Honduras - Second Education Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2243-HO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF HONDURAS FOR A SECOND EDUCATION PROJECT February 23, 1978 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.  CURRENCY EQUIVALENTS US$ 1.00 = 2 Lempiras L 1.00 = us$ 0.50 Fiscal Year January 1 - December 31 ABBREVIATIONS AID US Agency for International Development CABEI Central American Bank for Economic Integration CIDA Canadian International Development Agency COHDEFOR Honduran Corporation for Forestry Development CONSUPLANE Higher Economic Planning Council EDUCREDITO Educational Credit Institute ENA National School of Agriculture ENF National School of Forestry IDB Inter-American Development Bank INFOP National Institute for Vocational Training MOE Ministry of Education MNR Ministry of Natural Resources SCD School Construction Directorate  FOR OFFICIAL USE ONLY HONDURAS SECOND EDUCATION PROJECT CREDIT AND PROJECT SUMMARY BORROWER: Republic of Honduras. AMOUNT: US$5.0 million equivalent. TERMS: Standard. PROJECT DESCRIPTION: The project seeks to improve the quality and efficiency of rural primary education by providing adequate school facilities, organized under an improved nuclearization system, appropriately trained teachers and administrators, and relevant curricula and teaching materials. It will also increase the supply of critically needed agricul- tural, forestry and livestock professionals and techni- cians. About 35,000 children, 10,000 overage students and 15,000 out-of-school youths and adults would attend project rural schools in 1982. The project would contribute to making its beneficiaries more productive participants in Honduras' economic development process. Although unwillingness of qualified teachers and admin- istrators to go to rural areas and delays due to community participation in school construction are potential risks, they are considered small in view of the project provisions for increasing teacher salaries for double shift work and for supervision of construction activities by the Education Ministry's School Construction Directorate. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ESTIMATED COST: (US$ Millions) Local Foreign Total Rural Primary Education Rural Primary Schools 2.80 1.31 4.11 School Mapping 0.05 0.01 0.06 Teacher Training and Textbooks 0.06 0.03 0.09 Technical Assistance 0.02 0.14 0.16 Sub-total 2.93 1.49 4.42 Agricultural Education National School of Agriculture 0.19 0.07 0.26 National School of Forestry 0.17 0.11 0.28 Veterinary Training 0.04 0.36 0.40 Technical Assistance 0.02 0.11 0.13 Sub-total 0.42 0.65 1.07 Prolect Administration 0.17 0.04 0.21 Base Cost Estimate 1/ 3.52 2.18 5.70 Contingencies Physical 0.34 0.16 0.50 Price 0.94 0.46 1.40 Total -4.80 2.80 7.60 FINANCING PLAN: (US$ Millions) Local Foreign Total Percentage IDA 2.2 2.8 5.0 66 Government 2.6 - 2.6 34 Total 4.8 2.8 7.6 100 1/ At January 1978 prices.  - iii - ESTIMATED DISBURSEMENTS: (US$ Millions) IDA FY 1978 1979 1980 1981 1982 Annual .0 1.7 1.5 1.5 0.3 Cumulative .0 1.7 3.2 4.7 5.0 RATE OF RETURN: Not quantifiable. STAFF APPRAISAL REPORT: 1806a-HO, dated February 14, 1978.   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF HONDURAS FOR A SECOND EDUCATION PROJECT 1. I submit the following report and recommendation on a proposed development credit for the equivalent of US$5.0 million to the Republic of Honduras for a Second Education Project. The credit would be on standard IDA terms. PART I - THE ECONOMY 2. A report-entitled "Economic Position and Prospects of Honduras" (1165-HO) was distributed to the Executive Directors on August 23, 1976. An economic mission visited Honduras in June 1977 and is preparing an Updating Economic Memorandum. The main findings of the mission are summarized below. Country data sheets are attached as Annex I. Long-term Development Trends 3. The long-term growth rate of the Honduran economy has been exceed- ingly low. Between 1950 and 1975, real per capita GNP grew by only 1 percent a year and was estimated at US$390 in 1976, one of the lowest levels in the Western Hemisphere. Although there is a dearth of precise, reliable statis- tics, Honduras' poverty is evident from a variety of indicators. Malnutrition is severe: about three-quarters of pre-school children are believed to suffer from protein and caloric deficiencies, and infant mortality is estimated at 118 per thousand live births. It is estimated that roughly 60 percent of the population has no access to piped water and about 80 percent lives without any form of sanitary waste disposal. Furthermore, these are country averages which conceal substantial regional disparities, as living conditions in the rural areas, which account for about two-thirds of the population, are much poorer than in the cities. 4. A major reason for Honduras' poor growth performance has been the continued dependence of the economy on the production and export of a few agricultural commodities, especially bananas, whose prices depend on a fluctuating world market situation and whose output may be greatly influenced by domestic weather conditions. The latter was dramatically illustrated when extensive destruction of the banana plantations by Hurricane Fifi in 1974 reduced the volume of bananas exported in 1975 to about one-half the level of 1973 and contributed to a drop in per capita income of about 3 percent. 5. There are many reasons for the continued dominance of bananas in the Honduran economy. Known mineral deposits are not extensive. A serious lack of basic infrastructure and deficient development policies in the past have left Honduras' agricultural resources underutilized. In addition,  -2- the mountainous topography of the country has made the expansion of the road network slow and costly. There has been progress, however, since 1960, and major achievements include the establishment of a basic transportation network connecting the main population centers, and a considerable expansion of electric power service. 6. Much land suitable for agriculture is still available, and the country has sizeable forest resources, but agricultural output only grew at about 2 percent yearly between 1950 and 1975. Uneven land distribution and deficient credit, technical services and development programs have kept agricultural growth far below its potential. While reliable data on land ownership are not available, a 1966 survey indicated that roughly half of farmers owning or occupying farm units accounted for only about 6 percent of the land in farms, and two-thirds of farm units had an average size of only 2.5 hectares. In addition, about one-third of rural families are landless. 