities, these transfers represented most of their financing. Municipal revenues usually finance recurring (administrative and operational) expenditures. The main sources of municipal revenues are local taxes, fees and user charges. Local taxes include property taxes (BienesInmuebles), excise taxes and in some cases, a vehicle tax. For public investment financing, fiscal transfers from the central government are the main source of municipal revenues. However although the Municipal Law mandates a five percent transfer of national tax revenues to municipalities, actual transfers have been less-3.14 percent in 2004 (the five percent target i s expected to be met by 2006). Forty percent of the transfers are to be equally distributed among all 298 municipalities and 60 percent to be distributed according to population size. The decentralization trend presents both opportunities and challenges for rural infrastructure service delivery. On the one hand, local governments are better aware of local infrastructure needs and priorities and more likely to distribute scarce resources efficiently, responding to the local demand. Their accountability to rural populations also tends to be higher than that of the central government. On the other hand, local governments often lack capacity, which may lead to: (i) implementation delays; (ii) implementation inefficiencies (higher costs) and lack of attention to sustainability; and (iii) distortions in resource allocation (preference for simpler projects). It is, therefore, essentialto pay adequate attention to the local capacity buildingduring the decentralization process. In some cases, inefficiencies might also occur due to the small size of the individual municipalities which do not allow a capture of economies of scale. In Honduras, the majority of municipalities (56 percent) are small, with a population of less than 10,000. Although decentralization is a general trend, the three sectors covered by this project are affected in different degrees. The rural roads, composing the unofficial road network, have always been under municipalresponsibility. They are not considered inthe investment plans and maintenance arrangements of central agencies (SOPTRAVI and Fondo Vial), which oversee only the official network. They are, however, in a fairly poor state, due to the lack of financial resources and technical capacity at the municipal level. The trend toward decentralization and increased fiscal 20 autonomy of municipalities, therefore, present new opportunities to improve the quality and attain sustainedmaintenancearrangementsfor the rural road network. The water and sanitation sector is the most affected by the decentralization process. In the past, rural water and sanitation projects were implemented by SANAA and FHIS, mostly through community driven development (CDD) arrangements. This demand-responsive approach has undoubtedly increased local ownership and empowered the communities, but has not resolved the problem of relatively low quality and sustainability of the services. Following the municipal law of 1990, a new Drinking Water and Sanitation Law was approved in 2003. The law decentralizes SANAA and passes the responsibility for water and sanitation to municipalities. Recently FHIS has started implementing projects also with municipalities and mancomunidades, but the experience is too short to be evaluated. The law also establishes a regulator (ERSAPS), which will sign the service contracts with the municipalities. The municipalities are to decide the mechanisms for service provision. Their level of involvement might differ from the actual operation of systems to supervision and technical assistance provision, depending on service provision model chosen, but in all cases, it will be a completely new arrangement for the municipalities and will require substantial capacity buildingand monitoring. The electricity sector so far has been less affected by the decentralization trend, as rural electrification i s centrally plannedand implemented by the state-owned monopoly ENEE, but it i s expected that in the future also in this sector, in accordance with the municipal law, the municipalities will have greater role in planning and implementing rural electrification projects. Already now, decentralization presents some new opportunities to the municipalities, interms of being able to choose alternative power supply projects, such as offgrid projects using locally available energy resources. However, mainstreaming these experiences this will require policy changes. Today, rural electrification is still centrally planned and implemented by ENEE, which administers a rural electrification fund, FOSODE. While the projects respond to community requests (communities are required to present electrificationdesigns) there i s no interactionwith the municipalities. Sector issues Road sector: There are three road network types in Honduras: (i) official network (13,500 the km, of which 2,925 km are paved) administered by the General Roads Directorate (DGC) and the RoadFund; (ii) the unofficial network (13,500 km, all unpaved) which i s looked after by the municipalities, banana and coffee growers, finca owners and others; (iii) and the UrbanNetwork (approximately, 14,500 km). The DGC under the aegis of the SOPTRAVI i s responsible for constructing, rehabilitating and upgrading official network. The Road Fundi s responsible for the maintenance of the same network. However, the allocated resources are not sufficient. The unofficial network is maintainedsporadically by municipalities, etc. with no assistance from the Road Fund. Despite the fact that the Road Fundi s not fully funded, considerable progress has been made in the maintenance of the official network. About 83 percent of the paved network i s being maintained (routine maintenance) by micro-enterprises, Coincidentally, 83 percent of the paved road network is in good to fair condition (maintainable condition). Overall, about 70 percent of the official network, which includes paved and unpaved roads, i s ingood to fair condition. Table 3 below summarizesthe length andcondition of the official roadnetwork by surface type. 21 Information on the unofficial road network (14,500 km) is very sketchy as no inventory is available for the entire network. It i s estimated that the majority of these roads are in poor condition with a large percentage of them becoming impassable during the rainy season. The absence of all-weather roads leads to considerable losses, especially for the rural poor, further compounding their condition. The absence of all-weather roads i s responsible, to a large extent, for the absence of a reliable public transport system. Poor road conditions lead to high repair and maintenance costs for transport operators, and increasepoverty inthese areas. Rural water and sanitation: Water and sanitation coverage in Honduras i s relatively high by regional standards, despite the significant setback produced by Hurricane Mitch. According to INE, 83 percent of households at the national level have access to water and 81 percent of households have access to sanitation. Coverage inrural areas i s also relatively high: 74.8 percent for water and 72.4 percent for sanitation. These aggregate figures, however, involve various degrees of service quality: the Honduras PRSP defines access to water services as having access to potable water inside the home (for urban areas) or access to piped water or wells (in rural areas). Access to sanitation services i s defined as having access to a toilet in urban areas and at least to a latrine in rural areas. Inrural areas, most of the waterhanitation systems are operated by community-based water boards (juntas de agua). Service quality and sustainability are important issues. For example, a recent WSP sustainability study carried out for 43 rural water systems in Honduras shows that 90 percent of the drinking water tested positive for coliforms including fecal; there is no routine chlorination and less than 12 percent of the evaluated systems have treatment facilities for water chlorination6. Local water boards manage 91 percent; the rest are run by community organizations (patronatos) and municipalities. Most of the systems operate intermittently, with severe shortages during the dry Evaluation of project sustainability in43 rural water systems inHonduras, WSP, 2004. 22 season. Half of the systems are operating beyond their lifetime design and one third will complete its lifetime inthe next five years Table No. 4. Access to Water and SanitationServicesinHonduras 1990 1993 1997 1999 2002 2004 Water Coverage National 73% 85% 92% 91% 83% 82.8% Urban 82% 84% 93% 94% 94% 91.3% Rural 67% 85% 91% 89% 71% 74.8% Sanitation Coverage National 66% 83% 83% 82% 81% 78.3% Urban 87% 93% 94% 92% 95% 84.5% Rural 50% 74% 74% 73% 68% 72.4% Source: INE, EncuestaNacionalde Hogares de Propdsitos Mbltiples, various years. The WSP study also indicates that most local water boards do not have the administrative skills necessary to operate and run the services. Most water boards have one person, fontanero, responsible for the system. However, tariffs often do not cover operational costs, even for the fontanero, accelerating the deterioration process of the systems. The study shows that in 70 percent of the cases, service fees are not collected adequately and 20 percent of the cases, the deficit between the collected tariffs and the costs to cover operational activities exceeds 50 percent. According to the same study, less than 20 percent of households surveyed indicated having participated in the project's project cycle even though 40 percent of the surveyed households do indicate having participated in community awareness and training workshops on water related issues. FHIShas, however, been incorporating the lessons learnt, and the outcome of the more recent projects i s more promising, paying greater attention to community participation, training and general sustainability issues. Reaching the unserved rural population is another challenge. Most of the remaining rural population i s dispersed, distributed in settlements of 50 to 200 people. This population segment i s the most difficult to reach as the cost of access with conventional technologies i s significantly higher compared to rural concentrated communities. It i s estimated that 24 percent of the rural population is dispersed, located in around 22,000 settlements7. An effective rural water and sanitation strategy therefore should address this dual problem of: (i) improving quality and sustainability in the current systems; and (ii) finding adequate solutions for the remaining dispersedruralhouseholds. Aware of these challenges, the Government has responded with a decentralization strategy, aimed at better integrating the municipalities and communities in all aspects of service planning, design andprovision, increasing their ownership and commitment to sustainability. A new Drinking Water and Sanitation Law was approved in October 2003, replacing the old 1929Water Law. The law i s a starting point for restructuring the service provision through the decentralization of the responsibility over the local system to municipalities. The revised Modelos de Gesti6nAPS Rural, LAVIAL, Diciembre 2004. 23 institutionalframework establishesa planning entity (Consejo Nacionalde Agua y Saneamiento, CONASA) and a regulatory agency ERSAPS (Ente Regulador de Servicios de Agua Potable y Saneamiento). CONASA is represented by four ministries, municipalities, water boards, and SANAA and presided by the Ministry of Health. SANAA acts as the Executive Secretariat of CONASA. Responsibilities of CONASA include policymaking, financial and sector development planning, coordination and consensus building. ERSAPS, a decentralized entity of the Ministry of Health, is in charge of the sector regulation (including tariffs and quality standards). Municipalities are required to sign service contracts with ERSAPS, in which they define the service provision arrangements. The municipalities can choose freely the service provision mechanism (ranging from municipal company to local water boards or private sector providers). This new framework provides promising opportunities to improve water and sanitation service provision in rural areas, but it is still very recent and requires consolidation, fine-tuning and considerable capacity building at the local level. Rural Electrification. Electrification (including rural) has traditionally been Graph 3 Nationalelectricitycoverage the responsibility of ENEE, the integrated state-owned power utility. YO Untilthe early 1990s, electricity access 100 has been extremely low (35 percent 80 nationally), one of the lowest in Latin 60 Ameica. Since the early 1990s, electrification was given higher priority 40 and coverage has been increasing 20 steadily by about two percent per year. n - The key milestone was the Costa Rica Panama Guatemala El Salvador Honduras Nicaraoua LAC establishment of the Social Electrification Fund (FOSODE) by the 1994 Electricity Framework Law, with Government's obligation to contribute a minimumof Lps30 million a year. FOSODE i s administered by ENEE, through the Social Electrification Office (OES). Having set up a solid institutional structure, FOSODE has been able to attract significant donor resources, in addition to Government budgetary contributions. Between 1995 and 2003, FOSODE invested US$ 93.3 million in rural electrification, increasing national coverage from 45 percent in 1995 to 68 percent in 2004, with relatively low average connection cost of around $300-400 per household. However, despite some catching up, electricity coverage i s still among the lowest in the region. This i s mainly due to the extremely low rural coverage-38.4 percent of rural households have access to electricity, as opposed to 95.4 percent in urban areas, according to the latest INE household survey (May 2004). Inaddition, the distribution of access i s very uneven, both across the regions and income quintiles. In the poorest quintile, only 30 percent of households have access to electricity, comparedto practically universal coverage inthe highestquintile. 24 Practically all past rural electrification programs have been grid extension, with the exception of a few donor-funded small offgrid projects and commercially W Departmentalcoverage marketed solar home systems. For a number of communities, however, grid extension i s not a feasible or economic solution. As more distant users are connected, the average connection costs increase rapidly and are already over $700 per household in recent ENEE projects. In some cases, offgrid technologies can provide electricity at lower cost than grid extension and can match demand in a flexible way. The current focus on lowest cost grid connections also implicitly disadvantages the poorer households which in general tend to be more isolateddispersed and distant from the existing grid. However, there is no mechanism for subsidy allocation for offgrid projects. Inaddition, as inmany other countries, the use of offgrid technologies is limited by the lack of experience and knowledge about these technologies andbusiness models. The sector's structure i s defined by the 1994 Framework Law, which prepared conditions for a comprehensive sector reform and private sector participation in the power sector (which, however, has never been fully implemented). The law created the Energy Cabinet as the principal entity in charge of proposing expansion plans, and the National Commission on Electricity (CNE) as a regulator. Even though the Energy Cabinet i s maintained formally, the function of sector policy is mainly assigned to the Secretariat of Natural Resources and the Environment (SERNA), which develops system expansion plans, including proposals for new generating contracts between ENEE and private companies, which are put to the CNE for regulatory approval. The Energy Cabinet, however, has never functioned well because none of its ministers has assumed leadership. At the same time, SERNA's resources are limited, as its main role is in environmental control. The Government has prepared a new law that would deepen the reforms and improve the institutional structure, but the future and the timing of the reformremains uncertain. The weak institutional structure of the power sector has affected the quality and efficiency of rural electrification efforts. There is no integrated rural electrification policy at the national level. While FOSODE i s implementing grid extension projects based on its own screening methodology, SERNA is promoting offgrid electrification but lacks the resources to scale-up its efforts. There i s little coordination between the two programs and no clear policy on allocationof financing and subsidies for rural electrification. FOSODE's grid extension model, PLANES, has been effective in guiding its traditional rural electrification program but has not adequately integrated consideration of decentralized options. A good practice would be to establish a unified fund for all rural electrification efforts (both grid and offgrid) with a clear policy, transparent rules and rational financing mechanisms so as to select rural electrification projects on the basis of cost efficiency. Given FOSODE's successful record as an implementation agency, its 25 conversion into an autonomous agency to manage such a fund i s being considered by the Government. Several regulatory issues also require review. As in many countries, there is a "life-line" electricity tariff, subsidizing consumption of lower income households (the subsidy i s a mix of direct subsidy paid from the Government budget and a cross-subsidy). The threshold for the life- line tariff, however, i s too high, and the majority of subsidy, therefore, effectively goes to the middle class instead of the poor. Attempts to reform the tariff system, however, have found serious opposition. The situation i s further exacerbated by the current rise in oil prices, which make any tariff rebalancing (resulting in tariff increase for the majority of population) very unpopular. Inthe medium term, however, it will be necessary to restructure the tariff and ensure that subsidies are targeted to the poor. The high level of subsidization also discourages consideration of off-grid electrification options since O&M costs have to be fully covered in such cases. Inaddition, there i s a lack of clarity about the role of CNE and regulation in general for off-grid systems. 26 ISSUES TO BEADDRESSED BY PROJECT Even though, as described above, each sector faces a particular set of issues due to differing institutional and policy settings, the following five areas are common to all and they constitute the key features of the proposedproject: Access 0 Oualitv Sustainabilitv 0 Local capacity 0 Coordination and synergies ACCESS Inall sectors, access becomesmore difficult as more distant, isolated anddispersed communities need to be connected. These are the most difficult users to serve, as they represent a twin challenge of low capacity to pay and high service provision costs due to the remoteness and dispersion. In many cases, this will require the use of more adequate technologies and business models (offgrid electrification, low-cost water systems for poor, dispersed communities etc.). In addition, in some sectors (water and roads), access gains are being eroded by the inadequate attention to the sustainability. Rehabilitation of these water systems and roads, and setting up adequate arrangements for their maintenance, i s therefore also a key feature of access approach inthis project. SERVICE QUALITY The issue of quality of rural infrastructure services has two aspects. First, setting up adequate quality standards for rural areas is not an easy task. High service provision costs, low consumption and low capacity to pay, call for different technical and regulatory approaches than in urban areas, with more flexible standards to match the local demand. The project aims to designandintroduce thesemore flexible service provisionmodels. The second theme involves the establishment of arrangements to ensure and enforce the defined quality standards (through appropriate O&M arrangements, TA and other capacity building activities, regulatory oversight etc.). The experience in Honduras, particularly in rural water and the road sectors indicates that this has been a problem in past projects. The new legal and institutional framework for the water and sanitation sector, and the general trend towards municipal decentralization, provide new opportunities to address this issue, but substantial TA and monitoring will be required. The project will draw on a number of best practices from other countries inthis area. Practically all rural electrification projects in the past have been grid extension projects by ENEE. ENEEhas been operating these projects. The quality in general has been adequate, but there have been some problems with voltage fluctuations and brown-outs in more remote connections due to inadequatecapacity of the sub-stations andtransmissioddistributionnetwork -thisrelatedinfrastructure, however, willbere-enforcedwitharecentlyapprovedIDBcreditfor 27 ENEE's loss reduction and rural electrification program. Still, the issue of capacity will be analyzed inthe project, and will be a pre-condition for financing of grid-extension sub-project. SUSTAINABILITY is one of the key challenges and the key feature of the project design in each sector: Roads: The rural roads, forming part of the unofficial network, do not have any defined institutional arrangements for maintenance. They are under the responsibility of municipalities, but the maintenance has been sporadic. The project will apply the best practices from other countries (see Box 1 below) to mitigate the sustainability risks. In addition, the project will introduce a maintenancemicroenterprise pilot, which is expectedto enhance sustainability in: Creating permanent and reliable employment inpoor rural areas Fostering community awareness about the need for sustainable development Development of local entrepreneurial and organizational skills Fostering acceptanceand support of local communities and government officials Inaddition, increasedtransfer of budgetary resourcesto municipalities will provide greater fiscal space for maintenance. Box 1:SoundPracticesinMaintenance Planning Giving primary attention to keeping roads in good condition makes the best use of scarce resources and maximizes rural accessibility in the long term. Frequently, however, this approach i s overlooked in favor of improving the roads that are in the worst condition.Good practices for sustainable maintenance planning include: Maintainthose roads that are functionally important and inreasonablegood condition; Create a multiyear rolling maintenanceprogram that establishes the core network and its condition; Define routine and periodic maintenance according to tasks and budgets and include these tasks in reporting measures of achievement. Avoid charging routine maintenance as staff and equipment costs; instead, specify outputs such as drain cleaning, grass cutting, shape correction, and grading; Make separate provisions for emergency work that is required to keep roads open and serviceable; and Selectively add roadsto the maintainablecore network as capacity andresourcesexpand. It is also important that provision for emergency works not be diverted from maintenance funds but, if necessary, be provided for by tapping the capital budget. SOURCE:."Options for ManagingandFinancingRuralTransport Infrastructure", MalmbergCalvo, Christina Water and sanitation.The data from SANAA and the WSP study reveal serious issues related to sustainability of the rural water and sanitation systems. The new legal framework, however, introduces some important changes that (if implemented correctly) should enhance sustainability of new investments: 0 The responsibility for local service provision passes to municipalities-introducing incentives for municipalities to overseeproperly the localwater and sanitation systems; 28 0 The regulatory entity (ERSAPS) i s established and municipalities are required to sign service contracts with ERSAPS, in which sustainable O&M arrangements have to be ensured; 0 The municipalities can choose service provision models, this may open a way to greater diversity of models, including for small private sector providers, and a possibility to replicate and scale-up more successful arrangements. The project will introduce sustainability best practices (Box 2) and assist in the development of new service prrovisionmodels, includingapilot introducingsmall scale water service providers ) Electricity: The main issue relates to ENEE's tariff system. As in many countries, there is a "life-line" electricity tariff, subsidizing consumption of lower income households (the subsidy i s a mix of direct subsidy paid from the Government budget and a cross-subsidy). However, the consumption threshold for the subsidy i s set too high: 300kWh a month (covering about 90 percent of the residential population), while typical consumption of poor households would be well below 1OOkWh.Most of the subsidy, therefore, effectively goes to the middle class instead of the poor. Inaddition, the overall tariff level is too low and ultimately does not cover the total costs of power generation, transmission anddistribution (partly due to ENEE's hightransmission and distribution losses). The situation has recently been exacerbated by the rising oil prices, which increase generation costs. These issues go beyond the scope of the rural infrastructure project, and they are being addressed by various Bank and IDB operations supporting sector reform. Specifically: 0 Tariff adjustment andsubsidy rationalization (agreedinPRSC) 0 Ongoing support to sector reform, starting with ENEE's vertical unbundling, increasing accounting transparency (Public Sector Management Project) 0 Loss reduction program financed by IDB. However, some of these issues affect the proposed rural infrastructure project. Due to the lack of an effective tariff re-balancing mechanism, the expansion to low income residential users contributes to ENEE's losses, even though the impact on the overall ENEE's financing i s fairly limited. IDB has financed a comprehensive study of ENEE's finances, in the framework of the preparation of its US$ 35 million Rural Electrification and Energy Sector Support Project, on basis of which, it has concluded that the grid extension programcan be sustainable, provided that the agreed tariff adjustment process i s followed and loss reduction program implemented. A separate study for the PIR project i s carried out to determine the exact impact of the grid extension component of the project and introduce mitigation measures (manageable within the project), such as sub-project minimumeligibility criteria. The project will work with the Government in designing a long-term sustainable strategy, including subsidy rationalization and a designof a new financing and institutional framework for rural electrification. Close coordination with the IDB team and the Bank team working on the reformissues hasbeen establishedto ensure compatibility of approaches inthis area. There i s very little experience with offgrid solutions in Honduras, but there are considerable experiences and best practices collected from the projects in the region and worldwide. The key lessonslearned (sharedwith the rural water and sanitation sector) are includedinthe Box 2. 