c-/2 z&/C,)/ -- lVo Document of The World Bank

FOR OFFICIALUSE ONLY Public Disclosure Authorized MICROFICHE COPY

Report No. *0451-HO Type: (SAR) DE ST. ANT/ X31898 / I7 123/ LA2HR ReportNo. 10451-H

STAFF APPRAISAL REPORT

Public Disclosure Authorized REPUBLIC OF HONDURAS

SECOND SOCIAL INVESTMENTFUND PROJECT

MAY 18, 1992 Public Disclosure Authorized Public Disclosure Authorized Human Resources Operations Division Country Department II Latin America and the Caribbean Regional Office

This document has a restricted distributionand may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYA1D EQUIVALENTUNITS

US$1 = 5.4 Honduras Lempira (L) SDR1.0 US$1.37

WEIGHTSAND 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 InvestmentFund Project (Cr. 2212-HO) FHIS-II - Second Social InvestmentFund Project GDP - Gross Domestic Product GNP - Gross National Product GOH - Government of Honduras ICB - InternationalCompetitive Bidding IDA - InternationalDevelopment Association IDB - InteramericanDevelopment 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 Communicationsand Public Works SIF - Social InvestmentFund 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

SECONDSOCIAL INVESTMENTFUND PROJECT

STAFFAPPRAISAL REPORT Table of Contents

CREDITAND PROJECT SUMMARY ...... i-

I. INTRODUCTION ......

II. THE ECONOMICREFORM PROGRAMAND POVERTYALLEVIATION ...... A. The EconomicReform Program ...... 1 B. Povertyin Honduras ...... 3 C. GovernmentStrategy ...... 4 D. Bank and IDA Support . ... 5 E. IDA LendingStrategy for the Social Sector . ... F. Rationalefor IDA Involvement ...... 6

III. EXPERIENCEWITH THE FIRST SOCIAL INVESTMENTFUND PROJECT...... 7 A. LessonsLearned from Implementationof the Project ...... 7 Design Lessons ...... 7 Implementation Lessons ...... 8 B. ImprovementsAgreed at the Mid-TermReview . . . . . 9 C. Project Benefits ...... 11 D. InstitutionalImpact ...... 12 E. Other Componentsof the FHIS-I Project ...... 13

IV. THE SOCIAL INVESTMENTFUND ...... 13 A. Objectivesand Approach ...... 13 B. Institutionaland ManagerialAspects ...... 14 C. SubprojectProgramming and Implementation ...... 16 D. Targetingof 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 visitedHonduras in Novemderi991. Tre miaeion was composedof 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-appraisalmission in March 1992. Mr. Darren Dorkin contributedto the report at headquarters. Messrs.Rainer B. Steckhan(LA2DR) and Kye Woo Lee (LA2HR)are the Department Directorand DivisionChief, respectively,for this operation.

This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwisebe 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-TermReview ...... *. . . . .*.* ...... *. 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. SocioeconomicIndicators for Honduras 2. Agreements Reached at Mid-Term Review of FHIS-I 3. Project Costs 4. Financing Plan 5. Methods of Procurement 6. DisbursementSchedule 7. Terms of Reference for Mid-Term Review of FHIS-II 8. NGO Liaison Office 9. Social InfrastructureProjects Financed by FHIS 10. Economic InfrastructureProjects 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 SanitationProjects 14. Informal Sector Projects Financed by FHIS 15. Documents Included in the Project File HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

STAFF APPRAISAL REPORT

CREDIT AND PROJECT SUMMARY

Borrower: The Republic of Honduras

ExecutingAgencies: Honduran Social Investment Fund (FHIS) and NongovernmentalOrganization (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$10.2million equivalent)

Terms: Standard IDA terms with 40 years maturity including 10 years of grace

Proiect Obiectives: Building on the achievementsof 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 institutionalcapacities and complete policy reform programs. The credit would finance a range of small-scalesubprojects (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 subprojectswould be carried out by small private contractorsusing labor-intensivemethods. The credit would also provide institutionalsupport 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 transferringresources to poor urban and rural communities in a decentralized manner with the participationof 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. Experiencewith FHIS-I has demonstratedthat this risk is small. Specifically,the risk would be mitigated as a result of FHIS's commendablemanagement, its capable and motivated staff, its good informationsystem, 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. InstitutionalAssistance 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 expendituresincurred 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 retroactivefinancing. HONDURAS

SECONDSOCIAL INVESTMENTFUND 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$10.2million 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 implementationwas proceeding much more rapidly than anticipatedat 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 achievementsof 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 institutionalcapacities and complete their policy reform programs.

1.2 This report discusses the Government'sprogram to restructure the ecolomy and alleviate poverty, reviews the implementationexperience 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 comprehensiveeconomic stabilizationand adjustment program designed to correct distortionsresulting from past macroeconomicmismanagement and to lay the foundation for sustained economic growth over the medium term. The stabilizationprogram has focussed on increasing tax revenues, adjusting the exchange rate to reflect market trends, reducing public expenditures, .ncreasingtariffs for major public enterprises,and reducing Central Bank 'inancingof the fiscal deficit. The structural adjustment program has rested on four pillars: (i) a trade/tariffrefora promoting the product'On of exportable and efficient import-substitutiongoods; (ii) a gradual liberalizationof financial sector policies and regulations;(iii) administrativedecontrol of agriculturalpricing and marketing (including eliminationof 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 establishinga sound framework for energy policy formulation and regulatory functions, enhancing the efficiency and financialviability of the electricitysubsector, and promoting greater competitionir the petroleum (oil and gas) subsector through deregulationof pricing, distribution,and exploration activities.

2.2 Good mseroeconomicperformance during 1991 suggests that the economy is reco :-ingfrom the 1990 recession and attests to the Government's satisfactoryimplementation of the economic stabilizationand adjustment programs described above. Preliminary figures show a 2.2% growth in GDP (agriculturaloitput grew by 3.42) with strong increases in Iroduction of nontraditionalagricultural 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 increasedby 11.5% and 30.3%, respectively.

