Document of The World Bank FOR OFFICIL USE ONLY RePwt NO. 12582 PROJECT COMPLETION REPORT HONDURAS MUNICIPAL DEVELOPMENT PILOT PROJECT (LOAN 2583-HO) DECEMBER 6, 1993 MICROGRAPHICS Report No: 12582 Type: PCR Infrastructure and Energy Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of - their official duties. Its contents may not otherwise be disclosed witbout World Bank authorization. CURRENCY EQUIVALENTS (as of June 6, 1993) Currency Unit Lempirms (L) US$1.00 L. 6.12 GTOSSARY OF ABBREVIATIONS BANMA - Banco Municipal Aut6nomo (Autonomous Municipal Bank) CONSUPLANE (SECPLAN) - Consejo Superior de Planificaci6n Econ6mica (Superior Council for Economic Planning) ENE - Empresa Nacional de Energfa Eldctrica (National Electricity Company) ESW - Economic Sector Work IDB - Inter-American Development Bank MCI - Municipal Credit Institution MDPP - Municipal Development Pilot Project SANAA - Servicio Aut6nomo Nacional de Acueductos y Alcantarillados (National Autonomous Water and Sewerage Service) SECOPT - Secretara de Comunicaciones, Obras Piblicas y Transportes (Secretariat of Communications, Public Works and Transportation) SHCP - Secretarfa de Hacienda y Credito Pibtico (Secretariat of Finance and Public Credit) SOl - Secretarfa del Interior (Secretariat of Interior) SP - Secretarfa de la Presidencia (Secretariat of the Presidency) UNDP - United Nations Development Program USAID - United States Agency for International Development FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.SA Office of Direetor-General Operations Evaluation December 6, 1993 MKNORANDUH TO THE EXECUTIVE DIRECTORS AND rIdZ PRESIDENT SUBJECT: Project Completion Report on Honduras Municipal Development Pilot Project (Loan 2583-NO) Attached is the Project Completion Report on Honduras: Municipal Development Pilot Project (Loan 2583-HO)Pb prepared by the Infrastructure Operations Division of the Latin America and the Caribbean, Country Department 1I. The Borrower contributed a substantive Part II which recognizes the failure to reach major project objectives but highlights the esogenous factors and the partial achievement of this operation. Due in part to an adverse macroeconomic environment, the project failed to achieve its oF'I-ectives concerning the strengthening of the Autonomous Municipal Bask (Banco Municipal Autonow, BABMA) and selected municipalities. When Honduras failed to service its debt to the Bank, loan Cisburasements were suspended and physical works came to a stop. Aside from theae erogenous factors, the project design was too complex and institutionally demanding, particularly considering the very weak context of municipal development in Honduras. The lack of success of this operation highlights the need to be more realistic upfront during project design. Lack of coordination with other international donors (IDB, AID) compounded difficulties: the approval by other donors of similar operations on softer teoms than the Bank's undemined the appeal of the project to the Implementing agencies. Weak supervision management by the Bank at a critical time of implementation on most of the subprojects contemplated under the operation were not begun or left partially completed. The financial mechanisms at the municipal level lacked autonomy. A technical assistance program to the planning agency concerning urban and regional planning (CONSUPLANE) was completed, but the executed studies had no impact. As a consequence of discussions between the Bank and the Government following the lifting of the prolonged suspension of disbursements, the Government requested, and the Bank concurred with, cancellation of more than two-thirds of the loan amount (US$6.9 million equivalent) in recognition of the project's unsatisfactory performance as a pilot program. On balance, the project is rated as unsatisfactory, its inatitutional development impact as negligible, and the sustainability of project benefits as unlikely. The quality of the PCR is satisfactory. The project may be audited together with other municipal development projects. This dotoant has e restricted distribution and nay be used by recipients onty in the performance of their officfat duties. Its contents Day not otherwise be disctosed without Wortd Bank authorization. FOR OFFICIAL USE ONLY PROJECT COMPIETION REPORT HONDURAS MUNICIPAL DEVELOPMET PILOT PROJECT (LOAN 2583-HO) Table of Contents Page No. Preface ....................... . .. ..i Evaluation Summary ....................................... ii PART I: PROJECT REVIEW FROM THE BANK'S PERSPECIVE.. 1 Project Idendty .1 Background .1 MDPP Objectives and Description. 4 MDPP Design and Organization. 6 MDPP Implementaion. 9 Major Results of the Project .10 Project Sustainability .11 Bank Performance .13 Bo-rrower Performance .13 Project Relationship .14 Consulting Services .14 Procurement Issues .14 Project Documentation and Data. 15 Lessons Learned. 15 PART HI: PROJECT REVIEW FROM BORROWER'S PERSPECrIVE .18 Project Origin and Background .18 Project Scope and Objectives .19 Lessons and Results of Project Implementation .19 Sustainability .................... 24 Conclusions and Lessons. 25 Table 1: Financial Resources of LoanAgreement .26 Table 2: Financial Situation of Sub-loans .27 PART I: STATISIICALINFORMATION .28 Table I Related anB Loans and/or Credits ..... .......... 28 Table 2 Project Timetable .............. ............. 28 Table 3.1 Cumulative Estimated and Actual Disbursements .... ... 28 Table 3.2 BANMA Disbursements for Sub Projects ..... ....... 29 Table 4.1 Project Costs on Appraisa ........ ............. 30 Table 4.2 Project Costs: Actual .31 Table 4.3 Project Financing .31 TableS Status of Major Covenants .32 Table 6.1 Staff Inputs by Stage of Project Cycle .34 Table 6.2 Missions .35 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. HONDURAS MUNICIPAL DEVELOPMENT PILOT PROJECT (LOAN 2583-HO) PROJECT COMPLETION REPORT PREFACE 1. This is the Project Completion Report (PCR) for the Municipal Development Pilot Project in Honduras, for which Loan 2583-HO in the amount of US$6.9 million was ap!oroved or. June 13, 1985. The loan was closed on December 31, 1990, two years and three months behind schedule. The last disbursement of US$450 was made on September 26, 1989 and the outstanding balance of US$4.68 million was cancelled on May 29, 1991. 2. The PCR was jointly prepared by the Infrastructure and Energy Operations Division, Department II of the Latin American and the Caribbean Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). 3. Preparation of this PCR is based on the Report and Recommendation of the President to the Executive Directors; Loan and Project Agreements; supervision reports; progress reports; correspondence between the Bank and the Borrower; internal Bank correspondence; and a visit to Honduras to review project achievements. - ii - IONDURAS MUNICIPAL DEVELOPMENT PILOT PROJECT (LOAN 2583- HO) PROJECT COMPLETION REPORT EVALUATION SUMMARY Objectives 1. The primary objective of the project was to strengthen Banco Municipal Aut6nomo (BANMA) as the principal source of financial and technical assistance for municipal development programs and to address financial and managerial weaknesses in selected municipalities. This objective was to be met through three basic components aiming at BANMA, the Consejo Superior de Plamficaci6n Econ6mica (CONSUPLANE), and four municipalities, selected for being the fastest growing urban centers and those whose financial problems were the main cause of BANMA's own financial problems. These components involved: (a) a technical assistance program; (b) an investment program to finance a limited number of previously identified sub-projects; and (c) a pre-investment fund to finance feasibility and engineering studies (Part I, paras. 3.2 and 3.3). 2. To reinforce the Municipal Development Pilot Project's (MDPP) policy and institutional strengthening goals, the Loan and Project Agreements included specific covenants detailing actions to be taken and targets to be achieved, before disbursements were made. The most important of these covenants were: (a) participating municipalities were required to develop financial plans, and to submit annual reports demonstrating adherence to them; (b) the Distrito Central, which includes the Municipality of Tegucigalpa, was required to develop an acceptable plan for restructuring its large arrears with BANMA; and (c) targets for reducing BANMA's indebtedness and arrears level were set (Part I, para. 3.4). Iinplementation Experience 3. Implementation of the MDPP can be divided in two different phases: the first, from project effectiveness roughly to December 1987, at the onset of the Honduran debt crisis, and the second, from there on, in which project implementation came to a virtual halt. During the earlier phase of implementation, the MDPP advanced reasonably well. On the one hand, substantial progress was made in the implementation of the institutional strengthening component, particularly in the case of BANMA, while municipalities made serious efforts to develop their financial plans. On the other hand, disbursements for the capital investment program were delayed for nearly a year after the project became effective, and progress on physical works proceeded slowly throughout 1987, due to the time needed to prepare - iii - municipal finance plans, to changes in the municipal administrations, and to a laboriously slow system of contracting and procurement. As implementation advanced, the MDPP gradually fell behind schedule and its inherent weaknesses became more evident, chiefly because no substantial improvement was obtained in the debt service performance of BANMA's borrowers (Part 11, paras. 5.1 and 5.2). The Borrower considers that non- reimbursable funds should have been included in the project design for implementation of institutional strengthenng and training, and mentions as obstacles to project implementation both the lack of flexibility in reallocating resources among sub-projects and the higher cost of Bank funds relative to other available sources (Part 11, paras. 3.1 and 4). 4. During 1988-1990 on several occasions the Bank suspended loan disbursements to Honduras due to its failure to service its Bank debt. While some work could be continued on the project's technical assistance component during this period, physical works effectively halted. By the time the Government had implemented satisfactorily a Bank-supported structural adjustment and debt workout program, any chance of resuming the project and completing the original investr,ments program was effectively lost. It had become apparent that the mechanisms set up by the project would not have the envisaged results, since BANMA's financial condition had deteriorated precipitously. Also other donors had approved, one, a loan for the same purposes on much softer terms than that of the Bank and, another, a grant for technical assistance directly to the municipalities. As a consequence, Bank funds lost much of their appeal to both BANMA and the municipalities. In December 1990 the Bank and the Government of Honduras agreed to cancel the MDPP (Part I, paras. 