Honduras - Municipal Development Pilot Project

D _mnt iof The World Bank IFOR OmCIAL USE ONLY St'. e?F-83- A/o R_St No. P-4090-HO REPORT AND RECOMNENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPXENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USt6.9 MILLION TO THE REPUBLIC OF HONDURAS FOR A MUNICIPAL DEVELOPMENT PILOT PROJECT May 22, 1985 I b dwcarat ha a z3ucim dlrbugdei mad may be umad bY recPiphb sulY in tie Perfaiumm Of tedal dusn Us aM Ma me elherwhe be ib_sed wIbout Wod Bmk auftedds.  CURRENCY EQUIVALENTS Currency Unit - Leipira (L) US$1.0 = L2.0 L1.O US$0.5 - WEIGHTS AND MEASURES Metric System PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BAbMA Autonomous Municipal Bank CONSUPLANE National Superior Council for Economic Planning Drs Directorate of Technical Services (BANMA) DO Directorate of Operations (BAINA) ENEE National Electric Company SANAA National Autonomous Water and Sewerage Service SECOPT Secretariat of Communications, Public Works, and Transportation SOF Secretariat of Finance and Public Credit SOI Secretariat of Interior USAID U.S. Agency for International Development FISCAL YEAR January 1 to December 31  FOR OMCUIL USE ONLY HONDURAS MUNICIPAL DEVELOPMENT PILOT PROJECT LOAN AND PROJECT SUM4ARY Borrower: Republic of Honduras. Beneficiaries: The Autonomous Municipal Bank (BANMA) and the Borrower's Superior Council for Economic Planning (CONSUPLANE). Amount: US$6.9 mll:ion equivalent. Terms: 20 years v:tth 5 years of grace at standard variable rate. Relending The Arro!wer would relend about US$6.1 million to BANMA Terms: on the same terms as the Bank loan. The foreign exchange risk would be borne by the Borrower. BANMA would onlend part of the proceeds to selected municipalities for professional services, pre-investment studies, and pilot !nvestments, on terms that have been established according to the purpose of each sub-loan. BANMA would bear the credit risk an sub-loans. Project The primary objective of the project is to strengthen BANMA Description: as ;;to principal source of financial and technical assistance for wnu=icipal development. To this end, the project would finanre professional services to help BANMA s.trengthen Lts institutional capacity. A secondary av jective is to strengthen the financial management of tbQee BANMA clients which account for the largest portion of BRNMA's operational performance and require increasing finaucial assistance from the Central Govern-npt. For the group of munie_palities selected for participating in the pr-oje':t, financing rould be provided for (a) professional aervic es to strengthen municipal financial management, taclucllng revenue collection, budgeting, cost control, accorinving, debt management, and planning and execution of investuiint projects; (b) credit for pilot investments in four municipalities; and (c) a pre-investment fund for feasIbilfty srudies. Finally, the project would finance professional services for CONSUPLANE for strengthening its capacity in urban and regional planning. Risks: The prin-zipal project risk is the possible failure of participating municipalities to achieve financial balance. Because the most crucial problem to be addressed in improvirg the wunicipalities' financial situations is that of poor management of both revenue collection and expenditwure coatrol, the focus of the proposed project on administrative measures that can be implemented quickly and directl3r by municipalities would lessen this risk. Tbis document has a restricted clisuribution and may be laced by recipients only in th performance| |of their ofFcmI duties Its conterits may not otherwis be disclosed without World Bank authorwation.|  - ii - i. The three major municipalities will be required to establish a revenue strategy and financial plan for operations as a whole as a condition of effectiveness. Performance would be weasured by an agreed set of monitoring indicators, which would be inc.Luded in sub-loan agreements. Project Cost: Local Foreign Total - US$ illion -- BANMA Professional Services Q..08 0.17 0.25 Data Processing Equip. - 0.15 0.15 Mtunicipal Management Professional Services 0.18 0.49 0.67 Pre-investment Fund 0.72 0.20 0.92 Pilot Investments 1.14 4.03 5.17 CONSUPLANE Professional Services 0.13 0.13 Base Cost 2.12 5.17 7.29 Physical Contingencies ').07 0.17 0.24 Price Contingencies 0.20 0.51 0.71 Total Project Cost 2.39 5.85 B.24 Total Fiancing Required 2.39 5.85 8.24 Financing Plan: Local Foreign Total - US$ mllion Bank Loan 1.05 5.85 6.90 BANMA 1.10 - 1.10 -hmuicipalities 0.24 - 0.24 Total 2.39 5.85 8.24 Disbursements 1/: Bank FY86 FY87 FY88 FY89 -(U - million) Annual 1.55 4.20 0.75 0.40 Cumulative 1.55 5.7' 6.50 6.90 Rate of Return: Not applicable Appraisal Report: None. This is a combined Apprais.al/President's Report.. I/ Includes retroactive financing from April 1, 1985 for coutracts valued at about US$500,000 equivalent.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HONDURAS FOR A NUNICIPAL DEVELOPMENT PILOT PROJECT 1. I -ubmit the following report and recomendation on a proposed loan of US$6.9 million to the Republic of Honduras for a Municipal Development Pilot Project. The loan would have a term of 20 years, including 5 years of grace, at the standard variable interest rate. US$6.10 million of the proceeds of the loan would be relent, on the same terms as the Bank loan, to the Autonomous Municipal Bank (BANMA), and US$0.13 million would be retained by the Borrower for allocation to the National Superior Council for Economic Planning (CONSUPLANE). US$0.67 would be allocated as necessary for contingencies. Of the amount lent to BANMA, about US$0.40 million would be used for professional services and for purchase of data processing equipment to strengthen its institutional capacity. The remaining US$5.70 million would be onlent to selected municipalities, to finance professional services for strengthening municipal financial management (US$0.67), a pre-investment fund for pre-feasibility and feasibility studies (US$0.92), and pilot investments (US$4.11). The amount allocated to CONSUPLANE would cover professional services for developing an urban-municipal development plan. PART I - THE ECONOMY 2. A report entitled -Current Economic Memorandum on Honduras (3312-HO) was distributed to the Executive Directors on July 29, 1981. A Bank mission visited Honduras during March 1985 to review recent economic performance. The main findings of the mission are summarized below. Country data sheets are attached as Annex I. 3. Honduras' per capita GNP was about US$660 in 1982, making it one of the poorest countries in the Western Hemisphere. Malnutrition is severe, infant mortality is about 9 percent of live births, and the literacy rate is only 60 percent. About half of the nopulation is without safe water and three quarters of the households are without access to sanitary waste disposal and electricity. 4. The population of about 4 million is growing rapidly, at 3.4 percent a year, straining available resources. While two thirds of the economically active population is employed in agriculture, the latter accounts for only one fourth of GDP. Only one quarter of the land area is arable. The Government is showing increased awareness of population problems. Family planning information and services are provided at Government health clinics and by the Honduran Family Planning Association to anyone requesting them. The United Nations. USAID and private organizations provide external assistance to the family planning programs.  - 2 - 5. During 1950-1975, real GDP grew at 3.7 percent a year; per capita income grew by less than one percent a year. Important factors that contributed to this poor performance were the lack of export diversification and deteriorating terms of trade. The risk of dependence on banana exports was dramatically illustrated during 1974-1975 when the destruction of the plantations by one of the worst hurricanes in Honduras' history resulted in a sharp reduction in exports and GDP. 6. Real GDP recovered notably during 1976-1979, growing by 7.7 percent a year. 