Honduras - Second Social Investment Fund Project

c-/2 z&/C,)/ -- lVo Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. *0451-HO Type: (SAR) DE ST. ANT/ X31898 / I7 123/ LA2HR ReportNo. 10451-H STAFF APPRAISAL REPORT REPUBLIC OF HONDURAS SECOND SOCIAL INVESTMENT FUND PROJECT MAY 18, 1992 Human Resources Operations Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY A1D EQUIVALENT UNITS US$1 = 5.4 Honduras Lempira (L) SDR1.0 US$1.37 WEIGHTS AND MEASURES 1 Hectare (ha) - 10,000 m2 1 Metric Ton (mt) - 1,000 kg 1 Kilometer (km) = 1,000 m 1 Cubic Meter (m3) - 1,000 liters (1) 1 Liter (1) = 1,000 milliliters (ml) GLOSSARY OF ACRONYMS APP - NGO Specialized in Water Supply (Agua para el Pueblo) BANMA - Municipal Bank EEC - European Economic Community ESF - Emergency Social Fund of Bolivia FHIS - Honduran Social Investment Fund FHIS-I - Social Investment Fund Project (Cr. 2212-HO) FHIS-II - Second Social Investment Fund Project GDP - Gross Domestic Product GNP - Gross National Product GOH - Government of Honduras ICB - International Competitive Bidding IDA - International Development Association IDB - Interamerican Development Bank LCB - Local Competitive Bidding KfW - German Credit Institute for Reconstruction LSMS - Living Standards Measurement Survey MIS - Management Information System MOE - Ministry of Education MOH - Ministry of Health NGO - Nongovernmental Organization NLO - NGO Liaison Office PRAF - Family Assistance Program SANAA - National Water and Sewerage Service Company SECOPT - Ministry of Communications and Public Works SIF - Social Investment Fund of Bolivia SOE - Statement of Expenditure UN - United Nations UNDP - United Nations Development Program UNICEF - United Nations Children's Fund USAID - United States Agency for International Development FISCAL YEAR January 1 - December 31  FOR OFFICAL USE ONLY HONDURAS SECOND SOCIAL INVESTMENT FUND PROJECT STAFF APPRAISAL REPORT Table of Contents CREDIT AND PROJECT SUMMARY . . . . . . . . . . . . . . . . . . . . . . .i- I. INTRODUCTION . . . . . . . . . . . . . . . . II. THE ECONOMIC REFORM PROGRAM AND POVERTY ALLEVIATION . . . . . . . . A. The Economic Reform Program ... . . . . . . .. . 1 B. Poverty in Honduras . . . . . . . . . . . . . . . . . . . . . 3 C. Government Strategy . . . . . . . . . . . . . . . . . . . . . 4 D. Bank and IDA Support . ... 5 E. IDA Lending Strategy for the Social Sector . ... F. Rationale for IDA Involvement . . . . . . . . . . . . . . . . 6 III. EXPERIENCE WITH THE FIRST SOCIAL INVESTMENT FUND PROJECT . . . . . . 7 A. Lessons Learned from Implementation of the Project . . . . . . 7 Design Lessons . . . . . . . . . . . . . 7 Implementation Lessons ... . ..... . . . . . . 8 B. Improvements Agreed at the Mid-Term Review . . . . . 9 C. Project Benefits . . . . . . . . . . . . . . ... . . . . . . . 11 D. Institutional Impact . . . . . . . . . . . . . . . . . . . . . 12 E. Other Components of the FHIS-I Project . . . . . . . . . . . . 13 IV. THE SOCIAL INVESTMENT FUND ........... ... ...... 13 A. Objectives and Approach . . . . ...... ......... 13 B. Institutional and Managerial Aspects . . . . . . . . . . . . . 14 C. Subproject Programming and Implementation . . . . . . . . . . 16 D. Targeting of Funds . . . ..... .......... . 18 E. Coordination with Other Government Agencies . . . . . . . . . 20 F. Subproject Sustainability . . . . . . . . . . . . . . . . . . 20 G. Resource Mobilization and Needs . . . . . . . . . . . . . . . 22 This report is based on the findings of a PHIS-I mid-term review and FHIS-II appraisal mission, wnich visited Honduras in Novemder i991. Tre miaeion was composed of Messrs./Mmes. J.J. de Saint Antoine, Task Manager, A.M. Sant'Anna, L. Cord (LA2HR), M. Grosh (LATHR), C. Hurtado, B. Lopez, and M. Romero (Consultants). Mr. C. Bertao (LEGLA) participated in a post-appraisal mission in March 1992. Mr. Darren Dorkin contributed to the report at headquarters. Messrs. Rainer B. Steckhan (LA2DR) and Kye Woo Lee (LA2HR) are the Department Director and Division Chief, respectively, for this operation. 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.  V. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . 23 A. Objective . . . . . . . . . . . . . . . . . . . . . . . . . . 23 B. Description . . . . . . . . . . . . . . . . . . . . . . 23 C. Implementation . . . . . . . . . . . . . . . . . . 23 D. Costs and Financing Plan . . .. . . . . . . . . . . . .. 24 E. Procurement . . . . .. . . . . . . . . . . . . . . .. 25 F. Supervision and Reporting . . * . . . . . . . . . ... .. 