Honduras - Second Social Investment Fund Project

Docueu of The World Bank FOR OFFaCIAL USE ONLY MICROFICHE COPY Report No. P- 5746-HO Type: (PM) DE ST. ANT/ X31898 / I7 123/ LA2HR ReporNo. P-5i46-HO MEWORANDUM AND RECOMMEATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 7.445 MILLION TO THE REPUBLIC OF HONDURAS FOR A SECOND SOCIAL INVESTMENT FUND PROJECT M4Y 18, 1992 llis iooenat has a retict distrboutb and may be used byr recipienus only in the perforngee of *dr *Ddal dWte& Its cotmmay not odre be disclosed widhout World Bs* aumzation.  cUrREN~Y AND RO S VALIN ITS US$1 5.4 Honduras Lempira (L) SDR1.O = tTS$1.37 WEIGHT$ AND MASURESS 1 Hectare (ha) = 10,000 m2 1 Metric Ton (mt) - 1,000 kg 1 Kilometer (km) = 1,000 m GLOSSARY OF ACRONYMS BBC - Buropean Economic Commumity FHIS - Honduran Social Investment Fund FBIS-I - Social Investment Fund Project (Cr. 2212-HO) FRIS-Il - Second Social Investment Fund Project GDP - Gross Domestic Product GP . - Gross National Product IDA - International Development Association 1DB - Interamerican Development Bank -EWI - German Credit Institute for Reconstruction LSMS - Living Standards Measurement Survey NGO Nongovernmental Organixation NIO - NGO Liaison Office PRAP - Family Assistance Program UNDP - United Nations Development Program UNICEF - United Nations Children's Fund FISCAL YCAR January 1 - December 31  FOR OMCUAL USE ONLY SBCOWD SOCCIA INGESTMENT EUND PROJECT (IFIS-Il) CMIT AND PROJECT SIOR RY BorroQeg: The Republic of Honduras Executing Aaencies: Honduran Social Investment Fund (PHIS) and * Nongovernmental Organization (NGO) Liaison Office (NW) Target groups in rural and urban poverty areas through the FHIS, municipalities, NGOs and other entities AnSunt: SDR7.445 million (US$10.2 million equivalent) Terms: Standard IDA terms with 40 years maturity including 10 years of grace Financinc Plan: Local Poreicm Total ------ US$ million ------ Government of Hondurao 6.7 0.0 6.7 Beneficiaries 3.1 0.0 3.1 IDA 8.2 2.0 10.2 IDB 20.5 11.0 31.5 KfW 4.0 2.0 6.0 NBC 3.2 0.8 4.0 USAID 2.0 0.7 2.7 World Food Program 1.6 0.0 1.6 Government of Netherlands 0.6 0.4 1.0 UNDP 0.2 0.0 0.2 Government of Spain 0.2 0.1 0.3 Government of France 0.1 0.0 0.1 UNICEF 0.1 0.0 0.1 Total 50.5 17.0 67.5 Economic Rate of Return: Not applicable Staff ArorAisal Renort No: 10451-HO dated May 18, 1992 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.  NUYORADUM AND EEC ATON OF THE PRESIDENT Or TEE INTERNATIONAL DEVELOPMENT AS9OCIATION TO TER EZICUTIVE DIRECTORS ON A PROPOSED CREDIT TO THM REPUBLIC 0P HORDURAS FOR A SICOND SOCIAL INVE8TMENT FUND PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Republic of Honduras for SDR7.445 million (US$10.2 million equivalent) is submitted for your approval. The proposed credit would be repayable on standard IDA terms with forty years maturity, including ten years of grace, and would help finance a second Social Investment Fund project (PHIS-IX) in Honduras. The project would be cofinanced with other donors for SDR34.7 million (US$37.5 million equivalent). The total project cost is estimated at US$67.5 million. 2. Background. Since March 1990, the Government of Honduras has carried out a comprehensive economic stabilization and adjustment program to correct distortions resulting from past macroeconomic mismanagement and to lay the foundation for sustained economic growth over the medium term. Recent improvements in the economy show the progress achieved in the implementation of the program. Preliminary figures for 1991 show: (i) a 2.2k growth in GDP; (ii) a decrease in the fiscal deficit from S.4* of GDP in 1990 to 3.7*; (iii) a decline in inflation from IIt during the fourth quarter of 1990 to 2W during the same period of 1991; and (iv) an increase in private and public investment of 11.5% and 30.3%r, respectively. The adjustment program has had an uneven impact on different sectors of the economy. The liberalization of the exchange rate and decontrol of agricultural prices have raised income earning opportunities in agricultural and export-oriented activities, but have increased hardships for urban dwellers and