'Exports and investment led growth, and inflation averaged 7 percent a year. This favorable growth performance of the economy was partly a result of more aggressive Government development policies. A land reform program distributed about 210,000 hectares to over 48,000 families, of which 36,000 remain on the land. Serious infrastructure deficiencies in transport and power were eased when a basic network of trunk highways and ports was built while power generating capacity expanded significantly. Real public fixed investment rose from 3.2 percent of GDP in 1972 to 5.7 percent in 1974 to over 8 percent in 1978-1979. Taking advantage of the externalities created by the public sector, private sector activities expanded rapidly. In real terms, private investment increased from 11.6 percent of GDP in 1974 to 14.5 percent in 1979. Recent Developments 7. During 1980-1983, the economy stagnated as exports and private investment lost their dynamism; real GDP per capita declined by about 9 percent a year. Real GDP recovered slightly in 1984. Political events in Central America undoubtedly deterred private investment, which, by 1984, had fallen to half its 1979 level. Despite a rise in the share of public investment from 9.5 percent of GDP in 1980 to 11.6 percent in 1984, total investment fell from 26 percent to 18 percent of GDP over the same period. 8. The country's external financial position has deteriorated. The terms of trade have worsened recently, and by 1984, the index was 12 percent below the 1980 level. Export performance simultaneously weakened, with volumes of main export products stagnating, and with the real value of exports declining by 0.3 percent a year over the period. In 1983-1984, the current account deficit of the balance of payments averaged about US$230 million (7.6 percent of GDP) a year as compared with US$300 million (12 percent of GDP) in 1980-1981. This improvement was due to increased levels of bilateral grants and a decline in imports. The real value of imports fell by an annual average of 5.7 percent during 1981-84 and the real value of capital goods imports is one-third lower as compared with 1981. In spite of significant foreign official capital inflows, net official foreign exchange reserves have been negative since 1981. To ration foreign exchange, the Central Bank introduced import permits in May 1982. A non-official parallel market for foreign exchange has since developed. 9. Central Government finances also deteriorited, and the large increase in the use of domestic credit in 1982-83 added pressures on the already weak balance of payments position. Central Government current expenditures increased rapidly during 1980-81, reflecting salary  -3- adjustments and large expenditure increases in the areas of education and health. In 1981 public savings became negative and are projected to remain so for the fifth consecutive year in 1985. The Government took significant tax measures during 1982 as part of a stand-by agreement with the IMF covering a 14 month period ending in December 1983. Nevertheless, actual revenues were insufficient in 1982 and 1983 to cover rising current expen- ditures. Higher operating surpluses for the Port Authority, the Power Company, the Telecommunications Company and the Water Authority resulted from tariff adjustments undertaken in 1982 under the stand-by arrangement. However, the overall deficit of the Central Government remained high in 1983 (10.5 percent of GDP) because of lower than expected revenues, higher expenditures, and the large additional burden created by refinancing the National Investment Corporation (CONADI) obligations with foreign commer- cial banks. Many of the private sector enterprises supported by CONADI are now bankrupt or in arrears on their payments due, and the Government has assumed the burden of honoring CONADI's debt obligations. As a result of these developments, the Honduran Government was unable to meet the performance criteria under the IMF stand-by arrangement, and was thus unable to draw on the last tranche. Discussions with the IMF are expected to resume once the new administration takes office in January 1986. 10. In mid-1984 the Government undertook measures to improve its financial position. Taxes were raised and current expenditures were more tightly controlled. As a result, the Central Government current account deficit went from 3.3 percent of GDP in 1983 to 1.5 percent in 1984 and the overall deficit declined to 9.4 percent of GDP. Moreover, external funds were disbursed at an accelerated pace; net foreign financing went up by more than 40 percent in 1984 and covered around three fourths of the Central Government deficit. Consequently, the significant decrease in the use of domestic credit during 1984 reduced the pressures on the strained balance of payments position. In 1984, reserve losses fell to about half the 1983 level and represented only 10 percent of the drain experienced in 1982. 11. In December 1984 the Government reached an agreement with the foreign commercial banks to refinance the debts of ODNADI and a few other public agencies. About 14 percent of the disbursed external public debt at the end of 1983 (about US$220 million) will be refinanced. Under the terms of the agreement, US$117 million of principal repayments due from 1981 to 1984 plus US$31 million due in 1985 will be rolled over until June 1986. At that time, the situation will be reassessed in the light of the country's dialogue with the IMF, and a nine-year refinancing will be considered. Short Term Prospects and Development Programs 12. The modest recovery initiated in 1984 is expected to continue in 1985. Nevertheless, the country's economic outlook will be affected by the political climate in Central America, which has a dampening effect on private investment and may lead to increased capital flight. This will complicate the needed task of strengthening public finances. At the same time, however, substantial inflows of bilateral assistance are likely to continue through the late 1980s.  13. Current expenditures are expected to grow faster than current revenues, resulting in a Central Government current deficit of about 2.4 percent of GDP in 1985. Since capital expenditures and net lending are projected to decline, the overall Central Government deficit will remain at the 1984 level of 9.4 percent of GDP. Given the expected full disbursement of committed bilateral assistance, externAl financing will cover about 85 percent of the Central Government's deficit. This will permit a reduction in recourse to net domestic credit by one fifth from 1984 level. 14. The availability of foreign financing will help maintain the country's external position in 1985. Other factors will also contribute to stabilize the balance of payments situation: (i) the completion of the El Cajon Hydroelectric Project will reduce fuel imports (currently one fifth of total imports); (ii) commodity prices of the main Honduran exports are projected to rise during 1985; and (iii) the agreement with the commercial banks on the CONADI debt will reduce foreign exchange requirements for 1985. Consequently, the current account deficit is projected to remain stable at 7.6 percent of GDP. External Financing 15. In 1984, Honduras' disbursed public external debt repayable in foreign currency amounted to US$1.6 billion, or 200 percent of exports of goods and non-factor services; US$2.3 billion if undisbursed commitments are included. In the past, Honduras has managed to keep its external debt service ratio fairly low, because foreign loans to the non-financial public sector were almost all on concessionary terms. The debt service rztio in 1981 was 14 percent. It increased to 21.5 percent in 1984 and is projected to drop to 17.3 percent in 1985, partly because of the rescheduling of CDNADI's debt. 16. At the end of 1983, the Bank Group held about 22.1 percent of the disbursed public debt outstanding and repayable in foreign currency; excluding IDA, the Bank's share is about 17 percent. These shares are not expected to increase significantly in the next few years. One fifth of the Inter-American Development Bank (IDB) total loans disbursed and outstanding are repayable in local currency, so that IDB's share of the disbursed public debt repayable in foreign currency is only 14.3 percent. The Central American Bank for Economic Integration (CABEI) accounts for 8.2 percent of the total, the US Government for 12.8 percent, Venezuela for 9.7 percent, privately held debt for 26.1 percent, and others for 6.8 percent. In addition, since 1983, the U.S. Government has provided substantial grant financing. 