5.3 and 5.4). Results 5. Project results evaluated against objectives indicate the MDPP to be largely a failure. The technical assistance program, intended to improve BANMA's management and its capacity to assist municipalities, Vwas completed but became increasingly ineffective, given the overall deterioration of BANMA. The provision of technical assistance to 'ONSUPLANE to strengthen its capacity in urban and regional planning was totally executed but the contracted studies had no discernible impact. Most of the technical assistance activities which focused directly on municipalities were not completed, while resources from the pre-investment fund were utilized on two engineering studies. The project demonstrated a similar lack of success in completing its capital investments program; with few exceptions most projects were either not begun or were left partially completed (Part I, paras. 6.1-6.6). The Borrower's evaluation is more positive, asserting that some important results were obtained, since agencies and municipalities took advantage of the institutional strengthening program, acquired equipment, carried out pre-investment studies and benefited from the partial implementation of significant infrastructure works (Part II, para. 3). . iv - Sustainablility 6. Given the MDPP's results, the project itself cannot be termed sustainable. However, the Honduran Government has initiated a profound process of reforms in the municipal sector which takes into consideration the lessons of experience provided by the operation and to a lesser degree by other various bi-and multilateral donors. Two very important measures were taken by the Government: the publication on November 1990 of the new Ley de Municipalidades; and second, the creation on June 1992, of the Comite Interinsitucional de Descentralizaci6n y Fortalecimiento Municipal. The Bank has followed these developments closely and issued two reports with recommendations both for BANMA as well as with respect to the new law (Part I, para. 8.1). These recommendations, if followed, could have a significant impact and would provide delayed vindication for the project (Part I, paras. 7.1 and 7.2). 1sIndings and Lessons Learned 7. Lessons from the MDPP's design and implementation experience are: (a) the need for continuing close coordination between donor agencies; (b) projects which aim at substantial transformation of the performance of complex decentralized institutions, such as local governments, must address the overall system of incentives within which they operate, first and foremost of which is the legislative and regulatory framework that provides for the organization of public services delivery and which establishes the structure of municipal revenue; (c) addressing the overall system of incentives that affects local governments requires a lengthy process which ought to be compatible with the time needed to achieve political consensus on issues and also with the long learning process typical of decentralized institutions. This lengthy process may have to go beyond the duration of one single operation; (d) technical assistance for institution strengthening must be provided within an appropriate environment and have the duration of the protracted learning process of institutions; (e) it would be desirable to develop systems that rely on private capital markets to mobilize and allocate savings for municipalities; (f) the definition, for an individual country, of a specific project agenda to address complex decentralizationn issues, such as municipal finance, for which there are but some general guiding principles, requires a thorough understanding of the particularities of that country; and (g) close Bank supervision, through which information and support is timely provided, is particularly important in the case of promotion of institutional ref)rm (Part I, para. 14.2). PROJECT COMPLETION REPORT HONDURAS MUNICIPAL DEVELOPMENT PILOT PROJECT (LOAN 2583-HO) PART I: PROJECr REVIEW FROM THE BANK'S PERSPECTIVE 1. Project Identity. Project Name: Municipal Development Pilot Project Loan No.: 2583-HO RVP Unit: Latin America and the Caribbean Country: Honduras Sector: Urban Subsector: Municipal Development 2. Background 2.1 Urban Growth and Urban Infrastructure. The Honduran government approached the Bank in late 1982 about possible financing of a shelter project. During project identificationa it became apparent that there was a major unmet demand both for shelter and for urban infrastructure, either of which might serve as the basis for a project. It was also apparent that the Honduran municipal finance system was afflicted by a number of problems which were impeding a more prompt provision of urban infrastructure. 2.2 From 1960 to 1980, the urban population of Honduras had more than tripled to reach about 1.4 million, or about 32 percent of the total population of the country. Continuing uibanization trends indicated that by the year 2000, the urban population would triple and would account for 55 percent of the total population, and that by the end of the 1990s, 83 percent of the urban population would be concentrated in Tegucigalpa, Comayaguela and San Pedro Sula. Rapid urbanization had placed continuing strains on urban infrastructure. Surveys which had been conducted by Banco Municipal Aut6nomo (BANMA) in 41 municipalities, indicated severe deficiencies in the provision of even basic municipal services: access to water supply and sewerage were considered to be low relative to other countries in the region; unpaved urban roads contributed to severely limiting public transport; poor drainage caused extensive health-related problem and disruption of economic activity during and after seasonal rains; solid waste management was either poor or non-existent; and markets and slaughterhouses were badly maintained. One of the most evident consequences of the pace of the urbanization process was the housing deficit; the low-income population of -2 - urban centers was unable to access even the lowest-priced housing units and settled in squatter communities that lacked basic sanitary services. 2.3 The Institutional Framework. Central Government. Urban services were provided within an institutional framework that depended on the action of both municipalities and agencies of the central government. The most active of the latter were: Secretarfa del Intenor (SOD which was responsible for dealing with municipalities and also provided training for municipal staff; Secretarta de Hacienda y Credito P1iblico (SHCP) which under a broader mandate also guaranteed municipal loans; Secretar(a de la Presidencia (SP) which was the main provider of financial assistance to municipalities through discretionary grmnts; Consejo Superor de Planificacidn Econdmica (CONSUPLANE) which was responsible for planning the investments of central govemment agencies in urban areas; Directorfa de Urbardidn of the Secretar(a de Comundcaciones, Obras PNblicas y Transportes (SECOPI) which prepared city plans that were, however, rarely used as a basis for implementing municipal development programs. Water and sanitation, on the one hand, and electricity, on the other, were under two national public enterprises, Servicio Autdnomo Nacional de Acueductos y Alcantarillados (SANAA) and Empresa Nacional de Energfa Eletrica CUM. 2.4 Municipalities. These had been delegated diverse service responsibilities and had some political and operational autonomy. They had, however, financial constrants which inhibited their ability to discharge their service responsibilities and impeded the emergence of effective autonomy. Municipal revenue performance was poor, its improvement hindered by weak administration, while inflation (a relatively new phenomenon in Honduras) contributed to revenue reduction in real terms. At the time of project appraisal, there were signs that the situation was deteriorating progressively. The mobilization of resources by local governments in Honduras was poor and often insufficient to meet operating capital needs, let alone finance capital investments. Hence, the contribution of municipalities to their capital investmerts had been negligible, and urgently needed infrastrucue improvements had to be financed from borrowing. As a consequence, local debt service as a component of municipal budgets showed a rising trend, and in some cases was allowed to accumulate to unmanageable levels, while only a few municipalities had any remaining indebtedness capacity. 2.5 The Banco Municipal Autdnomo (BANMA). As a state autonomous municipal credit institution (MCI), BANMA provided technical assistance to local governments, and acted as a financial intermediary towards them. Since its creation in the nid-1960s, the MCI had financed 170 loans in about 60 municipalities but its effectiveness was severely constrained by its poor financial position, since most nmunicipalities, particularly the Distrito Central, were in arrears. These were rescheduled on such a regular basis that the correWonding debts resembled grant funding. Thus, with no casn generation coming from its loan portfolio, BANMA was unable to contribute to a - 3 - significant extent to the financing of the municipalities' investment program, nor had it established reasonable reserves against contingent liabilities. Some 85 percent of BANMA's loans were fiduciary, i,e. secured by the general revenues of municipalities. In many instances, the municipalities debt service obligations were paid by the Government in order to keep BANMA solvent. Moreover, the fact that the central goverment guaranteed municipal loans encouraged lack of discipline, both within the municipalities and in their relations with the central government. 2.6 During 1983-1985, the period from project identification to appraisal, the possibility of designing a municipal development project for Honduras appeared to be supported by the growing unmet demand for urban infrastructure, the need to prepare municipalities to contribute to respond to this demand, and, in the central government, the presence of a number of institutions, especially BANMA and CONSUPLANE, dedicated to municipal issues. Several factors suggested that there might be an opening for removing some of the barriers confronting the operation of these institutions. BANMA, which had long been the recipient of funding from the United States Agency for Intemational Development (USAID), had recently seen this relationship severed. On the other hand, additional funding from the central government, whose finances were increasingly deteriorating, was unlikely. Thus, it appeared that Bank funds, directed through BANMA, and attached to a technical assistance program both to BANMA and the municipalities, could have considerable leverage to improve the management of municipal finances. The reforms necessarily set forth by this project, by encouraging discipline and by promoting more municipal self-reliance in the long-run, were expected to have the additional reward of helping the promotion of central government's adjustment goals, by decreasing reliance of municipalities in the national budget. In fact, the prevailing macroeconomic situation prompted a project along these lines. 