7. Industry, which is highly concentrated in the cities of San Pedro Sula and Tegucigalpa, now accounts for about 16 percent of GDP and provides employment to about 10 percent of the labor force. During the 1960s, the manufacturing sector grew at a low annual rate (3.8 percent) owing to the small size of the domestic market, the lack of infrastructure, and the in- ability of domestic firms to take advantage of the opportunities offered by the Central American Common Market. Manufacturing growth, however, almost doubled in the 1970s (during 1970-76, real value added grew at an annual rate of 7 percent) because of the increase in both domestic and foreign demand and the consequent expansion and modernization of existing and new plants. Government Development Efforts 8. Since 1972, development efforts have increased substantially and several measures have been taken to lay the basis for the current improved economic outlook over the longer term. Temporary land reform measures intro- duced in December 1972 were replaced in January 1975 by a comprehensive Agrarian Reform Law. During 1973-76 about 45,000 families - 22 percent of those eligible - received land under the land reform program. The reform aims at greatly improving land utilization as well as increasing the income and employment of the poorest peasants through the transfer of unutilized or poorly utilized land from large landowners to landless rural families. Another major policy development was the nationalization of timber rights in January 1974. A new forestry law established guidelines for private sector participation in forestry development and created the Corporacion Hondurena de Desarrollo Forestal (COHDEFOR). COHDEFOR is in charge of all forest industry policies and activities, and is expected to exploit forest resources more rationally, increase lumber exports, and provide more employment for rural Hondurans. The third major achievement was an improvement in Government planning and executing capacity, particularly in infrastructure, which has resulted in a substantial increase in public fixed investment from 3.3 percent of GDP in 1972 to 6.6 percent in 1974 and about 7.6 percent in 1976. The Government has also made an effort to increase investment in the social  - 3 - and productive sectors and strengthen public finances through tax reforms and better tax administration. A 1975 tax reform made the tax on coffee exports an ad-valorem tax with marginal rates ranging from 10 percent to 20 percent depending on coffee prices, substituted a 3 percent value added tax for the sales tax, and raised the tax rates on beer, cigarettes and liquor. Recent Economic Developments 9. While Honduras was adversely affected by one of the worst hurricanes in its history in 1974, it had also to contend with the oil price rise of that year and the later OECD recession. As a result, during 1974-75, total GDP remained almost stagnant, severe balance of payments difficulties arose and the country's savings capacity was seriously reduced. Import prices grew almost three times as rapidly as export prices, and the terms of trade deteriorated by about one-fifth. The resource gap, which was equal to about 1 percent of GDP during 1972-73, averaged 11.6 percent during 1974-75. The rise in consumer prices, which had averaged 2.7 percent a year between 1966 and 1973, accelerated to 13 percent in 1974 before declining to 8 percent in 1975. 10. A high level of public investment, the gradual recovery of banana production and the doubling of coffee export prices were the major factors responsible for an improvement of the economic situation in 1976. Real GDP grew at about 6 percent. Merchandise export earnings grew by about 31 percent in current terms over 1975, about half of it as a result of higher coffee prices. Government tax revenues increased from 10.8 percent of GDP in 1972-73 to 12.8 percent in 1976 and, while there was a substantial increase in public current expenditures, public savings were estimated at about 3 percent of GDP in 1976 compared to an average 1.2 percent in 1972-75. However, as investment expenditures for hurricane reconstruction and development purposes were stepped up considerably, the overall deficit of the Central Government increased from 2.5 percent of GDP in 1970 to 4.9 percent in 1976. 11. In 1977, economic expansion continued, with GDP growth estimated at about 7 percent, due mainly to the expansion of export volumes (about 9 per- cent) and of public investment (over 15 percent), and to continuing high coffee prices. The balance of payments improved, with larger coffee and banana export earnings reducing substantially the current account deficit and adding significantly to foreign exchange reserves. Growth Prospects 12. The growth prospects for 1978-82 are good. Real GDP is expected to increase at an annual rate of about 6 percent, barring natural disasters. Real exports will grow at about 7.5 percent a year, reflecting continued recovery of banana production from the September 1974 hurricane, increased coffee production owing to higher yields and new plantings, expansion of sugar production, an increase of lumber exports made possible by the currently planned expansion of sawmill capacity, increased beef production, also the result of an ongoing program, expansion of fruit and vegetable production for export and promotion of tourism. Coffee prices, although declining from the unusually high 1977 level, are expected to remain above the 1976 level for two  - 4 - more years. In addition, the Government plans to accelerate economic growth over the medium-term through an ambitious public investment program designed to alleviate the most significant bottlenecks to the country's development process. The presently designed development strategy calls for large public investments in infrastructure, in export diversification through forestry development and tourism, and in agriculture to implement the agrarian reform program and increase productivity. 13. The expansion of the public sector's investment expenditures together with the necessary increase of complementary current expenditures creates a need for additional tax and tariff increases in the 1979-82 period as well as for careful control of other current expenditures. The Government is develop- ing a series of proposals to mobilize additional domestic resources in support of its development program. However, given the present and foreseeable poverty of the country, even with a greater revenue effort and current outlay control, Honduras needs external assistance in excess of the foreign exchange component of development projects suitable for international finance to enable the Government to implement the public investment program. 14. While real exports are expected to.increase at 7.5 percent a year during 1978-82, Honduras' terms of trade are expected to deteriorate. As the import needs of the economy expand, in particular the imports related to the investment program, the current account deficit is expected to increase to US$200 million by 1981 and US$250 million in 1985, and large capital inflows will be required. The bulk of the external financing requirements will have to be met through public borrowing. Honduras will require an estimated total gross capital inflow of US$900 million for the six-year period 1977-82, of which about US$255 million will be disbursed from commitments made through the end of 1976. 15. Honduras' public external debt repayable in foreign currency amounted to US$334.9 million at the end of 1976, US$580.6 million if undisbursed commit- ments are included. In the past, Honduras has managed to keep its external debt service ratio fairly low, because foreign loans were almost all on con- cessionary terms. It is important that the country continue to borrow on reasonably soft average terms, in view of the country's poverty, the fact that it will continue to depend on exports of a few commodities with volatile price prospects, and because, historically, natural disasters have sharply reduced the volume of exports every few years. Even if Honduras is successful in obtaining about two-thirds of the financing it needs for its investment program on terms similar to those offered by the international lending agencies, the debt service ratio is still likely to rise from about 6.6 percent in 1976 to about 13 percent by the mid-1980s. 16. The Bank is Honduras' largest creditor, holding 20.1 percent of the US$580.6 million external public debt oustanding--including undisbursed-- repayable in foreign currency, as of December 31, 1976. IDA holds an addi- tional 9.1 percent of the total. Although IDB loans outstanding (disbursed and undisbursed) total US$129.4 million, about 60 percent of this amount is  - 4 - more years. In addition, the Government plans to accelerate economic growth over the medium-term through an ambitious public investment program designed to alleviate the most significant bottlenecks to the country's development process. The presently designed development strategy calls for large public investments in infrastructure, in export diversification through forestry development and tourism, and in agriculture to implement the agrarian reform program and increase productivity. 