17. During 1970-83 external sources committed some US$2.5 billion of which the Bank Group provided 20 percent, IDB 16 percent, CABEI 10 percent, the US Agency for International Development (USAID) 11 percent, private banks 17 percent and others 26 percent. IDB has concentrated on industry, power, transport, water and sewerage; CABEI on transport and power and USAID on agriculture and education.  - 5 - 18. Honduras is expected to strengthen its balance of payments in the near term as commodity prices improve and as El Cajon's operations reduce fuel imports. Export promotion policies aiming at diversifying the export base will contribute to continued improvement in the longer term. Strengthening of the Central Government finances remains a high priority in the adjustment program required to deal with the difficult environment which the country will face in the next few years. Provided the Government improves its fiscal position and maintains a prudent external borrowing policy, the mDdest economic recovery experienced in 1984 is expected to continue in 1985-86. Honduras' manageable external debt service and the expected continuing large official flows on concessionary terms make it creditworthy for modest amounts of Bank lending. PART II - BANK GROUP OPERATIONS 19. Beginning with a loan of US$4.2 million for roads in 1955, Honduras has to date received 30 Bank loans totalling US$503.1 million and 12 IDA credits totalling US$85.1 million, both net of cancellations. Of the Bank Group's total lending to Honduras, 20.3 percent has been for highways, 5.2 percent for ports, 40.8 percent for the energy sector, 17.6 percent for agricultural credit and regional development, 11 percent for industrial credit and tourism, 1.9 percent for education, and 3.2 percent for water supply and drainage. 20. Annex II contains a summary statement of Bank loans, IDA credits, and IFC investments as of March 31, 1985. As of that date, a total of USS93.8 million remained to be disbursed on 12 Bank Group-assisted operations. An additional loan of US$19.6 million, signed on December 7, 1984, is not yet effective. 21. Speed of disbursements in Honduras has varied considerably by sector, with po-wer projects generaily the quickest disbursing, as well as accounting for the largest share. 'n FY84, disbursements reached a record high of USS65.4 million, of which over half was accounted for by El Cajon. Agricultural and industrial credit projects have also been relatively fast disbursing, accounting for about 18 percent of all disbursements in FY84. 22. In the past, Bank Group lending was heavily concentrated in transport and power, where inadequate facilities hampered the development of the country. In the last decade, it has been increasingly diversified to provide support for the exoansion of productive capacity in agriculture, industry, and tourism and to address major needs in education and water supply. 23. In future lending to Honiduras, we plan to support the Government's objectives to increase production, employment, anld expDrts, and to raise living standards of the poor by emphasizing projects in the productive and social sectors. In order to promote and diversify both agricultural and industrial production, we would continue to provide credit to those sectors. However, the level and focus of our financing will be  partly determined by the activities of other major lenders such as USAID and the IDB, in view of the low level of absorptive capacity of the country relative to the availability of financial assistance. 24. New lending in industrial credit will focus on promoting policy objectives in the sector, with a view to stimulating production of non-traditional goods, especially for export, and to encouraging private sector activity in several areas currently managed by Government agencies. Sector policy issues would also be vigorously pursued in future lending for agriculture, to assure adequate incentives to producers in the sector which employs over half the population and produces one fourth of GDP. New lending for infrastructure could be considered once the immediate obstacles to development are overcome and the Government's absorptive capacity has improved. 25. The proposed pilot project would be the first to the urban sector. It will directly assist in improving services to urban populations, while reducing demands on the Central Government for counterpart funding. The local counterpart would be provided by BANMA, with some contributions by participating municipalities; the project would assist BANMA to increase its capacity and that of the participating municipalities to service their own debts and thus further alleviate the financial burden on the Government. 26. It is expected that the Bank's share of total external public debt disbursed and outstanding will remain at its current level of 17 percent through the late-1980s. Annual interest and amortization on Bank loans currently represents about 14 percent of total public external debt service. This proportion is projected to increase to about 16 percent by the late-1980s. 27. IFC's activities in Honduras include a 1964 loan and equity investment, of USS295,nOO and US$55,000, respectively, In a tannery, Empresa de Curtidos Centroamericana, S.A. In 1966 an additional equity investment of USS27,500 was made in this company. In 1968 and 1970 equit- investments totalling US$75,000 were made in a pilot company, Compania rLno Celulosa de Centro America, S.A. In 1978 IFC approved a loan of US$9.0 million and an equity investment of US$1.0 million in Textiles Rio Lindo, S.A. de C.V., a locally owned textile company, to help finance an expansion and diversification project. IFC continues to look for investment opportunities in Honduras. A proposal for a shrimp farming project is currently under consideration.  PART III - THE URBAN SECTOR Recent Urbanization Trends 28. From 1960-1980, the urban population of Honduras more than tripled to reach about 1.4 million or about 32 percent of the total population. If current urbanization trends continue, fully three quarters of the total population growth in the next 20 years will take place in or move to the nation's towns and cities, as the urban population triples again to a projected 55 percent of total population by the year 2000. Already, about 72 percent of the urban population is concentrated in the Distrito Central, comprising Tegucigalpa and Comayaguela (with a combined population of about 600,000), and in San Pedro Sula (population 370,000), the focal point of the economically important northern region. Present trends indicate that, by the end of the current decade, this concentration will increase to about 83 percent of the urban population. Sector Organization 29. The Municipal Law of the late 1950s embodied the concept of an autonomous municipal sector and delegated extensive service responsi- bilities to municipalities. Typically these services include local roads and drainage, water supply (in most cases), solid waste management and sanitation, meat inspection and slaughtering, and municipal enterprises, such as public markets and bus terminals. Though municipalities enjoy considerable political and operational autonomy (even in the principal cities, where mayors are appointed by the President), financial constraints have inhibited their ability to discharge their service responsibilities and impeded the emergence of effective autonomy. 30. The Secretariat of the Interior (SOI) is responsible for political representation of municipalities in the Central Government; it also provides training for municipal staff (para. 32). The Secretariat of Finance and Public Credit (SOF), which routinely guarantees loans contracted by municipalities, has recently focussed on the financial constraints facing local governments, because of an increasing incidence of default on local debt obligations. 