27 G. Diisbursements . . . . . . . . . . . . . . . . . . . . . 28 H. Documentation of Expenditures . . . . . . . . . . . . . . . 28 I. Accounts and Audits . . . . . . . .. . .. . . . . 28 J. Mid-Term Review . . . . . . . .*. . . . .*. . * . . . . . .*. 29 VI. BENEFITS AND RISKS . . . . . . . . o. . . . . . . . . . 30 A. Banefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 B. Risks ............................ 31 VII. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . . . . . 31 A. Agreements Reached . . . . . . . . . . . . . . . . . 31 B. Recommendation . ....... . . . . ....... . . . . . . 33 Annexes 1. Socioeconomic Indicators for Honduras 2. Agreements Reached at Mid-Term Review of FHIS-I 3. Project Costs 4. Financing Plan 5. Methods of Procurement 6. Disbursement Schedule 7. Terms of Reference for Mid-Term Review of FHIS-II 8. NGO Liaison Office 9. Social Infrastructure Projects Financed by FHIS 10. Economic Infrastructure Projects Financed by FHIS 11. Social Services Projects 12. Results of Promotion Efforts in the 80 Poorest Municipalities 13. Status of Water Committees in Charge of Water and Sanitation Projects 14. Informal Sector Projects Financed by FHIS 15. Documents Included in the Project File  HONDURAS SECOND SOCIAL INVESTMENT FUND PROJECT STAFF APPRAISAL REPORT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Honduras Executing Agencies: Honduran Social Investment Fund (FHIS) and Nongovernmental Organization (NGO) Liaison Office (NLO) Beneficiaries: Target groups in rural and urban poverty areas through the FHIS, municipal4ties, NGOs and other entities Amount: SDR7.445 million (US$10.2 million equivalent) Terms: Standard IDA terms with 40 years maturity including 10 years of grace Proiect Obiectives: Building on the achievements of FHIS-I, the Project and Descrintion would help the Government sustain its poverty alleviation efforts and maintain social cohesion during the period of economic adjustment until line ministries strengthen their institutional capacities and complete policy reform programs. The credit would finance a range of small-scale subprojects (91% of the total project cost of US$67.5 million) sponsored by municipalities, community organizations, and NGOs, in four broad categories: (i) social infrastructure (54% of total subproject cost); (ii) economic infrastructure (13%); (iii) social services (22%); and (iv) credit to small informal sector entrepreneurs (11%). Wherever feasible, the subprojects would be carried out by small private contractors using labor-intensive methods. The credit would also provide institutional support through technical assistance to the NLO, so that NGOs improve their ability to plan, prepare, and implement subprojects for poorer communities (0.3%). The credit would not finance the operating costs of the executing agencies (9% of total costs). Benefits: By transferring resources to poor urban and rural communities in a decentralized manner with the participation of municipalities, NGOs, and private contractors, FHIS would help to: (i) create employment and income for the poor; (ii) provide better sanitation, health and education facilities, erosion control, and lower-cost transport; (iii) improve productivity of the population; and (iv) enhance efficiency of public delivery of social services. Risks: There is a risk that the Government may attempt to respond to the social cost of adjustments with excessive  ii speed, and project funds might be poorly used and diverted to uses nnt envioaged in the project. Experience with FHIS-I has demonstrated that this risk is small. Specifically, the risk would be mitigated as a result of FHIS's commendable management, its capable and motivated staff, its good information system, quarterly audits, and close superrvision. Estimated Costs: Local Foreian Total ------ US$ million ------ I. FHIS A. Subprojects 46.00 15.22 61.22 B. Operating Costs 4.37 1.71 6.08 Subtotal FHIS 5C.3; 16.93 67.30 II. Institutional Assistance to NGO Liaison Office 0.15 0.05 0.20 TOTAL COST! 50.52 16.98 67.50 Financina Plan: Local Foreien Total ------ US$ million ------ Government of Honduras 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 EEC 3.2 0.8 4.0 USAID 2.0 0.7 2.7 World Food Prog.am 1.6 0.0 1.6 Government of Netherlards 0.6 0.4 1.0 UNDP 0.2 0.0 0.2 Government of Spain 0.2 1.1 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 Retroactive Financing: Up to US$1.0 million would be permitted for eligible expenditures incurred since April 1, 1992. Estimated IDA Disbursemente: IDA Fiscal Year 1993 1994 --US$ million-- Annual 5.52 4.7 Cumulative 5.5 10.2 Economic Rate of Return: Not applicable Net of taxes and duties. a. Includes the initial deposit of US$1.0 million to the Special Account and US$1.0 million of retroactive financing.  