2.7 The Macroeconomic and the Debt Environment. Honduras per capita GNP was about il S$660 in 1982 and its population of 4 million was growing rapidly at 3.4 percent a year. A three decade historical record of the Honduran economy had not been encouraging. During the 1950-1975 period, GDP grew at 3.7 percent a year while per capita income grew by less than 1 percent a year. GDP recovered notably during 1976-1979, growing by 7.7 percent a year, while inflation averaged 7 percent a year. Exports and investment led growth oriented by aggressive Government development policies. During 1980-1983, however, the economic situation seriously deteriorated, with GDP per capita declining by about 9 percent a year. Political events in Central America had deterred private investment and depreciated terms of trade had weakened exports performance while central government's finance had deteriorated. 2.8 By the time the project was being appraised, Honduras was going through a modest economic recovery. In mid-1984, the government undertook measures to improve its financial position, raising taxes and more -4- tightly controlling current expenditures, and, in December 1984, it reached an agreement with fior:gn commercial banks to refinance debts of some public agencies. Hence, the expectation at project appraisal was that the modest recovery inidated in 1984 would continue in 1985, although the political climate in Centl America could have a dampening effect on private investment and increase capital flight. Substantial inflows of bilateral assistance were anticipated to continue through the late 1980s and, in the shorter run, external fimncing was expected to cover about 85 percent of the central government's envisioned deficit for 1985. It was also anticipated that there would be an increase in commodity prices and the reduction of fuel imports due to the completion of the large El Cajon Hydroelectric project, that the Bank had helped to finance. Honduras' manageable external debt service and the expected continuing large official fows on concessionary terms made the country creditworthy for modest amounts of Bank lending. Nevertheless, development of the project was affected by concern about Honduras' macroeconomic and fiscal situation and its creditworffiiness. Nonetheless, maintenance of a minimal lending program that would "keep the communication lines open" during a period when it was hoped the government would be initiating its reform process, was considered desirable. The Municipal Development Pilot Project (MDPP) was approved in June 13, 1985 for US$6.9 million. 3. 1IIDPP Objectives and Description 3.1 Strategy. In view of the constraints set forth by the poor financial situation both of BANMA and of the municipalities, the pre-conditions for proceeding directly with a broad-based urban investment program did not exist. As a first step, the MDPP was designed to help prepare such a program for possible financing by the Bank, and was to establish in BANMA4 the institutional basis for its implementation. If the MDPP had achieved the key targets established for its first year of implementation, the Bank would proceed to prepare a broader-based sequel project of support for the urban sector as a whole, with BANMA as the implementing agency. The improved efficiency of BANMA's principal municipal clients was important to the solution of BANMA's own financial problems and the development of its ability to support the sector. Consequently, the MDPP would channel both technical assistance funding and financing for specific investments to four municipalities: the Distrito Central, San Pedro Sula, El Progreso and Puerto Cortes. These are the largest and the fastest growing urban centers and those whose financial problems, once resolved, would also resolve BANMA's own problems (para. 2.5). The MDDP objectives, components, covenants and project administration were designed according to the above strategy. 3.2 Project Objectives. The objectives of the MDPP were: (a) to strengthen BANMA as the principal source of financial and technical assistance for municipal development programs; and -5 - (b) to address financial and managerial weakness in selected municipalities. 3,3 Project Components. The MDPP's objectives were to be met through three components: (a) BANMA. US$0.4 million of technical assistance program to strengthen the agency's: * overall organization by updating its organizational manual and personnel management policies; * financial planning and control to define financial policies regarding interest rates and collateral support for BANMA's lending operations; procedures for collection and enforcement; measures to strengthen the financial accounting system; programs and procedures for internal audit and control; and * project evaluation processes by strengthening its appraisal capability. (b) PARTICIPATING MUNICIPALITES. * US$0.67 million for consultant services in revenue administration, budgetary management and financial planning, and also urban planning; * US$0.92 million for a pre-investment fund to be managed by BANMA to finance feasibility and engineering studies; and * US$5.17 million for an investment program to finance a limited number of previously identified sub-projects in the municipalities of the Distrito Central, San Pedro Sula, El Progreso and Puerto Cort6s. (The full list of sub-projects is provided in Part HI, Table 3.2). (c) CONSUPLANE. US$0.132 million to assist in the formulaton of an urban-municipal development policy to be included in the central govemnment's five-year plan. 3.4 Conditions and Covenants. To reinforce the MDPPs policy and institutional strengthening goals, the Loan and Project Agreements included specific covenants (The full list of which is provided in Part I, Table 5), deiling actions to be taken and targets to be achieved, before disbursements were made. For the objectives of the MDPP, the most important of these covenants were: - 6 - (a) participating municipalities were required to develop financial plans and to submit annual reports demonstrating adherence to them; (b) the Distrito Central was required to develop an acceptable plan for restructuring its large arrears with BANMA; and (c) targets for reducing BANMA's indebtedness and arrears level were set. 3.5 Implementation. BANMA was to be the lead institution in the MDPP, on-lending funds to the municipalities and overseeing technical assistance, with the exception of that provided to CONSUPLANE. A steering committee, comprising representatives of CONSUPLANE, SHCP and BANMA, which had provided support during project preparation, would be maintained to provide policy guidance and liaison with Govenment agencies. In each municipality, a coordinator would be appointed to monitor progress of the expenditures, consulting work and investments, and to report on such progress to BANMA on a quarterly basis. 4. MDPP Design and Organization 4.1 Conceptual Foundation. Bank involvement in municipal finance projects worldwide dates from the 1970s1. In this initial phase, the Bank financed over 40 projects for single or pre-selected groups of cities, with property tax components; existing information suggests, however, that these projects have not resulted in significant, sustained increases in property tax revenues, which reflects a political environment in which governments, both central and local, are reluctant to suffer the political consequences of a property tax increase. 4.2 The MDPP fits well within a second generation of municipal finance interventions initiated in the 1980s, which broadened the Bank's approach to municipal finance. The Bank urban operations, of which the MDDP design is a good examnple, scaled-up, shifting from single cities projects to projects involving entire regions or classes of local governments, a shift which required increasing reliance on financial intermediaries, MCIs such as BANMA, to act as agents for its projects, assisting in project identification, appraisal, supervision, and loan administration. In the case of the MDPP, a major policy-objective was a shift from grant-financing to loan financing, at interest rates intended to approximate the opportunity cost of capital. The MDDP sought to increase municipal revenue generation (through the acquisition of cadastre equipment to make billing attd collection more efficient) and, in consonance with other Bank-financed projects of its generation, emphasized systematic project selection by requiring the 1. World Bank Sector Polcy and Research. Ifastrctre and Urban Development Departmet. ^FY92 Sector Review. Urban Development' Washington D.C -7- preparation of municipal plans. The MDPP was theoretically up-to-date and acin to the municipal development projects being developed in the mid- 1980s; it was one of the first such projects to create or support MCIs as providers of long-term municipal credit. 4.3 The MDDP was also carefully designed and attentive to the relations with the counterpart agencies. From the beginning of project preparation, cental government agencies, BANMA and representatives from the municipalities were involved, and their specific roles and responsibilities were clearly defined and apparently understood by all the participants. 4.4 Inadequate Iwstitutional Framework. With the benefit of hindsight, a limitation of the MDPP was the lacling evaluation: (a) of the relations between the central government and municipalities in the then prevailing political environment; and (b) of the limits and potential of Honduran municipalities for increasing revenues and providing urban infrastructure, in the context of the legal and institutional framework in which they operated. This led to an optimistic assessment of the feasibility of BANMA operating as the principal source of financial and technical assistance for municipal development programs in an efficient manner, and to an optimistic expectation that municipalities' financial and managerial weaknesses could be addressed adequately by the means proposed in the MDPP. With hindsight, both BANMA and CONSUPLANE, were incorrectly perceived as possible agents of positive change, when in fact their roles were part of the problems faced by the sector. Lack of attention to an increased role by the private sector should also be noted. However, as previously noted, in these regards the project did not differ much from most other municipal development projects approved at the time. 4.5 Honduran municipalities did not possess any effective financial autonomy. On the one hand, local revenues were meager and even if the central government did not exercise control over local taxes, expectations as to the feasibility of increasing them, by means of administrative procedures, may have been optimistic, both on political grounds and with respect to their economic basis (para. 4.1). On the other hand, the central government assumed the main responsibility for municipal financing of urban infrastructure, providing a considerable volume of transfers on a discretionary basis, and providing guarantees for municipal loans. Both transfers and guarantees were at least partly dependent on political factors, and ultimately favored the larger and richer cities while deterring acditional resource mobilization on the part of the municipalities. 