31. The Government has relied for the most part on the Autonomous Municipal Bank (BANMA) to support local development efforts. BANMA was established in 1961 as a state autonomous financial institution to provide financial and technical assistance to local governments, contribute to their economic and social development, and promote their financial autonomy. Although the scale of BANMA's operations remained relatively modest until the early 1980s, it has established strong relationships with its clients. It is now the major intermediary for municipalities, whose financial assistance from Central Government is limited to discretionary grants, mainly from the Secretariat of the Presidency. BANMA's assistance to municipal development programs in the recent past have concentrated on investments in water supply, markets, and electrification, chiefly in smaller urban centers.  Sector Issues 32. National Support for Sector Development. Until recently, municipalities and their needs for infrastructure have been neglected as a focus of national policy. The investment planning and review process under CONSUPLANE covers urban areas only to the extent that they are affected by the investment programs of Central Government agencies. In the past, the Directorate of Urbanization in the Secretariat of Communications, Public Works, and Transportation (SECOPT), has prepared outline city plans, but theEe have rarely been used as a basis for implementing municipal development programs. SECOPT also operates a facility for training in infrastructure maintenance, but this has not hitherto been available to municipal staff. At BANMA's request, detailed design work on water and electricity distribution systems are now undertaken on behalf of municipalities by the National Autonomous Water and Sewerage Service (SANAA) and the National Electric Company (ENEE). BANMA now coordinates closely with SOI, whose Directorate of Technical Assistance runs training programs in municipal administration and operations. However, staffing constraints in SOI have limited the impact of these programs. 33. Provision of Urban Services. Rapid urbanization has placed increasing strains on urban infrastructure. In addition, scarcity of managerial skills outside the Distrito Central and San Pedro Sula has prevented the growth of an administrative and technical cadre in most cities. As a result of these two factors, municipal governments have been unable to keep pace with the expanding demand for social and economic services. Recent surveys by BANMA in 41 municipalities that, combined, account for about 80 percent of the urban population, indicate severe deficiencies in the provision of even basic municipal services. Access to water supply and sewerage is low relative to other countries in the region. A high proportion of urban roads are unpaved, and access to public transport is thereby severely limited. Large proportions of urban areas remain without adequate drainage, causing extensive health-related problems and disruption to economic activity for long periods during and after seasonal rains. Solid waste management is very poor or non-existent. Because of low fee schedules and weak management procedures, markets and slaughterhouses are badly maintained. Markets have frequently been constructed to inappropriate and uneconomical design standards. As a result, they stand unoccupied and represent financial liabilities rather than productive municipal assets. 34. The low-income populations of urban centers are growing about twice as fast as urban populations as a whole (whose growth rates average 5 percent annually) and are most affected by these deficiencies. Excluded from even the lowest-nriced housing units produced by the public sector, an estimated 7,000 to 8,J00 families per year in the Distrito Central and San Pedro Sula alone gravitate toward squatter communities that lack basic sanitary services. To address the specific problem of these communities, municipal programs have been initiated with USAID funding, to provide basic infrastructure and services to marginal areas.  35. BANMA. To date, BANMA has financed 170 loans in about 60 municipalities, but its effectiveness as the principal intermediary in the sector is severely constrained by its poor financial position. Loans outstanding at year-end 1984 were estimated at about L64 million (US$32 million equivalent) compared to L41 million at year-end 1981. BANMA held the credit risk on about 65 percent (US$21.0 million equivalent) of this portfolio. Of this US$21.0 million, about 50 percent, was affected by arrears amounting to some US$5.0 million equivalent (outstanding obligations of the Distrito Central accounted for about 70 percent of these arrears (para. 54)). On a cash basis, annual net profit in 1983 represented 2.5 percent of risk assets; estimates for 1984 are even lower. * As a result, BANKA has been unable to contribute to a significant extent to the financing of its investment program from internally generated funds, nor has it established reasonable reserves against contingent liabilities (reserves are currently less than one percent of loans outstanding). Some 85 percent of BANMA's loans are fiduciary loans, i.e. secured on the genaeral revenues of beneficiary municipalities. Since these revenues are inadequate to cover debt service obligations to BANHA, these obligations have often been borne by the Government in order to keep BANMA solvent. In order to relieve this financial burden on the Government, BANMA's finances will have to be improved, which, in turn, depends on a stronger fiscal effort by BANMA's client municipalities. 36. Local Revenue Administration and Financial Management. Municipal revenue performance in the recent past has been poor, making it impossible for them to adequately provide the comprehensive range of social and economic infrastructure services expected of them (para. 29, above). During the period 1980-83, for example, while inflation averaged over 9 percent per annum and the urban population increased at over 5 percent per annum, revenues increased by only 7 percent annually, forcing a significant real reduction in local expenditures. Worse yet, much of the nominal increase in expenditures was absorbed by increases in staff costs. Municipalities' contribution to their capital investments has been negligible, and urgently needed infrastructure improvements have had to be financed increasingly from borrowings. As a result, local debt servicing costs have risen sharply as a component of municipal budgets, and in some cases have been allowed to accumulate to unmanageable levels. While the Central Government has assisted in covering debt service payments in the past, owing to its own financial problems, together with this growth in debt service costs, the Government has had to refuse to honor further demands for assistance to municipalities. -This has left lenders with little option but to renegotiate outstanding obligations--in some cases, on a repeated basis. 37. The Distrito Central illustrates this trend well. With a population of about 600,000 and annual revenues amounting to around US$13 million equivalent, the municipality has annual debt service obligations in the immediate term of about US$18 million equivalent per year. In a group of ten other economically important towns and cities identified by BANMA as  - 10 - priority urban centers, eight have consistently run current account deficits in recent years and four are in the process of renegotiating debt service obligations. As a result, and since municipalities' borrowings are often guaranteed by the Central Government, the Government has been called upon to meet debt service obligations on behalf of delinquent municipalities, particularly where foreign lenders are involved. 