HONDURAS SECOND SOCIAL INVESTMENT FUND PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.1 This report presents a second Social Investment Fund project (FHIS- II), for which an IDA credit of SDR7.445 million (US$10.2 million equivalent) to the Government of Honduras, is proposed. Total project cost is estimated at US$67.5 million equivalent. The proposed project grew out of the November 1991 mid-term review of the first Social Investment Fund project (Cr. 2212-HO) (FHIS-I) when it became clear that project implementation was proceeding much more rapidly than anticipated at appraisal and that funds would be fully '- committed by mid-1992 (the findings of the mid-term review mission are presented in Chapter III). The Government therefore requested additional IDA financing for a second phase of FHIS activities through March 1994, which would build on the achievements of FHIS-I, and would help the Government allay the social cost of adjustment, sustain its poverty alleviation efforts, and maintain social cohesion during the adjustment period, until the line ministries strengthen their institutional capacities and complete their policy reform programs. 1.2 This report discusses the Government's program to restructure the ecolomy and alleviate poverty, reviews the implementation experience of the FRIS-I project, describes the Honduran Social Investment Fund (FEIS), proposes IDA's involvement in a follow-up FHIS-II project, and provides the parameters for project implementation. TI. THE ECONOMIC REFORM PROGRAM AND POVERTY ALLEVIATION A. The Economic Reform Program 2.1 Since March 1990, the Honduran Government has carried out a comprehensive economic stabilization and adjustment program designed to correct distortions resulting from past macroeconomic mismanagement and to lay the foundation for sustained economic growth over the medium term. The stabilization program has focussed on increasing tax revenues, adjusting the exchange rate to reflect market trends, reducing public expenditures, .ncreasing tariffs for major public enterprises, and reducing Central Bank 'inancing of the fiscal deficit. The structural adjustment program has rested on four pillars: (i) a trade/tariff refora promoting the product'On of exportable and efficient import-substitution goods; (ii) a gradual liberalization of financial sector policies and regulations; (iii) administrative decontrol of agricultural pricing and marketing (including elimination of the public monopoly on the basic grains trade); and (iv) public sector reforms in the areas of tax structure and administration, investment programming, and public enterprise restructuring. At the sectora; level, the Government expanded the reform program in late 1991 to the energy sector, with  2 the objective of establishing a sound framework for energy policy formulation and regulatory functions, enhancing the efficiency and financial viability of the electricity subsector, and promoting greater competition ir the petroleum (oil and gas) subsector through deregulation of pricing, distribution, and exploration activities. 2.2 Good mseroeconomic performance during 1991 suggests that the economy is reco :-ing from the 1990 recession and attests to the Government's satisfactory implementation of the economic stabilization and adjustment programs described above. Preliminary figures show a 2.2% growth in GDP (agricultural oitput grew by 3.42) with strong increases in Iroduction of nontraditional agricultural commodities for the export markce and maquila activities in the free trade zones. (While encouraging, this GDP growth rate is still below the population growth rate of about 3% per year.) The fiscal deficit was contained at about 3.7Z of GDP (down trom 8.4% in 1990), and inflation declined from a.1-t 11% during the fourth quarter of 1990 to 2% during the fourth quarter of 1991. Private and public investment have increased by 11.5% and 30.3%, respectively. 