29 Box 2 OffgridElectrificationandRuralWater Supply Offgrid electrification and rural water supply: lessons on sustainability and reaching thepoor Least-costprinciplesindesigningsystems need to be appliedto ensurethat the best suitedtechnologies are applied. Thereis a needto aimfor operationalsustainability, which comprises institutional, social, financial and technical aspects of service provision. Locally adapted servicedelivery mechanisms needto be applied, including allowing for achoice amongdifferent businessmodels andcontractualarrangements(privateoperators, local cooperatives, NGOs...).Adequate business-typearrangementsfor service provision, inparticular through local private operators,tendto be more importantthan the issue of ownership. The proposedsolutions have to be sociallyacceptableby users andwithin their capacity to pay. Any investmentsubsidies shouldbe targetedtowardsthe poor, transparentandnon-distortionary. They shouldpromote efficiency by linking subsidiesto specificoutputs wherever feasible. Operationalsubsidiesshouldbe avoided, notwithstandingthe possibility of cross-subsidieswith a small numberof truly needy beneficiariesdeterminedby the local communitiesthemselves. The capacity of communitiesor local governmentneeds to be strengthened, either to allow themto provide better services themselvesor to regulatesmall local service providers. Technical assistanceto buildthis capacitycan requiresubstantialresources.It also often requires a changeinattitudeon the partof nationalinstitutions, which historically may haveprovided services directly or may have set policies, towards servingthe needsof communities andlocal govemments. LOCAL CAPACITY Infrastructure service delivery (including rural) has traditionally been the responsibility of the central government. Interaction with the local governments has been limited. As a result, there i s a lack of technical capacity at the local level for planning, design, implementation and supervision of rural infrastructure projects. The Government i s now restructuring the institutional framework to support local capacity building, which has been stated as one of the key objectives in the PRSP. This restructuring involves: Srenatheninnof the Ministry of the Interior and Justice as the regulatory body for municipal development. Reform of PHIS: The Government has recognized the need to adapt FHIS structure and responsibilities closer in line with the decentralization process. As a result, FHIS i s being transformed from the social investment implementation agency to the "engine of he local development", focusing on technical assistanceto the local government for the planning and provision of services at the local level. See Box 3. Water and sanitation sector reform: As described above, the new legal and institutional framework for water and sanitation sector, decentralizes responsibilities to the local level. Correspondingly, SANAA is being restructured from the implementing agency to policy development agency, also with a mandate to provide technical assistance to decentralized levels. Support to the local development vlannina process: All municipalities re now required to develop local development plans, based on a participatory needs assessment with the communities. These plans follow a determined methodology and are subject to validation by 30 the Ministry of Interior and Justice (an agency leading the decentralization process). The assistance to these municipalities i s then channeledon the basis of these plans (for example, FHISwould finance only the activities includedinthe plans). Municipalities have been responding to these new challenges on their own. To achieve better economies of scale, respond to common development problems, pool scarce technical and financial resources and create better condition to attract donor financing, they have been associating themselves into mancomunidades (voluntary associations of municipalities). There are about 50 mancomunidades in Honduras, in different degrees of institutionalization. The mancomunidades will be key implementation agencies for the project. The project would support the localcapacity buildingobjective through: Support to the localdevelopment planning and prioritization processes: Strengthening of UTIsof the mancomunidades. 0 Strengthening localinfrastructure service providers 0 Improvedcommunity participation at all stages of the project Local income generation in investment (such as use of labor intensive methods in road rehabilitation), and operation (creation of micro-enterprises etc.), and complementary activities (such as facilitation of productive uses of electricity) COORDINATIONAND SYNERGIES Each of the three infrastructure sectors has its own particular institutional framework for rural investments, with no coordination mechanism. The project has a unique opportunity to bridge these different approaches, both vertically and horizontally, and exploit synergies through an integrated approachto planninganddelivery of ruralinfrastructure services: Horizontal integration: At the mancomunidad level, the project will promote an integrated approach to planning for the delivery of infrastructure services, taking into account complementarities and synergies among the three sectors, with the objective of increasing development impact potential of the project. At the central level, advisory committee will be established to oversee the project implementation, with the participation of all relevant sectoral agencies to promote coordination and development of compatible approaches and policies among the three sectors at the national level. Vertical integration: The project will facilitate interaction between the local and central governments to ensure that the local development experiencesfeed into the sectoral policies and successful models can be replicated and scaled up at the national level. In all three sectors, good coordination between the mancomunidad and the sectoral agency is needed to maximize efficiency and development impact of investments (rural roads feed to the official network, which need to be properly maintained, coordination with FOSODE i s needed to understand which communities are included in the existing rural electrification plans etc.). In addition, in particular for the water and sanitation and electricity sectors, the mancomunidades and municipalities will require substantial TA, which i s likely to be best facilitated by the sectoral agencies. 31 Box 3: Integration of LocalDevelopment -- Transformation of FHIS: Over its fifteen year history, the Honduras Social Investment Fund (FHIS) exemplifies the evolution of social fund doctrine and practice toward increasing support for and integration with local development processes. The FHIS story shows how social fund agencies-often viewed as "parallel" to public sector structures-an contribute toward strengthening community and local government roles and capacities for governance and service provision. The FHIS was created in the early 1990s as a "social compensation" program to soften the impact of structural adjustment policies on the poor by creating employment through small-scale public works. Soon FHIS proved to be a more efficient means of providing basic infrastructureto rural communities than sectoral investmentprograms managedby line ministries. Associated with its emerging role as an infrastructure provider, the Government and FHIS became more concerned with the quality, sustainability, and relevance of its investments. This concern led to a greater emphasis on community participation in the micro-project cycle in order to improve resource allocation by responding to local demand and to enhance sustainability by ensuring local ownership. While the concept of "community participation" was always integral to the FHIS program, participation was initially viewed as a means to greater efficiency in resource allocation and project execution rather than an end in itself. But FHIS-promoted community participation had an important 0 externality: it began to alter the relationship between poor communities and public sector organizations at the local level. FHIS investment in community capacities to prioritize needs, deliberate over solutions to local problems, and contribute to local initiatives that address them led to communities increasing their influence over broader local affairs. By the late 1990s empowering communities emerged alongside financing investments as a core objective of FHIS. More participatory approaches to planning suggested the need for more decentralized approaches to management: (i) planningacross multiple communities to ensure more efficient and equitable location of facilities than result from community-centered first-come first-served planning systems; (ii) promoting stronger permanent roles for communities in governance and service provision to sustain community empowerment beyond one-off support during a subproject cycle; and (iii) involving municipal authorities in subproject planning and implementation since they play an increasing role in subproject maintenance. In response to these issues, since 1998 FHIS has strengthened the role of municipalities. A pilot program developed and tested new methodologies for participatory municipal planning; devolving responsibilities for managing subprojects to municipalities; and developing systems for preventive maintenance at both the municipal and community levels. This pilot was not only the basis for changing FHIS systems, it also informed national reforms to strengthen the roles and capacities of municipalities to plan, manage and maintain local infrastructure investments using participatory and transparent methods. Inearly 2000, FHIS complemented PIU and local government project executions by introducing a "community execution" modality in which funds are transferred directly to and managed by communities. Applying the subsidiarity principle to the choice of execution arrangements provides a decentralized alternative to municipal management which increases flexibility and adds an additional element of "checks and balances" at the local level. LinkingCommunity Empowerment, DecentralizedGovernance, and Public Service Provisionthrough a Local DevelopmentFramework, World Bank, 2005 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies HONDURAS: RuralInfrastructure Project Project (PO55991) DO-S areas of the-Department of Cortes and Tegucigalpa EmergencyDisaster $10.8 M IDA I P - s Vulnerability and risk maps, Management(PO64913) DO-S municipalcapacity building, and risk mitigation works invarious cities FHISV (P064895) $60 M IDA IP- s Local infrastructure subprojects and DO-S municipalcapacity building in various cities Financial Sector $9.9 M IDA IP- s Support to the CNBS and Central Technical Assistance DO-S Bank to address vulnerabilities inthe Credit (P040177) Honduran financial system. FirstProgrammatic $25 M IDA NA Support for reforms and institutional Financial Sector development inthe Honduran DevelopmentPolicy financial system. Credit Judicial Branch $15 M IDA NA Improve efficiency, transparencyand Modernization (081516) accessibility ofjudicial services in (proposedfor FY06) Honduras Barrio Ciudad Project $15 M IDA NA Support to the municipalities for the (proposedfor FY06) integrated urbandevelopment Nutritionand Social $20 M IDA NA Piloting activities in social protection Protection Project and inclusionof at-risk youth to help (P082242) (proposedfor and mitigate youth crime and FY06) I prevent violence Support to ENEE- loss reduction program and rural electrification Project I Poverty Reduction and I$35 M I IDB Local infrastructure subprojects(FHIS), municipal Local Development capacity building, strengthening institutional Program,Phase I1 framework for decentralization and local development (147WSF-HO) Peace and Citizen I$20M I IDB Crime and violence prevention & reduction inthe 17 CoexistenceProject for municipalities of the Sula Valley Region the Sula Valley (1123/SF-HOj San PedroSula I$ 9 M I IDB Improveurban service delivery in San Pedro Sula Municipal Development through restructuring financial management and Program,Phase I1 modernizing service delivery arrangements (1104/SF-HO) ComprehensivePilot Develop & test new programfor fighting urban Programto Fight Urban poverty, comprising: citizen outreachto design Poverty (1066/SF-HO) activities that will promote the use of culturalheritage and urban space in the historic city center; and, pilot interventions for comprehensiveservices for vulnerable transient groups. 33 PotableWater and I $26M IDB Municipal loansfor water and sanitation systems in Sanitation Investment intermediate-sizecities (> 10,000 pop.) Program (1048/SF-HO) Tegucigalpa and San III$63 M($27 M IDB Improveurban services inTegucigalpa and San Pedro Pedro SulaMunicipal for San Pedro Sulathrough modernization of financial management Development Program, Sula, US$36M and servicedelivery systems andfinancing of urban Phase I(1024/SF-HO) for Tegucigalpa) services and infrastructure Tegucigalpa Municipal $22.5 M IDB Improve urbanservicedelivery & finance urban Development Program, services and infrastructure in Tegucigalpa Phase I1(Pipeline, projected end 2004) Program for Municipal Revolving credit CABEI Rediscountfund for commercial banksto lendto Infrastructure line municipal governmentsfor infrastructure, urban servicesand other projects SIDA Loans to low-income families for housing construction / improvements& loansto municipalities for service installation and improvements Housing (FUNDEVI) Revolving KFW Loans to low-income families for housing construction and social infrastructure through FUNDEVIand grant-financed local (FHIS) infrastructure projects through FHIS Waste managementand 12.8 M EU Municipal capacitybuilding in secondarycities for sanitation insecondary waste management & sanitation cities Decentralization (in 34 M EU Budget support for decentralization and municipal pipeline) fiscal transfers Greater Transparency $29.5 M USAID Technical assistanceto municipalgovernments and andAccountability of local organizationsfor improved governance, citizen Government participationand accountability 34 Annex 3: ResultsFrameworkandMonitoring HONDURAS:RuralInfrastructureProject ResultsFramework To improve access, Ruralcommunities intarget areas use Year 3: Assess the effectiveness quality and improved infrastructure services (provided of applied approachesin sustainability o f incost-effective andsustainablemanner) mancomunidades CRA and infrastructure services for their economic and social needs - CHORTI and adapt the design (roads, water & measuredby: for other mancomunidades sanitation, and accordingly. electricity) for rural 1.Access: poor inHonduras Populationwith improvedroad access, passablethroughout the Year 5: Assess the effectiveness whole year of applied approaches as an input % of population ineachtargeted for Government's long-tem mancomunidad with improved strategy and a design of follow- access to water and sanitation (withupoperations. acceptable quality and cost recovery mechanisms inplace) % of population ineachtargeted Identify lessons learnt from the mancomunidad with electricity integration of three sectors service, provided with adequate (synergies on implementation quality and sustainability intarget and impact level vs. coordination areas costs) 2. Improved living conditions: Reducedtransport time for key Identify key elements necessary economic and social destinations for a successful scale-up. (measured by surveys in selected areas) Sustained improvement inwater and sanitation quality and hygienic conduct (measured through random audits andsurveys) Improvedproductive and social activities of households (e.g. extended learning time) enabled by electricity (measured by surveys) To develop capacities 3. Local capacity strengthened: and enabling 0 UTIsoperating with trained environment for technical staff and adequate budget locally-driven service Value of contracts successfully provision and procuredby U T I s 35 planning. % of users understanding and I complying with their obligations in water and electricity systems Number of small scale service providers operating satisfactorily Outcome 1: Outcome 1indicators: Year 1-5: Assess quality and level Improvedplanning 6 participatingmancomunidades of participationof population in andpolicyframework selected on basis of objective the preparation of investment for locally-driven, economic and social criteria. plans and prioritization of integrated indidividual sub-projects. infrastructure service Rural Infrastructure Action Plans delivery. established for each mancomunidad Assess progress indefinition of inaparticipatory manner, involving key policies to achieve mancomunidades, municipalities improvementsinproject's sectors andrural communities, with a (particularly rural electrification, bottom-up prioritization of andrural water and sanitation). investments, and adequate consideration of social and Year 3: Determine outstanding environmental safeguards. planning/policy/regulatory issues that constrain a successful Improved strategy for ruralwater implementation of the project and sanitation provision consistent with decentralization policies, Year 5: Determine outstanding including definition of a financing planning/policy/regulatoryissues mechanismand monitoring that constrain the PDO systems. achievements and/or a successful replication and scale-up. Adoption of a rural electrification policy, integratingall technologies (gridand offgrid), anddefining an efficient financing mechanism and subsidy allocation rules. Outcome 2A: Outcome 2A Indicators: Year 1-5: Assess pace of project Infrastructureworks 0 Kmof roads rehabilitatedwith implementation, identify possible concluded. adequateroutine maintenance constraints -institutional, mechanismsestablished capacity, financial etc., as an 0 Number of new or improved water inputfor defining corrective andsanitation connections measures 0 Number of new electricity connections to households, public and Year 3: Assess effectiveness of productive establishments through (i) applied approachesinCRA and gridextension, (ii) CHORTIandrecommend solar home systems micro-grids, and (iii)changes inmethodologies, service models, institutional set- up, procurement methods etc. for other mancomunidades. 36 Year 5: Assess key performance improvements inthe provision of infrastructure services interms of :osts, quality, delivery :fficiency, etc. Outcome2B: Outcome2B indicators Year 1-5: Continued monitoring Yew service delivery Number of rural road maintenance o f results of the demonstrative models applied and micro-enterprises operating; projects -applied for (i) :ested, with the replication of successful models, sbjective to improve Labor-intensive methods applied in (ii) modifications of designs, :osts, quality rural rehabilitation works; where necessary, (iii) rejection of :fficiency, and deficient models sustainability of Number of MSEs operating water service. or electricity rural systems, with Year 5: Identify strategy for adequatecapacity. scale-up of successful models Number of UTIs with permanent water and sanitation staff for sub- project follow up Number of micro-grids (based on micro-hydro or other renewable technology) operating under sustainable conditions (financial, social and technical capacity); Multiple solar home system providers accredited and participating inthe national solar PV development program. Outcome3: Outcome3 Indicators Year 1-5: Monitor U T I s Improved local Number of UTIs operating with performance- assessing capacity to plan, trained technical staff and adequate effectiveness of trainingreceived manage and budget. and identifying new training/TA implement rural requirements. infrastructure projects. Number of communities (and individual households) trained in Monitor performance of small- sustainable O&M arrangements. scale providers andcommunity- based systems -- assessing Number of infrastructureMSEs effectiveness of training received established inthe three sectors and identifying new training/TA requirements. Year 2-3: Adapt the capacity- buildingprograms on basis of practical experiences inCRA and CHORTI. 37 Year 5: Assess the adequacy of the applied service delivery models inrelation to the local capacity; identify successes and failures of the applied capacity- building exercises. Identify key lessons for follow- upprojects andscale-up. Outcome4: M&Eplanagreed. Year 1-5: Continued monitoring Monitoringand of results EvaluationSystems M&EunitinFHIS staffed. established I UTIs and communities involved in monitoring and evaluation 38 8 8 % 0 8 00 m. m S \o 0 8 0 d 2 E 4 2 W m 0 8 0 N z 8 0- m m w 3 o N w V# m o o 0m o 0 0 8 -B.-5 0 N c.l 0 v, w Ba -4 N 8 -B.- R Y 4a 8 B .- 5 3 3 0 N v , 0 e W .-BB e 0 W 4 0 N N 0 0 0 0 0 0 0 0 0 '4 I e Annex 4: DetailedProject Description HONDURAS: RuralInfrastructure Project The project will be implemented in six mancomunidades, starting with CRA in Santa Barbara and CHORTI in CopBn. Separately, through parallel financing, CABEI will finance rural infrastructure investments intwo or three additional mancomunidades. Component 1 Support to the participatorv local planning;for integrated infrastructure -- service deliverv (US$1.3 million) This component will finance the costs of consultants, workshops, and studies to: (i) rural prepare infrastructure diagnostics in each mancomunidad, (ii) expandkomplement the existing local development plans with infrastructure projects through a participatory process; (iii) establish mechanisms and procedures for approaching the infrastructure issues in an integrated manner among the sectors and localities; and (iv) provide follow up support and monitoring of the overall planning process ineach mancomunidad. The planning process will be based on a continuous interaction with: (i) mancomunidades; (ii) municipal authorities; (iii) communities; and (iv) sectoral agencies, and will pursue the following steps: 1.1. Selection of participating mancomunidades. There are about 50 mancomunidades in Honduras, with different degree of integration, institutionalization and capacity. The project preparatory work has identified 13 priority mancomunidades (eligible for project financing), based on combined criteria of poverty, human development index, economic development potential, infrastructure gaps and degree of institutionalization. While poverty was the criterion with the highest weight (in line with the PRSP priorities), other criteria such as degree of institutionalization were added to ensure a minimumimplementation capacity. On this basis, the first two mancomunidades (CRA in Santa Barbara, and CHORTI in Copan) were selected. The process was overseen by a committee composed of key government stakeholders (Ministry of Presidency, Ministry of Interior and Justice, FHIS, and sectoral agencies). The Project is expected to include four additional mancomunidades, which will be selected using the same prioritization criteria, further specified inthe Operational Manual. 1.2. Participatory infrastructure needs assessment. The assessment will be implemented in each mancomunidad at the start of the planning process, focusing on: (i) identification of key ruralinfrastructure gaps andconstraints; (ii) of existing provisionof services (and service review models) with particular attention to quality and sustainability; (iii)key contribution of infrastructure services to the achievements of the stated development objectives in each mancomunidad; and (iv) identification of potential synergies among the three infrastructure sectors. This assessment will follow participatory methodology, involving communities, local authorities and sectoral agencies. 1.3. Review of existing local developmentplans. The municipalities are required to prepare strategic municipaldevelopment plans (PEDM), ina participatory manner with the communities, 41 following guidelines of the Ministry of Interior and Justice. The Ministry and FHIS provide the TA to develop the plans, and validate them. The assistanceto the municipalities from the central government agencies (such as FHIS) i s then channeled on the basis of these plans. Some mancomunidades also prepare mancomunal development plans, summarizing the municipal plans, and highlighting strategic objectives for territorial development at the mancomunidad level. The review of the existing local development plans in CRA and CHORTI, however, revealed the lack of attention to infrastructure, due to: (i) the belief that this i s a responsibilityof central government agencies, which municipalities cannot influence (particularly in the case of electricity); and (ii)lack of knowledge of possible solutions and service provision mechanisms. Therefore, the project will work with mancomunidades and municipalities to fill this gap in the planningprocess. 1.4. Development of a rural infrastructure action plan (RIAP) at the level of mancomunidad. The project will assist the mancomunidades to develop infrastructure action plans as a complement or sub-set of the mancomunal development plan. Where mancomunal plans do not exist, the project will help the mancomunidades to develop those plans, following participatory processesusedfor PEDMs. The project will coordinate closely with the Ministry of Interior andJustice, overseeingthe preparationof the municipal andmancomunal plans. The RIAPs will be developed on the basis of the above described: (i) participatory infrastructure needs assessment; and (ii)review of the existing local development plans (PEDMs and mancomunal plans). The plan will be developed in stakeholder workshops, including municipalities, communities, FHIS and sectoral agencies. The long list of identified community sub-projects will be prioritized on the basis of an agreed methodology, combining: (i) objective quantifiable criteria, such as the incidence of poverty and extreme poverty; (ii) linkages with the key mancomunal and municipal strategic development objectives; and (iii) exploitation of synergies - among the three sectors, and with other development interventions in the area. This methodology was already used to prioritize the first sub-projects in CRA and CHORTI, with valuable lessons that will be introduced in the next mancomunidades. The methodology will be described indetail in the Operational Manual. The resulting ruralinfrastructure action plans will be validated by the key stakeholders, including the mancomunidad, municipalities and communities. Agreements will be signed among communities, mancomunidades, and sectoral agencies, specifying implementation of the plans. As PIR funds will not be sufficient to cover all infrastructure needs in the participating mancomunidades, where possible, the project will team up with other donors active inthe area, and includethem inpartnerships to implementthe agreed RIAPs. Component 2 -Infrastructure Service Delivery (US$40.2 million) The project will finance technical designs, feasibility studies, civil works, goods, equipment, and services related to the local provision of rural infrastructure, including actions related to the compliance with environmental and social safeguards. This includes: 2.1 Implementation of RIAPs inthe participating Mancomunidades - Roadsub-projects - WaterandSanitationsub-projects 42 - Electricitysub-projects 2.2 Implementation of selected offgrid electrification pilots outside the participating mancomunidades 2.3. Implementation of the national Solar Photovoltaic Program 2.4. Strengthening of the localinfrastructure service providers. Sub-component 2.1 - Sub-projectsprioritizedin Rural Infrastructure Action Plan of the participatingmancomunidades. The project will be developed insix mancomunidades (voluntary associations of municipalities), startingwith CRA (inthe departmentof SantaBarbara) andCHORTI (inCopBn). Muncomunidades CRA and CHORTI: Key Indicators: Mancomunidad Km2 Population Extreme Rural Water Sanitation Rural Road Poverty Pop. Covereage Coverage Elect. Network % % (urban & (urban & inGood rural) rural) or Fair Condition % CHORTI 1916 161052 50.9 73 87 56 CRA 1421 88574 40.4 81 80.4 59.3 24 20 39.2 The project's direct impact on these two mancomunidadescanbe summarized as follows: Roads: Rehabilitating 420 kilometers of municipal core network would, improve access for about 200,000 people. Additional benefits would follow from smaller programs of spot improvement, secondary tranches, Kil6metro Municipal and the implementation of a ruralroad maintenancemicroenterprise pilot. Water & Sanitation: The project would provide water services of acceptable quality to about 6,800 households in the two mancomunidades, including 4,700 who would receive improved services from existing deteriorated systems and 2,100 who would be supplied through new systems. Access to water with acceptable quality would improve from 62 percent to 67 percent (in the absence of the Project, access would decline to 53 percent, due to the deterioration of the systems) Electricitv access: Connections to 4,500 new households would behefit directly over 22,000 persons. Indirect benefits would include the electrification of schools, health centers, community centers, productive uses etc. Access would grow from 33 percent to 38 percent. All sub-projects will meet eligibility criteria, including: Prioritizationwithin the validated RIAPs; w Successful appraisal by FHIS (using sectoral minimum eligibility criteria and appraisalmethodologies described inAnnex 9); and Implementation arrangements demonstrating adequate attention to sustainability (institutional, financial, technical, and environmental-social). 