13. The expansion of the public sector's investment expenditures together with the necessary increase of complementary current expenditures creates a need for additional tax and tariff increases in the 1979-82 period as well as for careful control of other current expenditures. The Government is develop- ing a series of proposals to mobilize additional domestic resources in support of its development program. However, given the present and foreseeable poverty of the country, even with a greater revenue effort and current outlay control, Honduras needs external assistance in excess of the foreign exchange component of development projects suitable for international finance to enable the Government to implement the public investment program. 14. While real exports are expected to.increase at 7.5 percent a year during 1978-82, Honduras' terms of trade are expected to deteriorate. As the import needs of the economy expand, in particular the imports related to the investment program, the current account deficit is expected to increase to US$200 million by 1981 and US$250 million in 1985, and large capital inflows will be required. The bulk of the external financing requirements will have to be met through public borrowing. Honduras will require an estimated total gross capital inflow of US$900 million for the six-year period 1977-82, of which about US$255 million will be disbursed from commitments made through the end of 1976. 15. Honduras' public external debt repayable in foreign currency amounted to US$334.9 million at the end of 1976, US$580.6 million if undisbursed commit- ments are included. In the past, Honduras has managed to keep its external debt service ratio fairly low, because foreign loans were almost all on con- cessionary terms. It is important that the country continue to borrow on reasonably soft average terms, in view of the country's poverty, the fact that it will continue to depend on exports of a few commodities with volatile price prospects, and because, historically, natural disasters have sharply reduced the volume of exports every few years. Even if Honduras is successful in obtaining about two-thirds of the financing it needs for its investment program on terms similar to those offered by the international lending agencies, the debt service ratio is still likely to rise from about 6.6 percent in 1976 to about 13 percent by the mid-1980s. 16. The Bank is Honduras' largest creditor, holding 20.1 percent of the US$580.6 million external public debt oustanding--including undisbursed-- repayable in foreign currency, as of December 31, 1976. IDA holds an addi- tional 9.1 percent of the total. Although IDB loans outstanding (disbursed and undisbursed) total US$129.4 million, about 60 percent of this amount is  - 5 - repayable in local currency, so that IDB's share of the public debt repayable in foreign currency is only 9.0 percent. CABEI accounts for 18.8 percent of the total, the U.S. Government for 19.1 percent, Venezuela for 7.0 percent and privately-held debt for 8.6 percent. 17. In terms of the sectoral thrust of lending by the principal external agencies apart from the Bank, AID has concentrated on agriculture and educa- tion, IDB on transport, agriculture and forestry, health, education and housing, and CABEI on transport, industry, power and housing. It is expected that AID and CABEI will continue lending primarily in the same sectors in the future, while IDB would concentrate mainly on agriculture, forestry, transport, industry and power. The lending of the external agencies from 1950-1977 was as follows: IBRD IDA AID IDB CABEI TOTAL Total Gross Lending 1950-1977 177.5 53.2 113.4 294.7 199.2 838.0 Gross Lending 1950-1965 25.9 12.5 26.7 27.2 8.1 100.4 Gross Lending 1966-1977 151.6 40.7 86.7 267.5 191.1 737.6 Sectoral Lending 1966-1977 Transport 88.3 5.0 - 32.1 74.7 200.1 Power 60.3 9.5 - - 20.9 90.7 Telecommunications - - - 14.7 10.1 24.8 Education 3.0 3.0 10.5 17.4 - 33.9 Health - - 2.6 33.2 10.2 46.0 Housing - - 5.0 12.5 16.5 34.0 Agriculture and Forestry - 23.2 48.5 155.4 4.1 231.2 Industry - - 5.0 2.2 33.2 40.4 Other - - 15.1 - 21.4 36.5 PART II - BANK GROUP OPERATIONS IN HONDURAS 18. Beginning with a loan of US$4.2 million for roads in 1955, Honduras has to date received sixteen Bank loans totalling US$177.2 million and nine IDA credits totalling US$52.6 million, both net of cancellations. As of December 31, 1977, a total of US$89.0 million remained to be disbursed on eleven operations for ports, electricity, roads, livestock, education and agricutural credit. The proposed credit would raise the total of Bank Group assistance from US$229.8 million to US$234.8 million. Execution of projects financed by the Bank Group has, on the whole, been satisfactory. Annex II contains a summary statement of Bank loans and IDA credits as of December 31, 1977, and IFC investments as of January 31, 1978, as well as notes on the execution of on-going projects. 19. In the past, Bank Group lending was heavily concentrated in trans- port and power, where inadequate facilities hampered the development of  the country. The First Livestock Development Credit approved in 1970, how- ever, marked a first step towards the diversification of our lending. Since then, there have been operations for a Second Livestock project; a First Education project, which included as major components primary and secondary teacher training schools, support for the national agricultural secondary school and vocational training centers; and a First Agricultural Credit project to finance livestock and crop development with emphasis on assisting agrarian reform settlements through investment credits and a substantial technical assistance program. 20. In future lending to Honduras, we plan to support the priorities of the Government's investment program by giving increased emphasis to investment in the productive sectors and in education, while continuing to lend for physical infrastructure where there are still deficiencies to be overcome. A Rural Development Project for the Guayape Valley, which will help support the agrarian reform program in that area, has recently been appraised. A follow-on to the First Agricultural Credit Project and additional rural development projects, now being identified, are also being planned. Bank Group support is also being considered for COHDEFOR's pulp and paper project, as well as for the development of Honduras' tourism potential. The proposed Second Education Project described in Section IV is designed to support the Government's education and training program in rural primary education and agricultural and forestry training, and includes support for a school mapping exercise to determine priority areas for inclusion in a future project for the expansion and improvement of rural education. In transport, we plan to place emphasis on assisting the construction of a network of feeder and access roads to support the Government's agricultural program. We also hope to help finance power development, including participation in an interim project designed to meet electric power requirements until the large (US$400 million) El Cajon hydroelectric project comes on stream in the mid-1980s. The latter project, which has been identified as the most economic means of meeting Honduras' long-term demand for power, would generate excess energy for sale to neighboring countries in the early years of its operation and thus would represent an important step in Central American power interconnection. It is expected that the Bank, IDB and CABEI will contribute to the El Cajon effort, and the Bank has been helping Honduras contact bilateral sources to seek additional concessional financing. 