4.6 Before municipalities could have been assumed to be capable of responding to the requirements and incentives set forth in the MDPP, profound reforms would have to have been implemented in the legal and institutional framework in which municipalities operated. Reforms would have had to include the assignment of revenue sources appropriate to their functional responsibilities, i.e., the definition of clear principles for the -8 - transfer of resources from the central government to municipalities and for the municipalities' taxation powers, which, in turn, would have permitted municipalities to become good credit risks. Addressing the overall system of incentives that affects local govemments requires a lengthy process which ought to be compatible with the time needed to achieve political consensus on issues and also with the long learning process typical of decentralized institutions. 4.7 BANMA's FeasibUity as an MCI. While it might seem reasonable to take an MCI, such as BANMA, as the instrument to provide municipalities with access to long term financing, by the time of the MDPP appraisal, BANMA had a long and checkered history. Political considerations, rather than financial policies, had been a dominant factor influencing BANMA's operations, and serious weaknesses continued to impair its institutional effectiveness and its capacity to lend to municipalities and absorb additional debt. BANMA's history is not an isolated example and it should be seen in the wider framework of the operational difficulties which impair the functioning of institutions of a similar nature. Even without complete evaluation of Bank experiences with this type of institutions, for MCIs to operate independently one has to ask govemnments to observe exacting pre- conditions: clear separation of governments' own developmental interests in project selection from the financial role that the institution is intended to perform; holding MCIs accountable for overall financial performance; conditioning further financial backing on satisfactory financial return and loan recovery; and refraining from undermining the market for MCI lending through government grants or soft loan programs that directly compete with the loans that the MCIs are designed to make. By the time of project preparatiorn, none of these pre-conditions had been met and this situation continued during project implementation. A lesson from this experience seems to be that it is better to try to develop systems that rely on private capital markets to mobilize and allocate savings for municipalities. 4.8 Limitations to Institutional Strengthening. The MDPP proceeded from the assumption that institutional strengthening within the existing framework could make a major impact on the overall municipal finance sector, and that it could be achieved by introducing better administrative procedures in BANMA, CONSUPLANE and the municipalities. In particular, BANMA's weak financial position was viewed as the consequence of poor financial and fiscal management within the municipalities and not, as it was, the result of a system of distribution of resources based largely on political considerations. Consequently, the MDPP did not attempt to address the definition of the appropriate role of BANMA; the indication here might have been, for example, the advisability of separating the technical assistance from the finance function of the institution. Also, there was no assessment of whether sufficient incentives existed to promote the acceptance of the intended institutional strengthening reforms. In the case of BANMA, there were corporate motives which favored their adoption, but this was not so with munieinalities which, without significant fiscal and expenditure -9- autonomy, had no incentives to either increase their revenues or to be more cost conscious, and consequently, had no long-term incentives to adhere to reform efforts. Finally, the project relied on short-termn technical assistance operations which provided but an initial stimulus that faded away towards the closing of the operation 5. MDPP Implementation 5.1 Early Implementation: Institutional Strengthening and Municipal Flnance Plans. Implementation of the MDPP can be divided in two phases in which different circumstances prevailed and defined the course, pace and eventually the outcome of the project: the first phase, from project effectiveness roughly to December 1987, at the onset of the Honduran debt crisis, and the subsequent one during which project implementation in fact halted, resuming only briefly until the project was closed in 1990. During the first phase of implementation, mostly supervised either by the same Bank team who prepared the project or under their close orientation, the MDPP moved along reasonably well. On the one hand, substantial progress was made in the implementation of the institutional strengthening component. BANMA's technical assistance program quickly got underway; studies to address BANMA's organizational and staff requirements, a plan of action to strengthen its financial policies, and a taining program in maintenance of municipal infrastructure were submitted to the Bank. Municipalities, in turn, made serious efforts to develop their financial plans with guidance from Bank staff who went through several rounds of review before acceptable financial plans for all municipalities were in place (See Part m, Table 5, for the status of major covenants). On the other hand, disbursements for the capital investment program, which were expected to begin by early 1986, had to wait until October 1986-nearly a year after the project became effective, and thereafter progress on physical works proceeded slowly throughout 1987. A series of factors contributed to delaying the capital investment program: (a) dependency on the local approval of the municipal finance plans, which took more time than anticipated during project preparation, since these plans were developed in a period of changes in municipal administration, after the late 1985 elections. These plans were consequently subject to changes in administration priorities, which in some cases conflicted with the previously defined list of capital investment sub-projects; and (b) a laboriously slow system of contracting and procurement which, despite that the loan agreement only required spot checldng, led BANMA to seek Bank approval of nearly every document. 5.2 As implementation progressed, the MDPP gradually fell behind schedule, and its inherent weaknesses became more evident, since: (a) the financial plans devised under the project did not achieve any substantial improvement in the debt service performance of BANMA's borrowers. In one case, the Distrito Central threatened to withhold payments on the Bank funded loans for sub-projects during a negotiation with BANMA regarding the rest of its debt; (b) continual review of progress on the municipal finance - 10- plans or in the financial performance of BANMA slowed project pace and the rate of disbursements; (c) there was little flexibility in reallocating resources among sub-projects; and (d) as the Honduran foreign exchange situation worsened, local officials became more concerned with the lack of progress in capital investments than with sector reforms. After the Bank's 1987 internal reorganization, new project staff unfamiIiar with the project's history took over, the leverage of the Bank declined, and the project tended to become subject to the problems of the system rather than being able to influence the system towards reform. 5.3 The Inpact of the Honduran Debt Crisis and of Competing Donor Funds. Throughout the period from 1988 to 1990, the country moved in and out of suspension on loan disbursements on several occasions. While some work could be continued on the technical assistance component during this period, physical works, including all contracting, were effectively halted. By the time that a structural adjustment and debt workout program for Honduras was in place, any realistic chance of resuming the priject and completing the original investments program had been effectively lost. First, because it was no longer credible that the mechanisms set up by the project would have the envisaged results. In particular, BANMA's financial condition had deteriorated so precipitously that there was no hope of continuing the MDPP without its being restructured together with BANMA, and that would have meant a new or different project. Second, in March, 1988, IDB approved a loan to BANMA on much more concessional terms than that of the Bank, a problem which was aggravated in 1990 when USAID approved US$15 million in grant financing for technical assistance directly to the municipalities, forcing Bank funds to compete with others which were much less expensive and carried fwer conditions. As a result, the Bank loan lost much of its appeal to both BANMA and the municipalities. 5.4 Of the original US$6.9 million loan, only US$2.5 million was actually disbursed, and in December 1990, more than two years after the original closing date, the Bank and the Government of Honduras agreed to cancel the remaining loan balance for the MDPP. 6. Major Results of the Project 6.1 Project results should be evaluated primarily against its institutional strengthening objectives, also bearing in mind its pilot nature i.e., its guiding role intent. 6.2 The technical assistance program (para. 3.3 (a)), which intended to improve BANMA's management and its capacity to assist municipalities, was completed. During project suspension, the reduction in lending activity and, possibly, a governmental reaction against an attempt at personnel unionization led to a reduction in staff and to budget cuts. By the time implementation could have been resumed, 9 out of 10 of the staff trained under the project had left the institution. A Bank report (pam 6.6) prepared - 11 - after project closing, states that based on 1990 data, BANMA had very serious financial problems, showing a 19/1 debt-to-capital ratio. On^the- ground benefits from this component may well be considered to be non existent. 