43 2.1.1Rural Roads. This sub-component covers four areas: (i) Rehabilitation of rural roads; (ii) maintenance Road pilot project; (iii) Pilot project on labor-intensive methods for road rehabilitationworks; and (iv) Municipalkilometer program. Rehabilitationof RuralRoads This is the main sub-component of the rural road investment component. It will finance rehabilitation of rural roads, starting with the mancomunidades of CRA and CHORTI, and expand to four additional mancomunidades. The work to be done will restore year-round transitability and ensure physical access tailored to the specific transport needs of the local communities. Though poorly engineered, these roads have geometric standards adapted to the existing terrain and the low traffic they serve. The civil works to be executed on these roads are: (i)upgrading the drainage system by improving existing transversal and longitudinal drainage and constructing new drainage where required; (ii) rehabilitation of existing gravel roads or upgrading of natural surface roads to gravel surface standards; (iii) road segments with very steep gradients or sharp curves will be treated with low grade concrete to prevent erosion and to provide a better riding surface, a method successfully used for many years in Guatemala on low traffic roads. Additionally, this component will finance spot improvements along segments of municipal roads outside the core network. The purpose of this intervention i s to improve short sections of roads that become impassable duringthe rainy season. The type of works will include: (i) construction or rehabilitation of transversal and longitudinaldrainage to prevent the formation of ponds on the road; (ii) protection against erosion of stretches having steep gradients or sharp curves by applying a low grade concrete layer or stone pavements; (iii) rehabilitation or construction of smallbridges(not more than 10meterslong); and (iv) landslide removal. The total core network of the initial two mancomunidades (CRA and CHORTI) comprises 1165 km of which about 420 km have been proposed for improvement or rehabilitation under the project. According to present cost estimates, the above described works ineach of the two initial mancomunidades (CRA and CHORTI) will cost about US$4.49 million (four packages of works are envisaged during project execution - US$2.53 million for CHORTI and US$1.96 million for CRA). The project's intervention will concentrate on the works in the municipal core network. Some minor interventions will be allowed in the network under the jurisdiction of SOPTRAVI and the Road Fund (Fondo Vial), but with a ceiling, that for the case for CRA and CHORTI was US$0.45 million (US$0.25 million for CHORTI and US$0.20 million for CRA) RoadMaintenance Pilot Project, This Pilot Project would establish a system of associated microenterprises (MEs) to carry out satisfactory and cost effective routine maintenance of about 434 km of rural roads currently in fair to good condition and others rehabilitated under the project in the two initial mancomunidades(this is the length of the municipal core network inboth mancomunidades 265 kmfor CHORTIand 169kmfor CRA). The concept will be first applied inCRA and CHORTI, 44 and then extended to the remaining mancomunidades, incorporating lessons from the first year of implementation. The concept will benefit from the existing experience of Fondo Vial with microenterprises on the core network. It is envisaged that the system for routine maintenance by MEs could be extended, within territory of CRA and CHORTI to the whole municipal core network. The unit cost for routine maintenance of rural roads has been estimated at US$ l,OOO/km/year, including labor, tools, safety equipment and mobilization. Consequently, routine maintenance of about 430 kmwill cost US$430,000 per year, plus US$40,000 for supervision. In addition, the local capacity building component will cover expenditures for training, promotions and other technical assistance to mancomunidades, municipalities, communities and microenterprises to strengthen the capacity to implement this model. Pilot project on Labor-Intensive Road Rehabilitation Works. The main objective of this pilot project is to make optimum use of the resources available inthe economy and in the project region where many people are underemployed and natural construction materials are often found in the proximity of the works site. This objective can be achieved by using labor-based equipment supported methods to rehabilitate and improve municipal roads efficiently and to the required standards (the term labor-based equipment supported means labor supportedby machinesrather than machines supported by labor). The pilot project would provide for the selection of a limited number of road sections to be rehabilitated, using labor-based construction methods, in each of the regions of CRA and CHORTI. These road sections would be selected from the roads in the first package to be procured under the project. If the procurement and implementation of the labor-based road sections are successful, more labor-basedroads would be included inthe remaining procurement packagesand extended to other mancomunidades. Municipal Kilometer Program. The project will finance the improvement of some urban streets on a limited number of municipalities. Currently most of these streets are unpaved or are covered by deteriorated pavement. This component will surface some streets with stones or cobblestones. The streets will be chosen through a participatory approach, and the population served by those roads will be an important parameter for the final decision. For both mancomunidades, it i s expected that one km will be rehabilitated, at a cost of roughly US$0.5 million (US$0.25 in CHORTI and US$0.25 in CRA). 2.1.2 Waterand Sanitation This sub-component will finance rehabilitation, expansion and construction of community water and sanitation systems and facilities in rural areas, starting with CRA and CHORTI and expanding to other mancomunidadesin Year 2. Rehabilitation and Expansion of new Water Systems 45 The project will invest about US$4.2 million inthe two mancomunidades of CRA and CHORTI (which with 30% counterpart amounts to US$5.45 million). It i s expected that two thirds would be used for new systems and one third for rehabilitation. It i s also tentatively estimated that two percent of existing systems would deteriorate annually from satisfactory to insufficient water service in the absence of the project. Unit costs are estimated at US$800 per household for new systems and rehabilitation. The resultingestimates for coverage with and without the project in localities with less then 5,000 inhabitants inthe two mancomunidadesare as follows: Table 4.1 The project would thus provide water services of acceptable quality to about 6,800 households in the two mancomunidades, including 4,700 who would receive improved services from existing deteriorated systems and 2,100 who would be supplied through new systems. Many of the remaining Honduran households with no access to water and sanitation services are dispersed, distributed in settlements of 50 to 200 people. This segment i s the most difficult to reach as the cost of access with conventional technologies i s significantly higher compared to rural concentrated communities. The project will therefore develop and apply different service provision models, based on the use of technologies appropriate for dispersed populations. Subprojects will build on FHIS's experiences and lessons learned from its Rural Water and Sanitation Pilot Program, financed under the Fifth Social Investment Fund Project, scaling up lessons learned in DRA innovative technologies for the rural dispersed households, cost recovery, and community contracting of projects. The project will follow a participatory approach to planning and implementation of the sub- projects. In accordance with the Project's Operational Manual, once communities have selected from the long list of priorities. Each community will decide: (i) whether to participate in the project; (ii) the preferred level of service based on willingness and capacity to pay; (iii) how services will be planned, implemented, operated and maintained; and (iv) how funds will be managedand accountedfor. Each community will provide an up-front 30 percent contribution in labor, local materials and/or cash, thus promotingcapital cost recovery and a sense of ownership from users. Duringeach sub project design, local facilitators (NGOs or local consultants) will help communities define tariffs to ensure recovery of operations and maintenance costs, allowing informedchoices on lower cost technologies and more efficient service delivery options presented to them. The tariff model currently usedby FHIS will be reviewed by ERSAPS to ensure an appropriate methodology and that tariff revenuesactually cover operation and maintenance costs. The same approachwill be expandedto the other four mancomunidades. 46 Rural sanitation solutions The project will provide sanitation services under the same conditions as water supply services, i.e. requiring a 30% community contribution and including the costs of sanitation in calculating the tariff. It i s understood that the main options for the evacuation of excreta offered during the project will be: (i) latrines as the most common option; (ii) tanks; (iii) sewers. Small- septic and scale treatment through lagoons will be included as an option, but not as a requirement, following a staged approach to sanitation with priority given to the evacuation of excreta and hygiene education, followed by treatment at a later stage. Other treatment options (activated sludge, Imhoff tanks etc) have been excluded during appraisal due to their high costs, especially interms of operation andmaintenance. Even more than in the case of water supply, a demand-responsive approach will be necessaryin sanitation to ensure that service levels are aligned with willingness and ability to pay of the beneficiaries and to avoidcostly solutions at the expense of the unserved population. Water and Sanitation Operationand MaintenancePilot Project. To strengthen incentives for sustainable service provision, the service delivery models will be developed with the mancomunidades. The water boards (juntas de agua) as the main service providers will be strengthened through more commercial operating practices with a view to promotingthe long term sustainability of the services. Synergies will be built with the rural road maintenancemicroenterprise pilot and offgrid electrification. 2.2.3 RuralElectrification. This sub-component will finance access to electricity service through: (i) extension of the an national power grid; and (ii) offgrid electrification. Sixty sub-projects were identified in CRA and CHORTI, benefiting 4,680 households (22,787 persons) and expanding the rural electrification rate inthese two mancomunidadesfrom 33.3 percent to 38.4 percent. Grid extension This sub-componentwill finance extension of ENEE's gridinthe non-electrifiedcommunities in the selected mancomunidades, starting with CRA and CHORTI during the first year, and gradually extend the coverage into four additional mancomunidades. Grid extension is likely to be the most economical solution for the majority of non-electrified communities. The component builds on the successful grid extension program implemented through FOSODE (ruralelectrification fund, administered by ENEE).Where practical, therefore, grid extension will follow FOSODE's procedures and implementation mechanisms. However, the project will introduce some innovations to FOSODE's planning and implementation procedures to ensure: (i) greater responsiveness to the local demand; (ii) improved efficiency in allocating resources; and (iii) improved sustainability. These include: 47 Bottom up prioritizationof the sub-projects by mancomunidades and communities (as opposed to the current national level centrally managed prioritization by FOSODE). Local prioritization, together with the project's territorial, multi-sector integrated approach to infrastructure service provision, i s expectedto leadto a greater efficiency inresource allocation andenhancethe project's development impact. Community contribution - communities will be required to cover a portion of investment costs (up to 15%). Introduction of least cost analysis - grid extension projects will be compared to other (offgrid) alternatives. The project will finance only those grid extension projects that are the least cost solutions to extending the service (while the offgrid component will finance those projects where offgrid technologies represent lower costs). Introduction of financial sustainability screening criteria, based on a comparison of tariff revenueswith O&M costs. The project will finance those grid extension sub-projects that have been prioritized in the RIAPs, and pass the minimum eligibility criteria. In addition, high cost projects (above US$1,500 per connection) will have to undergo a special, detailed cost-benefit analysis, confirming their eligibility. CRA and CHORTZ sub-projects. The prioritization process has resulted in the selection of 59 sub-projects benefiting 4,578 households(with an averagecost per connection of US$768.). Communitv offgrid electrification Experience with offgrid electrification is very limited in Honduras. The project preparatory work, however, has identified potential for offgrid electrification for remote communities, using local natural resources, particularly hydrological. The project will therefore design and implement pilot offgrid electrification interventions for offgrid communities. Most of these sub- projects are expected to be micro-hydro grids, but other technologies (renewable, traditional and hybrids) will be considered. As inthe case of the grid extension projects, all sub-projects will be required to meet eligibility criteria, including: (i) prioritizationwithin the RIAPs; (ii)community financial contribution; (iii) least-cost analysis; (iv) cost-benefit analysis; and (v) sustainable O&M arrangements, includingtariff covering O&M cost. The micro-gridprojects will be implemented by mancomunidades, with TA and oversight by the sectoral agencies. Service delivery arrangements will be developed together with mancomunidades and communities, and may involve community-based organizations (similar to water boards), cooperatives, NGOs and small scale private sector. In addition to residential use, the power will be used for productive applications, such as refrigeration of milk, fish and produce, grain milling, and the like. Best practice for social organization and financial intermediation will be piloted. Synergies will be sought with the organizational models developed for water and roads sector (particularly with the micro enterprise pilots). CRA and CHORTZ. Project preparation has identified five possible sites, of which the first one, La Atravesada (mancomunidad CHORTI), was prioritized for the second year of the Project. La Atravesada will serve about 150households inthe communities of San Marcos, La Nueva Virtud and Las Palmas. In addition to domestic lighting, power will be provided to community centers and to small agro-processing activities in these three communities. The remaining sites have all 48 been prioritizedby mancomunidades, but are still subject to confirmation of technical feasibility and least-cost analysis. The project will seek additional GEF financing to complement this component (US$1.2 million), mainly for complementary TA activities. Subcomponent 2.2. Implementation of selected offgrid electrification pilots outside the participatingmancomunidades Given the novelty of offgrid electrification solutions, using local renewable resources, such as micro-hydro, the project will finance some pilot projects, which will be located outside the participating mancomunidades, to test these solutions, build greater awareness about these solutions, and apply early lessonsinthe participating mancomunidades. As a startingpoint, it has been agreed that the project will co-finance two micro-hydro projects identified and developed with EUfunds (program GAUREE)." If successful, it i s expected that EUco-financing mightbe applied for other micro-hydro projects identifiedandprioritizedinthis project. Subcomponent 2.3: Solar Photovoltaic Programand renewable electricity pilots The solar PV program will provide electricity service to dispersedhouseholds inrural areas that cannot be economically serviced by gridextension or mini/micro-grids. The solar PV program aims at installing approximately 5,000 household units averaging 43 peak Watts each and about 100 institutional and productive applications. The program will channel subsidies for solar home systems to: (i) increase affordability of PV systems for low income users; and (ii) stimulate the market through increased market size and reduction of market barriers. I t i s expected that this program will follow a "dealer model" successfully implemented in other countries, both regionally (e.g. Nicaragua) and worldwide (e.g. Sri Lanka). Best practices from these projects will be applied. Participation of micro-finance institutions will be sought to provide consumer credit for the PV systems. Targeting the poor will be achieved through the inclusion of lower-cost smaller systems in the subsidy program, and introduction of micro-financing to further enhance affordability. The subcomponent will also target specifically institutional and productive applications of PV (expected to install a total of 30 kW of systems). Due to the need to achieve economies of scale, the program will be managed nationally, but special incentives will be introduced to ensure priority targeting in the participating mancomunidades.The program will be managed by FOSODE from the technical point of view, with FHIS in charge of disbursement of subsidies. FHIS will release the grants and subsidies to the private contractors only after sales and installations have been verified. The project will lo. The two micro-hydros are not inthe territory of the two prioritizedcommunities, but were included at request of the Government, given that the project PIR would leveragealready approvedEUfinancing for these projects. 49 contribute US$1.6 million for this program, with additional US$O.9 million to be co-financed by the GEF grant. Sub-component 2.4: Strengthening of local infrastructure service providers The project will use a variety of service provision models, with varying institutional and ownership structures (public sector, municipal, community-based, private, NGOs etc.). However, with the exception of ENE, e common feature of these service providers i s their small scale. Therefore, significant attention will be paid to capacity building of these small scale providers, to ensure service quality, efficiency and sustainability. Examples of the small scale service providers supportedby the project include: 0 Ruralroad maintenancemicroenterprises 0 Community water boards 0 Community organizations operating micro-hydros 0 Small and micro enterprises for water and sanitation systems 0 Small and micro enterprises inoffgrid electrification. 0 Infrastructure multi-service micro organizations In all three sectors, the best practices from other projects worldwide highlight the need for sustained training of these small scale service providers. At the start of the project, the training will be provided particularly by consultants, but it will be gradually delegated to UTIs and sectoral agencies as the capacity and understanding of these sector provision models are built into these institutions. The key areas of training will include, among other: 0 Technical training 0 Financialmanagement training 0 Business development 0 Quality monitoring 0 Maintenance and repairs 0 Collection of data inputsfor the existing national information systems In the case of the water and sanitation, the TA role is by law given to SANAA. Outside assistance would therefore be under the overall coordination and leadership of SANAA, which will be strengthenedby the project. The actual provision of TA, however, will rely on multiple channels, including SANAA staff, UTIs, and independent consultants, including TOMS (TCcnicos de Operaci6n y Mantenimiento) and TAS (TCcnicos de Agua y Saneamiento), which usedto be SANAA staff. Component 3 Local Capacity Buildingand Policy Development TA (US$3.5 million) - This component will finance consulting services, training, goods and other TA to enhance the capacity of implementing agencies and key stakeholders, on both the national (FHIS and sectoral agencies) and local levels (UTIs, UTMs, and communities). The main objectives of this component i s to enhance local capacity to plan and implement decentralized, integrated rural infrastructure programs, using the territorial approach, contributing to the decentralization and local capacity buildingobjectives of the Government. 50 3.1. Capacitybuildingat the nationallevel The project will also provide support (consulting services, training and goods) to FHIS and sectoral agencies at the national level to ensure effective coordination and consistency between the project's approach and broader sector strategies and policies, contributing to the project's long-term sustainability and its replication and scale-up. The assistance will focus particularly on the following areas: 0 Development of rural infrastructure strategies and action plans, with focus on multi- sectoral, territorial approach 0 Support to the sector reform agenda, in areas affecting rural infrastructure: this i s particularly relevant inthe water and sanitation sector; 0 Support to the sectoral agencies to comply with their new roles and responsibilities (such as ERSAPS for the WSS regulation and project analysis and sustainability criteria, SANAA for TA to the mancomunidades, CONASA for the planning and resource allocation for water projects at the rural level, FOSODE to expand its scope of activities to offgrid electrification, CNE for offgrid electrification regulation etc.) 0 Transformation from "implementers" to "facilitators" -- sectoral agencies will be trained to provide TA and other capacity building services to mancomunidades, municipalities and small-scale service providers. 0 Integrationof the project's successfulexperiencesinto the national sector programs. 3.2. Capacitybuildingat the local level UTIs in the mancomunidades are the key institutional building blocks for the project, The objective of the component i s to strengthen their capacity to be effectively able to plan, implement and oversee the provision of the rural infrastructure services in the mancomunidad. The strength of UTIs varies across the mancomunidades. The first two mancomunidades, CRA and CHORTI, were selected partly on the basis of their relatively high levels of institutionalization and technical capacity of their UTIs. Nevertheless, considerable capacity buildingis required, particularly for the following areas: 0 Integrated, territorial, locally-drivenplanningapproach; 0 Sector specific issues related to planning of infrastructure services, such as possible service delivery models; 0 Procurement and financial management; 0 Supervision of the infrastructure service providers and provision of TA to communities and small-scaleprivate service providers; 0 Monitoring and evaluation; and 0 Environmental and social aspects. Curerntly, UTIs are formed by seven staff in CHORTI (including one infrastructure and one local development coordinator) and three staff in CRA. CHORTI's UTIi s better staffed because 51 more donors have been involved in that mancomunidad. To implement the project, the component will finance training and TA activities for UTIs, and additional temporary staff, where needed. In the medium term, however, all UTIs staff need to be financed by participating municipalities. To ensure efficient implementation, the project will also provide the UTIs limited financing for goods andequipment. The TA will be providedby FHIS, incoordination with sectoral agencies, supported by capacity building consultants hired by the UTIs or FHIS as required (particularly for more specialized areas). The capacity building activities will be particularly strong in areas that are new for municipalities (such as water and sanitation, offgrid electrification, rural road maintenance and the microenterprise model), and areas that in the past experienced sustainability problems. All UTIs will require substantial training on procurement issues and Bank safeguard policies too. The capacity of the UTIs will be evaluated every year. Their responsibilities will be defined to develop capacity gradually. Where appropriate, the project will also strengthen the technical units of municipalities (UTMs), and other regionally-based organizations, such as SANAA'S regional offices, relevant NGOs, and inthe case of water and sanitation, local technicians, TOMS and TAS. Training andTA will be also provided the communities for the following areas: Infrastructure planning - to ensure their informed participation in the territorial, integrated infrastructure planning process; Service provision choices -consultants and facilitators will discuss possible technologies and models of service provision with the communities (particularly important for water and sanitation and offgrid electrification) so that communities can make informed choices' User rightsandresponsibilities (O&M, tariffs, complaints etc.); Environmental and social aspects of service provision (watershed management etc.); and Efficient infrastructure use to enhance development impact - such as productive use of electricity, hygiene education to enhanceW&S interventions and the like. Component 4 -- Praiect management, monitoring and evaluation (US$2 million) The Project will finance a small PCU in FHIS in charge of the coordination. Where feasible, however, the project will rely on the existing institutional structures and processes in FHIS for project implementation. The PCU will consist only of the project coordinator, and sectoral experts. Given the Project's complexity and various novel features, close attention will be paid to monitoring and evaluation (M&E). A detailed M&E plan will be established to measure: (i) progress towards the achievement of the project's physical outputs; (ii) progress towards the achievement of intermediary and final outcomes; and (iii) compliance with the established procurement, financial management and social and environmental safeguards procedures, including an assessment of the extent and effectiveness of community participation in the sub- project selection, design and implementation. The M&E system will be managed by FHIS. The implementation will rely on FHIS M&E specialists (shared with other Bank and other donor projects), strengthened by sectoral specialists in the participating sectoral agencies, and other 52 experts as needed. To the extent possible, monitoring will be delegated to the UTIs. The information will be analyzed and evaluated by FHIS in coordination with sectoral agencies (Advisory Committee), and mancomunidades and serve as an input for the examination of the implementation approaches and their fine-tuning. The impact evaluation will be carried out as far as possible jointly with other Bank-financed operations implemented by FHIS, in order to learn about common impacts as well as differences inoutcomes. 