21. It is expected that the Bank Group share of total external public debt disbursed and outstanding will drop from 29.2 percent in 1976 to 26.4 percent by 1981 because of increasing lending by other external agencies and commercial borrowing. The Bank Group share of debt service in 1976 was 24.6 percent and is projected at about 25.3 percent by 1981. 22. Until recently, IFC's activities in Honduras included a 1964 loan and a share subscription, of US$295,000 and US$82,500 respectively, in a tannery, Empresa de Curtidos Centroamericana, S.A. (ECCASA); and a US$75,000 share subscription in a pilot promotional company, Compania Pino Celulosa de Centro America (COPINO) in 1969. COPINO was established to develop an industrial project based on timber from the Olancho Forest Reserve, but a series of  -7- obstacles to project development arose and efforts to go forward with it were virtually halted in 1971. While current plans for the Olancho forest indus- tries project do not include a role for COPINO, the IFC is assisting the Government in creating an organizational structure for the project and select- ing a technical partner. In December 1977 the Board approved a US$9.0 million loan, and up to US$1.0 million equivalent equity investment, for Textiles Rio Lindo, S.A. de C.V. for plant expansion aimed at almost doubling its production capacity. PART III - THE SECTOR Educational Implications of the Country's Development Strategy 23. Agriculture (including forestry) is the mainstay of the Honduran economy, but its productivity has been relatively low, largely due to tradi- tional farm practices, inefficient land use and tenure patterns, recurrent pests and animal diseases. The Government's development strategy emphasizes improved rural productivity and income distribution through agrarian reform and accelerated public investment in agriculture, and export diversification through forestry development. Attainment of these goals entails, inter alia, improving the basic education and training profile of the rural population and expanding the supply of highly qualified agricultural and forestry personnel. Educational institutions need strengthening to meet these demands. The average educational level of the labor force is especially low in the agri- cultural sector. In 1974, some 47 percent of the population was illiterate; 52 percent of agricultural workers had no formal education and 27 percent had fewer than three years' primary schooling. Although a variety of public and private agencies have initiated training programs in the agriculture- forestry field, their effectiveness has been constrained by the participants' lack of basic preparation, thus accentuating the importance of improving the coverage, quality and relevance of primary education linked to rural develop- ment needs. Given intensified Government emphasis on rural development, the demand for trained manpower in agriculture, animal husbandry and forestry, particularly at the technician level, has increased markedly and shortages have become acute. It is estimated that by 1990 the stock of agricultural and forestry professionals and technicians will have to be almost tripled. Overview of the Education Sector 24. The formal education system in Honduras consists of one to three years of preprimary, six years of primary, six years of secondary and three to six years of higher education. The Ministry of Education (MOE) administers most of the formal system up to university level, and the Ministry of Natural Resources (MNR) is involved with agricultural education through its adminis- tration of the National School of Agriculture (ENA). The National Institute for Vocational Training (INFOP) provides apprenticeship, accelerated and in- plant training for skilled and semi-skilled workers in industrial, agricul- tural and service occupations; and several Government and private agencies carry out relatively small nonformal training programs for youths and adults. Higher education is provided at the autonomous National University, the Secondary Teacher Training School in Tegucigalpa, the private regional Pan- American Agricultural School at Zamorano, and the National School of Forestry (ENF) administered by COHDEFOR.  - 8 - 25. Honduras' formal education and training system suffers from quali- tative deficiencies and structural imbalances. Opportunities are limited in rural areas at all levels and for all types of training. While 54 percent of children in urban areas complete the full six-year primary course, only 16 percent do so in rural areas. This imbalance can be attributed to the long walking distances to rural schools, many of which are incomplete (fewer than six grades), the low professional qualifications of teachers and school directors in these areas, the lack of teaching materials and the inappro- priateness of the curricula to rural needs. Rural children also have very limited access to secondary schools, since primary school completion rates are low, secondary schools are concentrated in large urban areas, and free edu- cation is provided in only 25 percent of the secondary schools in the country. To date, most secondary education is either semi-public with school fees (50 percent) or private (25 percent). 26. Despite these imbalances, data indicate that there is no sex discrimination in Honduran education. Enrollment in primary education is approximately equal to sex ratios (female 49 percent, male 51 percent), the majority of primary teaching staff is female, and women hold numerous high positions in public administration. 27. As noted in paragraph 8 above, total public investment has increased substantially as a percentage of GDP in recent years. Therefore, while the share of the education sector in total public expenditures has declined from 18 percent in 1972 to 15 percent in 1976, public and private educational ex- penditures increased from 4.6 percent of GDP in 1972 to a comparatively high 5.3 percent in 1976. Also, while education's share of recurrent expenditures declined somewhat over the same period, these expenditures grew significantly in absolute terms. Despite these substantial allocations, however, there is a need for improved efficiency in the use of resources in order to achieve plans for improving rural primary education, expanding nonformal education and training to out-of-school youths and adults, and increasing the supply of trained manpower for the agricultural sector. Government Priorities and Programs 28. In its 1974-78 Education Plan, the Government aimed at providing more equal access to the education system and linking it more closely to the needs of the economy. It identified the improvement of rural primary edu- cation as its major priority, and included among other objectives the expan- sion of public secondary education and nonformal training, and the improvement and expansion of technical and higher education. Since