2.3 Implementationof the stabilizationand adjustment program has had an uneven impact on different sectors of the economy and on rural and urban amilies. Liberalizationof the exchange rate and decontrol of agricultural rices have increased irnome earning opportunitiesin agriculturaland export- .ented activities (as well as in efficient import-substitutingindustries). *nsequently, real incomes appear to be increasing for participants involved in'these sub-sectorsof the economy. These same factors, however, have increasetharci '.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 amploymentin 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 utotwidely 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 unemploymentand underemploymentin 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 indicatorsmay decline in the short-term,particularly among pregnant and lactatingmothers 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 supervisionfor the children during their work absences, due to the limited nature of formal and informal childcara programs). The seriousnessof such potential developments,when viewed against the background of Honduras's underlying chronic poverty, spurred the Governmentto establish two innovative safety net programs in 1990: first, the PHIS, which finances labor-intensivesocial and economic infrastructure, social services, and informal sector subprojects;and second, the Family Assistance Program (PRAP),which provides nutritionalassistance 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 childbearingage on a national scale, and 6.9 in rural areas), low levels of contraceptiveuse (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'blGmsfacing the Honduran poor. lack of sanitation, inadequate diets, and deficient cov-erageof 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 (averaging624 per 100,000 in the three worst affected departments). Nutritional deficienciesare a contributlngfactor in about 60Z of infant deaths, and moderate and severe undernutritionaffects 37% of the children younger than 5 years of age. The undernutritionrate for rural areas is 42% and over 55% in some of the poorest areas. Undernutritionis 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 appropriateexcreta disposal, and 34% of the population is without home water connections. These national averages mask tremendous regional disparities,as the rural population'saccess to these facilities is considerablyless.

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 (particularlyin 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'sfundamental goals for porerty alleviationat1 to improve child survival, develop the human capabilitiesof the population, and erhance income earning opportunitiesfor the lowest income groups. To achieve these objectives,the Government is implementinga 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 deteriorationin 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 transitionalinstrument for responding rapidly to a critical poverty situat-.on,until the line ministries have Lean strengthened and project activities ma. be reintegratedinto normal ministry operetions. More generally, to protect social sector programs from the full impact of the austeritymeasures underway, it is the Government'siii.._erion to at least maintain the share of social expendituresin the budget roughly constant in real terms, at one-third of public spending and about llZ of GDP, during the remainder of this Administrationending in December 1993.

2.9 FHIS assistance includes rehabilitationof schools and health centers, constructionof 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 communitiesto ensure that these entitieswould provide staff and finance operating expenses and maintenance on a recurrent basis for social infrastructurerehabilitated ox constructedwith PHIS financing. Over the next two to three years, the Government also plans to expand the food coupon programs, managed by the FRAY in collaborationwith 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 lactatingwomen, poor primary school attenders, and poor children under five), program expansionwould 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 partnershipbetween 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'sstrategy 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 (particularlyin rural areas); and (iii) strengthen the institutionalcapacity of social sector line ministries. Nutritional assistance policies and 5

programs would also be reviewed to ensure that the most vulrterablegroups benefit, efforts and resources are not duplicated,and that programs are as cost-effectiveand 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 implementationcould begin in 1993. As a result of implementinginstitutional 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'sefforts to restructure and reactivate t'heeconomy through a combinat.'- of technical advice and financial assistance. Following the cleara- arrears to the Bank Group in late June 1990, a Second StructuralAdjustasen 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 classificationas an IDA-only country in late 1991, it became eligible for the IDA Reflow program for the first time in FY92, and a supplementalcredit of SDR23.8 million, attached to the ESAC, was approved in November 1991. To date, the first two tranches of SAL II (totalingUS$65 million), the SAC (SDR14.3million), the first tranche of the ESAC and the supplementalIDA Reflow credit (SDR38.8million) have been disbursed. Support for a reform p-ogram in the agriculturalsector is at an advanced stage of discussionwith the authorities.

2.12 IDA has also been actively involved in supporting the Government's poverty alleviationefforts. 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 sustainabilityof primary health, primary education, and nutritiLral assistance programs. Intensive discussions and prepar?mionwork have followed this request over the past year, and an appraisae *:issionfor a proposed Nutrition and Health project is tentatively scheduled for June 1992 Preparationof 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'sshort-term safety net programs as well as for its efforts to introduce sectoral policy and institutionalreforms over the medium term.

E. IDA Lending Strategy for the Social Sector

2.13 The IDA sectoral lending strategy for poverty alleviationand human resource development is to support the implementationof safety net programs in the short term, while strengtheningthe institutionalcapacity of the line 6

ministries and restructuringsocial programs to improve their efficiencyand equity impact over the medium term. The ccre poverty program to achieve these objectivesover 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 generationof poverty reduction and human resource developmentprojects, building on this core program and a forthcomingCountry Poverty Assessment,would be proposed for the post-1994 periodX This next generationof projects is likely to include sector investmentoperations in the healt), education,and water supply sectors, emphasizingprogram developmentand implementationcapacity 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 contributeto the short-term strategic objective of establish.Lngan effective safety net for the very poor, particularlyduring the adjustmentperiod. But both of these proposed projects would also contribute tn the medium-term objective of strengtheningline ministry capacity and reorientingsocial program priorities. In the case of the FHIS, project actlvities involve not only the rehabilitationand constructionof social infrastructure(schools, health centers, latrines, etc.) in poor rural and urban a£eas, but also the provision of school teaching materials, health center supplies, and training of nurses, teachers, and other social sector personnel. Another important legacy of the PHIS could be the transmissionto social ministries of methods of operationsand procedures to improve efficiencyand equity of service delivery. In the case of the proposed Nutrition and Health project, a primary objective is to strengthenhe._lIth center operations, family planning services, and rural sanitation,working through the line ministry and its normal programs. In essence, the expansion of primary health, basic education, targeted nutrition interventions,and rural sanitationresulting from these "short-term"safety net projects, is contributingto a de facto shift in social sector expenditurestoward the poor over the medium term.

2.15 The possible social sector reform operationwould consolidate this progress, and would contributeto significantefficiency gains in the sector by redeploying staff resources and instillingmore discipline in the expenditureprogramming process. Follow-up investmentoperations in subsequentyears would ensure that institutionaldevelopment goals would be achieved over the longer term.