53 Annex 5: Project Costs HONDURAS:RuralInfrasctructure Project ~ ~~ Local Foreign Total Project CostBy Component US $million US $million US $million Component 1- Support to the participatory local 0.5 0.8 1.3 planningfor integrated infrastructure service delivery Component 2 - Infrastructure Service Delivery 37.2 3.0 40.2 2.1 RIAPSub-projects ....2.2. Offgridcommunity electrificationpilots 34.0 2.0 36.0 0.5 0.2 0.7 outside mancomunidades .......2.3. SHS program 0.3 2.4 2.7 .2.4 Strengthening of local infrastructure service 0.4 0.4 0.8 providers Component 3 -Localcapacity buildingand policy 2.0 1.5 3.5 development TA Component 4 -Project Management, Monitoring 2.0 0 2.0 and Evaluation Total Baseline Cost 37.7 9.3 47.O Contingencies Total Project Costs' 37.7 9.3 47.O Front-endFee Total Financing Required 37.7 9.3 47.0 Project Cost By Category Local Foreign Total US$ million US$ million US$ million Works 33.0 3.O 36 ConsultantServices 3.4 3.4 6.8 Training 0.2 0.3 0.5 Goods 0.6 2.6 3.2 Operating Costs 0.5 0.0 0.5 Total Project Costs 37.7 9.3 47.0 Front-end fee Total Financing Required 37.7 9.3 47.0 54 Annex 6: ImplementationArrangements HONDURAS: RuralInfrastructureProject Implementationstrategy The project's implementation strategy consists of the following five elements: Multisectoral approach to infrastructure planning and delivery. There i s evidence that development impact rises significantly with a larger number of infrastructure services provided. For example, a recent study from Peru" shows that the combined effect of access to two services (water and telephone in this case), leads to a 38 percent increase in rural household income, compared to the sum of individual effects of these two services, reaching only 11percent. To maximize the development effect, therefore, joint service provision i s recommendable. Similar conclusions are being derived from a broader, asset-based analysis of rural development for Honduras.12 It should be remembered, however, that despite some common features, each infrastructure sector has its own set of issues and different policy, institutional and regulatory frameworks. Lumping these sectors together inevitably increases the project's complexity. Therefore, in the case of Honduras, a decision was made to limit the interventionto a maximum of three sectors (electricity, water and sanitation and roads). Even so, due to the fragmented structure for infrastructure planning in Honduras, this will require the involvement of eight agencies at the national level. Spatial (territorial)approach to local development. Figure4.1 LocalDevelopment Framework Honduras, like many other developing countries, i s moving toward the decentralization of public services, including infrastructure. As in many countries, these services traditionally were provided by a mixture o f (i) central sector agencies; (ii) governments; and (iii) local social investment funds under community driven development (CDD) principles, with limited interaction between the three approaches. The spatial approach aims at integrating these mechanisms within a certain territory (mancomunidad in this case), spurring efficiencies in planning, provision and monitoring of rural infrastructure services. The project will draw on the Bank's recent work in this area, such as a Local Development Framework Paper13, which provides guidelines for better integration of the traditional service delivery methods within the spatial approach to support improved service provision, empowerment, governance and private sector growth. Inclusion of the localprivate sector in serviceprovision. The provisionof basic services inrural areas through local communities or through municipalities has not solved the basic problem of l1Escobal and Torrero, 2004 l2For example, the forthcoming Drivers of Sustainable Rural Growth and Poverty Reduction in Central America (Honduras Case Study) advocates the "move from geographically untargeted investments in single assets to a more integrated and geographically based approach of asset enhancement with proper complementarities." l3Linking community Empowerment, Decentralized Governance, and Public Service Provision through a Local Development Framework, 2005 55 lack of sustainability and poor service quality. This has promoted a culture of dependency, tied up funds needed for system expansion in system rehabilitation and ultimately undermined full ownership by the communities, since they continue to call on outside assistance for rehabilitation. Localprivate entrepreneurstend to have a stronger incentive to maintain and even expand systems and to collect tariffs, providing value for money. In many countries, local communities, once convinced of the approach and empowered to contract services, have proven highly imaginative indesigning solutions tailored to local realities. However, political leadership at the local level and some targeted technical assistance in contract management are essential to make such a new approach successful. Enabling environment 1coordination. One of the challenges of decentralized service planning and provision is establishing effective linkages with nation-wide sector planning and strategies. This i s particularly important for infrastructure services, which are network industries and often require economies of scale. The project will facilitate interaction between the local and central government levels to ensure that the local development experiences feed into the sectoral policies and successful models can be replicated and scaled up at the national level. In all three sectors, good coordination between the mancomunidad and the sectoral agency is needed to maximize efficiency and development impact of investments. (For example, rural roads feed to the official network, which need to be properly maintained-or, as another example, coordination with FOSODE is neededto identify the communities included in the existing rural electrification plans.). In addition, mancomunidades and municipalities will require substantial TA, which insome cases is bestfacilitated by the sectoral agencies. Local capacity building. It has been acknowledged that the lack of local capacity is one of the main risks for the reforms involving a transfer of responsibilities for infrastructure provision to local levels. Efficient and sustainable provisionof infrastructure, with adequate quality, i s often a task beyond the local capacity. Without an appropriate TA, it may lead to: (i) delays in implementation; (ii) distortions in sub-project selections (avoiding more complex projects); (iii) higher costs and/or; (iv) quality and sustainability problems. Therefore, local capacity buildingi s one of the project's key objectives and components. An integrated approach to local development in Honduras should support coordinated strengthening of communities, municipal governments and sectoral agencies to promote effective and responsive human, social and economic development. Figure4.2 - A Conceptual Frameworkfor Local Development I NationalPolicv and InstitutionalEnvironment 3 I I I I I I 56 ImplementationstructureThe Project's implementation structure has five key buildingblocks: (i) (ii) FHIS, mancomunidades; (iii) communities; (iv) infrastructure services providers; and (v) sectoral agencies. The project, in its majority (above 70% of total funding) will be implemented by mancomunidades under the close supervision of FHIS. Mancomunidades will be in charge o f (i)developing their Rural Infrastructure Action Plans (RIAPs), in which they will prioritize their sub-projects, and contract out and supervision of these subprojects up to a certain ceiling (US$250,000 per subproject). For this task, they will receive substantial technical assistance from FHIS, consultants contracted under the project, and sectoral agencies. Mancomunidades will also contract infrastructure service providers to operate and maintain the constructed systems. Inmany cases, theseoperators will be localsmall and micro-enterprises or communities - themselves, which will also require substantial training in technical, commercial and other relevant aspects of their enterprise. The training will be provided by UTIs of the mancomunidades, specialized consultants and sector agencies. Sector agencies will accompany the project on both the strategic level and the implementation level to ensure consistency of policies and approaches and to provide technical assistance on sector specific issues where needed. Figure5 Implementationstructure MINGAND~TIZATION 57 CAPACITY BUILDING MONITORINGAND EVALUATlON Key stakeholders FHIS: FHIS is a social investment fund. Throughout the 1990s, FHIS has been the principal - government agency for financing small-scale civil works in the social sectors. FHIS was originally mandated to finance social infrastructure, but has expanded to encompass a broader range of services and infrastructure to meet local demand. In line with the Government's decentralization agenda, the role of FHIS has recently been changing, from the implementer to the facilitator of the local development projects, focusing on technical assistance to the local governments for the planning and provision of services at the local level. This strategy i s also supportedby other donors (mainly IDB andKfW). FHIS was selected by the Government as the key implementingkoordinating agency for the project, basedon the following considerations: 0 Experience with multi-sector projects; 0 Government's decision to reformFHIS to support the decentralization process; 58 0 Recent experience with local development projects channeling funds directly to municipalities and mancomunidades; 0 Efficient project execution (fast disbursements); 0 Experience with World Bank projects (the Nuestrus Raices and FHISV projects); and 0 Government's desire to coordinate various donor interventions supporting local service provision, through working with the same implementation agency. This choice was confirmed by the Bank's Honduras local development study, which endorsed the Government's decision. In addition, FHIS is expected to be a key implementing agency for the parallel urban development project (Barrio Ciudad). The complementarities and synergies between the two projects call for compatible implementation arrangements. FHIS will have overall responsibility for project implementation and coordination at the national level. A Project Coordinating Unit (PCU) will be established within FHIS to carry out these functions. The PCU will be small, consisting only of a coordinator and sectoral staff. Project administration otherwise will be mainstreamedinto the existing FHIS structure. The subprojects of the Rural Infrastructure Action Plans will be implemented mostly by mancomunidades, which will be in charge of procurement of works up to US$250,000 under the close supervision by FHIS. The capacity of mancomunidades will be evaluated every year and the responsibilities will be transferred gradually from FHIS to mancomunidades. In all cases, FHIS will have the responsibility for overseeing project implementation, including procurement, financial management and all Bank-required safeguards. FHIS will also be responsible for monitoringthe achievement of the project development objective and performance indicators. FHIS will sign framework agreements (convenio marco) with participating mancomunidades, and will follow procedures established in the Operational Manual (largely based on the new operational model that FHIS uses for its support to municipalities and mancomunidades). FHIS will provide technical assistanceto mancomunidades intwo key areas: (i) development of Rural Infrastructure Action Plans, following guidelines in the Operational Manual and those developed by the Ministry of Interior and Justice for municipal strategic development plans (PEDM); and (ii) procurement,implementationandsupervisionofsub-projects.Althoughthe design, sub-projects will be selected by mancomunidades, FHIS will also screen the projects to ensure that they meet minimum eligibility criteria, with the assistance of sectoral agencies, where needed. FHISwill be assistedinthe provisionof TA to mancomunidades by aconsultingfirm, individual consultants (where needed) and sectoral agencies. Participation agreements will be signed with the sectoral agencies, specifying their roles and responsibilities in the project, including for TA provision to mancomunidadesand small infrastructure services providers. Mancomunidades There are 298 municipalities in Honduras. The municipalities receive 5 percent transfers from the central Government, managed by the Ministry of Interior and Justice. This Ministry i s also 59 responsible for the overall municipal decentralization, and along with FHIS, provides TA to municipalities for development and implementation of their municipal strategic development plans (PEDM). Most of the municipalities are small (56 percent have populations of less than 10,000). To overcome the size constraint, many municipalities opted to form mancomunidades, which are associations of municipalities formed for a common objective. The Municipal Law establishes the right of municipalities to form these mancomunidades, which vary by size and by objective. The most common purpose of mancomunidadesi s for environmental management, followed by regional development, capacity building, promotion of joint interests/institutional coordination, andinfrastructure and service delivery. There are about 50 mancomunidades in Honduras, at different degrees of institutional development. Some of them are quite weak, and are basedonly on donor support. More mature mancomunidades (such as CRA in the Santa Barbara department), however, have proven to be institutionally strong and resilient, despite changes of local authorities after municipal elections. Most of the mancomunidades have created inter-municipal technical units (UTIs), staffed with technical and administrative staff, financed by transfers from each municipality, to manage the development programs at the mancomunidad level. The mancomunidades were chosen as the key implementation partnersfor the Rural Infrastructure Project, given that: 0 The mancomunidadesconstitute larger territorial units (as opposedto the individual municipalities) more suitable for the territorialdevelopment approach of infrastructure service delivery; 0 Some of the infrastructure sectors, such as roads or electricity are network industries, and can be delivered more efficiently ina larger territorial setting; 0 They are voluntary associationsof municipal governments, therefore directly representing local authorities, which the decentralization process aims to strengthen; 0 There is an opportunity to create adequate capacity inthe UTIsfor infrastructure service provisionina more efficient manner (it would not be feasible or economic to create the same capacity ineachmunicipality). The project preparatory work has identified 13 priority mancomunidades (eligible for project financing), based on combined criteria of poverty, human development index, economic development potential, infrastructure gaps and degree of institutionalization. While poverty was the criterion with the highest weight (in line with the PRSP priorities), other criteria such as degree of institutionalization were added to ensure a minimumimplementationcapacity. On this basis, the first two mancomunidades (CRA in Santa Barbara, and CHORTI in Copan) were selected. The process was overseen by a committee composed of key government stakeholders (Ministry of Presidency, Ministry of Interior and Justice, FHIS, and sectoral agencies). The project i s expected to include four additional mancomunidades, which will be selected on basis of the above mentionedprioritizationcriteria, described indetail inthe Operational Manual. The municipalities are required to prepare local development plans, in a participatory manner with the communities, following guidelines of the Ministry of Interior and Justice. The mancomunidades also prepare mancomunal development plans, summarizing the municipal plans, and highlighting strategic objectives for territorial development at the mancomunidad 60 level. The review of the existing local development plans in CRA and CHORTI, however, revealed the lack of attention to infrastructure in these plans, due to: (i) the belief that this i s a responsibility of central government agenciesthat municipalities cannot influence (particularly in the case of electricity); and (ii) of knowledge of possible solutions and service provision lack mechanisms. Therefore, the project will work with mancomunidades and municipalities to fill in this gap in the planning process and establish rural infrastructure action plans (RIAPs) as a sub- set of the strategic plans of the mancomunidades (PEDMs). Mancomunidades will be in charge of the preparation of the Rural Infrastructure Investment Plans (RIAPs - see Annex 4, component 1 for details), in a participatory manner, following Operational Manual guidelines, and with technical assistance from FHIS. They will also be responsible for decisions about service provision models (with corresponding guidance from FHIS and sectoral agencies); implementation of sub-projects (up to their certified level); and supervision, monitoring and evaluation of the sub-projects. UTIs will also play an important role in providing TA to small scale infrastructure service providers and overseeing service quality and sustainability. Substantial TA will be available to UTIs from FHIS, sectoral agencies and specialized consultants. On basis of the procurement assessment, the mancomunidades CRA and CHIORTI were certifiedto conduct procurement for sub-projects upto US$250,000. The mancomunidades will also be requiredto provide counterpart funds for the sub-projects. On basis of the existing best practices in each sector in the country, the counterpart funds were establishedat 15%for roads and electrification sub-projects, and 30% for water and sanitation. Communities The communities will actively participate in all project stages: (i) planning and sub-project prioritization; (ii) selection of technologies and service provision standards and models; (iii) smaller civil works; (iv) operation and maintenance of the community-owned systems; and (v) monitoring and evaluation. Therefore, it i s necessary that the communities be well informed and trained to make educated choices and contribute effectively to the Project's impact and sustainability. Communities may be directly contracted for some smaller works, where justified under the Bank guidelines and complying with procedures in the Operational Manual. These works would include, for example, smaller water and sanitation systems (under US$50,000, following FHIS's successfulexperience), smaller and simple ruralroadrehabilitationworks (also under US$50,000), and community microenterprises for rural road maintenance. Some community organizations or microenterprises will also operate water and sanitation and offgrid electrification micro-grid systems. Infrastructure serviceproviders With the exception of ENEE,most of the infrastructure service providers will be local and small. The project will provide technical assistance to these newly created service providers (communities, NGOs, microenterprises etc.). Special attention will be paidto the development of new, more sustainable service provision models, such as small and micro-enterprises. The 61 project will also attempt to exploit synergies increating multi-sectoral rural infrastructure micro- enterprises. In all three sectors, the best practices from other projects worldwide highlight the need for sustained training of these small scale service providers. At the start of the project, the training will be provided particularly by consultants, but it will be gradually delegated to UTIs and sectoral agencies as the capacity and understanding of these sector provision models are built into these institutions. The key areas of training will include, among other: 0 Technical training 0 Financial managementtraining 0 Business development 0 Quality monitoring 0 Maintenance and repairs 0 Collection of data inputsfor the existing national information systems Sectoral agencies Sectoral agencies will be involved at two levels. At the strategic level, an advisory committee will be established, consisting of the Ministry of Presidency, Ministry of Interior and Justice (in charge of the decentralization reforms), AHMON (association of municipalities), and the sectoral agencies (SANAA and ERSAPS for water & sanitation, SERNA and ENEE (FOSODE) for rural electrification, and SOPTRAVI and Fondo Vial for the rural road sub-sector). Inaddition, at the operational level, the agencies will sign participation agreements with FHIS, in which their role and responsibilities will be specified. These responsibilities will vary across the sectors, reflectingdifferent institutional arrangementsineach sector, but in general they will include: Coordination mechanisms ensuring consistent approaches and complementarity between the PIRproject and the projects implemented directly by the sectoral entities 0 Assistance to FHIS on sector-specific, technical issues, including sub-project evaluation, screening criteria, preparation of technical specifications, review of the technical designs etc. 0 Technical assistance and training to FHIS, UTIs and small-scale infrastructure service providers for design, implementation and O&M of the infrastructure systems (a type of "help desk" arrangement) Effective integration of the sectoral agencies into the project i s neededinparticular for water and sanitation (due to the ongoing reform) and electrification (due to the lack of experience of FHIS with this sector). In April 2005 FHIS signed a framework agreement (convenio marc0 de cooperaci6n tCcnica y financiera) with SANAA, the national agency which is in charge of providing technical assistanceto service providers under the new Water Law. While the framework agreement i s not specific to the project, it provides a useful umbrella. The framework agreement foresees the possibility that SANAA would, at the request of FHIS, participate in all phases of the project cycle for water and sanitation projects executed by and financed through FHIS (Art 3.1), in particular through technical supervision of works (Art. 4c). At the same time, the framework 62 agreement foresees training by FHIS for SANAA staff in the use of its methodology (Art 3.2.6), thus indicating a certain weakness of SANAA in this respect. The framework agreement would need to be complemented through a project-specific agreement that would specify exactly the obligations of FHIS andSANAA under the RuralInfrastructure Project. In the electricity sector, a participation agreement will be signed with the rural electrification fund, FOSODE. This fund, basically, will serve as a technical arm of FHIS, assisting FHIS, mancomunidades and communities in all technical aspects related to rural electrification. One reason for adopting this structure i s that over half of the electrification investments are for grid- extension subprojects, a field in which FOSODE has both expertise and sectoral responsibility. Inaddition, the Government has expressedinterest inbroadening FOSODE's mandateto include offgrid electrificationoptions and has requestedthe Bank's assistancefor this task. Execution of the grid-extension subprojects will follow proceduresestablished in P R for multi- sectoral delivery of services to selected mancomunidades. Essentially, mancomunidades will be allowed to procure works under US$250,000, under the supervision of FHIS (fiduciary) and FOSODE (technical). For the microhydropower (MHP) plants, FOSODE will act as the technical arm of FHIS and the relevant mancomunidades or communities in all phases of subproject development: helping to identify candidate sites, confirming availability of the hydro resources, helpingidentify suitable productive uses, drafting consultant terms-of-reference for feasibility studies, helping in the oversight of the construction of the plant and network, organizing and training local operators, and monitoring plant operation by the community. Inthe case of the solar sub-program, FOSODE will again be incharge of the technical aspects, including establishing technical specification and performance standards, accreditation of PV companies to participate in the program, providing market development support (promotions, etc), making arrangements with financing institutions, verification of eligible installations and arranging for release of applicable GEF grants and government subsidies by FHIS to the participating companies. FHIS will also administer the subsidies. Roles and Responsibilities Entity Roles and Responsibilities Advisory Committee Strategic guidance andoversight of project implementation, policies and inter-sectoral coordination (Ministry of Presidency, 0 Strategic supervision of project implementation, Ministry of Interior and providingthe strategic view of its principles and Justice, Sectoral policies Entities, AHMON) 0 Coordination among institutions involved inproject activities 0 Provisionof political/institutional support to project implementation andbudgetary strategies to support territorial approachto investments. Ministry of Presidency Strategic guidance on poverty reduction and other 63 Roles and Responsibilities Entity Roles and Responsibilities Government priorities Ministryof Interiorand Strategic direction on decentralization issues Justice Transfer of Government's budgetary contributions to municipalities Validation of municipal strategic localdevelopment FHIS Management and administration of the project, with the ultimate responsibility for compliance with project requirements,including safeguards, legal agreement, Operational Manual, procurement, FMand other administrative requirements. Official communications with the World Bank (no objections etc.) Monitoring of compliance with requirements and procedures established inthe legal agreement and the Operational Manual, monitoringand evaluation of the implementationprogress and achievement of the project development objectives. Convenes Advisory Committee meetings Signingoff on the transfer of resourcesto mancomunidadesfor the implementation of their RIAPs TA and supervision of procurement activities of UTIs Procurerment of works, goods, and services not in jurisdiction of UTIs Provisionof technical assistance to UTIsfor planning, contracting, and supervision of infrastructure services Approval of sub-projects basedon eligibility criteria and evaluation methodology included inthe Operational Manual Signsparticipation agreement with the sectoral agencies. Signsframework agreementswith mancomunidades Coordinates the need assessment Mancomunidades -- Preparation of participatory, territorial Rural UTIs Infrastructure Action Plans (RIAPs), according to the guidelines provided inthe Operational Manual Designof sub-projects with the assistanceof FHIS, sectoral agencies and specialized consultants, decision on service provisionmodels Procurement of works, goods and services up to their 64 RolesandResponsibilities Entity RolesandResponsibilities certifiedlevel Signingof contracts with localinfrastructure service providers (for sectordareas of their competence) Signingof agreementswith participating communities r Provisionof TA to local service providers Supervision, monitoring and evaluation of local infrastructure service provision Communities Participation inthe planning process andpreparation of Rural Infrastructure Action Plans (RIAPs) Validation of Rural Infrastructure Action Plans (RIAPs) Consultations on and validations of technologies, service provision standards and models at the community level Insomecases: execution of small works 0 Insomecases: operationandmaintenanceofthe infrastructure systems 0 Monitoringand evaluation of the service provision Infrastructure service Service provisionbasedon the contracts signedwith providers mancomunidades Sector agencies Sign participation agreementswith FHIS, specifying: 0 Coordination mechanismensuringconsistent (SOPTRAVI, Fondo approaches and complementarity between PIR projects Vial, SANAA, andthe projects implemented directly by the sectoral ERSAPS,ENEE entities Assistance to FHISon sector specific technical issues, including sub-project evaluation, screening criteria, preparation of technical specifications, review of technical designs etc. TA andtraining to FHIS, UTIs and small-scale infrastructure service providers for design, implementation and O&M of the infrastructure systems. I 0 Additional TNtraining requirements (to be financed by the project) of the sector agenciesto be able to fulfill their functions andresponsibilities specified in the participationagreements. 65 Sector agencies Specific roles and responsibilities for the PIRproject (specified inParticipationAgreements) SOPTRAVI Sector role: Roadpolicy makingentity. Responsibilitiesin theparticipation agreements: Provide guidance to FHIS on rural roads related ~ issues. Provide TA to UTIs inthe preparation of rural road rehabilitation programs. 0 Informregarding the status of the rehabilitation programs inthe official network located inthe TCN of I the mancomunidadesincluded inthe project. Fondo Vial (Road Fund) Sector role: To maintain the official roadnetwork. Responsibilitiesin theparticipation agreements Provide guidanceto FHIS and UTIs for putting in ~ place aMEprogram for maintainingthe municipal road network to be rehabilitated under the project. This assistancewill also cover the matter of ME'S supervision. 