adoption of the Plan, advances have been made in the expansion of primary, vocational and technical education, the revision of secondary curricula and the improvement of teacher and farmer training programs. Bilateral and multilateral agencies have been extensively involved in these efforts. AID has assisted primary education through its lending for school reconstruction in Atlantic coastal areas and for equipment and materials to support a curriculum materials production center, and UNICEF has provided some basic materials and equipment for rural schools. AID and UNESCO also are providing grant funds to help reorient, improve and coordinate on-going nonformal education programs being undertaken by the MOE, church groups and other organizations. Vocational, technical and agricultural training have received financial and technical  - 9 - assistance from IDB, which has also helped establish a student loan fund for local and foreign study at the higher and technical education levels. Technical training has also received assistance from Germany through the provision of specialist services and equipment for an industrial center. The Bank Group, through the 1974 First Education Loan (954-HO) and Credit (452-H0), discussed in paragraph 33 below, has financed improvements to ENA and construction of industrial and agricultural vocational centers. (ILO has also provided technical assistance for the industrial centers.) The first Bank Group project also has strengthened primary and secondary teacher training programs through construction of training and application schools and provision of technical assistance. In addition, UNESCO is providing some technical assistance in secondary education and teacher training. 29. Quality improvement of both primary and secondary education, how- ever, has lagged especially in terms of administration and supervision, in- service teacher training, and the provision of equipment and teaching materials. Also much remains to be done to extend educational opportunities both at the primary and secondary level in the rural areas. The forthcoming 1979-84 Education Plan is expected to place emphasis on the improvement and expansion of rural primary education and training of agricultural and forestry technicians, areas meriting high priority attention. It is also urgent, however, that the Government address adequately the needs of secondary education, and, while secondary education will benefit from the Bank Group's first project and UNESCO technical assistance, further improvements will depend on the Govern- ment's assigning high priority to this level of education, particularly in rural areas. (The Bank Group, through its continuing dialogue with the Government, will stress the need for a more active public sector role in rural secondary education, and for the development of projects in this field which the Bank Group might support in a future loan.) 30. As far as quality improvements at the rural primary level are concerned, an important element of the Honduran program is the nuclearization concept, a school location and administration system which links primary schools at the local level, provides maximum school access to children and integrates the schools into the community. Honduras has been experimenting with this system since 1973. Seventy-two "pilot" nuclei schools have met with mixed success since careful study of each local situation was not done, appropriate training was not provided to teachers and directors, and adminis- trative procedures were not clearly defined. The Government is presently developing policies to correct these deficiencies and refine the nucleariza- tion concept under the proposed Second Education Project. In this system each nucleus would serve 1,000 to 1,400 students, taught by 15 to 20 teachers on a double shift basis. A "central" six-grade school would be linked to a number of neighboring "subcentral" (six-grade) or "associated" (four-grade) schools. Each nucleus would constitute a technical and administrative unit: the central school would offer both formal primary education for school age children as well as accelerated primary education (three years equivalent to the six years of the formal system) for overage students, and literacy and non- formal training courses (agriculture, health, community development, home economics, etc.) for out-of-school youths and adults; the subcentral schools would provide the full six grades of primary education to communities 10 to 15 kilometers distant from the central school; and associated schools would provide the first four grades of primary education to small communities located within 3 kilometers of a central or subcentral school where students might attend the fifth and sixth grades.  - 10 - 31. Besides classrooms, each central school would have facilities for teaching science and practical subjects, a school library and an adminis- tration area; subcentral and associated schools would have a workshop and storage area; and all schools would have covered areas for community activi- ties. The double shift system would help ensure maximum utilization of physical space. Also, teachers would be allowed to work both shifts, which entitles them to additional remuneration above their normal salary. This financial incentive would help assure that competent teachers would be avail- able in adequate numbers for the rural schools. Multigrade teaching techniques would also be widely used. While the implementation of double shift work and multigrade teaching techniques would make more efficient use of teachers, it should be noted that student/teacher ratios would actually decrease, with the number of pupils per teacher dropping from 40-42 to about 35 per shift. Some central school teachers would receive specialized training in practical subjects such as agriculture, health, home economics, etc., in order to supervise other teachers in these areas and organize community activities. The director of the central school would have no teaching responsibilities, but would supervise teaching activities in the nucleus and serve as liaison between the community and non-formal training agencies using school facilities. This improved nuclearization system would be implemented first in the western, southern and southeastern regions of the country, with priority being given to areas where agrarian reform programs are already in progress. A school mapping survey was conducted in these regions to determine where the need to expand and improve education opportunities was most acute. 