2.3 Implementation of the stabilization and adjustment program has had an uneven impact on different sectors of the economy and on rural and urban amilies. Liberalization of the exchange rate and decontrol of agricultural rices have increased irnome earning opportunities in agricultural and export- .ented activities (as well as in efficient import-substituting industries). *nsequently, real incomes appear to be increasing for participants involved in'these sub-sectors of the economy. These same factors, however, have increaset harci '.ips for urban dwellers and net consumers of food in rural areas, ho facf higher prices for basic foods and other consumer commodities. ContracAion nf amployment in the central government and publicly-owned enterprises 1ns largely affected urban workers, as has the increase in tariffs for public u llities (water, sanitation, electricity, telephone), since these services are utot widely available in rural areas. While severance payments have helped cushion the impact of layoffs and many affected workers have found employment in the private formal and informal sectors of the economy, the high levels of open unemployment and underemployment in Honduras have meant that families have often faced reductions in disposable income. 2.4 The combined impact of these factors on the real income of the poorest families has raised serious concerns that health and nutrition indicators may decline in the short-term, particularly among pregnant and lactating mothers and children under five. There is also concern that the welfare of children from poor families may deteriorate in other ways, as pressure increases for parents to withdraw their children from school to put them to work and for mothers to enter the workforce (even though they may be unable to secure proper care and supervision for the children during their work absences, due to the limited nature of formal and informal childcara programs). The seriousness of such potential developments, when viewed against the background of Honduras's underlying chronic poverty, spurred the Government to establish two innovative safety net programs in 1990: first, the PHIS, which finances labor-intensive social and economic infrastructure, social services, and informal sector subprojects; and second, the Family Assistance Program (PRAP), which provides nutritional assistance via food  3 coupons for the most vulnerable groups of the population. The dimensionc of poverty in Honduras are explored in greater detail in the following section. B. Poverty in Honduras 2.5 Honduras, with 4.4 million people (60% of whom live in rural areas), is one of the poorest countries in the Western Hemisphere. Its 1990 GNP per capita of US$590 is higher only than that of Haiti, Guyana, and Nicaragua. Although social indicators have improved over the last 20 years, they are still very low. Extreme poverty affects over 50% of the population nationally and nearly 80% of the rural population. The poverty problem is aggravated by the rapid population growth of almost 3% per year, arising from high fertility rates (5.6 children per woman of childbearing age on a national scale, and 6.9 in rural areas), low levels of contraceptive use (63% in the cities, 30% in rural areas), and low birth spacing, with 30% of births taking place in an interval of less than 24 months. 2.6 Health and nutrition indicators reflect the acute pro'blGms facing the Honduran poor. lack of sanitation, inadequate diets, and deficient cov-erage of the primary health care system (which currently reaches only 60% of its target population). Infant mortality is over 65 per 1,000 live births, due largely to diarrhea and acute respiratory infections, and 35% of the children are born underweight. In 1990, maternal mortality was 221 per 100,000 live births nationally, although this rate is much higher in rural areas poorly served by the health care system (averaging 624 per 100,000 in the three worst affected departments). Nutritional deficiencies are a contributlng factor in about 60Z of infant deaths, and moderate and severe undernutrition affects 37% of the children younger than 5 years of age. The undernutrition rate for rural areas is 42% and over 55% in some of the poorest areas. Undernutrition is especially prevalent among pregnant and nursing women, and over half the women attendin; health centers suffer from Uild or moderate anaemia and vitamin A deficiency. The lack of potable water and sanitation facilities is acute. Over 44- -f households at the national level have no appropriate excreta disposal, and 34% of the population is without home water connections. These national averages mask tremendous regional disparities, as the rural population's access to these facilities is considerably less. 2.7 The status of education in