0 Provide maintenanceto the crucial road segments located inthe official network of the mancomunidades included inthe program. SANAA Sector role: Policy-making(Executive Secretariat of CONASA, andTA for decentralizedwater and sanitation provision. Responsibilitiesin theframework agreement: 0 Being a "strategic partner" of FHIS 0 Possibilityto assist FHIS inthe implementationof I water and sanitation projects at the request of FHIS, while FHIS commits itself to usethe services of SANAA Additional responsibilities to be specified ina project-specific agreement: 0 Role of SANAA intechnical supervision of works to be executed under the project 0 Role of SANAA inwater quality control 0 Role of TCcnicos de Operaci6n y de Mantenimiento (TOMS)and TCcnicos de Agua y Saneamiento (TAS) I under the project 0 Training: who would provide training to whom in what fields (primarily non-technical training on 66 Sector agencies Specific roles and responsibilities for the PIR project (specified inParticipation Agreements) participatory techniques and financial management) Scope and modalities for the possible provision of goods by FHISfor useby SANAA Scope and modalities for the possible payment by FHISfor services to beprovidedby SANAA The project-specific agreement could take the form of a multipartite agreement between ERSAPS,SANAA, FHIS and the Mancommunidades. ERSAPS Sector role: Regulator-decentralized entity of the Ministry of Health with three members appointed by the President of the Republic. Its responsibilities under the 2003 Water Framework Law are: To enforce the Water Framework Law and its Regulations. To promote efficiency inthe provision of services. To establish norms, criteria, indicators and representativemodels to assess the performance of service providers. To maintain a public registry of informationon service providers. To establish a modelformat for service regulation. To safeguarduser rights. To mediate and arbitrate inconflicts between municipalities, service providers and users. To apply sanctions for infractions to the norms. Itis suggestedthat ERSAPS sign botha framework agreement and a project-specific agreement with FHIS. The project-specific agreementcould take the form of a multipartite agreementbetween ERSAPS, SANAA, FHIS and the Mancommunidades. Responsibilities in the agreements: Provide guidance to FHIS on water and sanitation regulatory issues, inparticular on improving FHIS's tariff setting methodology inline with its responsibility to establish a model format and norms for service regulation. To maintain, with the assistanceof SANAA and association of Juntas de Agua, a public registry of Juntas de Agua 67 Sector agencies Specific roles and responsibilities for the PIR project (specified in Participation Agreements) Any other responsibilities under the Water Framework Law that FHIS, ERSAPSand the Mancommunidades chooseto include. SERNA Sector role: Energy policy making, environmental protection Responsibilitiesin theparticipation agreements: Provide strategic advice to FHISon issues related to rural electrification Provide expert support to FOSODEon renewable energy offgrid electrification for the FOSODE ENEE- OES -- Sector role: ENEE: Electricity utility, includingdistribution; FOSODE OES: social electrification office, administering a fund for ruralhocialelectrification (FOSODE) Responsibilitiesin theparticipation agreements e Provide technical advice to FHIS on all issues related to rural electrification e Provide information on the planned grid extension projects inthe participating mancomunidades; e Provide TA to mancomunidadeskommunities inthe planning and preparation of the technical designs of boththe gridextension and offgrid projects e Provide assistanceto FHISinthe evaluation of all ruralelectrification projects; e Manage the list of accredited contractors for grid extension projects e Manage, from the technical point of view, the solar PV market program e Accredit dealers for solar PV market program e Authorize subsidy disbursementsof the solar PV market program e Manage promotionand TA component of the solar PV market program. e Establish a "help desk" for mancomunidades, municipalities, communities and private sector providers on electrification issues (pool of consultants, technical design guidelines, sample TORS,key O&M issues, list of suppliers, sample technical specifications etc.) 68 Annex 7: FinancialManagementandDisbursementArrangements Honduras: RuralInfrastructureProject FinancialManagementFrameworkfor Mancomunidades For the purposes of this project, and in a manner consistent with other on-going government and donor programs, the existing structure for mancomunidad administration will be utilized. The Municipalidades, LM 1990, and Reglamentos de la Ley de Municipalidades, RLM, 1993)IYand fiduciary requirements, among other responsibilities established by the government (Le de supported by the Bank include, but are not limited to: municipal council approval of the annual budget (Article 25, LM); presentation of quarterly budget reports (Article 46, LM); presentation of the monthly internal audit report on municipal expenditures (Article 54,LM); semi-annual presentation of municipal budget expenditures in La Gaceta (Article 115, LM); presentation of budget revenues and expenditures along economic classifications, and in a manner by which sources of revenues are identifiable and expenditures are reported along investment programs (Articles 172 and 176, RLM); submission, by January 10, of approved the municipal budget for the forthcoming year and the final budget report (including explanations for budget amendments) for the past year to the Ministry of Interior and Justice (Article 183, RLM). The Ministry of Governance and Justice i s responsible for municipal decentralization and, along with FHIS, works with government and donor programs to implement local development programs. This ministry i s also responsible for establishing the legal and normative framework for municipal administration, and will play a key oversight (fiduciary) role in the enforcement of the framework. This ministry manages the five percent transfer (executed on a monthly basis) of fiscal revenues from the central government to municipalities. Municipalities are required to submit quarterly reports to the ministry. In past cases of non-compliance, the ministry has temporarily suspendedtransfers negligent municipalities. FinancialManagementImplementationArrangements Most of this project will be implemented by mancomunidades. Each mancomunidad works within an established framework for administrative management, including financial management (budget management, reporting and auditing). The Bank has agreed, based on its assessment of both mancomunidades and the framework, to implement the project within the existing framework. The flow of funds will result in transfers from the Special Account to mancomunidades. Funds will be used to finance local project and investments in rural roads, electrification andwater and sanitation. Additionally, all mancomunidades maintainan administrative unit responsible for financial and budget management, reporting and procurement, and these units utilize a basic system (often a manual system) of bookkeeping for budget management and reporting. Where needed, additional technical assistance will be provided to strengthen these existing units (e.g., installation of a basic [commercial] software package to computerize financial management and records management). Duringproject preparation, two mancomunidades have received technical l4Municipal Law applies to mancomunidadesand is supportedand enforcedby the Ministry of Interior and Justice 69 assistance to prepare investment plans, including financial plans. The Bank has assessed the capacity of CRA and Chortin mancomunidades, and found that both currently possess the basic minimumrequirements for financial management. Duringthe course of project implementation, four additional mancomunidades will be prepared within the same framework noted above, to receive proceedsfrom the Bank program. FHIS will be the central government agency responsible for project implementation. FHIS will manage the Special Account and will manage transfers, based on the financing needs of rural infrastructure action plans (RIAPs), to mancomunidades. FHIS will receive monthly reports on budget execution and project implementation from each mancomunidad. FHIS will also be responsible for the preparation of quarterly reports (Financial Monitoring Reports, FMRs) and for submittingquarterly disbursementrequests to the Bank. RiskAssessment Summary Inherent risk. Inherent risk i s the susceptibility of project funds not being used as intended, if we assume that there were no internal controls. n part because of the poor country rating of Honduras in 2003 and 2004 Transparency International's Corruption indices, and despite recent measurableimprovementsinthe country's public financial management systems, inherent risk i s still considered to be substantialto high. Control risk. As described in the Internal Controls section, adequate financial management and internal control arrangements are in place to provide reasonable assurance that misuse of funds would be prevented or detected and corrected on a timely basis. Even so, the control risk i s moderate. Detection risk. Given the combination of inherent and control risks, acceptable levels of detection risk need to be lower, so as to reduce the overall risk level. The requirement for semi- annual external audit reports of mancomunidades aims to directly mitigate this risk. Planning, budgetandfinancialreporting,FMRs Plans and budgets. Mancomunidades will prepare their own rural infrastructure development plans (RIAPs), and the project will utilize these plans, based on broader municipal strategic development plans (PEDM). l5Approved RIAPs will serve as a basis for executing financial transfers, and for monitoring cash flow requirements duringthe year, and will include bothBank financing andfinancial contribution from the mancomunidad. Mancomunidades will be required to contribute at minimum 15 percent of costs of works of their subprojects identifiedinRIAPs. The contribution will differ across sectors, reflecting the current practices (15% in electrification and roads, and 30% in water and sanitation). These counterpart funds would be composed of municipal and community contributions, but the responsibility to ensure these counterpart funds will rest with a mancomunidad. In the case of the road l5The plansfollow the normative framework establishedby the Ministry of Interior andJustice. New regulations for the preparationof municipal strategic developmentplans were issuedinOctober 2003. RIAPs contain 3 components: Community Action Plans, Municipal Investment Plans, and Annual Operating Plan. 70 subprojects, the mancomunidades (and their municipalities) will also need to ensure that maintenance funds are adequately budgeted. Budget reporting i s standardized, and includes reports on the use of funds against planned activities that had been approved in the PEDM. Budget reporting will also include an update of cash flow requirements, thereby enabling FHIS to determine the adequacy of liquidity in the Special Account. Mancomunidades will be responsible for submitting an additional bank reconciliation report, supported with the appropriate documentation (bank statements) to FHIS each month. It will also be essential that mancomunidades regularly report on project implementation and submit a procurement summary executed by the mancomunidades, even though these contracts will most probably fall below the prior review threshold. This can include a listing of "subprojects" under implementation and Section 3 (procurement),. Bank supervision and independent ex-post review (including independent audits) will be greatly facilitated by regular reports on procurement actions. Flow of funds Under the Rural Infrastructure project, about 90 percent of sub-projects identified in the RIAP will be implemented directly by mancomunidades. This represents about 70 percent of total project funds that will be disbursed to mancomunidades to implement RIAPs. FHIS has already developed a thorough Operation Manual (Manual PEC) for managing community-based and municipal development programs. The manual, which has been reviewed by the Bank, has incorporated many of the experiences from prior community and FHIS funded projects. This Manual is now being reviewed and adapted for the purpose of the present Rural Infrastructure Project to reflect its specific characteristics, such as (i): focus on infrastructure investments and services; (ii) implementation by mancomunidades; and (iv) involvement of sector agencies. An Updated Operational Manuali s a conditionof effectiveness. FHIS's managementinformation system provides the basis needed for tracking project activities and financial information, including advances to mancomunidades. The same system links the accounting and budgeting modules to allow for preparation of the financial section of quarterly FMRs.Dueto the experiencethat FHIShas accumulated with the two most recent Bank financed projects, the general format for FMRswill remainthe same. Bank accounts. FHIS will manage a Special Account for credit funds held at the Central Bank. The Bank will first disburse funds to a transit account administered by SEFIN, which will then deposit funds in FHIS's Special Account (based on FHIS's explicit request of transfer. These transfers typically take 48 hours only). From the Special Account, FHIS will execute quarterly transfers to the mancomunidades' accounts held in commercial banks. The mancomunidades have experience in managing their own commercial bank accounts. During the preparation of this project, the Bank found that mancomunidades manage their accounts in accordance with written internal procedures. For the purposes of this project, each mancomunidad will establish a separate commercial bank account for the receipt of project financing. This account will be for the exclusive use of Bank financing and will be registered with FHIS. The bank account 71 reconciliations will be prepared on a monthly basis (as i s current practice) and submitted to the localcouncil for approval and to FHIS. IDA proceeds from the Special Account will be transferred to the accounts managed by mancomunidades. Based on FHIS's ability to track the financial advances to mancomunidades, these transfers will be permitted to be claimed for disbursement. The mancomunidades will be responsible to submit monthly reports, including a full reconciliation and an updated financial forecast to FHIS. If mancomunidadesfail to submit monthly reports (reconciliation and forecast) ina timely and regular manner, transfers from the Special Account may be withheld untilthese reports are received. F H I S will take responsibility for the financial management (payments and expenditure management) other centrally managedproject components, including the Solar PV program and renewable offgrid electrification pilots implemented outside the mancomunidades. FMR-based disbursement. FHIS's financial management staff has gained sufficient experience in IDA credit disbursement procedures, and as such, FMRs will be used as the disbursement mechanism under this project. Additional training will be available for FHIS staff on the use of FMRs. F H I S will be responsible for aggregating the reports (financial, project implementation and procurement) submitted by the mancomunidades, and this will form the basis of the F M R s submitted to the Bank. In addition to the aggregatedreports, FHIS will provide a reconciliation of the Special Account, against which the more detailed transfers to mancomunidades will be reported and reconciled. The F M R s will include an updated cash forecast, based on updated RIAPs submitted by the mancomunidades, which will determine the need for further disbursement requests and transfers to the mancomunidades. Under this project, FHIS will play a greater role in monitoringthe implementation of projects at the mancomunidad level, and will not be directly involvedinthe daily management of resources. F H I S will determine, based on the updated financial plans, financial reports and reports on implementation submitted by mancomunidades, whether subsequent quarterly transfers will be executedinfull or at a reduced amount. 72 LV Disbursement ecial Account IT Quarterly transfers based on Monthly financialreports approved PEDMs and updated PEDMs II Mancomunidad I .PEDM s are approved b y the Ministry o f Interior and Justice .Monthly reports include a bank reconciliation and updated financial plan *FHIS willdetermine, based on the updated financialplans, i f further transfers to mancomunidades willbe required in fullor at a reduced amount. Mancomunidad Accounting system Mancomunidades also follow a standardbudget/accounting framework established jointly by the Ministries of Finance and Interior and Justice. The municipal framework requires budget management (expenditure classification) in a manner consistent with central government budget classification. This framework i s also embedded within the chart of accounts of FHIS, and will allow the ex-post (central) recording of local expenditures within FHIS's database and system. Mancomunidades are expected to prepare simple special purpose cash based financial statements*ssentially budget reports with expenditure accounting consistent with the government's budget classification system. Accounting; records. At the mancomunidad level, transactions are recorded as incurred, and all primary supporting documentation will be maintained to facilitate ex-post reviews and the external annual. During the Bank's assessment, supporting documentation was found to be properly filed and maintained. Such documents are maintained for a minimum period of five years in accordance with local norms. FHIS will record transfers and ex-post transactions based on the monthly reports submittedby the mancomunidades. Internal Controls. The assessment of two mancomunidades found that basic internal controls zwere in place. The basic controls consist of presentation of monthly budget, expenditure and 73 investment update reports to the monthly assembly in addition to semi-annual presentations to the general assembly (public meetings). Moreover, basic accounting records (bank reconciliations, budget reports) are reviewed and approved by the mancomunidad council and are maintained for the annual audit. Additionally, the council reviews procurement processes managedby technical staff, and authorizes the awarding of contracts based on local competitive procedures. External Audits Since the majority of project financing will be implemented at the level of mancomunidades, FHIS audits will include separate sections covering the audit of the mancomunidades. Duringthe preparation and appraisal of the project, the Bank found that mancomunidades have had ample experience with external audit requirements inthe context of implementing other donor-financed programs. Under this project, and consistent with the requirements establishedby the Ministry of Governance and Justice, the external audit will review not only the finances provided by the Bank, but will also cover the broader expenditures of the mancomunidades. The receipt of the semi-annual audit reports of mancomunidades i s one requirement to continue with future transfers from the Special Account. The semi-annual audit report will be due no later than two months after the end of each six-month period. FHIS will be responsible for receiving these reports and submitting them to the Bank for review. FHIS has taken steps to improve management and quality issues that were raised with its previous external auditor. The Banks external audit policy allows for a single audit of an implementing agency that manages multiple Bank financed projects. The single audit of FHIS would have a single management report for the agency, and would contain separate annexes for the special purpose financial statements for each of the projects (including PPFs and grants) financed by the Bank and managedby FHIS.The external audit of FHIS will be due no later than four months after the end of the fiscal year (January-December). ActionPlan The rural infrastructure project will advance the majority of financing, based on local strategic development plans (RIAPs), to mancomunidadesfor local implementation and management. The two mancomunidades, CRA and Chorti, have been assessed by the Bank and have been found to meet the Bank's minimumrequirements for financial management. As such, there are no further actions required prior to project effectiveness. Given the Bank's strong involvement with FHIS and its direct technical assistance to help FHIS modernize its administration, including financial management, there are no further actions required at this time prior to project effectiveness. 74 Annex 8: Procurement HONDURAS:RuralInfrastructureProject A) General Procurement for the proposedproject would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure categories i s below. For each contract to be financed by the credit, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank Project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. Procurement of Works: Works procured under this Project would pertain to the following Sectors: (i)rural water and sanitation; (ii) roads; and (iii) electrification. Works would rural rural be small and consequently pre-qualification of contractors i s not deemed necessary. ICB procedures would be followed for works costing more than US$1,500,000, though not expected. NCB procedures would be followed for contracts estimated to cost more than US$250,000 up to $1.5 million and will be procuredby FHIS. Procurement for the sub-projects would be done by the selected Mancomunidades through their UTIs and would follow procurement practices in accordance with FHIS operational guidelines acceptable to IDA. For contracts costing more than US$75,000 up to US$250,000 NCB procedures would apply. For works costing more than US$50,000 up to US$75,000 would follow national procedures requiring a short list of national contractors or private procurement. For works costing less than US$50,000 at least three quotations will be required. In some cases, direct contracting with communities would be permitted, if justified, following Bank's procurement guidelines for direct contracting, and detailed procedures established in the Operational Manual. These cases would include smaller water and sanitation and selected road rehabilitation works under US$50,000, following FHIS's successfulexperience inthis area.). For road maintenance contracts of US$50,000 or less direct contracting will be also permitted to community micro-enterprises. In the case of electrification works, it i s not recommendable to contract the communities directly, due to the relatively complex character of the works, and the relatively small component of unqualifiedlabor. Nevertheless, to the extent possible, efforts will be made to involve communities in the works that require unqualified labor. The detailed procedures for smaller works (including shopping and direct contracting) will be included inthe Operational Manual. Table A below outlines the procurement procedures and threshold to be followed. Procurement of Goods: Goods procured under this Project would be limited to vehicles, computers and office furniture and equipment following procedures listed below. These goods would be procured by FHIS. Such procurement will be undertaken as follows: (a) shopping for packagesestimated at less thanUS$50,000 basedon comparing quotations solicited from at least 75 three qualified suppliers; and (b) for contracts above US$50,000 and below US$ 150,000 National CompetitiveBiddingprocedures will be used. Selection of Consultants: Consulting Services under this Project would include services to be providedby firms and individual consultants, such as: (i) preparation of mancomunidades to be implemented during years 2, 3, 4 and 5 of the Project; (ii) project implementation; (iii)sub- project formulation; (iv) supervision of works; (vi) final designs; (vii) strengthening of mancomunidades, and central and local government agencies; (viii) establishment of sustainable service delivery models; (ix) support to establishing local management mechanisms for O&M; (x) preparation of sector strategiesandpolicy studies; (xi) project monitoringand evaluation; and (xii) training. To strengthenprocurement capacity at mancomunidades,the UTIs would contract services for subprojects formulation, final designs and supervision of works that would cost less than US$15,000. To facilitate the work of the mancomunidades, FHIS would prepare a list of eligible consultants, engineering firms, NGOs and individualconsultants from which they would be able to contract. Consulting firms would be selected following QCBS. Least Cost Selection (LCS) and Selection under a FixedBudget may be followed for contracts estimated to cost $150,000 or less. Selection Based on Consultant's Qualifications (CQ) may be followed for contracts estimated to cost $50,000 or less. Subject to prior review by the Bank, Single Source Selection may be used for contracting the International Labor Organization (ILO) for the training and implementation of labor-intensive methods. Short lists of consultants for services estimated to cost less than $150,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Individual consultants may be selectedfollowing Section V of the Consultant Guidelines. Operational Costs would be procured using the implementing agency's administrative procedures, which were reviewed and found acceptable to the Bank. This includes PCU staff salaries, office equipment, transportation fares, travel expenses and per diem, either related to training or supervision activities. Custom Duties and Taxes. All goods specifically imported for the Project will be subject to the payments of customduties and local value added taxes. Consultingfirms and individual consultants are also liablefor the applicable taxes. All duties andtaxes are paidfrom the Governmentcontribution. TABLE A Expenditure Contract Value Procurement FHIS Contracts Category Threshold Method Prior Review Subject to Prior (US$ thousands) Review 1.Works FHIS >1,500 ICB All documents >250-1,500 NCB Firsttwo contracts Mancomunidades >75-250 NCB All Firsttwo contractsper each Mancomunidad, 76 and all contracts for smaller works for road rehabilitation and water & sanitation sub- projects 50-75 Short List All First two (Private contracts per Procurement) each Mancomunidad 50 or less Three All Post Review Quotations or Direct Contracting with Communities 2. Services 2.1 Firms >150 QCBS All documents 150or less As per May All TOR and Short 2004 Guidelines Lists only 2.2 Individuals >50 As Above All All documents 50 or less As Above All TOR and Short Lists only 3. Goods >150 ICB All documents 50-150 NCB All documents 4 0 National All Firstcontract Shopping B) Assessmentof the agency's capacity to implementprocurement Luis Prada and Luis Tineo, Procurement Specialists (LCOPR) carried out an assessment of the capacity of FHIS, which would be in charge of procurement actions and supervision for the Project. The Procurement Capacity Assessment report was produced from the mission to Tegucigalpa and the mancomunidades (April 19-22, 2005). The assessment reviewed the organizational structure for implementing the Project and the interaction between FHIS and the mancomunidades. Procurement and contracting activities concerning contracts for goods, works and consultants services with a value of up to US$250,000 will be carried out by the UTIs of the selected mancomunidades, starting with the Project sample of CRA and CHORTI. All documents for smaller works for road and water and sanitation subprojects that cost up to US$250,000 will be reviewed by IDA. All the procurement and contracting activities executed by mancomunidades will be under close supervision of FHIS until"graduation" of mancomunidades. FHIS will be in charge of the procurement and contract activities for contracts exceeding that amount. Most of the issues and risks concerning the procurement component for implementation of the Project have beenidentified and include: 77 inconsistencies betweenthe Honduras Procurement Law and World Bank policies on: (i) registration requirements; (ii)thresholds; (iii) biddingdocuments and (iv) consulting standard services; weaknesses inthe operational manual for managing subprojects by the mancomunidades; weaknesses inprocurement capacity at UTIs; weaknesses inpreparation of technical specifications, terms of reference, and contract management at UTIs; and weed for additional qualified staff, at FHIS, to supervise andcontrolprocurement carried-out by Mancomunidades. The corrective measures agreed upon will be included in the technical assistance for Mancomunidades, and include: training by FHIS to UTIs' staff on preparation and formulation of annual procurement plans and quarterly updates; development of aprocurement and administration systemat UTIs; development of a tool kit for procurement at UTIs; a capacity buildingplan to strengthenprocurement procedures, reporting and audit, and staff skills at UTIs; and addition of qualified staff at FHIS. B y effectiveness, FHIS would assign from its staff or have recruited two full time Procurement Expert/Advisors with five years of experience in contracting of under Bank rules. Apart from these staff dealing with procurement issues in general at FHIS, advisors would be hiredper each mancomunidad and would be responsible for coaching the Procurement staff at the mancomunidades on Bank procurement methods and carryingout of post-review work. one UTImember assignedas procurement specialist and trained by FHIS; at least one ATM per mancomunidad, or a consulting firm, hired by FHIS, for monitoring andperformance evaluation of UTIs; . an operational manualfor UTIs completed by FHIS,by effectiveness; implementation of the Municipal Information System in CRA and CHORTI mancomunidades. Withthesemeasuresinplace, the overallproject riskfor procurement is average. C) ProcurementPlan At appraisal the Borrower developed a Draft Procurement Plan for project implementation that provides the basis for the procurement methods for next two years and includes the goods, works and services to procure by FHIS and by the first two mancomunidades. This plan has been agreed upon by the Borrower and the Project Team, and i s available at FHIS and the mancomunidadesof CRA and CHORTI. It will also be available inthe Project's database and in the Bank's external website. The Procurement Planwill be updated inagreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 78 D) Procurement Supervision by the Bank Post-review supervision should be conducted once a year and one out of ten contracts signed should be reviewed. Additionally, the ex -post review reports produced would be reviewed by the Bank and its results considered during ex - post supervision missions. As a result of the findings of its ex - post procurement reviews, after one year of Loan Effectiveness, the Bank may agree to change the thresholds to make them consistent with the procurement experience so far. For this purpose, the Project Operational Manualwould describemechanismsfor monitoring the procurement performance of FHIS andthe mancomunidades. 