F. Rationale for IDA Involvement

2.16 The proposed FHIS-T_ project would complementactivities to be implementedunder the proposea Nutrition and Health project, and would contribute to the institutionalstrengthening of the line ministries by transferringto ministries, to the extent possible, methods of operations and procedures that would improve their project implementationcapacities. IDA support for this second phase is consideredcritical to ensure that: (i) improvementsagreed at the mid-term review are fully internalizedand implemented during the remainder of PHIS's operating existcnce and transferred to line ministries, as appropriate;and (ii) sufficient concessionaryfunds 7

are mobilized from the internationaldonor community to finance the proposed project.

III. EXPERIENCEWITH THE FIRST SOCIAL INVESTHENTFUND PROJECT

3.1 There are four components in the FHIS-I project. The main one is the financing of FHIS subprojects,which comprise more than 95% of total project cost. There are also three other components: (i) a pilot targeted food coupon program implementedby the Family Assistance Program (PRAF); (ii) technical assistance to help design a program to improve the efficiency and equity of the servtces of the MOH and HOE; and (iii) implementationof a system of monitoring and evaluation of the Government'ssocial policy interventionsthrough the use of a LSMS, coordinatedby the Ministry of Planning.

3.2 The findings of the mid-term review confirm that project outcomes have met the intended objectives during the first phase of project implementation. Lessons from project implementationand the recommendationof the mid-term review have been fully implementedinto the design of the proposed project. The following sections draw the lessons l.earnedfrom the operation, and describe the improvementsagreed at the mid-term review, the project benefits and the institutionalimpact.

A. Lessons Learned from Implementationof the Prolect

Design Lessons

3.3 The design of FHIS as a semi-autonomousorganization with a broadly-basedBoard haa limitad political infiuence on its management, and special provisions have allowed the FHIS to recruit high-qualitystaff at competitive salaries and follow simplifiedprocurement procedures. As a result, the FHIS is managed effi..-entlywith clear procedures, quality control, accountabilityand an implementationstrategy based on decentralizationand privatization (paras. 4.4-4.11).

3.4 The use of a standardizedmenu of subprojects (para. 4.12) has resulted in efficient subproject implementationby: (i) limiting the range of specialiststo be recruited by FHIS; (ii) providing standard parameters and specificationsused by sponsors in subproject preparation;and (iii) facilitatingappraisal and supervisionof subprojectsby FHIS staff.

3.5 EHIS has targeted its subDroiectsbased on a poverty map using population and poverty criteria. While more resources (60% of FHIS) went to poorer communities,the middle class communitiesalso received a sizeable share of the Fund, although the poorer population living in these communities benefittedmore. FHIS subprojects throughout all 290 municipalitiesof the country have reached places where there had previously been hardly any Government effort= Under FHIS-II, the targetingwould be further improved, and a larger proportion of funds would reach poorer communitiesby limiting allocation to relatively richer communities (paras. 4.16-4.20). 8

3.6 FHIS informal sector credit, totaling US$2.1 million or 7Z of FHIS total subproject approvals, has succeeded in making credit available to urban and rural small and micro-entrepreneurswho do not have access to commercial banks. This program has worked well because: (i) FHIS delegates lending to NGOs which are specializedin credit to the informal sector; (ii) market rates are charged to final beneficiaries;(iii) NGOs assume the full credit risk vis-a-vis FHIS, which provides NGOs with a strong incentive to present quality projects and collect subloans; (iv) FHIS requires significantcost sharing (about 201); and (v) solidarity group lending (moral guarantees)ensures loan recovery without reliance on physical or fiduciary guarantees. These positive features, especially the market rates charged to final beneficiaries,would continue under FHIS-II (para. 4.12 (d)).

3.7 It was a good strateav for the Government to get FHIS off the ground very early in the new administration. The early start, with Government funds, was instrumentalin demonstratingto potential donors the nature of the program and the Government'scommitment thereto, which helped mobilize external resources. Once donors were on board, it was easy to improve the program with their advice and technical assistance. The technical assistance provided by UNDP for establishingand strengtheningFHIS at the inception of the program has been an instrumentalelement of this successful start (para. 3.12).

ImplementationLessons

3.8 FHIS succeeded in disbursing funds rapidly while sustaining high subproiect aualitv (para. 4.13). Thie is the result of a good quality staff, a well-designedmanagement information system, efficient appraisalmechanisms, simplified special procurementprocedures, and good quality control.

3.9 The insistence of external donors on the need for full transparencv,coupled with an equal desire of the FHIS Board and management team for full accountability,has ensured proper use of funds and prevented political interferencein FHIS operations. The system of quarterly operationalaudits (para. 5.22) is an innovation for a social fund. The transparencyof operations has been an essential element in attracting external resources and projecting an excellent public image in Honduras. This practice would continue under FHIS-Il.

3.10 Experience has shown that a social fund can be operated in good collaborationwith social ministries (para. 4.21). The FHIS proved to be a good complement to line ministries'programs due to: (i) a genuine desire on the part of FHIS's Executive Director to collaboratewith line ministries; (ii) good coordinationmechanicms; and (iii) the prestige of FHIS and its support at the highest level of the Government,which was an incentive for other Government agencies to collaboratewith FHIS.

3.11 Simplified procurement Procedures establishedby the FHIS law have helped expedite subproject disbursements. Given the small size and geographic spread of subprojects,special procurementprocedures were adopted to facilitate local shopping and direct contracting in cases where subprojects were undertaken in isolated communitieswhere not more than one contractor was 9

xpected to be present. FHIS has used private contractorsand NGOs well as nstruments for project preparation and implementation. This procedure would e used more extensivelyunder FHIS-II (para. 5.8).