net consumers of food in rural areas who face higher food prices. Urban workers have also been affected by increases in public utilities tariffs and contraction in government employment. The high levels of open unemployment and underemployment have meant that the families of workers laid off as a result of restructuring in the public and private sect r have often faced reductions in disposable income. The combined impact of these various factors on chronic poor families has raised concerns that health, nutrition, and education indicators may decline in the short-term, particularly among pregnant and lactating mothers and childrei. 3. The potentially serious impact of economic adjustment on the poor spurred the Government to establish two innovative safety net programs in 1990: first, the Honduran Social Investment Fund (FHIS), which finances labor-intensive social and economic infrastructure, social services, and informal sector sub- projects, prepared and executed by municipalities, communities, and nongovernmental organizations (NGOs); and second, the Family Assistance Program (PRAF), which provides nutritional assistance via food coupons for the most vulnerable groups of the population. These programs are viewed as temporary in nature and as providing a transitional instrument for responding rapidly to a critical poverty situation, until the line ministries have been strengthened and project activities have been reintegrated into the normal operations of line ministries. Recognizing NGOs as important agents ot oocioeconomic development, the Government created an NGO Liaison Office (MW) to strengthen the collaboration between the Government and NGO8 in addressing poverty issues. 4. The Bank and IDA have strongly supported the Government's efforts to restructure the economy. A Second Structural Adjustment Loan (SAL It) of US$90 million was approved in September 1990, followed by a Structural Adjustment Credit (SAC) of SDRi4.3 million in January 1991, and an Energy Sector Adjustment Credit (BbAC) of SDR37.95 million in October 1991. As a result of the reclassification of Honduras as an IDA-only country in late 1991, it became eligible for the IDA Reflow  -2- program and a supplemental credit of SDR23 .8 million (attached to the ESAC) was approved in November 1991. Support for a reform program in the agricultural sector is at an advanced stage of discussion with the authorities. IDA has also been actively involved in supporting the Government's poverty alleviation efforts. In February 1991, a Social Investment Fund credit (Cr. 2212-HO) of SDR14.3 million was approved to finance PHIS and other priority social sector project activities (a pilot food coupon program, Living Standards Measurement Survey, social sector services planning). In addition, preparation is advanced for a proposed Nutrition and Health project and a possible social sector reform operation is under discussion, which would focus on improving the efficiency and sustainability of primary health, primary education, and nutritional assistance programs. 5. The First Social Investment Fund project (FHIS-I) hao a total ccst of US$68.0 million; in addition to IDA funds (US$20.0 millicn equivalent), the project also receives financing from other external aid agencies (US$33.0 million), Government (US$8.0 million), and project beneficiaries (US$7.0 million). The project was expected to be completed by June 30, 1993. however, the mid-term review of the FHIS-1 project, carried out in November 1991, showed that project implementation had been much faster than expected and outcomes have met the intended objectives during the first phase of project implementation. FHIS has proved to be a successful subproject financing mechanism. By December 31, 1991, FHIS had approved 2,870 subprojects for a total of about US$50 millior., which helped to generate an estimated 30,000 temporary and permanent jobs. An estimated 500,000 poor Hondurans have directly benefited from FHIS investments in schools, sewerage, roads, and other types of subprojects. Subprojects are generally of good quality. The largest part of the financing went