32. With regard to agricultural education, since 1974 the Government has been implementing projects to improve and expand the programs at the MOE's lower secondary John F. Kennedy Agricultural School (with IDB financing) and the MNR's upper secondary ENA (with Bank Group financing). It has been found, however, that graduates of the Kennedy School have not been easily absorbed into the labor market, since graduates are too young, and their skills must always be supplemented with substantial on-the-job training. In view of this and the increased need for manpower at higher levels in the agricultural sector to implement national agricultural development programs, the Government has up- graded the Kennedy School to upper secondary level, and is taking the necessary steps to officially upgrade ENA to post secondary level, including the initiation of courses in animal husbandry. Students will be able to feed into the upgraded Kennedy School from lower secondary schools in the system, and the existing lower secondary cycle at Kennedy will therefore be gradually phased out. The Government also plans to expand ENF and initiate a forest industry course to meet the demand for this type of technician now that Honduras is beginning to commercialize its forest resources. Bank Group's Role in Education and Training 33. The First Bank Group Education Project was designed to help develop more effective systems for training primary and secondary teachers, agricul- tural technicians, farmers, and skilled and semi-skilled industrial workers through construction, equipping and furnishing of primary teacher training and application schools, a secondary teacher training college and application  - 11 - school, on industrial training development center,two industrial and three agricultural vocational centers; expansion of ENA; and provision of related technical assistance and fellowships. Project implementation is proceeding satisfactorily, and all work is expected to be substantially completed by the original closing date of June 30, 1978. A slight extension of the date may be needed mainly to permit completion of disbursements for technical assistance and fellowships. All primary and secondary teacher training facilities are in operation except for one teacher training college and three related primary application schools which should be completed by the closing date or soon thereafter. The industrial and vocational centers are expected to be finished by mid-1978. The agricultural training centers are ready to begin courses for small farmers and their wives, and the ENA extensions are nearing completion. The technical assistance and fellowship allocations under the project have not yet been fully utilized, due to delays in selecting and approving candidates, but action has been initiated to accelerate the commitment of these funds. PART IV - THE PROJECT 34. A report entitled "Staff Appraisal Report, Second Education Project, Honduras" (No. 1806a-HO, dated February 14, 1978) is being distributed separately. The project was prepared by the Government with assistance from IDA in March/April 1977, and was appraised in July/August 1977. Negotiations were held in Washington on February 1-3, 1978. The Honduras delegation was led by Mrs. Lydia Williams de Arias, Minister of Education. Oblectives and Composition 35. The proposed Second Education Project is designed to support the government's rural education and training development strategy by: (a) improving the quality and efficiency of rural primary education through the provision of adequate school facilities, in the context of an improved school nuclearization system supported by appropriately trained teachers and adminis- trators and relevant curricula and learning materials; and (b) increasing the supply of agricultural and forestry professionals and technicians through expansion and improvement of two existing training institutions (ENA and ENF) and through financing of training abroad for professional veterinarians. Specifically, the proposed project would comprise: 36. (a) Rural Primary Education Nuclei. This project element would help establish 40 rural primary education nuclei (discussed in paragraphs 30 and 31 above), comprising 131 associated, 387 subcentral and 40 central schools. A total of 545 classrooms would be constructed, equipped and fur- nished, with an additional 308 to be equipped and furnished only. In 1982, with all project facilities in full operation, about 35,000 school-age students in the project area (equivalent to 89 percent of the 7-12 year age group) would be enrolled in primary education, as well as about 10,000 overage students (some one-half of whom would attend accelerated courses). In addition, some 15,000 out-of-school youths and adults would receive literacy and non-formal training courses. It has been agreed that the Government would, no later than April 1, 1979, take all necessary action, including the issuance  - 12 - of regulations, to organize and administer these nuclei in a manner satis- factory to the Association, and in accordance with the principles described in paragraphs 30 and 31 above (Section 3.06(a) of Credit Agreement). Given the pivotal role of the director of each nucleus it was also agreed that suitably qualified persons would be selected for these positions and classified as equivalent to the Assistant Supervisors already working in the system (Section 3.06(b) of Credit Agreement). To attract and retain competent teachers for project schools,. it was agreed that, where applicable, rural teachers would be permitted to work two shifts, with appropriate remuneration (Section 3.06(c) of Credit Agreement). Although the amount of this remuneration can vary depend- ing on local factors, it is expected to be about 160 percent of a regular salary. 37. (b) Primary Education Curriculum. Although the curriculum for formal primary education is satisfactory, efforts are underway to revise syllabi to reflect the social, economic and geographic conditions of rural areas. Also, the present four year curriculum for accelerated primary edu- cation needs to be reduced to three years. The project would provide tech- nical assistance (12 man/months) to the MOE's Education Reform Commission for these revisions. 38. (c) In-Service Training. The project includes a comprehensive upgrading program for about 1,000 teachers, nuclei directors, national super- visors and staff of primary teacher training schools, with special emphasis on providing a better understanding of the objectives and content of the revised curriculum being prepared by the Education Reform Commission, including multigrade teaching techniques and the use of textbooks, equipment and other teaching aids. The upgrading would be implemented during vacation periods in the four teacher training schools constructed or remodeled under the First Education Project. A satisfactory implementation schedule for these courses has been prepared by the Government. Given the particular importance of the courses in multigrade teaching techniques, which are new, it was agreed that they would be initiated no later than December 1, 1978 (Section 3.07(a) of Credit Agreement). The project also includes fellowships (48 man/months), to supplement funds provided under the first project, for primary teacher training school administrators and national primary education supervisors. 39. (d) Educational Materials Distribution. The Government regularly prints textbooks which are provided free of charge at the primary level, but the distribution system is poor. Therefore, the project, which will provide basic elementary science and mathematics equipment, maps, charts, and tools for agricultural and industrial arts, would also include technical assistance (6 man/months) and a vehicle to improve the distribution of teaching materials. 40. (e) School Mapping. As part of the proposed project, a nationwide school mapping program would be undertaken with a view to eventual expansion of the nuclearization system throughout Honduras. Twelve man/months of specialist services are included to assist with this program. It was agreed that draft terms of reference and a schedule for completing the school mapping would be made available for the Association to review no later than January 1, 1979 (Section 3.07(b) of Credit Agreement).  - 13 - 41. (f) Evaluation. The programs implemented under the rural primary education component of the project would be evaluated continuously with a view to their future expansion throughout all rural areas. The project includes technical assistance (4 man/months) to aid in the establishment of a system for this evaluation, which would be directed by the Project Unit educator in coordination with relevant offices of the MOE. It was agreed that the Govern- ment would establish an evaluation system acceptable to the Association no later than July 1, 1979 (Section 3.07(c) of Credit Agreement). 