.12 The technical assistance provided early on by UNDP has been nstrumental in setting up FHIS as an efficient operation. UNDP has provided ontinuous technical assistance since the creation of the FHIS. It has helped elect FHIS staff, prepare operationalmanuals, and ensure the proper start-up of the project. Ir.addition to helping project design and preparation of the FHIS organic law, UNDP has supported FHIS through financing: (i) salaries of he top executives; (ii) logistical equipment (vehicles,computers, elephones, faxes, radios, photocopyingequipment, furniture, etc.); (iii) a ull-time top-qualityprincipal adviser whose advice has been well appreciated y both the Hondurans and the donor community; and (iv) short-term consultants (which has, for example, allowed FHIS to adapt the Bolivia ESF data-processing technology). The present UNDP contract, recently negotiated,covers the period up to September 1993, and is satisfactory. It will be extended -o cover the entire life of FHIS, up to March 1994, and will provide an additional US$200,000. Two important features of this technical assistance contract are: (i) specializedassistance to help improve the social services program; and (ii) technical assistance to help improve project preparation by poorer municipalities. As a condition for effectiveness,a technical assistance contract between FHIS and UNDP. satisfactoryto IDA. would have been signed (para. 7.3 (a)).

ImDrovementsAgreed at the Mid-Term Review

3.13 Overall, the mid-term review shows that FHIS has been performing well and has been an effective instrument to alleviate the social costs of adjustment. The major weakness was in supervisionas a result of an excessive number of projects per supervisingstaff. In December 1991, each FHIS supervisorwas responsiblefor 95 subprojects,i.e., more than twice the recommendednumber of 40, which would allow visits to each subproject every two weeks. Subprojectsare visited before disbursementsare made, but, given the limited number of staff, visits may be delayed by more than a month as subprojects are spread throughout the country's 290 municipalities,some in remote areas. The occasional understaffingof the supervisiondepartment may, at times, have caused a drop in project quality, as disbursementswere made without adequate supervisionof subprojects. Supervision efficiencywould be improved by increasing FHIS supervisionstaff or subcontractingpart of supervision to other parties (paras. 3.18 (a), 3.19).

.14 FHIS has lacked financial analysis capacity. Most FHIS finance lepartmentstaff primarily have accounting backgrounds. This has limited FHIS )otentialto analyze its future options, since financialprojections have not )een readily available to explore various scenarios under different lisbursementand funding assumptions (paras. 3.18 (b), 4.11).

3.15 The FHIS social services program has been unbalanced,with an excessive emphasis on one item of the menu: the school desks program, which received more promotion than other kinds of subprojectsin health, nutrition, and education. Initially, this emphasis on one item was an efficient 10

strategy, sirnceit was a simple and efficient approach to develop a solid social services department,to build credibilitywith NGOs, and to demonstrate an impact at the national level. However, other importantprograms in the social services menu have been neglected, and consequentlythe amount committed for social service subprojectshas been lower than appraisal targets (para. 4.15). Although the poorer communities require more social services, in fact, they have had fewer social service subprojects. This trend has contributed to the result that poorer municipalitieshave actually received less funds than those planned at appraisal. FHIS would agree to start promoting a more diversifiedsocial service program (para. 3.19).

3.16 FHIS has made concerted efforts to ensure sustainabilityof subprojects,but further efforts will be required in the future, especially for water and sewerage subprojectswhere performance of local water committees will have to be monitored more closely. This is especiallyimportant also for the basic sanitationprogram, the development of which is expected to remain significantunder FHIS-Il (para. 4.23).

3.17 Finally, the management informationsystem (MIS) operates well except for supervision,but there is a need to correct insufficient integrationbetween separate programs (para. 4.11).

3.18 At the mid-term review, agreementwas reached on a set of actions to improve rhe FHIS operations (Annex 2). So far, FHIS has:

(a) expanded its supervision and monitoring capacity by starting to contract additional staff and/or subcontracting supervisiontasks with accreditedprivate contractors and NGOs (Annex 2, page 1);

(b) strengthenedits financial analysis capacitv through: (i) the design of a financial planning methodology; (ii) the recruitmentof a financial analyst; and (iii) the training of FHIS financial departmentstaff (Annex 2, pages 2 and 3);

(c) made special efforts to channel additional resources to the poorest municipalitiesby increasingpromotion efforts and technical assistance for the poorer communities (para. 4.20);

(d) integratedits management informationsystems into a single continuous system, including financialprojections (para. Annex 2, page 2); and

(e) signed a contract with Agua para el Pueblo (APP), a well- known NGO specialized in the water sector, that is providing technical assistance to ensure proper running of local water committees (para. 4.23).

3.19 Two important findings of the mid-term review results, however, have not yet been addressed. First, the promotion of a more diversified social services Proaram, with special emphasis on one or two additionaltypes of subprojectsthat are easily replicable and can be financed on a large 11

scale. During negotiations.tha Borrower provided evidence that FHIS has: (i) preared and scarted to promote a more diversified social services Program, satisfactoryto IDA (para. 7.1 (a)); and (ii) revised the social services OperationalManual (para. 7.1 (b)). The revisions, however, have not yet been approved by FHIS Board. Therefore. amendment of the Operational Manual and its apnroval by the FHIS Board. satisfactoryto IDA. would be a condition for effectiveness(para. 7.3 (b)). Second, FHIS still needs to recruit additional supervision staff (Annex 2). During negotiations,the Borrower provided evidence that FHIS has confirmed that an additionalnumber of supervisionstaff. satisfactoryto IDA. will be contracted by August 31. 1992 (para. 7.1 (c)).

C. Proiect Benefits

3.20 During 1990 and 1991, FHIS subprojects generated an estimated 30,00' temporary and permanent jobs, representing8,700 person-yearsat an average cost per employee-yearof US$262, which is in line with other social funds in Latin America. Most of FHIS's subprojectshave been implementedby small and medium-size contractorswith a positive impact in developing this sector of the economy. The project also has had significantbenefits for those who use social and economic infrastructureservices, and credit supported through FHIS subprojects. An estimated 500,000 poor Hondurans have directly benefited from FHIS subprojectsto improve schools, sewerage, roads, and other types of services during 1990 and 1991.