38. Revenue improvements have been made by some municipalities through adjustments in the level of service charges and tbrough modifications in local taxes, but administration has remained weak. Property tax records in most municipalities have not been systematically updated. Maintenance of records, filing and other administrative tasks are done manually; rapid growth of cities has made it impossible for limited municipal clerical staffs to keep the necessary data up to date. Property tax cadasters are incomplete and property values are substantially understated. Tax enforcement procedures are weak and collection performance is poor. These problems must be addressed as a first step if attempts to reform the tax rate structure are to have any effect (such as those approved for the Distrito Central and San Pedro Sula) are to have a significant impact. 39. In the Distrito Central, even though receipts have recently increased as the impact of the reassessment undertaken in 1979-1980 makes itself felt, collection performance is still below 65 percent. Arrears on the property tax account amount to about L25 million (US$12.5 million equivalent), or fully two years receivables. Collection performance is considerably lower in most other municipalities. Delinquencies on the business tax account in many cities amount to several years' receipts. Fees and rents on markets and slaughterhouses are well below the economic rent. This situation is deteriorating progressively and threatens to place increasing demands for financial assistance on the Central Government. In order for municipalities to enhance, or even maintain their capacity to provide essential services to a rapidly increasing population, and to develop programs which would stimulate an improvement in their economic base, they must mobilize local fiscal resources more efficiently and manage them more responsibly. - Bank Strategy in the Sector 40. It is the Bank's purpose to contribute to the development of the sector by supporting the financial and technical strengthening of BANMA as the key institution in the urban sector, so that it may provide urgently needed assistance to municipalities for improvement of esseatial municipal infrastructure and services. In view of the constraints outlined above, primarily in terms of financial capacity, the pre-conditions for proceeding directly with a broad-based urban investment program do not yet exist. As a first step, the proposed project would help prepare such a program for possible financing by the Bank, and establish in BANMi the institutional basis for its implementation. If the proposed project achieves the key targets established for the first year of implementation, the Bank would proceed to prepare the first phase of support for the urban sector as a whole, with BANMA to be designated as implementing agency. The Bank would  - 11 - continue to support for the urban sector as a whole, with BANMA to be designated as implementing agency. The Bank would continue to support BANMA's efforts to strengthen its own institutional capacity and that of its client municipalities through this future assistance. 41. Participating Municipalities. The improved efficiency of BANMA's principal municipal clients is important to the solution of BANMA's own financial probLems and the development of its ability to support the sector. In order to help BANMA develop its capacity for providing technical assistance to its clients, the proposed project would channel both professional services--for strengthening financial management and pre-investment studies-and financing for specific investments to four economically important municipalities: the Distrito Central, San Pedro Sula, El Progreso and Puerto Cortes. These municipalities were chosen for this pilot project not only because solution of their financial problems is essential to solving BANMA's own problems, but also because they are the largest and fastest-growing urban centers, both economically and demographically, and are responsible for providing services to one fourth of the country's population. In addition, technical assistance would be provided to a second group of municipalities which are next in importance according to the above criteria. Participation of any municipality in the project would be contingent on their compliance with specific conditions designed to ensure achievement of project objectives (paras. 49, 53, and 57). PART IV - THE PROJECT 42. The proposed project was developed as a result of two separate but related analyses. The first was carried out in response to a request by BANMA in 1983 for support in developing a broadly focussed urban services project. The second, completed in the course of preparation and appraisal of the Water Supply and Drainage Project, approved in May 1984, identified a need to focus on management of overall municipal operations, rather than on each service function in isolation. Discussions with officials of BANMA, the Municipality of San Pedro Sula, the Distrito Central, and El Progreso revealed their strong interest in participating in a pilot program to employ professional services to strengthen their ability to achieve financial independence and to provide municipal services efficiently. The project was appraised in November 1984. Negotiations were held in Washington, D.C. from April 22 to April 25, 1985. The Government delegation was led by Ms. Maria Antonieta Dominguez, Director General of Public Credit, Secretariat of Finance and Public Credit. Supplementary data are contained in Annex III. Objectives and Description 43. The primary objective of the proposed project is to strengthen BANMA as the principal source of financial and technical assistance for municipal development programs and to address the financial and managerial  - 12 - weaknesses in selected municipalities. Under the project, these objectives would be pursued through assistance to BANMA and to its major client municipalities, on whose financial strength BANMA's own strength depends. The project would also assist the Governmnt in formulating a strategy for further development in the sector, through assistance to CONSUPLANE. 44. To achieve the above objectives, the proposed project would include three principal components: I. BANMA. A. Approximately 39 man/months of professional services to assist BANMA in the areas of: (1) organizational planning, to update its organizational manual and personnel management policies to meet the scale and complexity of its present and future operations; (2) financial planning and control, to define: financial policies regarding interest rates (particularly with respect to improving their economic efficiency) and collateral support for BANMA's lending operations; procedures for collection and enforcement; measures to strengthen the financial accounting system through design of a financial management information system and a system for monitoring performance of the loan portfolio; and programs and procedures for internal audit and control; and (3) project evaluation, to strengthen its appraisal capability, especially in the context of urban investment planning and municipal finance. B. The project would also provide financing for BANMA for the purchase of data processing and records management equipment, to support more effective portfolio management and improved financial systems. II. Participating Hunicipalities. A. Professional services totalling 90 man/months to assist participating municipalities (para. 41, above) in improving their performance in: (1) revenue administration, aimed at achieving greater efficiency in billing and collection procedures (especially for property and business taxes) and pricing policies for major services such as solid waste and public markets; (2) budgetary management and financial planning, concentrating on definition of expenditure policies appropriate to each municipality's resources and on design of an information  - 13 - system to enable municipalities to monitor their financial operations effectively; (3) urban planning: (a) for the Distrito Central to establish its development planning capability and (b) for San Pedro Sula to update its metropolitan economic structure plan, prepared in the mid-1970s. B. A pre-investment fund of about US$1.0 million would be used to finance pre-feasibility and feasibility studies and detailed design work