Honduras - Social Investment Fund Project

Document of The World Bank FOR OFFICIAL USE ONLY Repyt No. P-5432-HO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 14.3 MILLION TO THE REPUBLIC OF HONDURAS FOR A SOCIAL INVESTMENT FUND PROJECT FEBRUARY 6, 1991 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.  CalM AND SUVARA UNITS Honduras Lempira - US$5.5 SDRl.0 - US$1.43 WEIGHTS AND MEASURES 1 Nectare (ha) - 10,000 m2 1 Metric Ton (ut) - 1,000 kg 1 Kilometer - 1,000 m GLOSSARY OF ACRQNYMS ESF - Emergency Social Fund of Bolivia PHIS - Honduran Social Investment Fund GNP - Gross National Product GTZ - German Agency for Technical Cooperation COB - Government of Honduras 11W - Credit Institute for Reconstruction (Federal Republic of Germany) WOE - Ministry of Education MOB - Ministry of Health NGOB - Nongovernmental Organizations RUTA - Regional Unit of Techbical Assistance PRAP - Family Assistance Program SECPLAN - National Planning Ministry UMDP - United Nations Development Program USAID - United States Agency for International Development rISCAL D EAR January I - December 31  FOR OMCIL USE ONLY HONDURAS SOCIAL INVESTMENT FUND PROJECT CREDIT MD PROJECT SUMMARY Borrower: The Republic of Honduras Executing Atenciest Social Investment Fund (FHIS), Family Assistance Program (PRAY), and National Planning Office (SECPLAN) Beneficiaries: Target groups in rural and urban poverty areas through the PHIS, municipalities, NGOs and other entities bmounts SDR14.3 million (US$20 million equivalent) Terms: Standard IDA terms with 35 years maturity, including 10 years of grace Financina Plan: USS million Government 8.0 Beneficiaries 7.0 IDA 20.0 USAID 8.0 KfW 12.0 GTZ 0.2 CIDA 0.5 UNDP 0.6 The Netherlands/UNDP 2.1 UNICEF 0.1 Spain 0.6 Japan 0.4 Other Donors 8.5 Total 68.0 Economic Rato of Returns Not applicable Staff Appraisal Report No: 9148-HO 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPHENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF HONDURAS FOR A SOCIAL INVESTMENT FUND PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Republic of Honduras (CON) for SDR14.3 million (US$20 million equivalent) is submitted for your approval. The proposed credit would be repayable on standard IDA terms with thirty-five years maturity, including ten years of grace, and would help finance a Social Investment Fund Project. The project would be cofinanced with other donors for SDR23.1 million (US$33.0 million equivalent). 2. Backtround. Since March 1990, the Government has been taking bold economic measures i:c!uding devaluation of the currency, an important tariff reform, and fiscal measures to reduce the budget deficit. This adjustment program will ultimately increase growth, employment, and incomes, but it is having high social costs in the short run. As expected, there have been sharp increases in prices of basic foods, transport and other services, and many people have lost their jobs or are underemployed. The lose of jobs resulting from the stabilization and adjustment process would range between 26,000 and 52,000, as the adj tment measures take their toll not only in the public sector, but also in protected industries, construction, and other sectors which employ mostly blue-collar workers. Real wages and incomes of the urban poor and net buyers of food in rural areas are being reduced substantially and those who belong to the traditional poverty group are being more acutely affected by the adjustment program. This trend is going to continue for some time as additional economic measures are taken. If the adjustment program is to be successful and accepted by the population, the social costs of adjustment need to be mitigated. 3. Such action is especially important in Honduras where there is already a high degree of poverty. The GNP per capita of US$481, estimated for 1990 by the Bank, is higher only than that of Bolivia, Haiti and Nicaragua among the Latin American countries. Extreme poverty affects over 502 of the population nationally and nearly 801 of the rural population. At the same time, nutrition indicators remain among the worst in the Western Hemisphere, with malnutrition rates for children of less than 5 years varying between 55Z and 711 in the poorest regions. As a result of the economic adjustment, malnutrition and child mortality will probably increase. 4. Service delivery by the Ministries of Health and Education (MON and MOR) is inadequate. Honduras has not neglected the social sectors in terms of relative spending levels which, at 6.8Z of GDP, compare favorably to other countries in the region. However, the health and education sectors have been managed inefficiently with: (i) a serious drop in investment and maintenance expenditures, (ii) an excessive proportion of the MOE and MOR budgets going to salaries, and (iii) rapidly rising administrative costs. The MOH covers only about 601 of the target population in primary health care, and 322 of the adult population were illiterate in 1988. This situation is expected to worsen during the economic adjustment period. School attendance will decline because families will tend to withdraw primary school children from school to put them to work. In addition, the school and health infrastructure will deteriorate because of tighter budgets, especially in  -t - rural areas, where schools and health services are already in a very poor shape and there is a significant shortage of materials and supplies. 