3.21 FHIS has had a significantdevelopment impact by acting quickly and providing infrastructureof good quality. FHIS provided financing for the constructionor refurbishingof 1,733 primary school classrooms,67 health posts (i.e., about 102 of total primary health network), the installationof 263 km of water system tubing, water tanks with 170,000m 3 capacity, 130 km of sewage tubing, constructionof about 30,000 latrines, and repair of 788 km of rural roads. A 1991 Pan American Health Organizationstudy of infant mortality in Honduras identified intestinal infections as the most important cause. FHIS efforts in water and sewerage subprojectswill have a major long- term impact on health, especially on infant and child mortality. They have also helped contain the propagationof the cholera epidemic and lower dramaticallythe incidence of diarrhea, especially in the southern departments and in the densely populated poor areas in the outskirts of major cities. Because of its special procedures, higher quality of operations,promotion, technical assistance, and beneficiaries'involvement, FHIS has delivered quickly a much larger program than the line ministries could have with the same budget. For example, MOE staff estimate that FHIS can build about five times more classrooms than the Ministry in a given year, because the MOE does not have the adequate institutionalcapacity to plan, implement, and supervise a high volume of decentralizedsocial infrastructureprojects.

3.22 A more detailed analysis is required to determine the full impact of FPIS assistance and to provide a reliable basis for adjustmentsin policies and operations. For this purpose, FHIS-I has provided for a LSMS, which will provide data for the impact study. However, under FHIS-I, partly due to the short time span between effectivenessof the credit and the mid-term review, the LSMS was not launched, and an impact study was not carried out. This 12

study will be carried out not later than November 30, 1992, and will be used for the mid-term review, which would take place before February 28, 1993 (para. 5.25). In March 1992, FHIS created a unit to undertake impact studies of FHIS subprojects. In April 1992, the unit initiated a household survey for the general population,which contains questions of specific interest to the FHIS; the survey of FHIS's beneficiariesis scheduled for August 1992. During neaotiatione.agreement was reached that: by no later than November 30. 1992. the Borrower would carry out and furnish to IDA a study assessina the impact of the activitiescarried out by FHIS under FHIS-I. under terms of reference satisfactoryto IDA (para. 7.2 (a)).

D. InstitutionalImDact

3.23 FHIS subprojects are implementedby a wide variety of institutions and organizationsas shown in the table below. Most subprojects are sponsored by municipalitiesor governmentorganizations and are implementedby private contractors. NGOs are usually both sponsor and implementingagency.

k ., , . - .~~~~~~~~~~~~~~~~~~~~~~~...... ,-...a:I (AS01 DKO3MWR )I 19-91). ' ::X'0 -'E '- - 4190XT 1 ',y0 ,0:US0

Municipalities 2,201 30,213 NeighborhoodOrganizations 343 4,336 NGOs 85 6,058 Ministry of Education 81 1,658 Ministry of Health 76 2,910 Religious Groups 58 209 Other Government Organizations 14 4,311 Other 12 337 TOTAL 2,870 50,032

3.24 FHIS has had a positive impact on the institutionaldevelopment of executing agencies. NGOs have improved their subprojectappraisal methodology and implementationstrategies. FRIS subprojectshave had an even greater impact on private contractors,1,037 of which have worked on FHIS-financed subprojectsto date, and several of them, who were individualcontractors, have expanded into small firms. Another interestingdevelopment has been the improvementof municipalitiesin project preparation. Several of them, who were very weak institutionallyat the start of FHIS, have contracted qualified engineerswho could design good-qualityproject proposals. Poorest municipalitieshave received special assistancefrom FHIS in project 13

preparation. FHIS is also starting to have an impact on line ministries who recognize FHIS's comparative advantage in getting subprojects implemented. They are looking at the PHIS model and are improving their own methods of operation.

E. Other Components of the FHIS-I Proiect

3.25 The pilot nutrition componentwas well conceived and successfully implemented. It has reached 176,900 beneficiariesand proved a cost-effective instrumentfor income transfer targeted to those among the poor who are most at risk of malnutrition -- namely children and pregnant and lactatingwomen. In addition, the program raised the demand for preventivehealth services by 1312 in 1991, compared to 3% p.a. during the 1989-90 period, and increased enrollment in primary schools from 3.4% to 29.5% in 1991, compared to a 1.1% average growth rate in 1989. Based on the success of this pilot program, an expanded targeted food coupon program is now under considerationfor possible financing by IDA and other donors (paras. 2.13 and 2.14).

3.26 The implementationof the pilot food coupon program demonstrated the advantagesof starting on a small scale to prepare for the eventual expansion of a new form of nutrition interventio-n.The pilot performance shows that the coupons are used primarily to buy food and school supplies, are widely exchanged in the private market, and are well targeted to the poor through both primary schools and primary health care units, and can be successfullyexpanded on a larger scale. The pilot program confirms that a food coupon program is more efficient and less costly to administer than a conventionalfood distributionprogram, because it leaves all the logistics of food distributionto the private sector.

3.27 The technical assistancecomponent to help the Government design improvementsin equity and efficiencyof health and education service delivery has led to reform proposals by the Government,which are being reviewed, and would lead to a possible social sector adjustmentoperation. Although the impact study of the PHIS was not carried out (para. 3.22), elements of the LSMS have been incorporatedinto the regular statisticalsurveys that are periodicallycarried out by the Ministry of Planning'sDepartment of Statisticsand Census, and are expected to improve the Government'scapacity to evaluate social sector interventions.

IV. THE SOCIALINVESTMENT FUND

A. Obiectives and Anvroach

4.1 FHIS was designed as a financingmechanism to help protect and improve the standard of living of marginal population groups during the period of economic adjustment. Through the financing of social and economic infrastructure,social services, and informal sector subprojects,FHIS aims at improving the standard of living in poor communitieswhere malnutritionand illiteracyrates are high and government services scarce because of the limited reach and institutionalweaknesses of line ministries. 14

4.2 Several mechanisms have been put in place to enoure that subprojectswould be properly targeted to the poor. First, wages paid on FRIS-financedprojects are aligned with the market rate for unskilled labor, to ensure participationof individualsin the lowest deciles of the Honduras income scale. Second, FHIS allocates its funds on the basis of a poverty map ranking all 18 departmentsand 290 municipalitiesof the country based on population,child malnutrition,and access to potable water and basic sanitation indicators. These indicatorshave been used to produce a departmentaland municipal index of poverty and to assign additional resources to the poorest departmentsand municipalities. Third, the programming of funds by sectors require that social services subprojectsrepresent at least 20% of the overall program. Fourth, subprojectswith high social return are given priority.