6.3 The financing of professional services for CONSUPLANE for strengthening its capacity in urban and regional planning (par. 3.3 (c)) was totally executed. CONSUPLANE, through Direccidn General de PlanyflcaciOn Territorial, hired four individual consultants who prepared 15 documents focusing on territorial analysis and planning methodologies, the latter with an emphasis on institutional coordination of government levels and local projects evaluation. These documents served as basis for the preparation of phase one of the Plan Maestro de Ordenamiento Terrtorial which focused on systems of cities, rual development and environment. These studies and diagnostic, however, had no discernible impact, no other developments in the prepaation of this document of local development policy could be observed, while the agency resposible for its preparation was later reorganized and its objectives redefined. 6.4 Most of the technical assistance activities focused directly on municipalities (para. 3.3 (b)) and were not completed, whereas resources from the pre-investment fund were utilized in two engineering studies (Bus trminal study for the Distrito Central and Sanitation study for El Progreso), both of which, however, did not have corresponding resources for investment. 6.5 The capital investments program was half completed. Solid waste disposal equipment for the municipalities of El Progreso and San Pedro Sula and office equipment in Tegucigalpa and El Progreso was purchased and put to use as intended. Work on a major road in Tegucigalpa was begun but only half of it was finished, while the other eight sub-projects identified at appraisal, totaling US$3.9 million, were not begun (para. 5.1). 6.6 Hence, evaluated against project objectives, the MDPP was largely a failure. Given its objectives, even if Bank funds had been disbursed and activities completed, the results of the project would have to be evaluated against the repayment records of the municipal borrowers, and further, in relation to BANMA's long term financial prospects. However, after cancellation of remaining loan proceeds, the MDPP, through the preparation by the Bank of a study on municipal financing and on the role of BANMA (pam. 7.2), may have contributed indirectly to initiating an important and still on-going discussion on municipal sectoral reforms in Honduras. 7. Project Sustainability 7.1 Given the MDPPs results, the project cannot be considered sustainable. However, the Honduran Government has initiated a profound process of reforms in the municipal sector which takes advantage of the - 12 - lessons of experience provided by the operation of various bi- and multilateral organizations in the country. Two very important measures have been taken by the Government. First, the publication on November 19, 1990 of a new law of municipalities2. The main features of the law are: (a) municipalites are entirely responsible for the elabortion, approval and administation of the budgets for their public expenditures; (b) it is no longer necessary for municipalities to contract with national enterprises for public services. This means that municipalities are no longer captive clients of national enterprises, especially for those services which can be most easily decentrlized or provided by the private sector; (c) an automatic tax revenue sharing mechanism has been put in place that abolishes discretionary transfers from central governments to municipalities; and (cd) municipalities are fiee to set a wide array of local taxes and user charges. Second, the creation on June 22, 1992, of the Comite Interinstitucional de Descentralizacidn y Fortalecimiento Municipal, a permanent body attached to the Presidency in charge of defining municipal policies and conducting programs, with an operational agenda to support the implementation of the law of municipalities. 7.2 Tb assist the Government in its efforts to improve municipal finances, after loan closing the Bank conducted a study,3 that provides a number of recommendations both for BANMA as well as with respect to the implementation of the new law. The report's recommendations, if followed, could have a significant impact and provide delayed vindication for an otherwise largely unsuccessful project. The recommendations of the Guissari report are carefully documented and quantified. The findings confirn the earlier statements made with respect to the discretionary financial relaion between the central govemment and municipalities, and with respect to BANMA's financial situation (paras. 2.3-2.5 and 4.4-4.7). Concerning the Ley de Municipalidades, the report points out that, even though the new law represents significant progress, problems still remain. First, the tax revenue- sharing system: (a) attaches no weights to fiscal effort; and (b) makes no allowance for adjustments due to regional inequalities in income distribution. Second, the law maintains special tax benefits for port and coffee producing municipalities. Third, and possibly most important, there is no decentralization of expenditure, and so municipalities can obtain higher revenues through the law-mandated decentralization of tax collection, without takdng on additional responsibilities. The Guissari report analyzes possible options for managing the municipal debt, and recommends that refinancing may be used, as long as it is guaranteed by the central government transfers which were created by the new law. Given the newly acquired budgetary, taxing and expenditure responsibilities of the municipalities, the report 2. Ley de Mucipali ades. Decree 134.90 of October 29, 1990, of the Honduraa National Assembly. 3. Guissai, Adrian C. -La Nueva LAy de Municipalidades y Las Implicancias de La Deuda Municipal en Honduras.' World Bank. LA21E. Washington, D.C.: World Bank, April 1992. - 13 - recommends the provision of technical assistance by BANMA and that BANMA should cease operating as a financial intermediary. Subsequently the Bank prepared another report, "Honduras-Prospects for Public Sector Reformn4, which provides a wider coverage, but with respect to municipal finances basically endorses the Guissari report's recommendations. 8. Bank Performance 8.1 The overall experience with the MDPP shows that projects designed to address complex issues such as municipal and intergovernmental finances require from the Bank and the central govemment a thorough understanding of the nature of such issues, and that the approach to be taken would have to be that of a pilot or experimental project, as was the case, or alternatively be based on the preparation of extensive ESW. From identification to loan effectiveness, the Bank closely assisted BANMA and the municipalities in the preparation of the project (See Part Im, Tables 6.1-6.2, for use of Bank resources). 8.2 At first, during project implementation, the project was mostly supervised by the same staff that had prepared the project, but after the Bank reorganization in 1987, staff rotated (See Part Im, Tables 6.1-6.2, for use of Bank resources). After a period in which Bank staff had made strong representations on policy issues, these efforts became weaker (para. 5.2), since the Honduras debt crisis had interrupted supervision efforts and procurement became a major concern of project staff (para. 12.1). 8.3 Bank management during project preparation, was preoccupied with the numerous problems concerning both BANMA's portfolio and the finances of the municipalities, and requested correctly that the Loan documents clearly specify the actions already taken to clean up BANMA's portfolio and address municipalities' deficiencies. 9. Borrower Performance 9.1 Project ownership was established at the outset, facilitated by the fact that the idea of the project had originated in BANMA. Furthermore, BANMA had a clear corporate interest in the approval and success of the project, which was linked to the survival of its lending function. Lending, in turn, was perceived as providing the necessary leverage to permit the proper development of BANMA's technical assistance activities. Thus, BANMA embarked very rapidly in that part of the project which provided them with technical assistance, and for which there were clearly defined terms of reference. However, these strengthening efforts were made ineffective by the cessation of BANMA's lending due to lack of funds arising from the 4. World Bank. LAC Tecncal Department. Public Sector Management Division. 'Handurag- Prosnect for Public Sector Reform". Washington. D.C Sentember. 1992. - 14- Bank suspensions of disbursements, and from failure to collect from its borrowers (paras. 4.54.8). 9.2 BANMA also attempted to elicit interest and commitment on the part of municipalities, but it lacked sufficient leverage. Conditions with respect to Bank funds, in comparison with those of other donors, and political and administrative changes in the municipalities, restricted interest in the investment program. With reference to the technical assistance component, municipalities demonstrated willingness to engage in institutional strengthening and policy reform efforts by going through several rounds of revisions in the formulation of financial plans. However, without fiscal and expenditure autonomy, municipalities had no incentives to either increase their revenues or to be more cost-conscious, and they may have seen only limited benefits for them to engage in improvement efforts. 10. Project Relationship 10.1 The Bank's relationship with the Govemment of Honduras and with BANMA was marked by the ups and downs of the Honduran debt crisis, which frequently interrupted the implementation of the project and eventually determined its outcome to a large extent. However, during project preparation and supervision, relations with BANMA and the municipalities were very cooperative, with BANMA making consistent efforts to comply with conditions set by the Bank. CONSUPLANE, whose technical assistance program was not supervised by BANMA, was provided by the United Nations Development Programme (UNDP) with a consultant to draft terms of reference for the formulation of an urban-municipal development policy, which was one of the objectives of the Bank's institutional strengthening support to CONSUPLANE. This led to some discrepancies in view between UJNDP, CONSUPLANE and the Bank, since the consultant recommended an approach emphasizing a territorial analysis and planning perspective which differed from the agreed work program (paras. 6.3 and 11. 1). 