for high-priority investment projects. This assistance would provide hands-on training for municipalities in investment planning and advance the preparation of needed investments. Proposals would be selected for pre-investment studies for investments which: (a) fall within the area of principal service responsibility of a Participating Municipality; (b) would improve deficiencies of that service, particularly in the water supply, drainage and sewerage, and solid waste management sectors; and Cc) would assist either to increase the level of economic activity in the municipality or to strengthen its financial position. C. Pilot investments totalling about USS5.8 mlalion would be financed under the project in the Distrito Central, San Pedro Sula, El Progreso and Puerto Cortes (para. 41, above). Investments in data processing equipment were chosen to support the work to improve municipal financial management. The other investments were chosen because: {i) they would help to correct existing service deficiencies in these cities and have been assigned high priority by municipal authorities, (ii) they can be implemented quickly, {iii) they would provide a vehicle for improved management and maintenance of municipal facilities and for establishment of appropriate service pricing policies (para. 49, below), and (iv) they would provide the means for much-needed revenues and -are economically justified. The following investments would be financed: (1) Distrito Central: (a) equipment for solid waste management, to increase service coverage to 100 percent, (b) widening of a critical road link of 1.5 km into the central business district, to complete a major metropolitan road system, and (c) computer and records management equipment, office equipment and supplies to support the strengthening of revenue administration and budgetary management. (2) San Pedro Sula: (a) equipment for solid waste management to provide 100 percent service coverage, (b) equipment for infrastructure maintenance, (c) upgrading a maintenance depot, (d) a public retail market, and (e) office equipment and supplies.  - 14 - (3) El Progreso: (a) dual-purpose equipment for solid waste management to provide 100 percent service coverage and for infrastructure maintenance, (b) extension of the drainage system to include the entire business district, in order to reduce disruption of economic activity caused by flooding, and Cc) records management equipment, office equipment and supplies to support the strengthening of revenue administration and budgetary management. (4) Puerto Cortes: a micro-computer, office equipment and supplies to support the strengthening of revenue administration and budgetary management. III. CONSUPLANE. About 12 man/months of professional services would be provided to help CONSUPLANE formulate an urban-municipal development policy as a basis for determining priorities to be included in the next five-year national development plan. Project Implementation 45. BANMA would have lead responsibility for implementation of all parts of the project except the assistance to CONSUPLANE. Consultants providing services to CONSUPLANE under the project would work with its Projects Division, which is responsible for reviewing all public sector investment proposals. A steering committee, comprising representatives of CONSUPLANE, SOF, and BANHA, provided support during project preparation and would be maintained to provide policy guidance and liaison with Government agencies, as necessary (draft Loan Agreement, Section 3.04). 46. BANMA's General Manager would oversee project implementation. Consultant advisors to be retained to assist in BANMA's organizational planning would report directly to the General Manager. BANMA's Directorate of Technical Services (DTS), whose chief reports directly to the General Manager, is responsible for assessing the feasibility of municipal investment proposals. Under the project, DTS would, with assistance from consultants, help municipalities develop their overall investment program, implement financial management reforms, and prepare feasibility studies and planning and engineering designs. During implementation, the DTS would monitor progress and ensure adherence to agreed schedules. DTS would also be responsible to submit to the Bank, not later than December 31, 1985, a training program for municipal staff in maintenance of municipal infrastructure facilities, and SECOPT would carry out the program according to a timetable satisfactory to the Bank (draft Loan Agreement, Section 3.06). DTS is headed by a competent financial analyst and presently has 15 technical staff including financial analysts, economists, and engineers. Under the project, technical assistance will be provided to strengthen DTS's capability in urban planning and municipal financial analysis. To provide additional technical support, representatives have been assigned to this working group in BANMA by the Projects Division of CONSUPLANE and the office of the Superintendent of Autonomous Decentralized Agencies in SOF.  - 15 - 47. The Directorate of Operations (DO) of BANHA, whose chief also reports directly to the General Manager, is responsible for BANMA's financial operations, including budgeting and financial plannii'!%, accounting and financial control, portfolio management, and treasury functions. The DO would implement the recommendations of consultants financed under the project for the strengthening of BANMA's financial systems and operational performance. The chief of DO is well qualified to oversee the implementation of financial system improvements. BANMA would continue to employ individuals in the two key positions of chief of DTS and DO, whose qualifications, experience and responsibilities shall be satisfactory to the Bank (draft Project Agreement, Section 3.06). 48. BANMA's organizational manual is to be updated with consultant assistance under the project. In particular, this review would: (i) more clearly define delegated responsibilities; (ii) formulate clear job descriptions in organizational planning, personnel administration, and financial operations; and (iii) identify the role of internal audit in BANMA. BANMA would submit to the Bank by December 31, 1985, its proposed organizational and staffing changes and the timetable for their implementation (draft Project Agreement, Section 3.02). 49. In each municipality, a Project Coordinator would be appointed to monitor progress of expenditures, consulting work, and investments (where applicable), and to report on such progress to BANKA on a quarterly basis (draft Project Agreement, Schedule 2, para. 5(d)and (e)). Pilot investments would be implemented by the Distrito Central, San Pedro Sula, El Progreso, and Puerto Cortes. In order to assure the success of the pilot investments and to ensure that maximum benefit is achieved from them, special conditions of disbursement have been established for specific sub-loans: Ca) for sub-loans to San Pedro Sula and El Progreso for solid waste collection equipment or infrastructure maintenance, the respective municipalities must formulate their plan of action for equipment and infrastructure maintenance; (b) for a sub-loan to the Distrito Central for construction of the 1.5 km road, the municipality must formulate its plans of action for (i) traffic management in the zone of the city where the road is located, and (ii) collection of a betterment tax; and (c) all sub-loan agreements for solid waste collection equipment will include obligations of the respective municipalities to put into effect a plan of action, within three months after the signing of the agreement, which would establish, according to a timetable satisfactory to the Bank tariffs for solid waste collection adequate to cover total operating expenses for the service and amortization of investment costs (draft Toan Agreement, Schedule 1, para. 3 (f)); and  - 16 - (d) for a sub-loan to San Pedro Sula for a public retail market, a feasibility study, satisfactory to the Bank, must have been completed (draft Loan Agreement, Schedule 1, para. 3 (g)). The above obligations would be carried out by the respective municipalities under the respective sub-loan agreements (draft Project Agreement, Schedule 2, paras. 