5. Recognizing the lack of capacity of the social ministries to address tho longtenrm issues of health 4ad education officiently and equitably, the Government has requested the Bank's support to improve service delivery of tho NO and MOE under a proposed social sector restructuring operation. In the meantime, to cushion the adverse social offects of its adjustment program, the Government has created, in March 1990, the Honduran Social Investment Fund (MRIS) under legislation allowing the 4nstitution to operate flexibly and efficiently. The PHIS is broadly modelled after the successful Bolivia Emergency Social Fund (ESP). Its dynamic and well- respected Executive Director comes from the private sector and has the rank of Minister. There have been consistent Government efforts to msake the MIS as professional an institution as possible with an independent Executive Director, a well-balanced Board, a high quality staff, and the close vigilance by foreign donors. 6. The mS combines an emergency employment strategy with the objective of poverty alleviation through the provision of financing for: (i) social infrastructure projects such as rehabilitation of health posts, schools, water and sewerage systems, and emergency employment programs, (ii) projects in health, nutrition, and education targeted to the most vulnerable groups: mothers and young children, and (iii) informal sector projects. The MRIS has a limited life of three years. It is clearly seen by both the government and by donors as an instrument to complement and not compete with the line ministries who have serious capacity limitations and are not currently in a position to respond quickly to an emrgency situation nor to long-term sectoral issues. The Government has given strong support to the MIS through an initial budget allocation of US$6.0 million in early 1990. This has given a clear signal to the Honduran population and to potential donors about the Government's commitment to poverty alleviation. The mS has also received the financial support of USAID and UNDP, but it will need significant additional external financing to undertake its three-year program. During its first ten months of operations, the IHIS approved 1,113 projects totalling US$6.9 million. For 1991, IRIS has already a pipeline of subprojects requiring US$15.0 million, which is estimated to be half of the total subproject costs expected for the year. The IRIS ia not an executing, but a financing agency. Subprojects are executed by decentralized entities such as private local contractors, NGOs, municipalities, or other public agencies. So far, FHIS' operational procedures and practice have been sound, although they would be strengthened further under the proposed project. The mS will be audited by private external independent auditors, acceptable to the Association, who will undertake a quarterly audit combining financial review, physical inspection of works, and verification of procurement for subprojects. 7. PIRS-financed subprojects are clearly targeted to the poor. First, wages paid under subprojects are for heavy and unskilled labor and, therefore, mainly the poor will be employed. In addition, more funds are programed for those departments and municipalities that have the worst poverty indicators, and the mS will undertake more promotional activities in these areas. The mS has ranked departments and municipalities according to  - 3 , indices of poverty: i.e., child malnutrition, and access to potable water and sewerage services. 8. Cost recovery is one of the important oubproject selection criteria and takes diatinct forms depending on the type of subproject. In the case of social infrastructure, local committees are set up to recover sufficient funds from water rates, betterment taxes and voluntary contributions to cover the costs of operation, maintenance, and occasional repairs of water and sanitation systems as well as access roads. In the case of basic needs subprojects (health, nutrition and education), fees would be charged for those services or items where this is legally permitteds for example, modest fees for medicines to replenish stocks. For informal sector subprojects, final beneficiaries will pay the market interest rate. 9. Many of the poor suffering from the hardship of economic adjustment will be helped through the programs of the PHTS, but still a significant number of persons will remain acutely vulnerable. Because of their reduced purchasing power, their nutrition level or even their lives will be at stake. This is especially true for pregnant and lactating women and children under five years old. In March 1990, in order to supplement the food distribution program for the poor, the Government introduced a food coupon system for single mothers and children under five years old. While well- intentioned, the program has run into management and logistical difficulties. Through the Regional Unit of Technical Assistance (RUTA), the Association and UNDP have been providing technical assistance to the Government to improve the design and broaden the targeting of the nutrition assistance program. The revised program would benefit all mothers, not just single mothers, and children under five and would be implemented through the existing structure of the health service system. 