79 Annex 9: Economic Analysis HONDURAS: RuralInfrastructure Project Outline: A. Objectives andBeneficiaries B. Economic Evaluation B.1General Methodology B.2 Road Sub-projects B.3 Water and Sanitation Sub-projects B.4 Electrification Sub-projects A. Objectives andBeneficiaries The Project's objective i s to improve access, quality and sustainability of infrastructure services (roads, water and sanitation, and electricity) for the rural poor in Honduras, and to develop capacities and the enabling environment for locally-driven service provision and planning. The Project will be implemented in six mancomunidades, selected on the basis of criteria including, poverty, human development index, infrastructure gaps, development potential and degree of institutionalization. On this basis, the first two mancomunidades, CRA in Santa Barbara and CHORTI in Copan, were selected. Table 9.1 summarizes the key characteristics of the two mancomunidades. The main beneficiaries of the project will be the rural households, benefiting from new connections to electricity, water and sanitation (or rehabilitation of existing waterhanitation systems), and the population living in the area of influence of the roads to be improved to provide all-weather access. The rural populations will benefit from new services and economic opportunities that will be generatedresulting inlower costs of basic necessities. Table9.1 MancomunidadChorti Municipality Km2 Population % in %rural Water Sanitation Rural extreme covereage coverage electrifidation poverty Cabanas 126 9762 66.5 100 64 32 20 CopanRuinas 371 29378 56.8 80 76 51 11 ElParaiso 252 18054 55.5 78 73 57 7 Florida 345 24983 50.6 80 77 59 5 LaJigua 114 7807 46.6 100 80 62 21 Nueva Arcadia 151 27561 32.4 51 87 74 97 SanNicolas 74 9465 41.7 100 77 63 26 Sanhtonio 119 4529 52.7 100 74 60 37 SanJeronimo 72 5740 47.1 61 82 48 21 Santa Rita 292 23773 58.9 50 86 42 25 Total 1916 161052 50.9 73 87 56 24 80 MancomunidadCRA Municipality Km2 Population % in %rural Water Sanitation Rural extreme covereage coverage electrifidation poverty Concepcion 135 7740 46.3 100 71.2 62.4 15 delNorte Chinda 68 3969 48.5 100 80.1 59.7 22 Petoa 210 9521 35.4 100 84.8 68.1 29 San Jose de 243 15871 26.3 76 87.2 66.1 10 Colinas SanLuis 381 23229 52.9 78 72.3 44.1 7 SanMarcos 223 12347 42.1 69 88.5 54.3 13 Trinidad 161 15897 32.9 74 81.3 71.9 47 Total 1421 88574 40.4 81 80.4 59.3 20 B. EconomicEvaluation B.1 GeneralMethodology Through the participation process, including mancomunidades, municipal authorities and communities, CRA and CHORTI have identified their rural infrastructure action plans (RIAPs), and prioritizedsub-projects for the first year in each sector. Economic evaluation is based on the available data related to these prioritized sub-projects, following methodologies commonly used in each sector. Operational Manual will include details for the evaluation of all future sub- projects. Inall three sectors, individualsub-project evaluations will be basedon (i) cost-effectiveness, and (ii) economic cost-benefit analysis. Economic cost-benefit analysis will be applied to those instances when the identification and quantification of investment costs and expectedbenefits can be reasonably undertaken. Cost-effectiveness will be applied to those sub-projects whose benefits, given their characteristics, are difficult to quantify though they might be evident in qualitative terms. This methodology will apply also to those initiatives that generate services but are not oriented to the markets, Inthese cases, the project will seek to obtain the maximumbenefits with the least cost. Most of the sub-projects (being primarily of social character) are expected to follow cost- effectiveness approach. However, a threshold will be established for sub-projects for which cost- effectiveness is applicable. The threshold will be defined per beneficiary, connection or other unit for different technologies, and set for each mancomunidad, reflecting varying local connections. All projects that are above the threshold will require a full cost-benefit analysis. The threshold establishedfor CRA and CHORTIinclude: 0 Roadrehabilitation: Investment per beneficiary population not exceeding US$75/person 0 Gridextension: Costs per connection not exceeding US$1,500 (offgrid technologies will follow separate evaluation) 81 0 Water and Sanitation: Costs per capita not exceeding US$l50 Subprojects that include the recovery of costs through tariffs will be subject to financial analysis too. B. 2 Road Sub-projects The project will finance two categories of road interventions: (i) works aimed at improving road a track or a rural road to provide basic all-weather road access; and (ii) road works that will provide a higher level of service than basic all-weather road access. Interventions under the second category usually take place on roads with traffic levels over 50 vehicles per day. For this kindof intervention, economic evaluation uses the RoadEconomic DecisionModel (RED).This model performs an economic evaluation of road investments options usingthe consumer surplus approach and is customized to the characteristics of low-volume roads such as: (i) high the uncertainty of the assessment of the model inputs, particularly the traffic and condition of unpaved roads; (ii) the importance of vehicle speeds for model validation; (iii) need for a the comprehensive analysis of generated and induced traffic; and (iv) the need to clearly define all accrued benefits. RED computes benefits for normal, generated, induced, and diverted traffic, and takes into account changes in road length, condition on the dry and wet seasons, geometry, surfacetype, and accident rates. This approach does not apply to rural roads with very low traffic (usually under 50 vehicles per day). Rural road projects that aim to improve basic road accessibility from villages to markets and social services are expected to yield not only savings in vehicle costs (VOC) and road user travel time (TTC), but also substantial social values in the form of broadened socioeconomic opportunities for the rural population. As most rural access roads have very low traffic volumes, the social values generated from the improvement of basic access are often a more important item of project benefits than the direct road user cost savings. Due to the difficulty inquantifying the social values in monetary terms, the Road Cost-Benefit analysis methodology that quantifies benefits mainly as VOC and TTC savings i s unsuitable for evaluating rural basic access road projects. That i s why, in this case, a Cost-Effectiveness Analysis i s carried out, evaluating the minimum investment required to guarantee all-weather access. The CEA ensures that the projects envisaged under the program have a ratio of investment per beneficiary population not exceeding US$75/person. This threshold was defined basedon: (i) the characteristics of the road network inCHORTI and CRA, and (ii) the total amount available for roads intervention. In designing this rural road component, the following sectoral objectives were taken into account: (a) to improve the rural road network through the provision of basic, all-weather road access to communities that currently are not provided with such access; (ii) to maximize the use of labor intensive techniques; and (c) to promote a participatory approach during all the phases of the project. 82 Rehabilitation of MuniciDal Core Network (MCN):.The total road network comprises 1,505 km in both mancomunidades, whereas TCN comprises only 1,165 km (77% of the total road network) (See table 9.2). The M C N for both municipalities is comprised of 434 km, or 56 percent of the total municipal network (58% for CHORTI and 53% for CRA). TotalNetwork TotalCore Network unicipal SOPTRAVI Municipal TotalI SOPTRAVI Municipal Total Association (W (hi (w (W mi (w CHORTI 306 458 764 306 265 571 CRA 425 316 741 425 169 594 Total 731 774 1505 731 434 1165 The condition of the MCN is summarized in Table 9.3: three percent of the network is in good condition, 37 percent infair condition, and the remaining 60 percent inpoor condition. 14 159 261 434 The works envisaged in both municipalities amount to US$4.04 million (US$2.28 million for CHORTI and US$1.76 million for CRA). This estimate was based on average costs reported in each mancomunidad (the average unit cost for rehabilitation is US$ 8,500 in CHORTI, and US$ 10,600 in CRA). The type of civil works to be executed on these roads are: (i) upgrading the drainage system by improving existing transversal and longitudinal drainage and constructing new drainage where required; (ii) rehabilitation of existing gravel roads or upgrading of natural surface roads to gravel surface standards; (iii) road segments with very steep gradients or sharp curves will be treated with low grade concrete to prevent erosion and to provide a better riding surface. The average number servedi s 556 persons per kmin CHORTI, and 336 persons per kmin CRA (or, on average, 479 persons per km for both mancomunidades). The average cost effectiveness of the rehabilitation program i s US$48 per person in CHORTI, and US$20 per person in CRA (or, on average, US$30 per person). Summary of Roads Rehabilitation Program Based on the information already presented, the rural road component for the two association of municipalities (CHORTI and CRA), represent an investment of US$5.19million (see table 9.4). CoreRoadNetworkRehabilitation Spot Improprement Municipal unicipal SOPTRAVI Municipal Total MunicipalNetwork Streets Total (US$ M) (US$ M) (US$M) CHORTI 0.25 2.28 2.53 0.10 0.25 2.88 CRA 0.20 1.76 1.96 0.10 0.25 2.3 1 Total 0.45 4.04 4.49 0.20 0.50 5.19 83 The project's outcome in CRA and CHORTI will be 420 kilometers rehabilitated, improving access of up to 200,000 inhabitants. Additional benefits will follow from smaller programs of spot improvement, secondarytranches andKildmetroMunicipal. Tables 9.5 and 9.6 present the characteristics of the first year program of road investments for the rehabilitation of municipal roads inCHORTI and CRA. San Pablodel Roble- Plandel Naranjo Table9.6 CRA First Year MunicipalRoad! oad Length Width Surface Road Transi- Conditi Municipality Code Name (km) (m) Type on tabilitj Chinda 1609M03 Las Breas- ElTule 5.2 4.0 Earth Poor No Chinda 1609M06 ElTule - NuevaGranada (Cortes) 3.2 4.0 Earth Poor No Concepci6ndel Norte 1607M06 ElMacuelizo - ElAmatillo 3.9 4.5 Earth Poor No Concepci6ndel Norte 1607M17 Concepci6ndelNorte- Suyapa 7.0 4.0 Gravel Fair Yes Concepci6ndel Norte 1607M18 Santa Ana- SanJoaquh 3.1 4.0 Earth Poor Yes San Jose de Colinas 1606M05 PiedraGrande-Pinabete 7.0 4.0 Gravel Fair Yes SanLuis 1620M01 Palmira- San Miguel 11.0 2.0 Gravel Fair No ElZapote PlayadeCampo Agua - - SanMarcos 1621M01 Tapada ElTemblor-ElGuinea1- LaUni6n- 11.1 3.9 Earth Poor No Trinidad 5.5 3.0 Earth Poor No Trinidad 3.2 5.0 Gravel Fair Yes Total 60.2 Tables 9.7 and 9.8 present the Cost Effectiveness Analysis of the first year municipal roads program. The results indicate that in CHORTI, ten roads will be part of the first year program requiring an investment of US$ 396,080 dollars, representing an average unit cost of US$7,991 per kilometer, and with an average population served of 423 persons per km and an average cost efficiency of US$23 per person. In CRA, ten roads will be part of the first year program requiringan investment of US$602,476dollars, representing an average unit cost of US$ 10,240 per kilometer, and with an average population served per km of 503 persons per km and an average cost efficiency of US$ 29 per person. All roads have a cost efficiency rating lower than the maximumdefined threshold of US$75 per person. Two projects included inthe program of Kilometro Municipal, inTrinidad inCRA (US$63,150) andinSanNicolAs inCHORTI (US$84,000) representacost effectiveness of US$ 13 perperson inCRA andUS$33 perpersoninCHORTI. 84 amino0421M18 80,127 10,079 5,470 688 15 ea Nueva - San Lorenzode Techin 60,200 7,818 3,382 439 18 'Road InvestmentInvestmentPopulation Population Inv. per Pop Municipality Name (US$) (US$ikm) (persons) (personskm)(US$lperson Chinda .Las Breas - El Tule 50.774 9.708 2.337 447 22 hinda ElTule - NuevaGranada(Cortes) 47,328 14,790 995 311 48 oncepcidndel Norte ElMacuelizo ElAmatillo - 47,322 12,291 1,329 345 36 oncepcidndel Norte Concepci6ndel Norte - Suyapa 71,226 10,175 1,752 250 41 oncepcidndel Norte Santa Ana - San Joaquin 36,500 11,774 1,521 491 24 PiedraGrande - Pinabete 20,291 2,899 1,141 163 18 Palmira- SanMiguel 112,214 10,201 2,751 250 41 ElZapote Playade Campo- Agua Tapada - 132,513 11,949 3,717 335 36 ElTemblor - ElGuineal- La Uni6n- Pavimentada 59,186 10,761 2,976 541 20 LaHuerta- Cebadilla 25,122 7,851 6,060 1,894 4 602.476 24.579 verage 10,240 503 29 6.3 Waterand Sanitation Sub-projects The objective of this component of the project is to provide basic water and sanitation services to the designatedcommunities inthe target mancomunidades. The target populationcenters are between 100and 5,000 inhabitants. Inits first phasethe project will focus on the mancomunidadeesof CRA and CHORTIwith a total population of 282,749, including77,785 (28 %) living inpopulation centers with less than 5,000 inhabitants. Methodology The direct user benefits of the water and sanitation interventions fall inthree categories: (i) resource savings (time savings and savings that result from the elimination of individual water treatment, e.g. the cost for boiling water), (ii) benefits from increasedwater consumption estimated by the willingness to pay for the increasedconsumption, for users who without the project would use less effective andmore costly alternatives (such as rivers, springs, etc.) and (iii) benefits. health Figure 9.1 below. Illustrates the calculation of the resource savings andthe benefits from increasedconsumption. Resourcesavings are estimated by multiplyingthe implicit price P1per 85 cubic meter of water (estimatedbasedon the time spent hauling water) with the quantity of water usedwithout the project Q1. The benefits from increasedwater consumption (consumer surplus) are estimated by calculating the area below the demandcurve determined by the quantity of water usedwith the project 4 2 and the unit price of water P2, which would be zero ina non- metered system. Figure9.1: Calculation of Benefits from increasedwater supply Water Prictmrr (UWm3: \ P1 5.36 Resource Savings Benefit from Consumer Surplus P2 00 0.20 Q2 0.50 Water Consumptioninmaday Inaddition, important healthbenefits areexpectedto berealizedas aresult of water and sanitation interventions as well as hygiene education. The sanitation strategy of the project calls for strong hygienepromotionand education, demand generation for investments in sanitation, and promotionof a wider range of lower cost options. A least-cost analysis of alternatives i s proposedto be usedfor investment decisions in sanitation. All water sub-projects are expectedto reachan economic rate of returnof at least 12percent, basedon the direct benefits of the projects alone. The economic rate of water projects expanding access to the non-served householdsi s estimated at 32 percent, basedonly on resource savings and consumer surplus usingand excluding healthbenefits. FHIShas apre-existingmethodology for assessingproject feasibility, which includes legal, social, environmental, financial and technical screening criteria. This methodology needs to be complemented with an economic analysis along the lines described above to assess the rate of returnfor each sub-project. Untilsuch a methodology i s inplace, a simple cost-effectiveness analysis will be applied usinga threshold value for unit costs above which projects will not be eligible. Under the cost-effectiveness analysis any projects with a total water and sanitation cost of more than US$ 150per capita will not be financed under the project, inorder to eliminate over-designed projects and to ensure that project benefits are spreadto a large number of beneficiaries. Estimate of Coverage Levels and Costs Below i s a summary of the estimated deficit inthe potable water sector at the national level, with a focus on the populations of less than 5,000 persons in CRA and Chorti 86 Table 9.9 Summary ofShortageEstimates Countrywide Households Population % Households with water service 968.693 4,361.512 67.6 Households with insufficient water service 215.631 970.982 15.0 Households without water service 249.385 1,122.489 17.4 Total shortage 465.016 2,093.381 32.4 CRA and Chortiwithpopulationsless than5,000 residents Households with water service 29.304 128.254 62.2 Households with insufficientwater service 9.209 40.304 19.6 Households without water service 8.564 37.481 18.2 Total shortage 17.773 77.785 37.8 The project would be financed fromthree sources: 0 Financing providedunder the project (65%); 0 Community contribution (30%); 0 Municipalcontribution (5%). The 30 percent community contribution is well acceptedby communities and has beenusedas a matter of national policy for ruralwater and sanitation for several decades. The five percent municipalcontributioncorrespondsto the contribution by the poorest municipalities (category D),the lowest of four categoriesusedby FHISto classify municipalities. The Project is expectedto contribute US$12million of externally financed resourcesto water supply and sanitation investments, complemented by an estimated US$5.5 million of community contributions and US$0.9 million contributions by municipalities for a total of US$18.5 million of investments. About 30 percent of this sum, or about US$5.4 million, would be investedin CRA andCHORTI. Itis expectedthat one thirdwouldbeusedfor new systems andtwo thirds for rehabilitation andimprovements. It is also tentatively estimated that deterioration of current systems would lead to 2.5 percent of existing systems moving annually from satisfactory to insufficientwater service inthe absence of the Project. The resulting estimates for coverage with and without the project inlocalities with less then 5,000 inhabitants inthe two mancomunidades are as follows: Table9.10: Access to water supply inCRA and CHORTIwithand withoutproject Current I Without project I With project IIncremental Acceptable quality I 29304 I 62% I 26374 I 53% I33187 I 67% I 6814 Deficientquality 9209 20% 12139 25% 7479 15% -4660 Sub-Totalwith access 38513 82% 38513 78% 40667 82% 2154 No service 8564 18% 10965 22% 8812 18% Total 47077 100% 49478 100% 49478 100% The project would thus provide water services of acceptable quality to about 6,800 householdsin the two mancomunidades, including 4,700 who would receive improved services from existing deteriorated systems and 2,100 who would be suppliedthrough new systems. 87 B.4Electricity Sub-projects The Project will provide access to electricity to rural population in CRA and CHORTI. All technologies will be considered, the most likely being grid extension, isolated village microgrids, and solar home systems. The least cost technology will be applied. The preliminary investment program for the first year (to be confirmed during the appraisal) includes 25 grid extension projects, benefiting 2,049 rural households (10,544 persons), and one isolated village micro- hydro, benefiting three communities (102 households). The estimated average costs per connection are about US$756. Table 9.11 First Year InvestmentProgram(gridextension): Households Population costs (US$) Costs per connection (US$) CRA 819 4,432 696,671 851 CHORTI 1,230 6,112 853,020 694 TOTAL 2049 10,544 1,549,591 156 Over the five year of the project, it i s estimated that the project will finance over 4,000 new connections, benefiting directly over 20,000 persons in these two mancomunidades (more population will benefit indirectly from electrification of schools, health centers, community centers etc.). In addition, it is estimated that some 300 households in the two mancomunidades will benefit from the National Solar PV Program for dispersed households. The total costs of this investment would be about US$3.3 million. However, taking into account the population growth, this will increase access only by about 5 percent, from 33 to 38 percent. This demonstrates the enormous challenge the country i s facing to bridge the gap in the electricity access between the rural and urban areas (urban coverage being 95%). In total, the project is expected to finance about 10,000 new connections. Table 9.12 OverallinvestmentprograminCRA andCHORTI (5 years) (US$) Cost per connection ~Program New household Costs connections (estimate) (US$)(estimate) Mancomunidad 4,278 3,287,577) 768 Investment Programs Solar PV- ~ _ _ ~ 300 1.so0 600 Total 4,578 3,289,377 718 Tale 9.13 Impact of 5-year programinCRA and CHORTI Access, 2005 (%) New connections Beneficiary Access, 2010 population CRA 30.4 2,116 10,157 38.6 CHORTI 34.9 2.462 12.630 38.3 Total 33.3 4,578 22,787 38.4 88 Methodology The economic evaluation methodology uses the consumer surplus method. Economic analysis has been performed separately for each of the main subproject technologies which will be financed under the Project: (i) grid extension; (ii) village microgrids; (iv) Solar Home isolated Systems. Economic analysis draws on real demand and cost data from Honduras where possible, and uses real data from similar remote area subprojects in Nicaragua and Bolivia where no Honduras data i s available. The analysis will be refined once a comprehensive demand study of CRA and CHORTI i s completed For the purpose of this PAD, typical, hypothetical subprojects have been used for each possible technology type to determine a conservative estimate for minimum Economic Internal Rates of Return(EIRRs) of possible subprojects.The results are shown inthe Table 9.15. Economic costs consist of investment costs, replacement costs and operating and maintenance costs of the new systems in the project sites. The minimum consumer benefit i s estimated conservatively from: (i) current substitutable expenditures for fuel and batteries and (ii) net the consumer surplus derived from lighting(based on demand data to estimate demand curves), plus (iii) environmentalexternalitiesfor renewabletechnologies.Thenetbenefits ofeach global subproject are aggregated to calculate the Economic Internal Rate of Return (EIRR) and Net Present Value (NPV) of each sub-project. It should be noted that there are additional 1direct and indirect benefits from rural electrification, which are difficult to estimate, such as improvements in education, health, communication and productivity They have not been counted towards the conservative ERRusedfor quantitative cost benefit analysis. Results Table 9.15 Summary of CostBenefit Analysis by Technology (using typical, hypotheticalsub-projects) All Costs inconstantYear 2005 Thousand US$ (for typical sub-project sizes) NPVMin. NPV (Min. NPV (Min. Net NPV Technology (Costs) Benefits) Benefits) MinEIRR HH (Costs)/HH 1 GridExtension 2,300 5,500 3,200 33% 1,000 2,300 2 Isolated Village 1,000 2,300 1,300 20% 500 2,000 Microgrid 3 SolarHome 1,000 1,500 500 30% 1,000 1,000 Systems The economic analysis yields positive results for all technologies that have been analyzed: NPV of Minimum Total Net Benefits i s positive, and minimum ERRSof the real subprojects are expected to range from 15 percent to 35 percent; above the hurdle discount rate of 12 percent. The ERR values of the real subprojects will depend on technology type as well as the site- specific cost, local renewable energy resources and load curves. The Project's selection proceduresfor subprojects will not allow proposals with EIRR lower than the hurdle rate. 89 Backgroundfor consumer surplus calculation Example: Estimation of the benefits of improved lighting: Diagram 9.2 models the adoption of PV lightingby households usingtraditional lighting fuels: a shift on the lighting demand curve from a to p. Current lightingfuel expenditures (D+B) represents a minimumwillingness to pay (WTP) for an improved lighting source. Real current substitutable energy expenditures have been usedto estimate the likely size of market segments. The increase in consumer surplus from adopting a more efficient lightingsource is represented by the additional area under the lighting demand curve (B+C). Households that change to electricity will enjoy an (minimum) increasein welfare (from lighting only) of B+C plus their revealed willingness to pay for the lighting services from the PV system (D+E). Total WTP for electricity service i s higher, as it includes also the non-lighting benefits. Estimation of increases in welfare from ICT would follow the same approach, with separatedemand curves. The area A+B+C+D+E i s the Total LightingUser Benefit of electrification. Area A does not count towards net benefits, as it i s part of consumer surplusfor usersbothwith andwithout the Project. Figure 9.2: Contributions to Total Lighting Benefits Price/Cost I Avenge Cost of Oil Lamp ,,'AverageCost of Electric Light Lumens Benefits from electrification, however, include a variety of effects, and have been estimated in past World Bank projects inseveralways. While estimating minimumbenefits via tariffs, cost savings, consumer surplus through improvedlighting and global benefits is straightforward, estimating the multitudeof additional direct and indirect benefits of electrification (improvements ineducation, health, communication andproductivity) i s more difficult. However, it is important not to forget the latter whenjudging the real net gain inbenefits from rural electrification. Recent researchhas estimated some of the indirect benefits for the Philippinesand India(Barnes 2002), with resulting TotalNet BenefitsfromUS$SO to US$l50 per monthper household. While adirect transfer of these results to Honduras is obviously not possible, these results give an idea of the range of additional benefits that can bederived from ruralelectrification. 90 Annex 10: SafeguardPolicyIssues Annex 10. A ENVIRONMENTALASSESSMENT I. INTRODUCTION Duringpreparation of the Rural Infrastructure Project (PR), a number of environmental considerations were included to ensure the Project's environmental sustainability and comply with the Bank's Environmental Safeguards Policy. Ingeneral, the Project will execute rehabilitation, improvementand maintenance of existing rural works. The construction o f new works will include small projects at the community level, where it i s expected that the environmental impacts will be minimal. In the case of electrification, the Project includes environmentally friendly innovative projects in accordance with national and international policies. Another innovative element i s the strategic use of local labor as a way to contribute to poverty reduction. Since the beginning of the Project's environmental evaluation process, the recommendations of the Quality Assurance Team (QAT) to the Project Concept Note (PCN) were included to comply with the Bank`s safeguard policies. The Project includes an Environmental and Social Management Conceptual Framework (MCMAS). The first set of works will be basedon the application of this framework. The following Environmental Evaluation Report presents the elements analyzed by the Bank during the preparation process, whichjustify its environmental viability. 