8-10). Project Cost and Financing 50. Total project cost is estimated at about US$8.24 million (including contingencies) of which about US$5.8 million, or 71 percent, represent foreign exchange cost. Baseline costs are updated to April 1985 price levels, from cost estimates prepared in November 1984. There are no applicable taxes or duties. Physical contingencies represent 10 percent of civil works costs only. Price contingencies were calculated on the basis of forecast international inflation rates of 5 percent for 1985, 7.5 percent for 1986, and 8 percent for 1987 and 1988, for foreign costs, and local inflation rates of 7 percent each year for local costs. 51. The proposed Bank loan of US$6.9 million would cover about 84 percent of total project cost. It would finance the foreign cost {77 percent) of the pilot investments, and the total cost of professional services, including an estimated US$580,000 for domestic consultants. BANMA would lend from its own resources about US$1.1 million for sub-loans for pilot investments (14 percent of total project cost), and the municipalities receiving those investments would contribute about US$240,000 (2 percent of total project cost). Relending Terms and Conditions 52. About US$6.10 million (plus contingencies) of the proceeds of the proposed loan would be relent to BANMA on the same terms as the Bank loan. The Government would bear the foreign exchange risk. These terms would be spelled out in a subsidiary loan agreement to be drawn up between the Government and BANMA. This agreement would specify, inter alia, the mechanisms for channeling the proceeds of the loan to BANMA and for repayment of the Bank loan, and that BAIWA would bear the credit risk on sub-loans. Execution of the subsidiary loan agreement, in a manner satisfactory to the Bank, would be a condition of effectiveness (draft Loan Agreement, Section 6.01 (a)). 53. BANMA would relend about US$6.35 million to participating municipalities (para. 41) to finance sub-projects for professional services, pre-investment studies, and pilot investments. A sub-loan agreement for each sub-project would be signed by BANMA and the municipality receiving the sub-loan. Sub-loan agreements would detail, inter alia, (a) the terms of the financing, and (b) the content, timing, and conditions of the sub-project, including indicators appropriate for monitoring the progress and performance of the work to be done. Execution of sub-loan agreements for professional services for improvements of  - 17 - financial management with-the Distrito Central, San Pedro Sula, and El Progreso, in a manner satisfactory to the Bank, would be a condition of effectiveness (draft Loan Agreement, Section 6.01 (c)). BANMA's Financial Position and Prospects 54. A detailed financial analysis of BANMA was carried out to determine (a) the potential for developing its capacity to fulfill its mandate as financial and technical intermediary in the sector, and (b) the specific measures required by BANMA and its client municipalities to permit it to develop this potential (para. 35, above). The single most important issue confronting BANMA is the level of arrears. Therefore, in preparation for the proposed project, BANMA and the Distrito Central finalized an agreement in early 1985 providing for settlement of these arrears according to a timetable which is satisfactory to the Bank. Collection of payments under the settlement agreement with the Distrito Central will improve BANMA's profits in 1985 and beyond. Consultants' services to all municipalities and establishment of targets for revenue-collection and cost-control performance would help municipalities correct their own deficit problems (para. 57, below). 55. BANMA's Current Position. With a debt/equity ratio of 1.1:1, BANMA's capital structure is satisfactory. BANMA has sufficient liquidity to provide the counterpart funds required under the proposed project. 56. Stabilization and Prospects. All participating municipalities would formulate plans for liquidation and/or restructuring of outstanding payments to BANMA similar to those prepared by the Distrito Central and San Pedro Sula (paras. 54 and 57). BANMA would enforce collection under these agreements, in order to reduce, by December 31, 1986, arrears in its loan portfolio to not more than 10 percent of its total portfolio, and maintain thereafter cash collection of at least 75 percent on all currently due loans (draft Project Agreement, Section 3.05). In order to maintain its present satisfactory capital structure, BANMA would obtain the Bank's approval before incurring any debt over US$8.5 million equivalent (draft Project Agreement, Section 3.04). Assistance would be provided to BANKA under the project to formulate recommendations to strengthen BANNA's policies regarding its reserve for bad debts, interest rates, and collateral requirements. Based on such recommendations, BANMA would submit to the Bank by January 31, 1986, a plan of action to strengthen its policies in those key areas and would carry out the plan, taking into , account the Bank's comments, according to a timetable satisfactory to the Bank (draft Project Agreement, Section 3.03). 57. Municipal Financial Covenants. The Distrito Central, San Pedro Sula, and El Progreso, which are most important to a solution of BANKA's arrearage problem, have made progress in preparing their respective financial plans. Completion of the financial plan, together with a plan of  - 18 - action to achieve balance between total municipal revenues and expenditures, would be a condition of disbursement for any sub-loan to these tuncipalities (draft Loan Agreement, Schedule 1 para. 3 (d)). Each action plan would establish annual targets for, inter alia, increasing current revenues and controlling debt service and personnel costs. A plan of action for settlement of outstanding debts is necessary to complement the financial plans. The Distrito Central has already agreed on an action plan for settlement of outstanding debt service obligations to BANMA (para. 54, above). As an additional condition of disbursement for any of its sub-loans, the Distrito Central must present a satisfactory plan of action for settlement of outstanding debt service obligations to all creditors other than BANMA (draft Loan Agreement, Schedule 1, para. 3 (c) and (e)). San Pedro Sula is already implementing a plan for settlement of its obligations to all creditors. As a condition of disbursement for sub-loans to El Progreso and any other participating municipality, the municipality must present its plan of action for settlement of debt service obligations to BANMA. Formulation of the financial plans and plans of action of participatingmunicipalities other than the Distrito Central, San Pedro Sula, and El Progreso would be carried out with assistance under the project (draft Project Agreement, Schedule 2, para. -12). BANMA (DTS) would review progress in achieving the above targets at regular intervals (draft Project Agreement, Schedule 2, para. 11). Accounts and Auditing 58. BANHA will maintain overall project accounts and loan fund records for all pilot investments and technical assistance under the project except for assistance to CONSUPLANE. Each participating municipality will be responsible, under BANMA's guidance, for maintaining detailed project accounts for pilot investments implemented under the project. In the past, BANMA has contracted private commercial auditors to undertake annual financial audits of its overall operations, and standard audit reports have been completed on a timely basis. BANMA would contract such firms, satisfactory to the Bank, to audit all project-specific accounts relating to BANMA and to sub-loans to participating municipalities and of all statements of expenditure (draft Project Agreement, Section 4.01). CONSUPLANE will account for technical assistance provided to it under the project, and the Borrower will employ an independent auditor, satisfactory to the Bank, to carry out an audit of the project accounts of CONSUPLANE and of the Special Account (draft Loan Agreement, Section 4.01). Procurement 59. Equipment totalling about US$2.5 million, would be procured through international competitive bidding (ICB) in accordance with Bank guidelines. Packages of equipment costing less than $150,000 each and not to exceed US$500,000 in aggregate, would be procured through local shopping. Civil works contracts would be awarded through local competitive bidding, open to foreign participants, according to procedures which are acceptable to the Bank. Conwulting services totalling US$2.0 million would be procured in accordance with Bank guidelines for consultant selection.  - 19 - Consultant services in municipal revenue administration and financial management would be procured in a single package. All bidding packages over US$150,000 would be subject to the Bank's prior review of procurement documentation. This would result in Bank review of about 85 percent of the value of all contracts. The balance of contracts would be subject to random post review by the Bank after contract award. Disbursements 60. The Bank loan is expected to be fully di.bursed in about thirty-six months. The Bank would disburse for 100 percent of all consulting services and for foreign expenditures on pilot investments. Disbursements would be made against statements of expenditure for contracts valued at US$20,000 or less. Disbursements would include retroactive financing for contracts valued at about US$500,000 to cover costs incurred after April 1, 1985 for computer and records management equipment and for consulting services which are required for an early start of the work of institutional strengthening in BANNA and the three principal municipalities (draft Loan Agreement, Schedule 1, para. 3(a)). 61. To speed disbursements, a Special Account would be established for BANMA by the Borrower in the Central Bank. An initial deposit of US$1.25 million, equivalent to 4 months projected expenditures (excluding direct payments), would be made from loan proceeds. The Special Account would be replenished through normal reimbursement of project expenditures. In addition, as a condition of effectiveness, a Project Account would be established in BANMA with an initial deposit of US$200,000 equivalent, to ensure adequate and timely availability of counterpart funds from BANMA for project components, excluding professional services for CONSUPLANE (draft Loan Agreempnt, Section 6.01(b)). Benefits 62. The project would stabilize BANMA's financial position and establish the financial and technical soundness necessary for BANMA to serve as intermediary and lead executing agency for municipal development on a larger scale. Stabilization of the participating mimicipalities' delinquency problems would contribute to the achievement of BANMA' s targets, as well as relieve the Central Government of the fiscal burden imposed by such delinquencies. Pilot investments financed under the project would provide direct benefits to the populations of the beneficiary municipalities, while enabling the municipal governments to realize much-needed increases in their revenues. Many measures to be carried out under the project, such as updating the cadaster in the Distrito Central, would produce large immediate financial benefits. In addition the impact of efforts toward institution-building would continue in the medium term. For example, improvement of municipal investment planning capacity would guide investments toward economically justified projects which would both provide needed services and infrastructure and contribute to municipal revenues, in contrast to the pattern of the past. Projections indicate that, even if only half of the expected improvements in the budgetary position of the participating municipalities over the next five years  - 20 - materializes, the cost of the consultants' services would be repaid many times over. Risks 63. The principal project risk is that participating municipalities may fail to achieve financial balance. Because the most crucial problem to be addressed in impr3ving the municipalities' financial situations is that of poor management of both revenue collection and expenditure controls, the focus of the proposed project on administrative measures that can be implemented quickly and directly by municipalities would lessen this risk. The three major municipalities will be required to establish a revenue strategy and financial plan for operations as a whole as a condition of disbursement for sub-loans to them. Performance would be measured by an agreed set of monitoring indicators, which would be included in sub-loan agreements. PART V - LEGAL INSTRUMENTS AND AUTHORITY 64. The draft Loan Agreement between the Republic of Honduras and the Bank, the draft Project Agreement between the Bank and BANMA and the Report of the Committees provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern of loans for urban projects, and their more important features and special conditions have been included in Part IV and summarized in Section III of Annex III to this report. There are three special conditions of effectiveness of the Loan Agreement: (i) that the subsidiary loan agreement between the Government and BANMA has been duly executed; (ii) that BANMA has established the Project Account; and (iii) that sub-loan agreements for professional services for improvement of financial management have been executed between BANMA and the Distrito Central, San Pedro Sula, and El Progreso, respectively, on terms and conditions satisfactory to the Bank. 65. The following are conditions of disbursement for specific sub-loans: (i) for any sub-loan to a municipality other than the Distrito Central or San Pedro Sula, that the respective municipality has presented a satisfactory plan of action for settlement of its debt service obligations to BANMA; (ii) for any sub-loan to the Distrito Central, that it has formulated a plan to restructure its debt service obligations other than those to BANMA; (iii) for any sub-loan to the Distrito Central, San Pedro Sula, or El Progreso, that the respective municipality has submitted to the Bank a satisfactory financial plan; (iv) for any solid waste collection sub-project, that the respective municipality has formulated a plan of action which would establish, according to a satisfactory timetable, tariffs adequate to cover all costs related to the service; (v) for solid waste equipment or infrastructure maintenance in San Pedro Sula and El Progreso, that the respective municipality has formulated a satisfactory  - 21 - maintenance plan; (vi) for road construction in the Distrito Central, that the municipality has formulated its plans of action for traffic management and collection of a betterment tax; and (vii) for a public retail market in San Pedro Sula, that a satisfactory feasibility study had been completed. 66. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 67. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments May 22, 1985 Washington, D.C.  ANNEX I -22- Page 1 of 5 UlOllDUB - MAL INDICATOR STA axrznc csun cvtu;Dm X HonT (MCT R1N TITXATI) 1 i,eo(k 19701k macm= Kim" iwu.u KIDOLKTNCONZ igGLl, isitb znant3.iLb LAT. Auatrca &en msns AULCMOM S- M) TOTAL 112.1 112.1 112.1 AGRICULTUIAL 46.6 49.4 51.6 ow CAI cuss) i01a.o 290.0 660.0 210S.6 2345.3 in cuxs (KIL0OANS OF OIL IQUIVALENT) 102.0 190.0 206.0 995.5 1122.8 PPATIW AM XTAL IIC POPULATION.HlD-TRAR (THOUSANDS) 1943.0 2639.0 3957.0 U03 POPULATION CZ OF TOTAL) 22.8 26.9 37.3 66.5 46.a POPULAT'ON PROJECfTONS POPUIATION Is YEAR 2000 (HILL) 6.B STATIONARY JPOPUATION CHILL) 16.5 POPULATION 2.0 POPJLUAfION DENSITY PER SQ. EN. 17.3 23.5 34.1 35.7 82.9 PER SQ. It. AGRI. LAND 39.8 53.4 74.0 92.4 15e.9 POPULATION ACE STRUCTURE (I) 0-1L US 45.6 47.4 47.2 39.9 31.6 15-64 YRS 52.3 50.1 50.0 56.0 61.1 65 AND ABOVE 2.1 2.5 2.7 6.1 7.1 POPULArION GROWH RATE (C) TOIAL 3.3 3.1 3.4 2.4 1.6 URBA 5.8 5.5 5.5 3.6 3.7 CRUDE 31RTH RATE (PER THOLS) 51.1 49.3 43.8 31.3 23.4 CRLDE DEATH RATE (PER THOUS) 16.8 14.5 10.3 3.1 5.8 CROSS REPRODUCTION RATE 3.5 3.6 3.1 2.0 1.6 FAMILY PLANNING ACCEPTORS. ANNAL (THOIUS) . 12.7 USERS (I OF HARRIED IWOEN) .. .- 27.0