11. Consulting Services 11.1 Consultants were hired for technical assistance to BANMA, CONSUPLANE and the municipalities. InterTnational consultants, mostly well known, provided services according to the prescribed standards on BANMA's organization, financial administration, urban planning capacity, and staff training and development. Municipalities also used consultants which prepared project studies of acceptable quality. In the case of CONSUPLANE (para. 10.1), after negotiations with respect to different perspectives on the nature of the studies to be pursued and Bank acceptance of a program with a territorial planning approach, CONSUPLANE chose four individual consultants from a list submitted to the Bank (pam. 6.3). - 15 - 12. Procurement Issues 12.1 Consulting services, goods and civil works were procured under procedures satisfactory to the Bank. The Bank required that only bidding packages over US$150,000 to be subject to the Bank's prior review of procurement documentation. Nonetheless, BANMA required the Bank to review most contracts, contributing to slow progress on physical works through 1987, while also taking a considerable amount of supervision time. 13. Project Documentation and Data 13.1 Given the nature of the project, a Staff Appraisal Report was not required. The President's Report is concise, well argued and Lovers relevant background material on the economy and the urban sector as well as a detailed description of the project's objectives and of its implementation procedures. The legal documents, a separate loan and a project agreement, reflect the recommendations on the President's Report and were adequate. Files for the project lack some supervision documents, such as BTO reports, but overall provide sufficient information for the preparation of this report. 14. Lessons Learned 14.1 The MDPP was based on the best practice then available through Bank operations in the domain of municipal finance (paras. 4.1 and 4.2). Bank staff worked closely with the counterpart institutions and there was evidence of commitment and interest of the latter in the project (paras. 5.1 and 9.1). Within this framework, the preconditions for project success seemed to be in place. Nevertheless, the project was largely a fhilure. 14.2 There are various levels of explanation and lessons from this failure: (a) The Honduran debt crisis, which led to frequent suspensions of the operation, delayed and disrupted the implementation of its various components, and interrupted the Bank's supervision and support link with the project. However, the Honduran debt crisis could not have been anticipated and counteracted within the project design and, as an explanation of the project's failure, sheds little light on the evaluation of the project itself (para 5.3); (b) The appearance of other donors with less demanding requirements was the project's coup de grace; it completed that whic the Honduran debt crisis had initiated, by turning Bank resources unattractive to municipalities. This was a much more predictable and controllable event and the lesson that ensues from it is the need for continuing close coordination between donor agencies (para. 5.3); (c) However there were clear indications that independent of these external determinants, the project was heading to failure; it was - 16- falling behind schedule, and covenants, although formally met, were not leading to expected results. The project's shortcomings were partly the consequence of the context in which Honduran municipalities operated, which limited their potential for increasing revenues and for providing public services, and also the consequence of an optimistic expectation with respect to BANMA's ano to the municipalities' response to the project's incentives. Projects which aim at substantial transformation of the performance of cmplex decentralized institutions; such as local governments, must address the overall system of incentives within which they operate, first and foremost of which is the legislative and regulatory framework that provides for the organization of public services delivery and which establishes the structure of municipal revenue. Although local in its final effects, the conceptual foundations and operational procedures of a project of a decentralized nature should be formulated within the framework provided by the central government, which has the power to initiate most changes related to a local governments' incentives system (paras. 4.4-4.6); (d) Addressing the overall system of incentives that affects local governments requires a lengthy process which ought to be compatible with the time needed to achieve political consesu on Issues and also with the long learning process typical of decentralized institutions. The project was too optimistic in its expectations of what could be achieved - the financial overhauling of municipalities and of BANMA - in a relatively short period of time and unrealistic in its reliance on covenants which tended to be looked at by the implementing agencies, not as the indicators of accomplishment, but simply as stumbling blocks which had to be removed. This lengthy process may have to go beyond the duration of one single operation (para. 4.6); (e) As an instrument to support the promotion of change, technical assistance for institution strengthening must be provided within au appropriate environment and have the duration of the protracted learning process of institutions. There was no sufficiente payoff to induce institutions to accept the institutional strengthening reforms and, also, the project relied on short-term technical assistance operations which provided but an initial stimulus that faded away towards the closing of the operation (para. 4.6); (f) It would be desirable to develop systems that rely on private capital markets to mobilize and allocate savings for municipalities. BANMA's operations were fraught with difficult problems which originated from its status as a state level institution (para. 4.7); - 17- (g) The definition, for an individual country, of a specific project agenda to address complex decettraizationn Issues, such as municipal finance, for which there are but some general guiding principles, requires a thorough understanding of the particularities of that country. This requires comprehensive ESW (paras. 4.4 and 7.1-7.2); (h) Close Bank project supervision, through whkh iformaton and support Is timely provided, is particularly important In the case of promotion of institutional reform. The Honduras debt crisis limited the access of Bank staff to the country, and the Honduran requirement that most procurement documents be reviewed by the Bank may have distracted Bank staff from policy issues (paras. 5.2 and 8.2). - 18- PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 1. ProJect Origin and Background The Pilot Municipal Development Project was identified in 1983, when the first contacts were made with the International Bank for Reconstruction and Development (World Bank). In 1984, the first Bank missions arrived to carry out a study of the financial, institutional and operational situation of the Banco Municipal Aut6nomo (BANMA), as well as to identify the possible areas and eligible municipalities where the financial resources would be assigned. In 1985 the Central Government/BANMA joint committees were created to negotiate the financing; the Loan Agreement was signed on July 31 of that year by the authorized representatives of the World Bank and the Government of Honduras. 1.1 Sector Development Objectives (During Project Identification). The objective of the Pilot Municipal Development Project was to strengthen planning, financial control, project evaluation and improve infrastructure through the construction of civil works, equipment and preparation of feasibility studies to identify and prepare development projects in the different municipalities of the country. 1.2 Sector Development Macro-Policy. The sector's macro-policies imply a broad system of goals and regulations to improve services, finances, investment and employment generation. Among the general policies applied by the Government of Honduras as the framework for the implementation of development projects financed by international organizations are: * That sub-projects have a high social content; * That sub-projects comply with all technical specifications on construction and quality; * That the cost of sub-projects be in accordance with the real municipal financial possibilities. 1.3 Interrelation Between the Project and Sector Development. The need of the municipalities at the national level with respect to physical infrastructure, provision of services to the population, equipment and training are some of the main reasons defining the need for specific projects such as the World Bank's Loan 2583-HO. - 19- 2. Project Scope and Objectives 2.1 Project Objectives or Goals. The main objectives and goals pursued by the Government of Honduras with the implementing of this pilot project were: (a) Strengthening BANMA's organization, planning and operations as an autonomous governmental agency; (b) Strengthening of competence among municipalities with respect to income administration, budgetary and financial administration and investment planning; (c) Strengthening the municipalities' physical infrastructure and equipment. (d) Institutional strengthening of the Planning, Coordination and Budget Secretariat (CONSUPLANE). 2.2 Project Components. In accordance with the terms of the Loan Agreement, the project was conceived with three main components, subject to amendments that the Government of Honduras and the World Bank could eventually agree upon. * Part A: BANMA Institutional Development. * Part B: Municipal Development Program. * Part C: CONSUPLANE Institutional Development (presently known as CONSUPLANE). 3. Lessons and Results of Project Implementation During Project implementation, BANMA, as execution agency, performed an important role in providing support and technical assistance to municipalities, through its duly trained staff. This has allowed BANMA to obtain enough experience to develop this type of projects. On the other hand, the Project was not completed due to exogenous reasons beyond the control of the executing agency. It is important to note that in spite of this failure, some important positive results were obtained since the agencies involved in the Project and the municipalities achieved the programmed institutional development, equipment, partial implementation of significant infrastructure works and the development of pre-investment studies with the financial disbursements made. - 20 - 3.1 Project Design and Organization. Under the original plan, the Pilot Municipal Development Project was designed to be executed in 3 years. However, the Project was not completed because of suspension of disbursements due to the Government's failure to comply with payments to international financial organizations which fnally ended with the cancellation of the remaining resources assigned to the Project. Tlere are certain associated elements which decreased expectations to reactivate project implementation, among them, the cost of resources through exchange rate fluctuations of European currencies against the US Dollar. Thus, the municipalities' ability to pay decreased to confront the commitments with the addition of those costs. There is no doubt that the project's original plan was shared and consistently supported by the participating institutions. Nevertheless there are certain factors that affected project implementation which are described in number 4 of this report. The resources