Honduras is also critical. Although school enrollment indicators show good access to public schools, the country has a 32% illiteracy rate, and on average the population attains only 3.5 years of schooling. Repetition and dropout rates are high, with only 46% of those who enter first grade likely to reach sixth grade, and much worse (23Z in rural areas. Part of the reason for these low completion rates (particularly in rural areas) is that over 36% of the primary schools offer less than six grades. Repetition in primary school is over 54Z and 21% in the first and second grades. The dropout rates are over 39% in first and over 19% in second grade, reflecting a legacy of poor management and inappropriate resource allocation in the education sector, which has resulted in low internal efficiency of the education system in general, and of the primary level in particular. The primary education system, in particular, suffers  4 from a severe shortage of classrooms, deterioration of existing facilities, and a lack. of textbooks, desko, and teaching materials. C. Government Strategy 2.8 The Government's fundamental goals for porerty alleviation at1 to improve child survival, develop the human capabilities of the population, and erhance income earning opportunities for the lowest income groups. To achieve these objectives, the Government is implementing a two-pronged strategy in the social sectors. In the short term, priority is being given to the execution of the sdfety net programs managed by the FHIS and the PRAF, which are targeted to the most vulnerable members of society and are intended to prevent a deterioration in the already precarious living standards of the poorest groups during the adjustment period. These programs are viewed as temporary in nature and as providing a transitional instrument for responding rapidly to a critical poverty situat-.on, until the line ministries have Lean strengthened and project activities ma. be reintegrated into normal ministry operetions. More generally, to protect social sector programs from the full impact of the austerity measures underway, it is the Government's iii.._erion to at least maintain the share of social expenditures in the budget roughly constant in real terms, at one-third of public spending and about llZ of GDP, during the remainder of this Administration ending in December 1993. 2.9 FHIS assistance includes rehabilitation of schools and health centers, construction of latrines and wells, provision of teaching materials and health supplies, training for social personnel, and credit for informal sector activities. The PHIS has worked closely with the Ministries of Health (MOR) and Education (MOE) and with local communities to ensure that these entities would provide staff and finance operating expenses and maintenance on a recurrent basis for social infrastructure rehabilitated ox constructed with PHIS financing. Over the next two to three years, the Government also plans to expand the food coupon programs, managed by the FRAY in collaboration with the MOB and MOE, to the poorest areaa of Uonduras. To optimize the nutritional impact of the food coupon program among the target beneficiary population (poor, pregnant and lactating women, poor primary school attenders, and poor children under five), program expansion would include strengthening the operations of primary health centers and primary schools and improving rural water supply and sanitation. Lastly, the Government has created a NGO Li.ison Office (NLO) to facilitate NGO activities in Honduras and to strengthen the partnership between the public sector and NGOs in addressing poverty problems. 2.10 The Government recognizes that these safety net programs, while crucial in the short-term, are not adequate to resolve Honduras's structu:al poverty. Consequently, in parallel with the initiatives outlined above, tie Government's strategy for the medium term is to develop and implement a social sector reform program that would: (i) improve policy formulation, sector management, and program coordination in the social sectors; (ii) increase the efficiency and equity of social sector programs by shifting resources to primary health care, basic education, and water supply and sanitation (particularly in rural areas); and (iii) strengthen the institutional capacity of social sector line ministries. Nutritional assistance policies and  5 programs would also be reviewed to ensure that the most vulrterable groups benefit, efforts and resources are not duplicated, and