10. Rationale for Bank Group Involvement. Recognizing the efforts of the Honduran Government to undertske a bold program of economic reform, the Bank Group has approved a Second Structural Adjustment Loan in September 1990 and a supplemental Structural Adjustment Credit in January 1991. While, in the long term, the structural reforms of this program will help alleviate poverty, in the short term it will have negative social effects. This proposed project is designed to address these negative short-term effects of the Government's restructuring program supported by SAL II and to provide the basis for a long-term program which would lead to a more equitable and efficient provision of social services (pars. 12). The Bank Group can also be helpful in transferring the experience acquired in the social sectors of Bolivia, Jamaica, and other countries, where the Bank Group financed similar operations. In addition, by chairing the Consultative Group for Honduras, the Bank Group is in a unique position to mobilize external grant or soft loan funds to help the government alleviate the impact of the economic reform program and initiate broader social sector reform. 11. Proiect Obiectives. The objectives of the proposed project are to support part of the Government's social program to: (i) mitigate the social costs of adjustment and allow economic reform measures to be put into place rapidly and made acceptable to the population, (ii) lay the basis for a program of direct support for the poor and malnourished to buy food, and (iii) support the improvement of service delivery in the social ministries.  - 4 . 12. Pro1ect DescDlition. The project would have four componentst (i) the financing of PHIS programs (more than 952 of total project cost), (ii) support to a pilot targeted nutrition assistance program (the executing agency vould be the Family Assistance Program: PRAP), (iii) technical assistance to help design a program to improve the efficisacy and equity of the services of MOH and MOE, and (iv) the setting up of a monitoring and evaluation system of the government'e social policy interventions through the use of a living standards measurement study (the coordinator of this program would be the Ministry of Planningt SECPLAN). 13. The proceeds of the Credit would be lent to the Republic of Honduras, which would pass on SDR13.9 million equivalent as a grant to the PHIS. The PHIS, in turn, would use the Credit, in conjunction with funds from other in ernational donors and the National Treasury, to finance, on a grant basis, sub-projects in local communities, implemented by private contractors, NGOs, and public agencies under the technical supervision of appropriate agencies. The Borrower would make available the balance of SDR 0.4 million equivalent to the respective institutions (PRAP and SECPLAN) in charge of implementing components (ii) - (iv) of the project. 14. The project would be implemented over a period of about three years. The project cost is estimated at US$68.0 million with a foreign exchange component of US$17.2 million (25 percent). The proposed IDA Credit of SDR14.3 million (US$20.0 million equivalent) would represent about 291 of total project costs. As shown in the Pinancing Plan presented in Schedule A, beneficiaries are expected to finance 10 of project costs and the Borrower would put up US$8.0 million or 122. The Government of the Federal Republic of Germany has indicated that it intends to contribute US$12.0 million on highly concessional terms, subject to a satisfactory appraisal of the project by KfW; USAI.D would participate with US$8.0 million; the Government of the Netherlands, US$2.1 mil.i.on in a joint financing with UNDP; sad UNDP by itself would provide US$0.6 million. Other funds totalling US$1.8 million have been approved by UNICEF, European donors, CIDA, and Japan. This would leave a financing gap of US$8.5 million, which is expected to be filled through resources mobilized from other donors on concessional terms. Should this gap not be filled, the project size would be adjusted accordingly through a reduction in the number of subprojects financed by F3IS. 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. 9148-HO, dated February 6, 1991 is also attached. 