to the rehabilitation of social infrastructure (63* of total subprojects cost), such as primary school classrooms, health posts, and water and severage systems; economic infrastructure (160), such as road maintenance and irrigation; and social services (14*), such as training of midwives and health volunteers, deworming of children, provision of vitamins to children and mothers, and supply of school desks to primary schools. Finally, FHIS provided credit (7%) to small and micro-entrepreneurs, such as market vendors and handicraft makers, who do not have access to the banking system. Subloans, administered by NGOs, were made at market oriented rates. This program has worked well with arrears of only 3.7 percent. 6. The PHIS has a strong and independent management and a well-qualified and motivated staff. FMIS-financed projects have been implemented efficiently, with reasonable administrative costs (representing 9% of total commitments). The PHIS has coordinated its operations well with those of responsible line ministries and Government agencies (ministries of Bducation and Health and the National Water Service), complementing their programs and using their norms. Approval of subprojects is made in consultation with these ministries, which ensure the sustainsbility of the subproject investments by committing themselves to provide staff and other recurrent expenditures. Local committees are required to be organixed for cost sharing (12% in 1991, exceeding the estimated 10% appraisal target), cost recovery, and maintenance. In addition, FHIS has a contract with the National Water Service for maintenance and technical sustainability of water Systems provided under PHIS subprojects. The PHIS has had a positive institutional impact on municipalities and private sector organizations including small private contractors and NGOs that have either sponsored or implemented subprojects. 7. FHIS has targeted its subprojects well, based on a poverty map using population and poverty criteria, which are transparent to all concerned. Poorer communities received more funds (60* of total FHIS resources, compared with the  - 3 - appraisal target of 731) than less poor communities. The actual amount committed by the PHIS for poorer communities reached 70* of funds targc.ed at appraisal for these communities, and this percentage is improving. FHIS has reached poorer places where there had previously been hardly any Government social support effort, but poorer communities have lagged behind in preparing subprojects to be financed by FHIS. B. While the mid-term review has been very positive on the performance of the FHIS, it was agreed that, to further improve its operations the FHIS would, inter &i.i: (i) expand its supervision and monitoring capacity; (ii) integrate its management information systems; and (iii) prepare an action plan to channel more resources to the poorer municipalities. Actions (i) and (ii) have already been implemented. 9. As of December 31, 1991, FHIS had committed US$50 million (741) of the total available funds of US$68 million, and it had disbursed US$12.1 million, or 601 of the total IDA Credit, i.e., considerably more than the amount of US$7.5 million (381 of the total Credit) expected at appraisal. Given that total remaining funds available for commitment frum all sonurces were about US$18 million, and as about US$3 million per month have been committed recently, FMIS will likely exhaust its funds as early as June 1992. Additional funds are urgently required for FHiS to continue its operations beyond mid-1992. 10. FHIS has clearly demonstrated that it has a strong implementation capacity, and the Government has provided adequate counterpart funds. At the time of FHIS-I appraisal, IDA appraised a project of more than US$100 million as the Honduran Government proposed. But at negotiations, InA and the Government agreed to downsize the project to US$68 million because of uncertainty about the FHIS implementation capacity and availability of counterpart funds. Based on the successful FHIS-I experience, FHIS could easily channel additional funds to finance subprojects totaling between US$60 million and US$70 million by December 1993. 