that programs are as cost-effective and efficient as possible. Work on developing such a broad sector reform program is currently underway with assistance from the Japanese Technical Assistance Grant Facility, and implementation could begin in 1993. As a result of implementing institutional strengthening and sector reform measures, the Government expects to be able to integrate, as much as possible, the experience and activities of the PHIS and the PRAP, the life spans of whici are limited, into mainstream ministry programs. D. Bank and IDA Support 2.11 The Bank and IDA have supported the Government's efforts to restructure and reactivate t'he economy through a combinat.' - of technical advice and financial assistance. Following the cleara- arrears to the Bank Group in late June 1990, a Second Structural Adjustasen Loan (SAL II) of US$90 million was approved in September 1990, followed by a Structural Adjustment Credit (SAC) of SDR14.3 million in January 1991, and an Energy Sector Adjustment Credit (ESAC) of SDR37.95 million in October 1991. As a result of Honduras's classification as an IDA-only country in late 1991, it became eligible for the IDA Reflow program for the first time in FY92, and a supplemental credit of SDR23.8 million, attached to the ESAC, was approved in November 1991. To date, the first two tranches of SAL II (totaling US$65 million), the SAC (SDR14.3 million), the first tranche of the ESAC and the supplemental IDA Reflow credit (SDR38.8 million) have been disbursed. Support for a reform p-ogram in the agricultural sector is at an advanced stage of discussion with the authorities. 2.12 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 FHIS and other priority social sector project activities (food coupon pilot, Living Standards Measurement Survey (LSMS), sector planning). In April 1991, the Government requested IDA assistance to: (i) expand the PRAE food coupon program, strengthen primary health center services, and provide rural sanitation facilities in targeted areas; and (ii) develop a sccial sector reform program to increase the efficiency and equity of social services, with particular attention to improving the quality and sustainability of primary health, primary education, and nutritiLral assistance programs. Intensive discussions and prepar?mion work have followed this request over the past year, and an appraisae *:ission for a proposed Nutrition and Health project is tentatively scheduled for June 1992 Preparation of a possible social sector reform operation is also underway, and appraisal could take placL in FY93. IDA sectoral lending strategy is to provide technical advice and financial support for the Government's short-term safety net programs as well as for its efforts to introduce sectoral policy and institutional reforms over the medium term. E. IDA Lending Strategy for the Social Sector 2.13 The IDA sectoral lending strategy for poverty alleviation and human resource development is to support the implementation of safety net programs in the short term, while strengthening the institutional capacity of the line  6 ministries and restructuring social programs to improve their efficiency and equity impact over the medium term. The ccre poverty program to achieve these objectives over the next two yeurs consists of the proposed Second Social Investment Fund project, the proposed Nutrition and Health project, and a possible social sector reform operation. A second generation of poverty reduction and human resource development projects, building on this core program and a forthcoming Country Poverty Assessment, would be proposed for the post-1994 periodX This next generation of projects is likely to include sector investment operations in the healt), education, and water supply sectors, emphasizing program development and implementation capacity for services required to improve Honduras's low social indicators. 2.14 IDA support for FHIS-I and II and for the propoied Nutrition and Health project would clearly contribute to the short-term strategic objective of establish.Lng an effective safety net for the very poor, particularly during the adjustment period. But both of these proposed projects would also contribute tn the medium-term objective of strengthening line ministry capacity and reorienting social program priorities. In the case of the FHIS, project actlvities involve not only the rehabilitation and construction of social infrastructure (schools, health centers, latrines, etc.) in poor rural and urban a