15. Actions Agreed. During netotiations, agreements were reached as follows: (a) the Borrower would provide funds as indicated in the project financing plan and as needed to cover the operating costs of the PHIS; (b) the Borrower will have entered, by June 30, 1991, into loan agreements with other financiers, providing the IHIS with a total financing of US$10.7 million equivalent and that such agreements would be effective by that date; (c) quarterly and annual audits would be carried out by external auditors on the basis of acceptable sets of accounts; (d) experience and qualifications of IHIS Executive Director would be acceptable to IDA and any future appointment for that position would be subject to prior IDA consultation; (e) the Borrower  -5- would carry out a mid-term review of the mS, would discuss the results with the Association, and would implement actions agreed upon as a result of this review; and (f) retroactive financing of up to US$2.0 million would be allowed in respect of eligible expendituree incurred since November 1, 1990. 16. The conditions of effectfive_ess would bet (a) completion and application of operational manual of the MIS, satisfactory to IDA; (b) agreement for making the IDA funds available to the PHIS, and arrangements for the same purpose with PRAF and SECPLAN; and (c) an additional funding agreement of US$12.0 million equivalent minimum between the mS and KfW (or alternative f4ancing arrangements for an equivalent amount with other donors) and receipt by MIS of formal commitments of cofinancing, satisfactory to IDA, totalling US$10.7 million equivalent from other financiers. 17. Benefits. By transferring resources to poor urban and rural communities, the PHIS would help tot (i) create employment and income largely among those who would have otherwise been underemployed or unemployed as a result of the economic adjustment program, (Ui) improve the social infrastructure so that the beneficiaries enjoy better sanitation, lower transport costs, less erosion damage, etc., (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 social services. By supporting a pilot food coupon program, the project would ensure an appropriate design while limiting possibilities of errors to a small scale, and would lay the basis for a broader nutrition program. 18. 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. This risk would be reduced substantially through a good information system, quarterly audits (both financial and physical) of a significant sample of subprojects, and close supervision. There are also risks associated with the food coupon program as poor design and targeting may result in waste of resources and affect the Government's image. For this reason, it is proposed to start with a pilot operation which can identify and solve logistical problems on a small scale. 19. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of IDA and recommend that the Executive Directors approve the proposed Credit. Barber B. Conable President Attachments Washington, D.C February 6, 1991  Schedule- A SOCIAL iNVESTHENT FUlED PROJECE Estzsated Costs ant Financimg Plan Local rorelr Tota -----------USS million---- -- I. FHI8 A. Subprojects 45.19 16.18 61.37 B. Institutional Support 0.64 0.42 1.06 C. Recurrent Costs 4.07 0.31 4.38 D. Monitoring & Evaluation 0.04 0.01 0.05 Subtotal PHS 49.94 16.92 66.86 II. PILOT NUTRITION ASSISTACE PROGRAM 0.38 0.04 0.42 1II * SIAL COR MESTRUCTURING PROGRAM 0.20 0.20 0.40 IV. LIVING STANDARDS STUDY 0.30 0.02 0.32 TOTAL COST 1/ 50.82 17.18 68.00 Pinancina Plant USS million 0overnment 8.0 Beneficiaries 7.0 IDA 20.0 VSAID 8.0 RfW 12.0 6TZ 0.2 CIDA 0.5 UNDP 0.6 The NetherlandsaUNDP 2.1 UNICEF 0.1 Spain 0.6 Japan 0.4 Other Donors 8.5 Total 68.0 1/s Net of taxes and duties.  -7 Schedule B Page 1 of 2 HONDURAS SOCAL IMVSTtMENT MuD PROJECT Methods of Procurement (US$ million) Procurement Procedures Total Catexorv of Exmenditure ICB LCB QOther NA osts Civi1 Works and Materials 1.0 29.6 19.9 -.- 50.5 (0.8) (9.3) (5.3) -.- (15.4) Furniture and Equipment -.- 3.9 0.7 -.- 4.6 (1.4) (0.3) -.- (1.7) Computers . 0.1 -.- -.- 0.1 (0.0) -.- -.- (0.0) Vehicles - 0.3 -.- -.- 0.3 (0.0) -.- -.- (0.0) Consultant and Auditors' Services -.- -.- -.- 1.2 1.2 (0.9) (0.9) Training -.- -.- -.- 6.8 6.8 (2.0) (2.0) Salaries, Allowances -.- -.- -.- 4.5 4.5 and Other Recurrent Costs -v- - - -'- (0.0) (0.0) Total Project Costs 1.0 33.9 20.6 12.5 68.0 (0.8) (10.7) (5.6) (2.9) (20.0) Notet Numbers in parentheses reflect IDA financing.  Schedule a Page 2 of 2 SOCIAL INESTMENT FUND PROJECT DisbureomentA (US$ million) CategorV Amount Pecentatee 1. PHIS Subprojects 18.8 902 of disbursements by PHIS for eligible subprojects approved by December 31, 1992 2. Furniture and Equipment 0.3 1002 of expenditures for imported goods; 801 of expenditures for locally procured goods 3. Consultant Services and 0.6 1002 Training 4. Auditors' Services 0.3 1002 TOTAL 20.0 ESTIMATED DISBURSEMENTS IDA Fiscal Year 1991 1992 1993 1994 ------ US$ million----- Annual 4.0 1' 8.0 7.8 0.2 Cumulative 4.0 12.0 19.8 20.0 1/ Includes the initial deposit of US$2.0 million into the Special Account.  Scbedule c SOCIAL XNLSTHENT FUND PKOI3KCT Tieatablg gf Kat Protect Proeesgnm Svent. (a) Tie taken to preparet 6 months (b) Prepared bys mS, PRAP, SECPLAN, with assistance of IDA, UND,P and RUTA (c) First Bank missiont May 1990 (d) Appraisal mission departures October 1990 (e) Negotiations: January 1990 (f) Planned date of effectiveness: March 1991 (g) List of relevant PCRos: Not applicable  - 10 - Schedul. D Page 1 of 2 BOS ,SOCI IVESM PROJ-CT The Status of Bank Group Ong ratiL nEg to ur4 A. Statement of