assigned to the project were L.18.4 million, of which L.13.8 million represented the funds provided by the World Bank in accordance with the Loan Agreement No. 2583-HO which represented 75 percent of the Project proceeds. The domestic counterpart was L.4.6 million representing the remaining 25 percent. Considering that this was a pilot project, BANMA assumes that the amount of the assigned resources was adequate to its scope and size; these two aspects were adequate for the needs of participating municipalities at that time. With respect to the contents of the Project, these were intimately related in all their categories to the needs of the participating institutions at that time as to institutional strengthening and that of the municipalities, equipment and infrastructure works. Likewise, the conditions for project selection, location of works, blueprint development, supervision, equipment procurement, and all other aspects were carefully analyzed in advance by qualified staff, and the awards were made within the framework of legal competition. The International Bank for Reconstruction and Development (World Bank), as the financial entity providing 75 percent of the resources, had a very significant role in the course of the disbursements of the loan; however, in December 1987 because of causes entirely attributable to the Government of Honduras (ilure to meet its financial commitments), disbursements were suspended, originating financial and implementation phase differences in the projects. One aspect ta had a direct influence was the exchange rate fluctuations between the European currencies and the US Dollar, creating the - 21 - additional difficulty that the municipalities did not accept additional costs to those originally established to execute works and purchase goods and services. Finally, when the Govemment of Honduras brought the situation of payments to the international organizations up-to-date in mid-1990, these organization notfied their agreement to reactivate the project. This situation never actually materalized because some of the beneficiary municipalities had completed some works with their own funds and, on the other hand, they are in arrears with BANMA, and therefore it was not advisable to assign them the undisbursed resources (ble No. 2 of Part It). Partial execution of the Project should not be technically considered as a failure. The fact that some objectives initially planned (Part B) were not achieved was due to project stoppage for over two years, causing the increase of unforeseen costs in the original designs, thus causing an imbalance in construction budgets and on purchase of equipment initially approved. The organizational structure is part of the factors that had the least incidence in the partial execution of the project; the role played by the organization was effective until the termination of the project. Resource assignment was clearly defined under the terms of the agreement, however, with time some municipal authorites gave priority to other projects that had not been originally included; such is the case of the San Pedro Sula and Puerto Cort6s municipality, the restrictions to reassign resources caused some municipalities to withdraw their participation and at the same time BANMA could not place the resources pending allocation. BANMA considers that it was a mistake not to include non- reimbursable funds in the project design for implementation of institutional strengthening and training aspects. There are other international organizations that provide financial assistance in more favorable conditions and that also include grants for technical training and institutional strengthening. 3.2 Project Execution. The timetables for execution of Project components A and C did not vary significantly and the activities were executed as scheduled. With respect to the execution timetables of the sub-projects (component B), these were completely out of pace in all their stages upon the suspension of disbursements due to the arrears situation of the country with the international organizations at the beginning of 1988; consequently, several sub-projects suffered and others had to be completed with outside financing sources. - 22 - The unfavorable variations in the execution timetables of the sub- projects were mainly caused by the above-referred disbursement suspension, which in turn caused some participating municipalities to decide not to use the project funds and others proposed the implementation of new projects that they considered had greater priorty. 3.3 Project Results. The objectives linked to the strengthening of the physical infrastructure of the municipalities and which were not possible to achieve because of reasons beyond the control of the executing unit, forced the latter to recommend to the Ministry of the Treasury and Public Credit (Government Representative) to give up the remaning funds of Loan No. 2583-HO. Nevertheless, important objectives were achieved, since components A and C of the Project were fully executed and their description is as follows: Part A: BANMA's Institutional Development. (a) Technical Assistance provided by COFINSA, CLAPP AND MAYNE AND PRICE WATERHOUSE. 3 BANMA's organization * BANMA's financial administration 3 Municipal financial administration e Municipal urban services planning * Staff training and development (b) BANMA's Equipment * Purchase of computer equipment * Purchase of 4 motor vehicles Part C: Technical assistance to CONSUPLANE As a result of the assistance received, the consultants carried out the following studies. (a) Francisco Otava * Basis for the Development of the Territorial Organization Plan. * Territorial Planning Information System. * Urban Development Policies within the Framework of the Territorial Organization Plan. * Pre-investment Scheme and Urban Development Project (prepared jointly with Sergio Galilea). * Historical Evaluation and Analysis of Territorial Policies in Honduras. - 23 - * Manual for the Development of Departmental Diagnoses. (b) Ricardo Jordan l Methodology for the Analysis of Rural Human Settlements in Regional Development. * Rural Development at the Territorial Level. Political and Project Guidelines. (c) Fernando Saler * Detailed Methodology of Analysis and Urban Diagnoses: Economic, Social and Special Aspects. * Preparation, Evaluation and Monitoring of Urban Development Projects. (d) Sergio Galilea * Inter-institutional Coordination in Regional-Urban Planning of Human Settlements. -- .Strategic Guidelines and Social Development Policies at the Local Level. * Preparation, Evaluation and Follow-up of Territorial Development Plans and Projects. The resulting product constitutes a source of elements that have guided the development of CONSUPLANE studies such as the "Master Plan of Territorial Organization". Likewise, there was ample cooperation from the Consultants in the preparation and execution of a series of training courses for BANMA and Municipality human resources. Part B: Municipal Development Program (a) Central District Municipal County N * Technical assistance * Purchase of data processing equipment * Purchase of equipment for the cadastre office * Bus Terminal Study r Metropolitan Planning Study * Construction of the Hospital-Escuela/Boulevard Estadio (partial) - 24 - (b) San Pedro Sula Municipality * Equipment for solid waste collection * Equipment for sanitation sewerage * Equipment for cadastre office (c) Municipality of El Progreso * Sanitation Sewerage Study * Purchase of solid waste equipment Despite the fact that the development of the pilot project became a sort of experiment in our country, notable achievements were reached both at the economic and at the social levels, since the financial assistance contributed to some extent to balance our finances. We believe that the role played by the World Bank in channeling long-term technical and financial assistance for the development of projects that are generally well planned and supervised is of great importance. 4. Sustainability There are no factors that may affect the sustainability of the project results since, as mentioned before, the technical assistance is being tansmitted to the municipalities, the purchases are being used and are under the responsibility of the municipalities and the works completed are of general welfare. As to the risk factors which affected project continuation, we could mention the following: * The rigidity in the use of resources and the total absence of resource reallocation. * The high cost of the resources vis-a-vis the low ability to pay of the municipalities. * The substantial increase in the execution costs of sub-projects and the internal difficulty to comply with the national counterpart. * The competition of outside financing on more favorable conditions and geared toward the development of similar projects. * The currency fluctuations in the interational market was a factor that had a direct impact on the financial cost of the _ & -.1 +S aVVI n^_s2V% - - 25 - 0 The decreased ability to pay and the loss of priorities assigned by the new municipal coxporations was another discouraging factor for the development of the sub-projects originally approved. 5. Conclusions and lesons 5.1 Performance of the World Bank. The World Bank's technical and financial assistance in the development of this project had an important role. Unfortunately, the Project was only partally executed due to the circumstances already mentioned. 5.2 Performace Gf the Borrower. The Government of Hondurs fell into arrears with the international organizations and the efforts of the involved institutions was not enough to comply with the objectives and goals of -the Project. 5.3 Lessons Learned. In the initial stages, there were certain delays in executing the sub-projects, caused by circumstances beyond our control. However, during the execution of the Pilot Municipal Development Project, both the Ministry of the Treasury, Banco Municipal Aut6nomo and other institutions involved acquired enough experience to continue the development of projects of this nature efficiently. The need for financing of infrastructure projects in the different municipalities increases rapidly each year, and this makes it absolutely imperative to have the financial support available at a reasonable cost from the international financing organizations. -26- Table 1: Financial Resources of Loan Agreement 2583-HO Banco Municipal Aut6nomo CATEGORIES APPROVED USED FUNDS CANCELLED FUNDS FUNDS 1. Municipal Development Program (Part B) a) Consulting Services $ 1,592,000 $ 341,710.18 $ 1,250,289.82 b) Construction and Civil Works $ 1,263,000 334,544.88 928,455.12 c) Equipment Acquisition $ 2,808,000 935,578.94 1,872,421.06 2. BANMA's Institutional Development (Part A) $ 196,000 370,587.45 (174,587.45) Consulting Services Part A (1) $ 198,000 105,751.00 92,249.00 Acquisition of Equipment and Vehicles Part A (2) 3. CONSUPLANE's institutional Development $ 132,000 132,180.07 (180.07) Consulting Services Part C 4. Unallocated Funds $ 711,000 -0- 711,000.00 Sub-total $ 6,900,000 $ 2,220,352.52 $ 4,679,647.48 Less: advance 292,381.46 (292,381.46) TOTAL $ 6,900,000 $ 2,512,733.98 $ 4,387,266.02 Table 2: Fnancial Situation of Sub-loans at February 21, 1991 (in US dollars) MunildpalitylPrqject AMOUNT BALANCES ARREAS Approved Priodpal Interest Total Prial Iterest Total Central District Municipality Boulevard Estadio Suyapa $ 1,906,200 769,034.5 289,966.6 1,059,001.1 36,337.5 289,966.6 326,304.1 Equiprent Cadastre Office 50,000 50,000.0 18,223.9 68,223.9 23,259.4 18,223.9 41,483.3 UrbanPlanning Consultant 93,000 65,925.0 20,376.1 86,301.1 3,614.0 20,376.10 23,990.1 Bus Terminal Study 169,000 125,883.6 33,850.4 159,734.0 10,885.5 33,850.4 44,735.9 Purchase Data Processing Equipment 134,993 134,993.0 36,545.9 171,538.9 18.299.6 36,545.9 54,845.5 Study on Improvement of Urban Roads 40,000 -0- 772.0 772.0 772.0 772.0 Solid WasteEquipment 1,398,600 -0- 27,014.7 27,014.7 27.014.7 27,014.7 t Adm. Eng. Budget Plan. Consultant 169,000 40- 3,265.0 3,265.0 3,265.0 3,265.0 SUB-TOTAL 3960.793 1,145.836.10 430014. 