4.3 Subproject financing can be requested by municipalities,Government ministries, NGOs, and community groups. The subprojectsare executed by private sector contractors or NGOs, and supervised by EHIS or a third party with the necessary technical qualifications. FBIS evaluates each subproject based on targeting and sector priorities,a site inspection, strict cost specifications,and social benefits in accordancewith the Operational Manual agreed with IDA.

B. Institutionaland ManaRerial Aspects

4.4 FHIS was created by law on February 22, 1990, according to which FBIS: (i) has a life of three years (to be extended to four years under the FHIS-II project); (ii) is a financing and not an executing entity; (iii) is subject to external audits; and (iv) uses special procedures for public contracting.

4.5 The creation and operation of PHIS have been declared a high priority by the President of the Republic. Clearly, EHIS has solid support at all levels of the Government, and is given high priority by Government agencies. FHIS has a Board of nine members, chaired by the President of the Republic, and including top Government officials and representativesof the private sector, cooperatives,and NGOs. It meets quarterly to: (i) approve general policies and rules of operation; (ii) approve the annual budget (once a year); (iii) authorize FHIS to contract loans; and (iv) review FHIS performance. Project approval is left to the operations committee,which is headed by the FHIS Executive Director and includes all FHIS department directors. The Executive Director has the rank of cabinet minister. The incumbent comes from the private sector. He is dynamic and well respected.

4.6 IBIS is organized into seven departmentsfor projects, special projects, administrationand finance, monitoring and supervision,external financing, legal, and data processing. The projects department,responsible for subproject promotion and appraisal, is divided in line with the three main programs of FHIS: social and economic infrastructure,social services and informal sector. The special projects department handles the promotion, appraisal and supervisionof all subprojectsgreater than US$35,000, mostly large water and sanitation projects, distributedgeographically in poor areas throughout all 18 departments,and approved on the basis of rigorous economic 15

and engineeringanalysis. FHIS has a total staff of 124, of which 82 are professionals,including civil engineers, economists,sociologists, credit specialists,computer engineers, and other technical specialists. Most departmentheads have graduate degrees from abroad and their competenceis comparable to the highest level in the public sector.

4.7 FHIS-financedsubprojects have been implemented rapidly and efficiently. Total FHIS administrativecosts have represented9% of total commitments,vhich is reasonablebased on the number of subprojectsprocessed and their average cost. A detailed analysis of FHIS administrativecosts shows that expendituresfor staffing, professionaland technical services, promotion, travail,and maintenancewere fully justified in relation to the number ot subprojectsprocessed by FHIS, and the mid-term review concluded that FHIS had not recruited sufficientsupervision staff (para. 3.13). The 6.51 of total commitments anticipatedat PHIS-I appraisalwas an underestimationinfluenced by the performance of other social funds with a considerablylarger average size of subprojects.

4.8 Several factors explain FHIS's ability to process and approve subprojectsrapidly. First, FHIS has an effective Executive Director with valuable private sector experience. He has also been effective in raising funds from foreign donors and maintaining good relations with Government ministries. Furthermore,FHIS's status as a statutory organizationoutside the civil service has helped contain political pressure. FHIS staff are experienced,dedicated, work long hours, and are paid competitivesalaries.

4.9 FHIS also has a sound administrativestructure (para. 4.6). The apportionmentof the projects department in three divisions, one for each of the three programs, assigns clear responsibilityand accountability. Each division has assigned clear responsibilitiesto staff in charge of promotion and appraisal of subprojects. There is a separate supervisiondepartment that covers all three programs.

4.10 The use of standardizedproject types has promoted the efficiency of FHIS. Sponsors choose from a project menu, e.g., schools or health posts, which considerablysimplifies project preparationand streamlinesproject processing (Anndxes 9-11). This, together with extensive prescreening,has contributedto a low subproject rejection rate of about 2 percent.

4.11 FHIS has a good microcomputer-basedmanagement information system which facilitatessubproject administrationand monitoring by enabling the staff to rapidly access data on the current status of any subproject. It is also helpful in discussionswith sponsors on the status of their subprojects. FHIS is now integrating its management informationsystem to eliminate inefficienciesand minor reporting inconsistenciesthat resulted from the use of four separate computer systems. The new system will help improve subproject supervisionand financial analysis,which needs to be strengthened in the areas of cash flow projections and monitoring of disbursementsand administrativecosts. 16

C. Subvroiect Programmint and Implementation

4.12 The FHIS finances subprojects in accordancewith eligibility criteria and evaluation parameters establishedin an OperationalManual approved by IDA under FHIS-I. Investments are financed in the areas outlined below, according to the following standardizedmenu of subprojects:

a) Social InfrastructureSubproiects: This program (Annex 9) includes: (i) the rehabilitation,maintenance, and constructionof pre-primary and primary schools, health centers and posts, water and sewerage systems (which are expected to have direct health improvementbenefits); and (ii) maintenance of rural roads.

b) Economic Infrastructure Droiects: This progrqm (Annex 10) includes the financing o (i) public works and simple infrastructuresuch as repairs and constructionof canals and ditches, constructionof gutters and sidewalks, and forestationaud reforestation;and (ii) projects of special interest to protect cultural heritage and ethnic minorities, provided that projects in either category generate significantemployment at reasonable costs.

C) Social Services Subproiects: Through this program, which targets pregnant and lactatingwomen and children aged 0 to 12 years (Annex 11), FHIS finances programs for nutrition, primary health care, vaccination,primary and pre-primary education (such as school breakfasts),nutrition assistance to pre-school age children, early stimulation,training of midwives, health promotors, and community health guardians, provision of furniture, teaching materials and small libraries to primary schools.

d) Informal Sector Proiects: The FHIS makes funds available to NGOs for lending at market oriented rates to help expand small and micro-enterprisesin the productive and service sectors (Annex 14). Terms and conditions for financing of informal sector projects are spelled out in the Operational Manual.