11. * Rationale for IDA Iolv emet. This follow-up IDA Credit for the second phase of FHIS programs fits in well with IDA's assistance strategy, which is to provide technical advice and financial support for the Government's adjustment programs and short-term safety net operations, as well as for its efforts to introduce sectoral policy reforms over the medium term. The proposed project would build on the achievements of FHIS-I and would help the Government sustain its poverty alleviation efforts during the transitional period, until the line ministries strengthen their institutional capacities and complete their policy reform programs. The FHIS-Il project would complement activities to be implemented under the proposed Nutrition and Health project, and would contribute to the institutional strengthening of the line ministries by helping them to improve their project implementation capacities through close collaboration with FHIS. IDA support for this second phase is critical to ensure that: (a) improvements agreed at the mid-term review are fully internalized and implemented during the remainder of FPIS's operating existence and transferred to line ministries, as appropriate; and (b) sufficient concessional funds are mobilized from the international donor community to finance and follow through the safety net operations during the socioeconomic adjustment period. 12. ProJect 4eatien. The aim of the project is to help the Government sustain its poverty alleviation efforts and maintain social cohesion while the line ministries strengthen their institutional capacities and complete their reform programs.  13. Proiect Description. The credit would finance a range of small-scale subprojects (91W of total project cost) sponsored by municipalities, community organizations, and EGOs, in four broad categories: (i) social infrastructure (54S of total subproject cost); (ii) economic infrastructure (13*); (iii) social services (22%); and (iv) credit to small informal sector entrepreneurs (11W). Wherever feasible, the subprojeats would be carried out by small private contractors using labor-intensive methods. The credit would also provide institutional support through technical assistance to the PIBS. Finally, the credit would provide technical assistance to the NW, to strengthen the partnership between the public sector and NGO8 in addressing poverty problems, and to promote NGOs' role in the preparation of subprojects in poorer communities, so that the poor can actually take advantage of all funds targeted on them. The credit would not finance the operating costs of the executing agencies (9* of total cost). 14. The total project cost is estimated at US$67.5 million with a foreign exchange component of US$17.0 million (25 percent). The proposed IDA Credit of SDR7.445 million (US$10.2 million equivalent) would finance 15* of total project cost. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursement, and the disbursement schedule, are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Honduras are given in Schedules C and D, respectively. The Staff Appraisal Report, No. 104S-HO, dated May 18, 1992, is also attached. 1S. Pro i_ct Ilemomentatio. The project would be implemented over a period of about two years. The main executing agency would be the FHIS, which has clearly demonstrated its strong implementation capacity over the last two vears. Quarterly and annual audits of MIS expenditures confirm that there has been no misuse of funds. IHIS's limited life was to expire on March 1993, but has been extended to March 1994. The other executing agency, the NL, io a new office established in the Presidency in 1992. 