11. IDENTIFICATIONOF IMPACTS 11.a) RoadsComponent The rural roads component will develop works to rehabilitate and maintain existing roads. There are no plans to construct new roads, which would have an environmental or other impact on nearby population centers. Below i s a list of possible activities, their potential environmental risks and ways to mitigate or compensatefor the impacts. Activitiesthat may generateenvironmentalimpacts: The following preliminary activities may result inenvironmental impacts: .. Selection of areas to place machinery and equipment to be used duringconstruction; and Identification of environmentally sensitive areas The following implementationactivities may result inenvironmental impacts: .. Traffic management duringimplementation, especially inareas with access to the centers; Transport of material andcombustibles; . Handling of oil, grease and combustibles inthe work areas and inthe asphalt plants; Widening of walkways could affect the neighboring properties; and Transport of dangerousmaterials to disposal sites. The following final activities have potential environmental impacts .. Construction of speed bumps and bus parkingareas, among others, could have temporary impacts on the normal development of activities inpopulatedareas; and Reforestation and beautification activities. Identificationof potentialsocialandenvironmentalimpacts: . Air pollution: Some constructionactivities result inthe emission of particulates into the atmosphere 91 . and affect the workers' environment. These activities are: (a) emission of gases from combustion during operationof machinery and equipment; (b) use of materials; and (c) transport of material, among others. Solid Waste: Among the contaminants produced duringimplementationare: residue from materials, residue from machinery (such as filters) used parts, tires, oil containers and trash. . Noise and vibration: The use of machinery andequipment duringconstruction, use of material and .. the very implementation of the roadrehabilitation andimprovement projects can cause noise levels that would affect the workers and the neighboringpopulations, especially inareas with access to communities. Visualpollution:The lack of environmental criteria duringimplementationas, for example, the disposal of waist material inthe rights of way can change the landscapeand scenic beauty. Protectedareas: The implementationof projects indesignatedenvironmentally protectedor sensitive . zones requires integrated management. This does not affect rightsof way, which promote naturalhabitat development, becausethey serve as biological corridors. Stabilization of slopes and eroded areas. Project resourcescould improve the physical and environmentalcharacter of the zones, at the moment experiencing problems of stability and erosion. This could have an impact on the roads' transitability. Impactsonthe country's culturalandphysicalpatrimony Inareas where there is ahighpossibility of findingphysicalandculturalartifacts, inappropriatedigging can cause irreversible damage, which i s the reason to develop an adequate strategy during the construction phase. Given the country' s rich cultural heritage and the potential of finding archeological artifacts, a policy framework has been developed as part of the Bank's requirements. 11. b) Water and Sanitation Component The water and sanitation subcomponent will develop works at the community level to rehabilitate and expand waster water treatment and collection through home and secondary collection sites. Smaller works of collection, treatment and distribution of potable water will be provided to community centers. Water andsanitation activities with environmentalimpacts arediscussedbelow. i) Sanitation sub-Component Possibleenvironmentalimpacts: Duringthe preliminaryphase, the followingcouldhaveenvironmentalimpacts: Selection of areas to place equipment and materials to be used duringconstruction; The following activities have been identified as havingpotential social and environmental impacts during the execution stage: Transport of materialandcombustibles; .. Handling of lubricants andcontaminants inarea reserved for storage of material and vehicle parking; Interfering with normal traffic flows by constructionactivities; Transport of dangerous materials to disposal sites; and solid waste disposal in construction and work sites. The following activities have been identified as having potential social and environmental impacts during the final stage . Recovery of staging and preparation areas; and Management of waste disposal sites. Potentialsocialandenvironmentalimpacts: . Airpollution: The operation of machinery and the transport of material will increase the emission levels of particulates inthe atmosphere. Solid waste:Implementationof the works will producecontaminants for the operation of the 92 machinery and equipment, such as filters, usedparts, tires, oil depositories and trash, among other. These could have a negative impact on the urban environment. Noise and vibration: The use of machinery and equipment duringthe execution phasecould cause noise levels that would affect the nearby residents andthe workers. Lakes and rivers: Inadequatedisposal of liquidwaste could have an impact on the fragile lakes and rivers. ii) Potable Water Sub-Component Activities with possible environmental impacts: Activities that may have environmental impacts are similar to the works described in the sanitation component above. The primary activities with environmental impacts will be developed duringexecution. Nevertheless, given the size of the works themselves, they are not expected to produce significant environmental impacts. The construction of water distribution systems will disrupt traffic flows. An adequate strategy to minimize these temporary impacts shouldbe developed. Potential social and environmental impacts: The principal impacts are related to the execution of the water works. Soil removal, disposal of residues and the laying of water distribution lines and access points are, among others, principal impacts of execution and operation of the systems. On the other hand, the expansion and rehabilitation of distribution systems can result in negative impacts for the nearby residents and the consumers. Noise and dust particles during execution are the most common impacts and mitigation and preventionmeasures shouldbe developed to reduce these effects. 11.c) ElectrificationcomDonent: The electrification component includes construction, rehabilitation and improvement of mini and micro hydroelectric grids (less than 1MW) and the extension of grids, micro grids and household connections. The component includes clean energy projects using solar panels to serve rural communities. Activities with potential environmentalimpacts are: Activities with possible environmental impacts: Activities with possible environmentalimpacts will occur duringthe construction and operation phases. Although hydro generation projects includerunof the river projects, special care should be taken with the opening of access roads, laying of pipes, construction of sewer drains, among other, to avoid potential impacts on the environment andthe lake or river. Potential environmental impacts: Special care should be taken with the hydro electric projects since they are generally located in inaccessible zones with extensive tree coverage and house a large number of flora and fauna. Among the principal impacts are: Deforestation as a result of the construction of channels for the piping, transmission lines and access roads; Finaldisposal of accumulated sediment inthe settlement ponds; Contaminationof the ponds and obstructionof the dams by polluted water; Loss of aquatic fauna through lack of adequateecological control; Impacts on the natural habitats; Use andfinal disposal of residues andcombustibles; Impact on faros; and Impact of noise andaccidents. 93 Although this type of Project can have certain environmental implications, it can bring great benefits at the local and global levels. Issues such as carbon emissions reduction, reduction of river contamination levels, employment generation, worker training, productive activities for the communities and improvements in services are some of the benefits or positive impacts, among others, that are available from this type of project. 111.ENVIRONMENTALEVALUATION No major direct or indirect environmental impacts are expected during implementation of the various components of the Project. This i s due to the size of the subprojects. In general rehabilitation, improvement and maintenance works at the community level will be executed and will bring great benefits to the residents' quality of life. As a result the Project has been classified "Category B" based on the World Bank`s Operational Policies (OP). This category is principally a result of the expected, easily identifiable and remedied impacts of the execution of the works. In the rural roads case, the rehabilitation, improvement and maintenance works will be completed on already existent roads and will not change significantly the character of the roadways. The water and sanitation rehabilitation, expansion and construction works will be at the community level and small scale. The electrification component i s expected to develop clean energy projects using small scale renewable and environmentally friendly resources. No major environmental impacts are expected. Nevertheless, to ensure social and environmental sustainability and to comply with the Bank's Environmental Safeguard Policy (OP 4.01), duringpreparation, it was agreed with the QAT to prepare an Environmental and Social Conceptual Framework and to complete an environmental evaluation of the first package of works in the Project. ConceptualFrameworkfor EnvironmentalandSocialManagement(MCMAS) As mentioned before, one of the Bank's requirements to be developed during the Project preparation phase was to include an instrument that would permit identification of the social and environmental procedures duringthe project cycle of PIR's proposed subprojects. This instrument will ensure social and environmental sustainability of the subprojects and compliance with the Bank`s Safeguard Policies and Honduras's environment laws. Among the specific objects of this tool are: Define the Social and EnvironmentalManagement procedures duringProject implementation; Create the necessary conditions for social and environmental sustainability of the subprojects, encouraging citizen participation for effective and equitable management of resources; Define the activities to be developed as part of social andenvironmental management; Identify the functions of the persons responsible to assure adequate social and environmental management and its applicationto the Conceptual Framework; Provide an adequate and timely coordination of activities with local actors in the mancomunidades to direct conservation andprotectionefforts of the natural resources andenvironment; and Ensure the application of the NationalEnvironmental Laws and the World Bank`s Safeguard Policies duringProject development. This instrument has been designed to be used on three levels, each of which responds to a subproject's social and environmental risk. The Environmental Unit of the Technical Interinstitutional Units will be responsible for the classification of the subprojects. In the high-riskCategory 3 subprojects, the Natural Resources and Environmental Secretariat will be responsible review and approval. In the moderate-risk Category 2 subprojects, the responsibility for review and approval will fall on the Environmental Management Unit of FHIS. In the low-risk Category 1 subprojects, the Municipal Environmental Units will be responsible for review and approval. 94 At the technical level, a series of promotional and training activities are planned to ensure the use and application of this instrument. Social and Environmental Evaluationof the FirstPackage of Works. For the first phase of the Project, two mancomunidades located in the north of the country were chosen: the mancomunidades of CRA and CHORTI. The first packages of works were selected by the communities through a participatoryprocess incoordinationwith the municipalities. Once the package of subprojects to be financed for the first year of the Project was developed, a field visit took place to verify and ensure compliance with the Social and Environmental Safeguards of the road, electrification and water and sanitation subprojects. This sampling identified 23 out of 102 subprojects for implementation. The sampling included eight road subprojects, nine electrification subprojects and six water and sanitation subprojects. The subprojects are detailedbelow for each of the mancomunidades. Table 10.1 Projects visited duringfirstfield visitfor first package of works MANCOMUNIDL 1CRA Subproject Sector Munieipio I. Sewersystemfor Chinda APS Chinda 2. Rural Electrijkation in SanRafael Electrification Chinda 3. Highway Las Breas -El Tule Roads Chinda 4. Rural Electr$cation in El Tule Electrification Chinda 5. Kildmetro Municipal Roads Trinidad 6. Highway LaHuerta -Cebadilla Roads Trinidad APS Trinidad 7. Potable WaterLa Cebadilla Roads Trinidad 8. Highway San Francisco-Agua Tapada Electrification Trinidad 9. Rural Electrijication en El Carmen APS Petoa 10.Municipal SewerSystemdePetoa Electrification Petoa 11.Rural Electrijication Petoa APS SanMarcos 12.Municipal Sewer Systemfor SanMarcos Electrification SanMarc0 13.Rural Electrijication in Bellavista Electrification SanMarcos 14.Rural Electrijication in La Puerta 95 Table10.2 Projects visitedduringfield visit of thefirst package of works MANCOMUNIDAD :HORTI Subprojeet Sector Municipio 1. Rural Electrij2ation in Sinsin Electrification LaJigua 2. Kilometro Municipal de Torrecillas Roads LaJigua 3. Rural Electr$cation in Potrerillos Electrification LaJigua 4. Potable Waterfor El Jaral APS LaJigua 5. Highway Buena Vista-SanJoaquin Roads LaJigua 6. Potable waterfor SanJoaquin APS SanJoaquin Roads El Paraiso 7. Highway La Pita -La Cumbre Elect@cation El Paraiso 8. Rural ElectrijkationLa Cumbre Roads Santa Rita 9. Highway Los Achiotes -Piedra Colorada Before the field visits and as part of the evaluation process, a set of social and environmental indicators was developed for all of the 102 proposed subprojects, to identify their social and environmental risk level, usingthe format designed by the QAT team. Results of the environmental evaluation Becausethe roads projects are for rehabilitation and maintenance, no significant social and environmental impacts have been identified beyondthose direct and temporary impacts duringimplementation. Based on their environmental indicators, the 29 roads subprojects in the first package of works were classified as low social and environmentalrisk. The field visit verified the poor state of the roads and the highpositive impact these projects will bring.The evaluation did not identify any roads projects located inhighriskzones, such as inprotected or environmentally fragile areas. These projects will require the application of the EnvironmentalManuals for the Sector, according to the Conceptual Framework for Social andEnvironmental Management. Most of the electrification subprojects consist of grid extension to rural areas. In these cases, the posts have already been set or at least acquired, but cables have not been installed. Electrical generation i s also planned using environmentally friendly sources, as are the run of the river and solar panel projects. For the first package of works, one hydro electrical generation project, L a Atravesada, has been identified in Chorti. Nevertheless, due to the lack of information on the project, it i s expected to be included in the second year of the PIR. Therefore, it was not includedinthis first stage of evaluation. Conservation of the river basin through legal means will be required in these cases to ensure the quality and quantity of the resource. Of the 44 electrification subprojects in the first package of works, 43 are classified as low social and environmentalrisk, while the complexity of the one project that requires development of a basin has been classifiedof moderate social andenvironmentalrisk. The 43 subprojects will require application of the MCMAS environmental manuals, while the one generation project will require DIA and its related studies. The water and sanitation subprojects include rehabilitation, maintenance and construction of new systems at the community level. N o significant social or environmental impacts are expected, except for temporary and direct impacts duringexecution, becauseof their rural location, size andcharacteristics. Of the 29 water and sanitation subprojects in the first package of works, 17 have been classified as moderate social and environmental risk and 12 as low risk. No high-risk projects were identified. The 96 moderate-risk projects include new construction. These will require the DIA.The remaining 12 will only require application to the respective Environment Sector Manuals. IV. INSTITUTIONAL CAPACITY Among the most important problems the municipalities must confront i s the lack of technical and logistical capacity to preservethe natural resources under their charge, to apply environmental knowledge to social and economic activities and respond adequately to the already existing environmental problems under theirjurisdiction Most of the alcaldias in the country lack a specific environmental organization and the material and human resources (technical) to provide adequate management and sustainable use of the natural resources inthe municipality, suchas controlof activities that directly affect the municipios' environmental quality. Inthis context, during project preparation, directives were included in the conceptual framework to develop an Environmental Management Capacity Building Plan, directed mainly to municipal environmental management (see Chapter 7 of the MCMAS) ThisEnvironmentalManagement Capacity BuildingPlanwill focus principally on: Strengthening and consolidating local structures; Implementing and consolidating the National Evaluation and Environmental Impact System ( S I N E W ; Elaborating andmodernizingthe MunicipalEnvironmentalAction Plan (PAAM); and Elaboratingan EnvironmentalProjects portfolio; Administrative, FinancialandTechnical Sustainability Strategy by the UAM The required budget for the elaboration and implementation of the Environmental Management Capacity Building Plan has been included in the project budget for institutional strengthening. The estimated amount i s US$20,000 for elaboration and US$lOO,OOO for implementation. V. COMPLIANCE WITH ENVIRONMENTALLEGISLATION The Environmental and Natural Resources Secretariat (SERNA) i s responsible for environmental management at the national level, with directives to implement environmental policies and laws. Environmental management i s embodied in Decree 104-93, General Environmental Law, its related regulations, and the National Environmental Impact Evaluation System and Regulations (SINEIA), established by Decree 109-93, publishedinthe Diario Oficial la Gacetano. 27,291 on March 5, 1994. Municipalities are responsible for the implementation of environmental management procedures through the Social and EnvironmentalManagement Units( W A S ) and other municipal-level structures. FHIS's Environmental Management Unit would be responsible for coordination of the PIR's social and environmental management process in the selected mancomunidades. One of the its roles would be to establish a good level of permanent coordination of the Sectoral Environmental Units (UNAS) with the National and UAM institutions, to guarantee compliance with the Honduran normal mechanisms and procedures and the Bank's social andenvironmental Safeguards. The Inter-institutional Technicdl Units (UTI) in the mancomunidades will include an environmental managementunitto assure adequate social andenvironmental management at the locallevel. Social and environmental management responsibilities will be a function of risk level during implementation of the PIR. Level 3 projects, that is, high social and environmental risk, will be reviewed by SERNA. Level 2 projects will be reviewed and approved the FHIS's environmental management. Level 1projects will be review by the UAMs. 97 The environmental indicators for the first packageof works have been delivered to FHIS's Environmental Unitfor review andapproval. VI. SOCIALAND ENVIRONMENTAL VIABILITY The project i s deemed viable from the social and environmental point of view and complies with the Bank's Safeguard Policies once the evaluations have been finalized and actions have been taken to ensure the integration of the social and environmental dimension into the project, It is important to stress the importance of developing ongoing follow-up and monitoring of compliance during project evaluation, to assure implementation and guarantee adequate social and environmental management. 98 Annex 10.B: SOCIALASSESSMENT I.INTRODUCTION One aspect of the PIR intervention is its small size. The reach of the works in each sector i s minimal,focusingits priorities onrehabilitation andexpansion of coverage for potable water and sanitation, rehabilitation and improvement of roads and electricity grid extension and pilot implementation of minihydro electric stations. Giventheir size, none of these interventions impliesremovalof families. A policy framework for population resettlement i s proposedinthe eventuality that this may be necessary. Some of the mancomunidades include indigenous populations. To maximize the benefits of the projects for the indigenous populations, a policy framework has been designed to ensure prior consultation and inclusion, according to specific social and cultural characteristics. A framework policy for the protection of the country's physical and cultural patrimony has been designed as a guide if, during project implementation, there are important archeological finds. This includes establishing archeological potential and contacting the Honduran Institute of Anthropology and History. The social interventions associatedwith infrastructure point to the creation of community micro enterprises for sustainable rehabilitation and maintenance of the road system, strengthening of innovative models of service management and financing, promotion of hygiene, environmental aspects to maximize the impact andbenefits of the services, and productive uses of energy. These activities imply the implementation of capacity building programs in the communities. The specific content of the capacity buildingexercises should be designed by the UTIs with the support of FHIS and basedon the needs of each subproject. This includes promotion and implementation of the strategic use of labor (Mano de Obra Intensiva, MOI), according to the guidelines and methodology and of the International Labor Organization. This would encourage participation in and commitment to the project and improve the incomes of the population duringimplementation. 11. CULTURALAND SOCIOECONOMICEVALUATION GeneralContext Honduras has a young demographic structure, characterized by accelerating population growth and slow declines in mortality and fecundity. Net migration rates are negative, which results in growth rates that are slowly falling and producing a multipliereffect. Of the total 1,262,000 households, 63.6 percent, equivalent to 800,000 households, are poor, with incomes less than the cost of a basic basket of goods, including foods and other goods and services. The country's total population is 7,028,389 and will reach 8,894,975 persons by 2015, an increase of 26 percent. Growth rateswill decline to less that two percent in2015. Local Government Most of the municipalities have a simplified government where there i s little delegation of function, Some municipal governments are intermediate, with horizontal growth and efforts to 99 delegate authority. Other municipalities have a more complex organizational structure, with marked vertical and horizontal growth. Organizational structure, administratively and technically, has been expanding, depending on the complexity of the development of municipal competencies, as in the Municipal Technical Units (UTMs), Municipal Environmental Units (UMAs), informationsystems, water services andlandadministration. In 1962, the MunicipalAssociation of Honduras (AMHON) was created as a dependency of the Secretariat of Governance and Justice, to strengthen municipal government. AMHON was later established as a non-profit organization, with its own budget and administration, made up of all the country's municipalities. Among it principal purposes i s to represent the interests of the municipalities and maintainmunicipalautonomy. Municipal Mancomunidades: A model of local and regional development The inter-municipal association, or muncomunidud de municipios, i s a local entity voluntarily created by various municipalities as defined in national legislation. These associations have specific, although flexible and open, goals and concrete objectives. The municipalities have used the mancomunidad as way to develop capacities inplanning, management, service provision and land administration, among others. This type of entity offers its member municipalities the possibility of jointly solving problems that are difficult to confront individually, due to the many technical and financial limitationsthat most municipalities mustconfront. Presently, there are around 50 mancomunidades that cover 91 percent of Honduran municipalities. Among these, 60 percent have achieved legal recognition. The rest are in the process of organizing. The mancomunidades are in the process of developing and strategic development plans. They are supported by their Intermunicipal Technical Units (UTIs), most of which have one or two technical staff. As the management units, the UTIs play an important role in the development process of the mancomunidades. They include a multi-disciplinary team of technical staff, which provides technical assessment to the mancomunidad and member municipalities to improve evaluation, design, planning and management capacities such as: municipal strengthening, environmental management, citizen participation, socioeconomic development and public service, among others. Ethnic Communities In the face of social, economic and political inequalities, the ethnic and black communities have been marginalized as a group in a largely mestizo society. The eventual recognition of these communities i s the result of protest and mobilization, which, since 1994, demanded better treatment from the central authorities. Protests focused on problems of land, restriction on exploitation of forests, justice, new local governments in largely indigenous regions, bilingual education and cultural recognition. Infrastructure and basic services inthe indigenous and black communities are limited. Priorities include construction and improvement of roadways, electrification, water and sanitation, provision of latrines, and communications. The ethnic communities are: Garifunas, English-speaking Blacks, Misquitos, Tolupanes, Pech, Tawahkas, Chortis, Lencas and Nahumahoa, all of which represent 7.2 percent of the population, according to the 2001 census. 100 The Tolupanes live in Yoro and Francis0 Morazan, the Pech in Olancho and the Misquitos in Gracias a Dios, on the Atlantic litoral. The Garifunas are found on the coastal litoral and the English-speaking Blacks live on the bay islands. The Tawahkas live in Olanch and Gracias a Dios. The Chortis, originally from Copan and Ocotepequelive inthe western part of the country. The Lencas, originally from the center and west of the country, live in Lempira, Intibucaand La Paz. The recently recognized Nahua/Nahoa group is the nucleus of a rural population located in Jano, Guata andCatacamas. This group has sought legal recognition. Table 10.3 Ethnic SocioPolitical Organizations Ethnicities Organization LENCAS Alcaldiade la Vara Alta de Yamaranguila-traditional organization ComitCde OrganizacionesPopularese Indigenasde Intibud(COPIN) GARIFUNAS OrganizacidnFraternalNegrade Honduras(OFRANEH). Organizacidnde DesarrolloComunalEtnico (ODECO). Enlacede MujeresNegras de Honduras(ENMUNEH) CentroIndependientede Honduras(CIDH) MISQUITOS Mosquitia,Asla, TakankaMasta ComitC de Mujeresparael DesarrolloIntegralde laMosquitia (COMUDEIM) OrganizacidnProMejoramientode 10s Buzosde laMosquitia(PROMEBUZ) TOLUPANES Federacidnde Tribus Xicaques de Yoro (FETRIXY). CHORTIS ConsejoNacionalIndigenaMaya- Chortide Honduras(CONIMCHH) Pech Federacidnde IndigenasPechde Honduras. TAWAHKAS Federacidnde IndigenasTawahkas de Honduras(FITH). FundacidnRaices. ENGLISH-SPEAKING Asociacidnde Profesionalesy TrabajadoresNativosIsleiios(NABIPLA). BLACKS OTHER Federacidnde PueblosAutdctonos de Honduras(CONPAH) ORGANIZATIONS ConsejoAsesor Parael Desarrollode las Etniasde Honduras(CADEAH) Source:Informe SobreL Farrollo Humanode Honduras. 