1.575.850.7 92,396.0 430.014.6 522,410.0 1 San Pedro Sula Municiwalitv Solid Waste Equipment $ 675,000 534,005.9 -0- 534,005.9 -0- -0- -0- Worbshop Tools 43,000 -0- -0- -0- -0- -0- Cadastre Equipment 143,000 -0- -0- -0- -0- -0- Infrastlrct. Maint. Equip. 860,000 -0- -0- -0- -0- -0- Nomenclature and Signalization System 170,000 -0- -0- -0- -0- -0- Sur Erste Market 118,800 -0- -0- -0. -0- 4 Chamelec6nMarkd 118,800 -0- -0- -0- -0- -0- SUB-TOTAL 2,128.600 534005. 34005.9 El Proureso Munidcialitv Solid Waslt Equipment $ 93,000 78,441.3 32,062.0 110,503.3 39,058.2 32.062.0 71.120.2 Study Sanit. Sewage Systetn 42,000 42,000.0 18,016.7 60,026.7 21,289.0 18,026.7 39,315.7 CadastreEquipment 700 700.0 -0- 700.00 6,752.5 -0- 6.752.5 Public Slaugterhouse 22,500 -0- -0- -0- -0- SUB-TOTAL A64.500 7.441.3 30 50.088.. 11711188.4 TOTAL $ 6,253,893 1,807,283.3 480,103.30 2,287,386.60 159.495.70 480,103.3 639.599.0 - 28 - PART mI: STATISTICAL INFORMATION 1. Related Banks Loans and/or Credits: Loan 2421-HO, Water Supply and Drainage, for US$19.60 million was approved on May 22, 1984. The revised closing date is June 30, 1993. 2. Project Timetable. Date Planned Date Actual Ideadfication May 1984 May 1984 Appaisal October 1984 October 1984 Negotiations April 198S April 1985 Board Approval June 13, 1985 June 13, 1985 Loan Signing July 31, 1985 July 31, 1985 Effectiveness August 1985 November 8, 1985 Completion Date March 1988 December 31, 1990 Closing Date September 30, 1988 December 31, 1990 Loan Balance Cancelled May 29, 1991 3. Loan Disbursements. 3.1 Cumulative Estimated and Actual Disbursements. (In millions of US dollars) FY 1986 1987 1988 1989 1990 Appraisal 1.55 5.75 6.50 6.90 - Actual 1.25 1.45 1.88 2.00 2.56 3.2 BANMA Disbursements for Sub Projects. * (In thousands of US dollars) National IBRD Total Appraisal Actual*** Appraisal Actual*** Appraisal Actual DISTRITO CENTRAL Solid Waste Disposal System 253.30 0 1,300.70 0 1,554.00 253.30 Boulevard Estadio Suyapa 885.00 40.6 1,233.00 728.46 2,118.00 885.00 Data Processing Equipment** 15.00 7.92 135.00 142.08 150.00 15.00 Equipment for Cadastre Office** 5.56 2.64 50.00 47.36 55.56 5.56 SAN PEDRO SULA Solid Waste Management Equipment 75.00 40.3 675.00 723.38 750.00 763.68 Office Equipment 5.00 - 43.00 - 48.00 0.00 Equipment for Cadastre Office** 16.00 - 143.00 - 159.00 0.00 Infrastructure Maintenance Equipment 140.00 - 860.00 - 1,000.00 0.00 Signal and Identification System 360.21 - 170.00 - 530.21 0.00 Sur-Este (Las Palmas) Market 97.20 - 118.80 - 216.00 0.00 Chamelecon Market 97.2 - 118.80 - 216.00 0.00 EL PROGRESO Solid Waste Disposal Equipment 10.00 4.14 93.00 74.30 103.00 78.44 Equipmentfor Cadastre Offlice** 1.03 0.42 7.00 7.61 8.03 8.03 Sanitation Project 1.5 - 43.50 - - 0.00 UNALLOCATED FUNDS 68.73 - 618.59 - 687.32 - TOTAL 2,085.93 96.00 6,900.00 1,723.18 8,985.93 1,819.00 * Totals may differ slightly from BANMA esdmates due to revisions in project costs during implementation. ** Added after appraisal. **' Actual local contribution for sub projects computed by pro rating total local contribution among actual disbursements for subprojects. 4. Project Costs and Financing. 4.1 Project Costs on Appraisal. (In millions of Lempiras) (In millions of US dollars) Project Components Local Foreign Total Local Foreign Total BANMA Professional Services 0.16 0.34 0.50 0.08 0.17 0.25 Data Processing Equipment - 0.30 0.30 - 0.15 0.15 MUNICIPALITIES Professional Services 0.36 0.98 1.34 0.18 0.49 0.67 Pre-Investment Fund 1.44 0.40 1.84 0.72 0.20 0.92 Pilot Investments 2.28 8.06 10.34 1.14 4.03 5.17 CONSUPLANE o Professional Services - 0.26 0.26 - 0.13 0.13 BASE COST 4.24 10.34 14.58 2.12 5.17 7.29 Physical Contingencies 0.14 0.34 0.48 0.07 0.17 0.24 Price Contingencies 0.40 1.02 1.42 0.20 0.51 0.71 TOTAL PROJECT COST 4 78 11.70 16.48 2.39 5.85 8.24 * Computed at 1986/1990 exchange rate of 2.00 Lempiras/US$. 4.2 Project Costs: Actual (In millions of Lempiras) (In millions of US dollars) Project Components Local Foreign Total Local Foreign Total BANMA Professional Services 0 0.70 0.70 0 .35 .35 Data Processing Equipment 0 0.22 0.22 0 .11 .11 MUNICIPALITIES Professional Services 0 0.12 0.12 0 .06 .06 Pre-Investment Fund 0 0.34 0.34 0 .17 .17 Pilot Investments 0.2 3.44 3.64 0.1 1.72 1.82 CONSUPLANE Professional Services 0 0.26 0.26 0 .13 .13 TOTAL PROJECT 0.2 5.12 5.30 0.1 2.56 2.65 * Computed at 1986/1990 exchange rate of 2.00 Lempiras/US$. 4.3 Project Financing. (In millions of US dollars) Appraisal Actual Local Foreign Total Share Local Foreign Total Share Government 1.10 0 1.10 16% .096 - 0.96 3% Bank Loan 1.05 5.85 6.90 84% - 2.56 2.56 97% Total 2.39 5.85 0.24 100% .096 2.56 2.65 100% - 32 - S. Status of Major Covenants. Loan Subject Status Agreement Section 2.02 (b) Borrower to open and maintain in dollars a special accout Complied in the Central Bank of Honduras on the terms and conditions satisfactory to the Bank. 3.06 Borrower to prepare and fiimish to the Bank a training Complied program in mantenance of municipal infrastructure no later than Dec. 31, 1985 sad carry out the program on a timetable acceptable to the Bank. 4.01 Borrower to have the records and accounts, including the Complied Special Account, of the operaions, resources and expenditures of the departments or agencies of the Borrower tesponsible for the Project maintined and audited and to submit to the Bank audit reports not later thn four months after the end of the year. Schedule 1, No withdawals for sub-projects without supplying Bank Complied 3. (b) with conformed copy of Sub-Loan Agreement and legal opinion that agreement is binding upon municipality and BANMA. Schedule 1, No withdrwals for sub-projects without a plan of action Complied 3. (c) for settement of previous debt satisfactory to the Bank. Schedule 1, No withdrwals for sub-projects in the Distrito Cental, Complied 3. (d) Municipality of San Pedro Sula, or the Municipality of El Progreso without a financial plans for 1986, 1987 and 1988 for the respective municipalities satisfactory to the Bank. Schedule 1, No withdrawals for sub-projects in the Distrito Central Complied 3. (e) without a plan of action for restructuring debt service satisfactory to the Bank. Schedule 1, No withdrawals for sub-project for acquisition of solid Plan of 3. (f) waste management vehicles, equipment for the maintenance action of micipal ifrastructure service, instalation of storm prepared drains and sanitary sewers, and construction of a 1.5 km road without prepaton of plans of action for the maintenwae of vebicles and equipment, and for traffic management and the collecion of betterment charges in the Distrito Central. Schedule 1, No withdrawals for construction of public retail in - zet Study 3 (g) without preparation of feasibility study. prepared - 33 - Project Subject Status Agreement Section 3.02 Borrower to prepare and furnish to the Bank a study on Complied BANMA's organizational and staff requirements no later than Dec. 31, 1985 carry out its recommendations according to a timetable satisfactory to the Bank. 3.03 BANMA shall prepare and furnish to the Bank a plan of Complied action to strengthen BANMA's policies on its operating loss reserves, interest rates and collateral requirements no later than Jan. 31, 1986 and carry out its recommendations. 3.05 BANMA shall take all action necessary to reduce arrears Not on its portfolio to not more than 10% and maintain at all achieved times cash collection on currently due loans at not less than 75% of such loans. Schedule 2, Sub-loan agreements shall include obligations of Distrito Plans of 7 Central, San Pedro Sula and El Progreso to put into effect action a plan of action to maintain solid waste collection tariffs prepared adequate to produce revenues to cover both the sum of its total operating expenses and the amount by which debt service requirements exceed the provision for depreciation. Schedule 2, Sub-loan agreements shall include obligations of San Pedro Plans of 8 Sula and El Progreso to carry out plans of action for the action maintenance of equipment of solid waste collection. prepared Schedule 2, Sub-loan agreements shall include obligations of San Pedro Plan of 9 Sula to carry out a plan of action for the maintenance of action infrastructure facilities. prepared Schedule 2, Sub-loan agreements shall include obligations of the Plans of 10 Distrito Central to carry out both a plan of action for traffic action management and a plan of action for the collection of prepared betterment charges. - 34 - 6. Use of Bank Resources 6.1. Staff Inputs by Stage of Project Cycle (Staff Weeks in Field) Project Cycle Final Through Appraisal 35.1 Appraisal through Board Approval 1.4 Board Approval Through Effectiveness 13.9 Supervision 45.9 TOTAL 96.3 - 35 - 6.2. Missions stge of Mo Numbw of SW Sj3eazaoa fetfoim e Raft Tye of Pojt Cyele Yearw roa lneld _RresedW * Statsbil Prodns el brou_ Appra fication 093 1 1 E d/ 11183 2 1a F, E 1 05184 2 2 F, EC di Psearatio Om 3 S F,EEC d/ Appraisal 10184 4 10 F, F, . E d Poe Appraisa 02/8S 2 S ECEDC,EC di 061i5t85 1 1W E dt SUB-TOTAL: 24.2 3upenv loa1 09/85 1 6 F dl Supervisian2 03186 2 2.2 F, E 2 M Supervlslon3 12/86 2 2 F,E 2 M Superv sion4 05/7 1 1 E di SupervisionS 09187 1 2 ECIE Supervislon6 11/88 2 2 E, 2 M Suporvision7 05190 1 .4 E U Supervisen 8 10/90 1 .4 E 3 M SuperlaP 029 112 1 A E 4 MY Supervi 10 01193 2 2 EC/E SUB-TOTAL, 1 TOTAla- 392 a/: F, Fhndal Anast; E, i e EC, Economit T, ThbaI speialt b/: 1, PrUn Free or minor probln 2, Modwate Prbems; 3, Major Probbm c/: M Mana F, F. rhadal, P, PO" d.k Non Raed
Groupe de la Banque mondiale · Project Completion Report
Honduras - Municipal Development Pilot Project
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Organisation
Groupe de la Banque mondiale
Type de document
Project Completion Report
Pays
Honduras
Source
Banque mondiale