16. Actins Aned. During neaggtigtion: (a) PHIS presented evidence that a more diversified social services program, targeted to poorer communities, had been prepared; (b) the Borr-wer provided evidence of preliminary agreements on financing of approximately US$30 million available from IDB, and approximately US$10 million from other financing agencies and donors; (c) the Borrower presented an action plan for 1992 and 1993, satisfactory to IDA, to channel more funds than in 1990 and 1991 to poorer mtunicipalities, and agreed that, without IDA's approval, PIS would not comnit more funds for relatively richer municipalities beyond the agreed amoAunt programmed in the action plan for these municipalities; (d) the Borrower agreed to provide funds as indicated in the project financing plan and as needed to cover the operating costs of the PHIS; (e) the Borrower agreed that any future appointment of the IBIS's Executive Director would be subject to prior IDA consultAtion and agreement; (f) retroactive financing of up to US$1.0 million would be permitted for eligible expenditures incurred since April 1, 1992; (g) IHIS agreed to carry out quarterly and annual audits by private independent external auditors, acceptable to DA; and (h) the Borrower agreed to undert.ake a mid-term review of the PIBs-SS project not later than February 28, 1993, prepare an action plan, based on discussions with, and acceptable to, IDA, by March 31, 1993, and thereafter implement it in accordance with the timetable included in the plan. 17. The acnditian of effectiveness would be that: (i) a technical assistance contract between IHS and UNDP, satisfactory to IDA, would have been signed; (ii) the Operational Manual has been amended in a manner satisfactory to IA; (iii) a Subsidiary Agreement for making the funds available by the Borrower to  -5. the FHIS, satisfactory to IDA, would be entered into; and (iv) a funding agreement of approximately tS$30 million between the FnIS and IDS, and funding agreements totaling approximately US$10 million for the FHIS, with other financing agencies and donors, respectively, would have been signed. 18. A condition f or disbursement for the WLO component would be the appointment of key staff to the NW and the issuance of the regulations to the legislation that established the NW. 19. Ravironmental Aspects. FRIS's operational manual stipulates that all subprojects financed by the FHIS in various sectors do not adversely affect the environment and indigenous cultures, and this manual has been well enforced. 20. Participation of Women. FHIS has programmed 22V of its resources for subprojects ca basic needs (health, nutrition and education). All these subprojects would be presented and executed by NGOs and community organizations, thus providing a systematic channel for the participation of women in the improvement of their household's and communities' well-being. Based on experience under PHIS-I, about half of the beneficiaries of informal sector subprojects are also expected to be women. 21. Benefitg. By transferring resources to poor urban and rural communities, the PHIS would help: (i) prevent a deterioration in the living standard of the poor during the period of economic adjustment; (ii) improve the social infrastructure so that the beneficiaries enjoy better sanitation, health, lower transport costs, and less erosion damage in their communities; (iii) reduce the rates of mortality, malnutrition, and illiteracy, particularly among women and children; and (iv) provide the Government experience with a decentralized mechanism for delivering development assistance to municipalities and small businesses and mobilizing grass-roots efforts, which could subsequently be put to use by line ministries. 22. Risks. There is a risk that the Government may respond to the social cost of adjustments with excessive speed, and project funds might be poorly used and diverted to uses not envisaged in the project. Experience with FIIS-I has demonstrated that this risk is small, considering FHIS's excellent management, capable and motivated staff, its good information system, quarterly audits, and close supervision. 