4.13 As of December 31, 1991, FHIS had approved 2,870 subprojects for a total of about US$50 million. This representsabout 80% of total FHIS commitments originally expected (i.e., total project cost of US$68 million less beneficiaries'contribution of US$6 million) in about half the originally planned total project life. As of December 31, 1991, a total of 1,221 subprojectswere in execution,with 1,649 completed. As part of the mid-term review, a sample of about 100 subprojectswas visited by a team of sector specialists (engineers,sociologists, and credit specialists)and was found to be of generally good quality.

4.14 The average subproject size of US$14,500 is more than twice the average of US$6,200 during the first year of FHIS, but only about one-third to 17

one-fourth the average subprojectsize of similar social funds in the Latin American region. This reflects the FHIS strategy to finance eligible subprojects targeted to the poor in all municipalitiesof the country (while allocatingmore resources to poorer areas; para. 4.16) and to ensure political neutrality in selection of municipalities. As a result, PHIS had to spread limited resources,especially during the first year, over 290 municipalities. Another reason for the small subprojectsize is the small unit cost of social infrastructuresubprojects, such as classroom rehabilitationand latrine construction,which received a high priority from FHIS.

4.15 As shown in Table 1 below, the largest part of the financing went to social infrastructure(63Z of total commitmentscompared to 43% estimated at appraisal). These subprojects include rehabilitationand expansion of primary school and health posts, water and sewerage systems. FHIS also financed economic infrastructuresubprojects such as road improvement, drainage and retentionwalls (16% of total commitments,which was less than the 271 anticipatedat FHIS-I appraisal and confirms FHIS's strategy to give lower priority to economic infrastructureand higher priority to social infrastructure). Social services such as training of midwives and health volunteers, deworm4ng of children, provision of vitamins to children and mothers, and supply of school desks to primary schools, represented 14Z of total commitments,which is smaller than the appraisal '.argetof 22Z. This social services program has started well, but is currently unbalanced, with an excessive emphasis on the school desks program. FHIS recognizes this imbalance, and has agreed to improve the balance of the portfolio (paras. 3.15, 3.19). To that effect, in FHIS-II, the following programs, included in the social services subprojectsmenu (Annex 11), would receive special promotion: (i) training of midwives; and (ii) community training in health and basic sanitation (para. 3.19). Finally, FHIS provided credit (7% of total cost), through NGOs, at market rates, to small and micro-entrepreneurssuch as market vendors and handicraft makers, who do not have access to the banking system. Subloans have a 24 month maturity, including 3 months grace. This program has worked well with arrears of only 3.7 percent.

Table 1: ACTUALCOMMITMENTS AND APPRAISAL ALLOCATIONSOF FHIS (April 1990 - September 1991) (X) ar~ ~ -- :: - *...... L -:.. : ...... :.

Economic Infrastructure 27 16 Social Infrastructure 43 63 Social Services 22 14 Informal Sector 8 7 TOTAL 100 100 18

D. Targeting of Funds

4.16 The FHIS aims at nationwide coverage, assigning additional resources to the poorest areas (para. 4.14). Resources are first allocated to each of the 18 departments according to population size and a poverty index, composed of sanitation,water supply and child malnutrition indicators from the 1988 census. Within each department,resources are again allocated by municipality, according to the same criteria. Municipalitiesare grouped in five categories,ranging from very poor to acceptable. Poor municipalities (i.e., very poor, poor, and deficient) are assigned larger allocations on a per capita basis than the other municipalities. The regular and acceptable municipalitiesare eligible for FHIS financingbecause there are poor people in relativelywealthier municipalities. A one percent increase in the poverty index would imply a US$0.14 increase in the allocation of funds. It was difficult to achieve this target, particularlyin the early phase of FHIS, since poorer municipalitieshave less capacity to prepare subprojects (para. 4.18).

4.17 Geographic targeting is complementedby a sectoral target allocation as follows: economic infrastructure(27%), social infrastructure (43%), social services (22Z), and informal sector (8Z). For economic and social infrastructure,and informal sector subprojects,these percentages generally reflect demand by municipalitiesand community groups. For social services subprojects,based on agreement between FHIS and IDA, the percentage was set at a much higher level than if selection of subprojectshad been totally demand driven. The financing of these types of subprojects is consideredimportant because of the status of health, nutrition, and education indicators in Honduras. However, these subprojectsare complex and need to be implementedby decentralizedagencies and NGOs in close collaborationwith line ministries. Such institutionalcapacity is scarce and needs to be developed, a process to which FHIS-I is currently contributing,and that would be continuca under EHIS-Il through the technical assistanceprovided by UNDP (para. 3.12).

4.18 To date, PHIS resources have been allocated to all 290 municipalities. Actual F1HS resource commitmentsshow that poor municipalitiesreceived about 601 of total PHIS resources,which is below the 731 target agreed at PHIS-I appraisal. On a per capita basis, a one percent increase in the poverty index for a given municipalityis associatedwith an increase in its actual per capita commitment of US$0.02, as opposed to a planned US$0.14 increase. The proposed project would address this shortcoming in various ways, in parvicular, through stepped-uppromotion activities in poorer communities,diversification of the social service subprojectsmenu, preparation of an action plan to channel more resources to poorer communities than under FHIS-I, and PHIS's obligation to consult with IDA before exceeding the resource allocation ceilings for richer communities (paras. 3.19, 4.20).

4.19 Experience of several social funds has shown that, if no targeting mechanism is used to allocate investments,a larger proportion of funds will be absorbed by wealthier municipalitiesthat have a larger demand for projects and a greater capacity to prepare project proposals because of the larger number of private firms, engineers, and NGOs operating in these areas. The 19 purposeof the targetingmechanism under FHIS-Iwas to ensurethat funds would be more fairlydistributed. To a significantextent, this was attained, althoughthe goals set up by FHIS,which were ambitious,were not fully reached. Table 2 comparesactual commitments to targetallocations in the municipalities,which are groupodin 5 categories,ranging from very poor to acceptable.It shows: (i) that the poorermunicipalities (i.e., the total of the 3 groups: "verypoor", "poor", and "deficient")received 70% of funds allottedto them at appraisal;(ii) that FHIS has been successfulin limiting fund resourcesin the "acceptable"municipalities; but (iii)that the "regular"municipalities received significantly more than theirplanned allotmentbecause money not spent by poorermunicipalities in one department was reallocatedto other areas and programs. Poorermunicipalities committed only 70Z of their allocatedresources because: (i) they have a lower capacity to preparesubprojects; (ii) NGO-sponsoredsubprojects tend to be locatedin "regular"and "acceptable"municipalities since there are greaterinformal sectors;(iii) promotion was insufficientin poorermunicipalities; and (iv) subprojectsare usuallysmaller in poorerareas. Under FHIS-II,technical assistancewould be providedto poorermunicipalities to help improvetheir projectpreparation capacity (para. 3.12).