42. (g) National School of Agriculture (ENA). Catacamas. The project would assist the Government in upgrading ENA from an upper secondary to a post secondary level institution, in order to train higher level technicians in agricultural and animal husbandry. Since the existing school is being re- modeled and expanded under the First Education Project, only minor additional extensions are needed, including construction of 2 laboratories, a milking shed, a workshop for processing farm products, 10 staff houses and 4 storage rooms. Based on the Government's decision to upgrade ENA to post secondary level, upper secondary courses have been gradually phased out since 1975. ENA is currently preparing for the start of post secondary courses in 1978. Specialist services provided under the First Education Project have been engaged in preparing a new curriculum and determining the new facilities needed for the reorganization of ENA, and additional specialist services (24 man/months) are provided under the proposed project to continue this effort, especially to help organize the new animal husbandry courses. A more attractive staff salary scale is being established at ENA, and many of the staff are being replaced by personnel with higher qualifications. Fellowships (48 man/months) have been allotted under the project for about 4 teachers estimated to require additional studies. The issuance of a Ministerial decree officially authorizing the ENA upgrading, and the establishment of an Advisory Board to help assure that ENA curricula are related to the needs of employers in Honduras would be conditions of disbursement for this project item (Para. 4(b) of Schedule 1 to Credit Agreement). (Total IDA disbursements for this item, in- cluding contingencies, would be US$364,000.) 43. (h) National School of Forestry (ENF),. Siguatepegue. ENF's facili- ties would be expanded and upgraded, and a new forest industry technician course would be established. New laboratories and a library would be con- structed, and dormitory capacity would be expanded through modest additions to, and better space utilization of, existing dormitory blocks. Additional equipment and furniture would also be provided. In order to help reduce a high dropout rate at the school, specialist services (2 man/months) would be provided to assist in establishing criteria and regulations for the selection of students. ENF's staff and curricula are satisfactory, except that the new course for training forest industry technicians would require specialized equipment and substantial technical assistance, both of which the Canadian International Development Agency (CIDA) has agreed in principle to finance. Receipt of the signed agreement with CIDA, or satisfactory evidence of alter- native financing for the necessary equipment and technical assistance, would be a disbursement condition for this project item (Para. 4(c) of Schedule 1 to Credit Agreement). (Total Bank disbursements for this item, including contin- gencies, would be US$276,000.)  - 14 - 44. (i) Training of Professional Veterinarians. Fellowships would be provided for studies abroad by 20 Honduran students in four year university level veterinary science programs. Existing student aid programs do not offer adequate fellowships for this purpose. The program would be administered by EDUCREDITO, a decentralized public agency with extensive experience in handling fellowships abroad. A committee to be appointed by the MNR would select candidates from among students who had successfully completed a minimum of one year of general studies at the National'University. Students would repay the loan financed by IDA through service to the MNR or an institution designated by it, and students who fail to complete the training course or who do not comply fully with the service requirement would be liable for reim- bursement of total expenditures incurred during training. A draft contract between the MNR and EDUCREDITO setting forth the financial conditions and regulations governing EDUCREDITO's administration of the fellowship program has been prepared. Receipt by the Association of an acceptable signed contract and of satisfactory evidence that the committee for the selection of fellow- ship candidates has been established would be disbursement conditions for this project item (Para. 4(d) of Schedule I to Credit Agreement). (Total Bank dis- bursements for this item, including contingencies, would be US$349,000.) Project Cost and Financing 45. The total cost of the project is estimated at about US$7.6 million, including physical contingencies of US$0.5 million and price contingencies of US$1.4 million. The average cost of technical assistance (totalling 5 man/ years of specialist services and 88 man/years of fellowships) is estimated at US$50,000 per man/year for specialist services, US$5,000 per man/year for veterinary fellowships and US$10,000 per man/year for non-veterinary fellow- ships. The proposed credit of US$5.0 million, equivalent to 66 percent of the total project cost, would finance the full foreign exchange component of US$2.8 million and US$2.2 million, or 46 percent, of local costs. The balance of project costs would be borne by the Government. The proposed local cost financing by IDA is justified in view of the low foreign cost component of the project and for the reasons stated in paragraph 13 above. The detailed breakdown of project costs and their proposed financing are contained in the Credit and Project Summary at the beginning of this Report. Recurrent Costs 46. The recurrent costs generated by the project would be well within the capacity of the Central Government to finance. The rural education compo- nent would generate about US$1.3 million (1977 prices) additional recurrent expenditures per year by 1985, when the schools would be in full operation, representing an increase of 3 percent over the MOE's 1977 recurrent budget. As the result of two offsetting trends - improved efficiency in the utilization of staff and increased resources needed for supervision, school supplies and maintenance - recurrent costs per student in the project area would be slightly reduced. The agricultural education component would raise recurrent expenditures by about US$0.5 million annually by 1980, equivalent to 1.7 percent of the 1977 recurrent budget of the relevant public agencies. About 45 percent of the projected increase for ENA is expected to be met from increased revenues from the school farm. The absorption of the projected  - 15 - output of agricultural and forestry technicians from project and nonproject schools for the 1977-87 period would require an expansion of staff positions, representing an average annual increase of less than 1 percent in the re- current budget of the four main public employers (expected to absorb about 75 percent of the projected supply). Project Implementation and Procurement 47. The project would be implemented over a period of four years. Construction and procurement and installation of furniture and equipment would be completed by about mid-1981. A Project Unit established under CONSUPLANE to administer the First Education Project would be responsible for coordinating implementation of the second project and for liaison with the relevant ministries/agencies. This Project Unit has the experience and authority necessary to carry out its tasks, and presently comprises a director, an engineer, a procurement