1998Table 6.2., p. 103. Physicaland CulturalPatrimony Honduras is a rich source of archeological artifacts. According to the Honduran Institute of Anthropology and History (IHAH), 4,465 sites have been inventoried, representing only 15 percent of extant sites. The Rio Copan valley i s the most recognized archeological zone in the country. It holds the Maya de Copan city, one of the most important cities from the Late Classic period (300-900 ax.), a period of major economic, social, and political development. The valley also has the city's tributary settlements. The city of Copan was registered as a World Heritage Site by UNESCO in 1980. In 2001, the archeological site in the Copan valley was divided in three zones, (I,IIQ to aid it protection and safeguarding by IHAH. 11, Other areas of archeological interest are: ElValle del Rio Amarillo, Valle de Florida, Valle de La Venta, Valle de Sensenti, Valle de Cacaulapa, Valle del Rio Chamelecon, Valle de Naco, Valle de Sula, Valle de Tencoa, Valle de Jesds de Otoro,. Valle de Comayagua. Valle de Culm'. Llanuracostera Omoa-Corinto. RegiBn del Lago de Yojoa and Zona del CajBn. 101 111. CITIZENPARTICIPATION The Constitution guarantees social and citizen participation and the exercise of civic, social, economic and judicial rights. The Municipal Law identifies a set of instruments to be used to develop citizen participation. These are: the Municipal Development Council, the Cabildo Abierto, Plebiscite, Public Audiences, and Municipal elections. The patronatos were createdto work for the improvement and development of the communities. They have been the most relevant community organizations in Honduran society. They receive legal recognition from the Offices of Governance and Justice inthe Secretariat of State. Other organizations serve as direct interlocutors of sectoral institutions, such as health committees, head of household organization, water juntas, local development counsel, sports clubs, "pastorals" and various committees to deal with the environment, security, natural disaster preparation, and patron saint celebrations, among others. Non-governmental organizations (NGOs) are important members of civil society. They work in such diverse areas as human rights, culture, citizenship, credit, alternative medicine, technical assistance, training, education, and the like. These organizations work with internal and external assistance and encourage activities that are alternative, complimentary or substitutions of state activities. Some NGOs manages public resources assigned to them in specific projects by some state institution. After Hurricane Mitch, in the process of reconstruction and national transformation, the government created the Commission for Civil Society Participation (CPSC) as the main consultative mechanism with different sectors to implement the Master Plan for Reconstruction and National Transformation. The creation of the CPSC recognized the importance of these sectors inthe process. Other opportunities for civil society participation include: Gran Dialog0 Nacional; el Foro Nacional de Convergencia (FONAC); Red Nacional de la Sociedad Civil; el Fondo Social de la Deuda Externa (FOSDE); la Coalicidn Patrio'tica. They develop proposals and initiatives for nacional policies. oscType Basic Characteristics Examples Basic mechanisms for participation and organization Patronatos, juntas de community and at the community level, representing specific needs. agua, comite`sde salud, base They emerge and focus on local problems and comite`sde emergencia, occasionally dissolve when the problem is resolved. club de amas de casa, Other maintain a major presence in areas of more sociedad depadres de permanent nature (education, health). familia, consejosde desarrollo local, otras. OSC tied to the Develop religious, community, assistanceand service Asociaciones de: pastores, church activities. de Iglesias, Comite`s Sociales de las Iglesias. OSC de Promote the exercise of civil and political rights, the Organizaciones de defense y rights and recognition of specific collective group Derechos humanos; expansion of interests. ktnicas; de Genero y de rights Mujeres; depromocidn de interesesdifusos y colectivos, etc. 102 OSC artistic, Dedicated to recreation and use of free time. Promote Asociaciones culturales, cultural and culture, art and sport. Promote of autochthonous grupos de teatro, grupos sport activities culture. Idepromocidn del deporte, etc. ASC de INGOsand OPDs: promote following activities: IAsociaciones de Education; research, credit management development desarrollo;fundaciones; Promotion participation, production, organization, etc. Institutos de investigacidn, Technical & centros de capacitacidn, Financial privadus de desarrollo y Assistance Ifinanciamiento. Humanitarian comedores, club rotarios, Assistance club de caridad y de beneficencia. osc Work inthe interest o f their membership; in terms of Sindicatos, cooperativas, Cooperatives & economic interests, professional, occupation or colegios y gremios de Unions offices; reflect the rights and social responsibilities of profesionales, cdmaras the sector. empresariules, organizaciones campesinas. IV. EVALUATION OF THE PROJECT'SEXPECTEDBENEFITSAND SOCIAL IMPACTS The PIR will provide for the reconstruction of neighborhood roads, the provision of potable water and sanitation and electricity. All of the subprojects will result in few or no negative 103 impacts. The PIR's fundamental criterion is social development and provisionof benefits derived from access to infrastructure by the poor communities. The PIR's positive value derives for its contribution to the socioeconomic development of the municipalities and the consolidation and institutional strengtheningof the mancomunidades. Among the possible social impacts are: Possible impacts on the Culturaland PhysicalPatrimony PIR's interventions will be so small that the Honduran Institute of Anthropology and History (MAH) is of the opinion that a monitoring agreement during implementation is all that is required to safeguard the patrimony. The executing agency and the MAH are preparing an interinstitutional agreement for the management of the cultural and physicalpatrimony, based on previous experiences. Strategic Use of Labor (MOI) Construction, reconstruction and rehabilitation of infrastructure can generate a considerable number of opportunities for temporary work. This canresult inimportant increasesinincome for the beneficiary population, which makes investments in their principal economic activities possible. The impacts on employment increase if local inputs and other products and local services are used. Inclusion of indigenousand ethnic communities The small size of the PIR interventions, in addition to the consultation process with the communities suggests that there will be no negative cultural impacts. The way that these phases are developed depends on each society and particular culture and the type of management developed by the project's promoters. In general the PIR operations constitute an exogenous factor incultural change, in that the transformations result in changes in the cultural systems. In any case, some minor changes and possible managementmeasuresare identified. Possible impacts of the interventionsinthe ruralmunicipal roads sector The PIR does not include plans for expansion or new construction, which could have an impact on the environment or settled populations. It includes only projects of rehabilitation and maintenanceof existing roads. Possible impactsof the interventionsinthe ruralwater and sanitation sector The PIR includes rehabilitation and expansion of collection and treatment of water through secondary and home collection grids at the community level. Inthe case of potable water, the PIR plans to provide services to community centers through minor works of collection, treatment, transport and distributionof water. Possible impactsof the interventionsinthe ruralelectrification sector The PIR includes plans for construction, rehabilitation and improvement of mini and micro hydro electrical stations (less that 1 MW), grid extension, micro grids and household connections. The project includes clean energy generation subprojects with solar panels for rural communities. VI. SOCIAL MANAGEMENT PLANS Community Participation 104 Objective: Provide a program of communication to assure complete participation of population during the entire implementation process, to aid in the development of local capacity for the sustainability of the works to be executed. Specifically: Make known the project's goals and objectives to encourage active involvement of the participant population in the entire implementation process; Facilitate processes of articulation among the local actors, municipal authorities, civil society, public and private institutions; Provide incentives to the population to identify sustainablealternatives. Protectionof the physicalculturalpatrimony Objective: Avoid the loss of the cultural patrimony and support its preservation; Ensure that the cultural patrimony i s identified and protected inthe subprojects: Assure that the projects comply with the country's legislation on cultural patrimony; Contribute to the development of the capacity to identify and protect cultural patrimony. Specifically: The establishment of mechanisms to coordinate with local authorities responsible for the preservation of the cultural patrimony; Establish the level of importance to the archeological patrimony and the possible impacts of the subproject in terms of the nature, size and importance of the patrimony. Follow up and protection of the possible new sites. During execution, the subprojects will need monitoring to register the possible new archeological sites that have yet been identified. StrategicUse of Labor(MOI) Community contracting i s the preferred approach for construction and rehabilitation of the infrastructure works financed by the PIR. The users and beneficiaries are contracted to execute the job. For certain activities that require technical abilities, third parties will be contracted-for example a master builder or small contractor. Contracting of small private firms for construction and rehabilitation for infrastructure projects always assumes that there is no possibility of completing the work with local labor and especially large systems. VII. SOCIALEVALUATIONOFTHE FIRSTPACKAGEOFWORKS For the first phase of the Project two mancomunidades were chosen located in the north of the country, the mancomunidades of Chorti and CRA. The first package of works was identified by the very communities through a participation processincoordination with the municipalities. Once the package of subprojects was identified for financing field visits were taken to a sampling of subprojects of the roads, electrification, water and sanitation components to verify and ensure compliance with the Bank's Social and EnvironmentalSafeguard Policies. This sampling consisted of 23 subprojects out of the 102identified. The sampling included eight roads subprojects, nine electrification subprojects and six water and sanitation subprojects. The subprojects for each mancomunidad are found below. 105 I Table 10.5 Projects visited duringthe review of the first package of works CRA Mancomunidad Subproyect Sector Municipio Sewer system for Chinda APS Chinda Ruralelectrificationen SanRafael Electrification Chinda Highway Las Breas-ElTule Roads Chinda Ruralelectrification en ElTule Electrification Chinda Kil6metro Municipal Roads Trinidad Highway L a Huerta- Cebadilla Roads Trinidad Potable water inLaCebadilla APS Trinidad Highway San Francisco - Agua Tapada Roads Trinidad Ruralelectrification inElCarmen Electrification Trinidad Municipal sewer system inPetoa APS Petoa Rural electrificacibn inPetoa Electrification Petoa Municipal sewer system inSanMarcos APS SanMarcos Ruralelectrificacih inBellavista Electrification SanMarco Ruralelectrification inLaPuerta Electrification SanMarcos Table 10.6 Pro-jectsvisited duringthe review of the first package of works Chorti Mancomunida Subproyect Sector Municipio RuralElectrificationSinsin Electrification L a Jigua Kil6metro Municipalde Torrecillas Roads L aJigua RuralElectrificationPotrerillos Electrificacih L aJigua Potable Water ElJaral APS L aJigua Highway Buena Vista - SanJoaquin Roads L a Jigua Potable Water SanJoaquin APS SanJoaquin Highway LaPita-La Cumbre Roads ElParaiso RuralElectrificationLa Cumbre Electrification ElParaiso Highway Los Achiotes -Piedra Colorada Roads Santa Rita Before the field visits, and as part of the evaluation process, a set of social and environmental indicators was developed usingthe format designedby the QAT team for all of the 102proposed subprojects, to identify their social and environmental risk level. Resultsof the Social Evaluation The positive benefits of the roads sector could be verified in terms of rehabilitation. The labor strategy should provide sufficient levels of capacity building and training of the cooperative for road maintenance, but efforts should be made to generate proposals more in accordance with Honduran experiences with M O I 106 Most of the electrification projects are grid extension and the communities have great expectations. The arrival of electricity should not cause great cultural changes, since the communities are already familiar with the service and some of their neighbors have it. Residents see it as an equity issue. For this type of project, it would be important to provide training on productive uses of energy and issues relatedto maintenance. The juntas de ugua are at the forefront of the water and sanitation programs. This should be supported and encouraged. The juntas de agua are a very good organizational form and with much experience inthe various communities. In general the communities recognize all of the projects as resulting from the participatory process in the municipalities. Priorities in the PIR represent the opportunity to realize projects that the communities consider important. This i s very positive, but special care should be taken that the PIR achieves the same in the less developed mancomunidades, for which the methodology of participationandprioritizationof the subprojects should be improved. VIII. INSTITUTIONAL CAPACITY One of the most important problems confronting the municipalities i s the lack of technical and logistical capacity to preserve the natural resources under their charge, application of environmental discipline to economic and social activities and how to respond adequately to the environmental problems intheir jurisdiction. As in the environmental area, most of the alcaldius lack a specific organization to provide adequate management of the PIR requirements for human (technical) and material resources. Therefore, the strengthening program should include the development of competencies in this area. Duringpreparation, directives to develop aManagement StrengtheningPlanwere includedinthe policy frameworks for resettlement, indigenous communities and cultural and physical patrimony, along with the conceptual framework for social and environmental management (see chapter 7 of the MCMAS). The budget for the development of the Social and Environmental Management Strengthening Plan was formally included in the project proposal for institutional strengthening. The estimated amount i s US$20,000for plan development and US$lOO,OOO for its implementation. IX. SOCIAL AND ENVIRONMENTALVIABILITY The Project will be considered to be socially and environmentally viable and in compliance with the Bank's Safeguard Policies once the social and environmental evaluation is finalized, taking into account that a series of actions to ensure their incorporation was developed during the preparationphase. It is important to point out the importance of developing a permanent follow up and monitoring of compliance of the identified actions during Project evaluation, to ensure implementation and guaranteeadequate social andenvironmental management. 107 Annex 11:Project Preparation and Supervision HONDURAS:RuralInfrastructure Project Planned ~ Actual ~~~~~ PCNreview November 3,2003 November 3,2003 Initial PID to PIC December 12,2004 December 12,2004 Initial ISDS to PIC December 12,, 2004 December 12,2004 Appraisal April 11-20,2005 April 11-20,2005 Negotiations May 17-23,2005 May 17-23,2005 Board/RVP approval July 7,2005 Planneddate of effectiveness December 2005 Planned date of mid-term review June 2007 Planned completiondate December 30,2009 Planned closingdate June 30,2010 Ministry of Presidency together with FHIS were two key institutions responsible for preparation of the project, incooperation with sectoral agencies, includingSOPTRAVI, Fondo Vial, SANAA, ENEE-FOSODE, SERNA andthe Ministry of Interior andJustice. Bankstaff andconsultants who worked onthe project included: Name Title Unit Dana Rysankova Task Manager, Sr. Economist LCSFE G u i l l e i o Ruan Former Task Manager LCSFT Rajeev Swami Financial Management Specialist LCOAA LuisTineo Sr. Procurement Specialist LCOPR Pilar Gonzalez Counsel LEGLA Morag van Praag Sr. Finance Officer L O A G l Manuel Sevilla Sector Leader LCSFP Cecilia Corvalan Sr. Transport Economist LCSFT Manuel Schiffler Sr. Economist LCSFW Gustavo Saltiel Sr. Water Engineer LCSFW Ernest0 Terrado Consultant, RuralElectrification Specialist LCSFE Ghislaine Kieffer ExtendedTerm Consultant LCSFE Eric Palladini ExtendedTerm Consultant LCSFR Sergio Carmona Consultant, Social Safeguards Specialist Marco Zambrano Consultant, EnvironmentalSpecialist Elena Correa Sr. Social Scientist LCSEO Rodrigo Archando Highway Engineer TUDTR Callao Stig Trommer Operations Officer LCC2C FernandaPacheco Language Program Assistant LCSFE MartinOchoa Former Water and Sanitation Specialist TGPWB Jerry Lebo Peer Reviewer, Sr. Transport Specialist EASTR Christophe Prevost Peer Reviewer, Sr. Water and Sanitation Specialist AFTU2 MalcolmCosgrove Peer Reviewer, Sr. Energy Specialist AFTEG 108 Bankfundsexpendedto dateonprojectpreparation: 1. Bankresources: US$407,200 2. Trust funds: US$650,000 (PHRD) 3. Total: US$ 1,047,000 EstimatedApprovaland Supervisioncosts: 1. Remainingcosts to approval: US$ 5,000 2. Estimatedannual supervision cost: US$120,000 109 Annex 12: Documents inthe Project File HONDURAS:RuralInfrastructure Project Project preparation studies - -~ Informe de Priorizacidn y Seleccidn de Mancomunidades Diagndstico General RegionalCRA y CHORTI Propuesta de Inversidn Total por Mancomunidad AnAlisis de Capacidad Financiera de CRA y CHORTI Propuesta de Contrapartida Total por Mancomunidad Rural InfrastructureAction Plan CRA Rural InfrastructureAction Plan CHORTI Analisis de la capacidadlocal de Ejecucidn Plande Fortalecimientode las UTIs de CRA y Chorti Manualde Aplicacidn de laM O I Marco Conceptual Socio-Ambiental Marco de Aplicacidn de laPolitica de Salvaguarda de Reasentamientos Marco de Aplicacidn de la Politica de Salvaguarda de Pueblos Indigenas Marco de Aplicacidn de laPolitica de Salvaguarda de Patrimonio Fisico-Cultural Informe Sector de Caminos Rurales -diagndstico, diseiios, linea base Informe Sector elCctrico -diagndstico, modelos de gestidn, estudio de demanda, diagndstico de potencialidades productivas, diseiio de proyectos de extensidn de red, estudio de prefactibilidadde la plantamicrohidroldgicaL a Atravesada, Plan de Manejo de Cuenca de L a Atravesada Inventario de caminos rurales CRA y CHORTI InformeSector de Agua Potable y Saneamiento-diagndstico, modelos de gestidn, modelo tarifario, opciones tecnoldgicas, diseiios Linea de BaseCRA y CHORTI Demand Study and ImplementationPlanfor Solar PV Market Program (inprocess) Feasibility studies andinstitutionalanalysis for micro-hydro development (inprocess) Economic Analysis Procurement Capacity Assessment, Financial Management Capacity Assessment Project Procurement Plan Relevantbackground materials Honduras MunicipalLaw (1990) and Implementing Regulations (1993) Honduras Water andSanitation Law (2003) Honduras Electricity Law (1994) PlanIntegralde Desarrollode CRA y CHORTf Planes EstratCgicosde DesarrolloMunicipal (municipalities of CRA andCHORTI) Guias de preparacidn de Planes Integrales de Desarrollo A Futurefor SocialInvestment Funds?Andrea Vermehren and Rodrigo Serrano-Berthet Honduras Local DevelopmentPaper, World Bank -FPSI, 2005 (forthcoming) Drivers of Sustainable RuralGrowth andPoverty Reduction inCentral America, Honduras case study, World Bank, 2005 Private Solutions for InfrastructureinHonduras, A Country Framework Report, PPIAF, 2003 Honduras; Reform of the Water and Sanitation Sector, PPIAF, (ongoing) LinkingCommunity Empowerment, DecentralizedGovernance, and Public Service Provision through a Local DevelopmentFramework, World Bank, 2005 Pro-Growth Study, World Bank, 2005 Honduras Poverty Reductionand Strategy Paper, 2001 Ine: Censo de Poblacidn (2000), Encuestasde Hogares (multiples) 110 Annex 13: StatementofLoansandCredits HONDURAS:RuralInfrastructureProject Differencebetween expectedandactual Original Amount in US$Millions disbursements Project ID FY Purpose JBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO70038 2004 HNTradeFacilitatio & ProductivityEnha 0.00 28.06 0.00 0.00 0.00 30.55 0.25 0.00 PO40177 2003 HNFinancialSector TechnicalAssistance 0.00 9.90 0.00 0.00 0.00 10.74 0.21 0.00 PO81172 2003 HNRegionalDevintheCopanValley 0.00 12.00 0.00 0.00 0.00 12.44 -0.52 0.00 PO57859 2002 HNSUSTCOASTALTOURISM 0.00 5.00 0.00 0.00 0.00 3.88 1.48 1.98 PROJECT(LIL) PO53575 2002 HN-HEALTHSYSTEMREFORM 0.00 27.10 0.00 0.00 0.00 28.84 7.84 0.00 PROJECT PO60785 2001 HNECONOMIC &FIN.MANAGEMENT 0.00 19.00 0.00 0.00 0.00 12.03 13.34 0.00 PROJECT PO64895 2001 HNFmHSOCIAL INVESTMENT 0.00 60.00 0.00 0.00 0.00 23.45 3.03 0.00 FUNDPROJECT PO73035 2001 HNAccess to LandPilot (PACTA) 0.00 8.00 0.00 0.00 0.00 5.88 3.22 0.00 PO57538 2001 HNROAD RECONSTRUCTIONAND 0.00 66.50 0.00 0.00 0.00 37.12 2.76 0.00 IMPROVEMENT PO07397 2001 HNCOMMUNKY-BASED EDUCATION 0.00 41.50 0.00 0.00 0.00 35.12 16.60 0.00 PROJECT PO64913 2000 HNEMERGDISASTER MGMT (TAL) 0.00 10.82 0.00 0.00 0.00 7.79 4.41 0.00 PO57350 1999 HNPROFUTURO 0.00 8.30 0.00 0.00 0.00 3.18 -1.36 2.76 PO44343 1998 GEFHN-BIODIVERSITY 0.00 0.00 0.00 7.00 0.00 1.98 7.00 0.00 CONSERVATION Total: 0.00 296.18 0.00 7.00 0.00 213.00 58.26 4.74 HONDURAS STATEMENTOFIFC's HeldandDisbursed Portfolio InMillions of USDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1998 CaminoRealPlaz 7.07 0.00 0.00 0.00 7.07 0.00 0.00 0.00 Lechosa 0.00 0.63 0.00 0.00 0.00 0.63 0.00 0.00 0195 1986199 GranjasMarinas 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 Totalportfolio: 11.57 0.63 0.00 0.00 11.57 0.63 0.00 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. ~ Totalpendingcommitment: 0.00 0.00 0.00 0.00 111 Annex 14: Country at a Glance Honduras at a dance 9/15/04 Latin Lower- POVERTYand SOCIAL America middle- Honduras & Carib. income Developmentdiamond' 2003 Population,mid-year (millions) 7.0 534 2,655 Life expectancy GNi percapita(Atlas method, US$) 970 3,260 1,480 GNI (Atlas method, US5billions) 6.8 1,741 3,934 T Average annualgrowth, 1997-03 Population (%) 2.6 1.5 0.9 Laborforce (%) 3.8 2.1 1.2 GNI Gross per primary Most recentestimate (latest year available,199703) capita enrollment Poverty(% ofpopulationbelownationalpovefivline) Urbanpopulation(% of totalpopulation) 46 77 50 Lifeexpectancyat birth(years) 66 71 69 1 infant mortality (per 1,000Cvebirths) 32 28 32 Childmalnutrition(% of childrenunder57 17 11 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 88 86 81 Illiteracy(% ofpopulationage 154 20 11 10 Grossprimaryenrollment (% ofSchool-aQepopulation) 106 129 112 -Honduras Male 105 131 113 __Lower-middle-incomegroup Female 107 126 111 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1983 1993 2002 2003 Economicratios` GDP (US$billions) 3.1 3.5 6.6 7.0 Grassdomestic investmenffGDP 13.8 33.5 27.7 29.2 Exportsof goodsand services/GDP 25.3 31.1 37.2 36.5 Trade Grossdomestic savingsIGDP 9.9 21.6 12.1 11.9 Gross nationalsavings/GDP 5.9 21.4 20.7 21.3 Currentaccount balance/GDP -8.0 -12.1 -6.8 -7.5 Domestic Interestpayments/GDP 3.1 4.4 1.4 1.4 savings Investment TotaldebffGDP 69.1 125.2 81.8 80.2 Totaldebt service/exports 24.4 29.0 12.1 9.0 Presentvalue of debffGDP 46.8 Presentvalue of debffexpofis 94.4 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annualQrowth) - GDP 3.7 2.7 2.0 3.0 4.0 Honduras GDP percapita 0.6 0.0 -0.6 0.5 1.3 Lower-middle-incomearouD Exportsof goods andservices 2.1 1.7 2.1 -2.5 2.1 STRUCTUREof the ECONOMY 1983 1993 2002 2003 I Growth ofinvestmentand GDP (Oh) (% of GDP) 1 Agricukure 21.2 20.6 13.4 13.5 10 Industry 25.3 30.1 30.6 30.7 5 ManUfactUnng 15.1 17.7 20.3 20.2 0 Services 53.5 49.3 56.0 55.8 5 Privateconsumption 77.0 67.8 74.1 74.4 Generalgovemmentconsumption 13.1 10.6 13.8 13.7 Importsof goodsandservices 29.2 43.1 52.8 53.8 1983-93 1993-03 2002 2003 Growthof exportsand imports(Oh) (average annualgrowth) Agricuiture 3.8 2.2 4.8 9.0 10 Industry 3.9 3.2 0.7 4.4 5 Manufacturing 4.0 4.1 2.8 3.8 0 Services 3.4 3.6 2.9 -0.6 5 Privateconsumption 3.1 3.2 1.7 2.5 -10 Generalgovemmentconsumption 1.4 6.6 0.5 1.4 Grossdomestic investment 10.2 1.8 3.3 8.4 Importsof goods andservices 4.0 3.2 2.1 1.3 112 Honduras PRICESand GOVERNMENT FINANCE 1983 1993 2002 2003 1 Domesticprices Inflation("A) I (% change) 25 Consumer prices 10.7 7.7 8.4 XI Io' ,I ImplicitGDP deflator 7.0 13.6 7.3 8.6 15 10 Government finance 5 (77 of GDP, includescurrentgrants) Currentrevenue 13.0 16.6 18.3 19.9 9* 99 00 61 02 Currentbudgetbalance -3.1 -1.1 -0.6 1.4 Overallsurplus/deficit -10.1 -9.6 -5.5 -4.1 wHdvH+*GDPdeflator *CPl TRADE 1983 1993 2002 2003 I Export (US$millions) and import levels (US$ mill.) I Total exports (fob) 699 856 1,371 1,396 Bananas 203 225 171 I Coffee 151 . 125 175 Manufactures .. Total imports(ciD 823 1,320 2,920 2,994 Food 123 166 546 Fueland energy 164 183 408 I Capitalgoods 126 292 809 892 Exportprice index (1995=100) 80 89 97 98 99 00 01 02 Import priceindex (1995=100) 88 109 Exports Imports Terms of trade (1995=100) 91 82 BALANCEof PAYMENTS 1983 1993 2002 2003 (US$ millions) Currentaccount balanceto GDP (%) Exportsof goodsand services 801 1,084 2,437 2,550 Importsof goods and services 912 1,498 3,456 3,758 Resourcebalance -111 -415 -1,019 -1,208 Net income -152 -75 -177 -165 Net current transfers 18 68 748 849 Current accountbalance -246 -421 -446 -524 Financing items (net) 202 327 577 524 Changes in net reserves 43 94 -129 0 I Memo: Reserves includinggold (US$millions) 134 1,493 1,492 Conversion rate (DEC, local/US$I 2.0 6.5 16.4 17.4 EXTERNALDEBTand RESOURCEFLOWS 1983 1993 2002 2003 (US$millions) Compositionof 2003 debt (US$ mill.) Total debt outstandingand disbursed 2,127 4,360 5,395 5,598 IBRD 268 479 105 85 IDA 81 236 1,014 1,143 G:466 A:85 Total debt service 203 374 397 311 IBRD 26 85 20 28 IDA 1 3 13 17 Compositionof net resourceflows Officialgrants 62 93 130 Officialcreditors 165 218 82 92 Privatecreditors 5 150 -43 -54 Foreigndirect investment 21 27 143 Portfolio equity 0 0 0 World Bank program Commitments 45 183 27 22 A IBRD * E Bilateral - Disbursements 60 81 51 45 B IDA D Other multilateral - F Private - ~ Principalrepayments 8 47 16 29 C IMF -- G Short-tern Netflows 52 34 36 15 Interest payments 18 40 17 15 Nettransfers 34 -6 19 0 113 MAP SECTION 89°W 88°W 87°W 86°W 85°W 17°N 17°N BELIZE Caribbean Sea HONDURAS Roatán LA BAHIA Gulf of Honduras 16°N ISLAS DE 16°N Trujillo Iriona Puerto Cortés Tela La Ceiba Balfate GUATEMALA C O L Ó N speranza Corocito Barra Patuca M o C O R T E S A T L Á N T I D A Sonaguera E s La q u Lago de San Pedro Aguan i to Izabal Olanchito Sula El Progreso Quimistan La Vega o El Carbón Carbón C Morazán Morazán Sierc ra Paulaya Si G R A C I A S o a Puerto s Lempira Nuevo Sirsirtara Arcadia S A N T AUlúa Higuerito Y O R O A D I O S t San Esteban Yoro Dulce Nombre 15°N B Á R B A R A Sulaco de Culmí Culmí 15°N C O P Á N Santa O L A N C H O Coón del Patutuca ca Bárbara Bárbara Lago de Catacamas Copán Copán Salamá Salamá Santa Rosa Yojoa San Luis de de Copán Copán Humuya Pa Auasbila To Jaitique Guayape To Chiquimula Gracias Puerto d e M o n t a ñ a s Juticalpa Cabezas O C O T E - Cedros Montañas Cerro Guaimaca Las Minas C o m a y a g u a Montañas Nueva P E Q U E (2,870 m) La O Ocotepeque Esperanza UCÁComayagua La Paz COMAYAGUA L E M P I R A Jalán Guyaambre To San Salvador Marcala CISCZANTECUCIGALP RA A EL PARAÍSO PARAÍSO Coco Mapulaca I NTIBL A P A Z N Danlí Danlí 14°N Camasca FRAM O 14°N Sabana Yuscarán uscarán HONDURAS EL SALVADOR To Las Manos San Miguel Grande VALLE NICARAGUA SELECTED CITIES AND TOWNS To To Nacaome Estelí San Marcos DEPARTMENT CAPITALS San Salvador San Lorenzo de Colón Colón NATIONAL CAPITAL Choluteca 0 20 40 60 80 100 Kilometers RIVERS de Fonseca CHOLUTECA MAIN ROADS SEPTEMBER 13°N Golfo El Triunfo 0 20 40 60 Miles 13°N RAILROADS This map was produced by the Map Design Unit of The World Bank. IBRD PACIFIC OCEAN To Managua The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank DEPARTMENT BOUNDARIES Group, any judgment on the legal status of any territory, or any 33418 2004 endorsement or acceptance of such boundaries. INTERNATIONAL BOUNDARIES 89°W 88°W 87°W 86°W 85°W