23. Recomation. I am satisfied that the proposed Credit would comply with the Articles of IDA and recommend that the Bxecutive Directors approve the proposed Credit. Lewis T. Preston President Attachments Washington, D.C Way 18, 1992  N9RF- A Page 1 of 1 HOWDURAS SECOND SOCIAL INVESTMENT FUND PROJEcT ESTInOMD COSTS AND FINANCING PLAN Local Foreican Total -US$ million------ A. Subprojects 46.00 15.22 61.22 B. Operating Costs 4.37 1.71 6.08 Subtotal PHIS 50.37 16.93 67.30 __. instituttinal Assistance to NGW Liaison Office 0.15 0.05 0.20 TOTAL COST/ 50.52 16.98 67.50 Financing Plan: Lscal Foreion Total -$-------u5 million------ Government of Honduras 6.7 0.0 6.7 Beneficiaries 3.1 0.0 3.1 IDA 8.2 2.0 10.2 IDS 20.5 11.0 31.5 KfW 4.0 2.0 6.0 BEC 3.2 0.8 4.0 USAID 2.0 0.7 2.7 World Food Program 1.6 0.0 1.6 Government of Netherlands 0.6 0.4 1.0 UNDP 0.2 0.0 0.2 Government of Spain 0.2 0.1 0.3 Government of France 0.1 0.0 0.1 UNICEF ,0.1A 0 .0 Q 0.1 TOTAL 50.5 17.0 67.S 1/ Net of taxes and duties.  7- SCHEDULR _B Page . of 2 SECOND SOCAL IES METHODS OF PRROCULEMTN (US$ million) .,-,W0 OP E1MUW , , ,:.R : _ : . . Ii;;;Iv;e ~~~i(a -~C OTNIR- l Civil Works and W-_erials -.- 6.2 3.32/ 47.1 56.6 . (5.7) (3.1) (8.8) Furniture and Equipment -.- 0.9 0.23' 2.9 4.0 -.- (0.8) (0.2) (1.0) Consultants, Training and -.- -.- 0.4 0.4 0.8 Auditors' Services -.- -.- (0.4) (0.4) Salaries, Allowances and -.- -.- . 6.1 6.1 Operating Costs of FHIS and NW -.- -.- -,- (0.0) 7.1 3.9 56.5 67.S TOTAs PROJ7CT COSTS -.- (6.5) (3.7) (10.2) Notes: Numbers in parentheses reflect IDA financing. 1/ Not IDA-Financed. 2/ Includes local shopping and direct contracting, with direct contracting up to an.aggregate amount of US$2.2 mill" n. 3/ Shopping.  SCH8D-la B Page 2 of 2 SECOND SOCIAL XNVESTNMET FMND PROJECT DISBMRRSE M- (US$ million) CATBGORY MQN PERCENTAGES 1. FHIS Subprojects 8.8 90* of disbursements by FHIS for eligible subprojects signed by September 30, ")93. 2. Consultant Services and 0.2 100* Training 3. Auditors' Services 0.2 loo0 4. Unallocated 1.0 TOTAL 10.2 ESTIMATED IDA DISBURSEMBNTS I=A Fiscal Year 1993 19 --US$ million-- Annual 5.5A 4.7 Cumulative 5.5 10.2 1/ Includes the initial deposit of US$1.0 million to the Special Account and US$1.0 million of retroactive financing.  Page l of 1 5C}ND- SOCIALnVBIra ND PRATC TIMTABLsE OF IBY PROJRCT PEMCss8ING EVENTS (a) Time taken to prepare: 4 months (b) Prepared by: PHIS, NI0, with assitanCe of IDA and UWDP (c) Appraisal mission departure: November 1991 (d) Negotiations: May 1992 (e) Planned date of effectiveness: August 1992 (f) List of relevant PCRs: Mid-Term Review Report (No. 10280-HO), dated January 15, 1992  - 10 - iCqhedule p Page 2 of 2 H0ONDURP8 SECOND SOCT ZNVST 1D PROgEcT STATUS OF nRMc GROUP OPERATXONS N RONDRAS A. Statement of Bak L and IDA Credits (as of March 31, 1992) Origifkl Apprtoval Hold Held by Undbbursd Rsoal Yost -by Paf- pncuduid Amn Obil TSnegot swnews Laaq EuTb Low- IF goa PauXlafns 186W lmp. do CutUdos C entro-A anad. SA. (ECCA8A" Tannery 0.30 0.08 0.38 19o70 Cla Pie Cohdo de Cent*- Ameca (COPINO) Pulp and Paper 0.00 0.0 0.08 10781 TsxtdllsRloUndo. A.deC.V. Tsxtilosand Fbes 0.77 1.00 10.77 3.14 186 Granjas marAs Shrimp Factory 0.00 0.58 gm 0.58 TOW grossomnmitments 10.07 1.73 11.80 Less Canosetaono. Terminations. Repayment and Saes 7.93 0.15 8.08 Total ConmmItente now held 3l 1 5 372 3In  * 11 - Page 2 of 2 Ro1coD ROCII TnVUTINT10 PUO33= T P ROF qK MM OPUR CNS -IN _==U B. Staten=t of I nveatments (as of March 31, 1992) hAosmt In .S$ OIIJAa CeediLti PAcal Losa No. year Borrower Burpose lank ]MA Udtsbursed CreAtJ cV~~ ---_*_-^______ 31 loans and 13 aredits fuly disbursed 319.1 103.00-. Of which SEOAL. SALO, and Pogrza tLoan v tin 2990-SDs 1989 oduraS Structural Adjustment 50.00 CT. 2208-US 1991 oandura Struturval Adjustmt 20.00 - - -"- --- -- -- - - - Subtotal 30.00 20.00 tn. 2421-U8 1984 onduras Yates Sppwy 19.40 9.39 Ia. 2703-US 1986 Hoadura Intrial Credit 37.40 4.28 La. 2804-lD 1987 ondura Va cation 4.40 3.36 TI. 2991-UlS 1989 oadura Agricultural Crsdit 25.00 2.S5 * La. 3237-U0S 1991 Iobdurs Structural Adjuatmet U 90.00 25.00 Cs. 2212-UDS 1991 gonduras Socl Investmt 1us 20.00 4.38 * Cr. 2304-RUS 1992 sanduras leeg sets stuetui Adj 50.60 31.34 * Cc. 2306-1-lS 1992 Hondr" hery setr Stretti AdJ 31.50 32.50 * Total 696.21 207.10 112.80 Of which has beas repaid 242.36 9.98 Total mm held by Bank ad ID 455.85 197.12 Amt Sold s 4.46 of which hs bean repaids 4.46 Total nadisbursd 44.58 68.22 112.80