specialist and an accountant; it would be strengthened by the inclusion of an educator acceptable to the Association, whose appoint- ment would be a condition of effectiveness of the proposed credit (Section 5.01(a) of Credit Agreement). The MNR and COHDEFOR would each appoint a high level officer acceptable to the Association responsible for the imple- mentation of its project items and for liaison with the Project Unit; these appointments would also be conditions of effectiveness of the proposed credit (Section 5.01(b) of Credit Agreement). The School Construction Directorate (SCD) of the MOE would be responsible for the physical implementation of the rural primary education component. It would, inter alia, be responsible for: (a) preparing architectural briefs and designs (on the basis of already discussed and agreed prototypes); (b) preparing furniture and equipment lists and bid documents; (c) organizing support from the communities for rural school construction activities; and (d) supervising civil works. For these purposes the SCD would be strengthened by one manager-engineer, two supervisor engineers, one administrator, one accountant, two social promoters and support staff. It was agreed that appointment of the key personnel (all except support staff) acceptable to the Association would be made no later than September 15, 1978 (Section 3.08(a) of Credit Agreement). 48. Foreign contractors are unlikely to be interested in bidding for civil works under the rural schools component because of the scattered and remote locations of the schools and the small contract size, which may vary from about US$3,000 for a one classroom school to about US$80,000 for a complete nucleus. The SCD has considerable experience in rural school construction and would carry out the civil works program on a labor contract basis, with essential building materials supplied by the Government and by contribution of local communities (e.g., sand, gravel and stone), and with lump sum contracts being signed whenever possible. For the purposes of ensuring quality control of construction, about 40 labor contractors would be selected and trained by staff of SCD and INFOP in a one to two week course on the construction procedures and methods established for modular rural primary schools. SCD would maintain separate accounts for each school or nucleus and would make semi-monthly payments to contractors in accordance with the quan- tity of work completed. Most of the building materials (which total US$2.9 million without contingencies) would be procured, in bulk whenever possible (cement, steel, asbestos, etc.), in accordance with local procedures which  - 16 - have been found satisfactory by the Association. In view of the many small, diverse expenditures under the primary school component, it was agreed that the Government would make a revolving fund of no less than US$100,000 avail- able to the SCD no later than September 1, 1978 (Section 3.01(b) of Credit Agreement). 49. Construction contracts for extensions to ENA and ENF would be awarded on the basis of competitive bidding advertised locally in accordance with procedures which have been found satisfactory to the Association. Because of the small size of the contracts involved (US$200,000-250,000), foreign contractors are not expected to participate in bidding, although they would not be precluded from doing so. Construction supervision would be carried out by the architectural firm responsible for designs, expected to be the same firm employed for the ENA component of the first project. 50. Contracts for furniture and equipment for the project institutions would be awarded on the basis of international competitive bidding in accord- ance with IDA guidelines. Furniture and equipment which cannot be grouped into packages for bulk procurement of at least US$50,000, not exceeding in the aggregate US$190,000 (equivalent to about 15 percent of the estimated total cost of furniture and equipment), would be procured in accordance with local procedures which have been found satisfactory to the Association. Disbursements 51. Disbursements would be for 64 percent of civil works and architec- tural services; 100 percent of foreign expenditures or 85 percent of local expenditures for furniture and equipment; 75 percent of total expenditures for veterinary fellowships (the remaining 25 percent to be financed by EDUCREDITO's own resources), plus 100 percent of total expenditures for the administration fee to EDUCREDITO; 100 percent of total expenditures for school mapping, teacher training and textbook distribution; and 100 percent of foreign expenditures for technical assistance and other fellowships. Retroactive financing not exceeding US$30,000 would cover expenditures incurred after July 1, 1977 in respect of architectural services for designing the extension of ENF and for construction of ENF's dormitories. Risks 52. No major risks are foreseen, especially in view of the competence of the Project Unit, the provisions for monitoring and evaluation, and the Govern- ment's commitment to an improved nuclear school system. There would be a shortage of qualified teachers and administrators if the conditions of service were not improved, but the assurances described in paragraph 36 above are considered adequate to substantially reduce this possibility. The risk of delays in project execution and higher investment costs if school construction based on community participation were not carefully supervised is considered minimal given the proposed staffing of the SCD as set forth in paragraph 47 above and the implementation procedures described in paragraph 48. Justification 53. This project will contribute significantly-to supporting Government efforts to increase the coverage of basic primary education in rural areas and train critical middle and higher level agricultural and forestry manpower.  - 17 - In addition, significant improvements in quality and efficiency will be derived from the introduction of an improved system of school organization and administration, the provision of more facilities for accelerated and literacy courses, greater emphasis on curricula oriented toward rural life, better training of teachers, directors and supervisors, and the timely provision of textbooks and other materials. PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Credit Agreement between the Republic of Honduras and the Association and the Report of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association are being dis- tributed to the Executive Directors separately. The draft Credit Agreement conforms to the normal pattern of credits for education projects and its more important features have been included in Part IV and summarized in Section III of Annex III of this report. There are two special conditions of effective- ness of the Credit Agreement: (i) that a full-time educator has been employed within the Project Unit; and (ii) that liason officers for MNR and CORDEFOR have been designated. Conditions to disbursement for the ENA project item will be the establishment of an Advisory Board and the official upgrading of ENA to post secondary level; for the ENF component, evidence of adequate financing for complementary equipment and technical assistance; and for veterinary fellow- ships, the signing of a contract between MNR and EDUCREDITO and the establish- ment of a committee to select candidates. 55. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President by J. Burke Knapp Attachments February 23, 1978   ANNEX I Page 1 of 4 pages TABLE 3A HONDURAS - SDCIAL INDICATORS DATA SHEET LAND AREA (;HOU KM2) -