Table 2: COMPARISONBETWEEN PLANNED AND COMMITTED RESOURCES By Municipality Category (April 1990-September 1991)

.. C.. ... O . 1 ' ; C:1 I 11:? O?AL

Very Poor 20 4.9 7.1 69 60 71 19 Poor 21 4.1 6.7 61 57 62 16 Deficient 25 4.7 5.8 81 70 83 22 Sub-Total 66 4.6 6.5 70 62 72 70 Regular 26 8.0 4.9 164 137 170 40 Acceptable 8 2.2 4.5 49 54 48 3 TOTAL 100 5.3 5.9 90 79 92 100

4.20 FPIS needs to improveits targetingperformance and has already startedto take measuresto that effect. An encouragingtransition has alreadystarted between 1990 and 1991 (Table2), with the percentageof the committedamount in the very poor communitiesrising from 60% to 71% of their planned resources. As a result of the mid-term review, FHIS began to intensifyits promotionefforts in late 1991 in the 80 poorestmunicipalities, where FHIS engineershelped local groupsprepare more subprojects.The resultsof these effortsare shown in Annex 12. To furtherimprove targeting resultsunder EHIS-II,durina negotiations: (i)the Borrowerprovided evidencethat FRIS has preparedan actionplan for 1992 and 1993.satisfactory 20

to IDA. to channel more funds than in 1990 and 1991 to poorer municivalities. based on a Doverty index (para. 7.1 (d))I and lii) aRreementwas reached that. w_ithoutIDA's approvel. FHIS would not make new commitments of funds to "reazular"and "acceptable"municipalities over and above the amounts programmed in the action plan for these municipalities(para. 7.2 (b)).

E. Coordinationwith Other Government Agencies

4.21 FHIS has coordinated its operationswell with line ministries and agencies, includingMOH, MOE, Public Works (SECOPT),the Water and Sewerage Authority (SANAA), and the Municipal Bank (BANMA), and has a good working relationshipwith them. IHIS is clearly viewed as a temporary institution whose purpose is to complement the line ministries during a period of adjustment, and its projects are geared to fit into the long-term plans of the ministries. FHIS has followed the ministries' technical norms and standarde in its projects (e.g., prototype architecturaldesigns for schools), and FRIS informs the ministries of its proposed subprojectsby fax. The ministries have a week to reply on a non-objectionbasis. FRIS also meets periodically with these ministries and agencies to review their respective pipeline of projects and with other financing agencies such as USAID or IDB who finance many of the ministries'programs. The mid-term review has shown the effectivenessof the FHIS coordinatingmechanisms since: (i) all the Ministries and agencies concernedwere satisfied that FHIS operates within their overall objectives and plans; and (ii) achieving a high level of interagencycoordination has not delayed subproject implementation.

F. Subproiect Sustainabilitv

4.22 FHIS has structured its subprojectsto ensure the sustainabilityof each investment and its benefits. IRIS supports subprojectswith low recurrent costs, such as training of health care promoters in the social services program. In the infrastructureprogram, FHIS gives priority to the rehabilitation or expax'sion of schools and health centers, rather than new construction,and it finances road maintenance as opposed to construction. Before contracts for the constructionof schools or health posts are signed, PHIS requires confirmationfrom MOH or MOE that the required positions of teachers or nurses have been created and budgeted by the ministry. Also, counterpart financing of at least 5% of the total subproject cost is required from beneficiaries (or sponsors in the case of subprojectssponsored and implementedby NGOs), to ensure submissionof good quality subprojectsthat would likely be sustainablebeyond IHIS support. In practice, the proportion of counterpartfunds has been much higher, on average 122 of total subproject costs in 1991, because: (i) when possible, PHIS has asked for more counterpart funds; and (ii) in a number of cases, sponsors (e.g., NGOs) have presented financing requests with a higher proportion of counterpartfunds.

4.23 FHIS has also undertaken considerableefforts to ensure the sustainabilityof water and sewerage subprojects. All subproject contracts have a clause requiring the final owner of the project, SANAA or the municipality,to provide for cost recovery and maintenance. As SANAA's operationalcoverage is limited mostly to urban areas, IHIS has organized the formation of local water committeeswhere necessary. In agreementwith the 21 municipalityand SANAA, the local committeesset up tariffs and administer revolving funds to recover sufficient funds to cover the costs of operation and maintenance of water and sanitation systems. For the operation and routine maintenance of the system, local water committees require appropriate equipment which PHIS will finance. Annex 13 provides the operational status of water and sanitationsubprojects financed by FHIS. FHIS has signed a contract with APP, to provide technical assistanceto the poorer municipalitiesto set up and strengthenwater committeesand assist them to establish and collect tariffs. APP has a good track record in the water sector in Latin America. Furthermore,UNDP is also supportingan institutionaldevelopment program in 40 of the poorest municipalitiesto help train local officials in subprojectevaluation and supervision. In addition to these efforts, to fully ensure the sustainabilityof infrastructure subprojects,PHIS has agreed to strengthen its supervisiondepartment.

4.24 As regards social services subprojects (para. 4.12 (c)), EHIS has been careful to select subprojectssponsored by NGOs who have a proven track record in the type of subprojectpresented. Also, IHIS supports the expansion of already successfulprojects, and requires significantcost sharing from the sponsoringNGOs. These subprojectsare approved in consultationwith MOE and NOH, who ensure recurrent cost funding for the operation of the facilities provided for under the subprojects and take over the ownership when the subprojects are completed (e.g., construction of school desks).

4.25 Institutionalcapacity is also an important factor in screening NGOs presenting subprojectsin the informal sector. NGOs must have experience in the administrationof credit programs; the revolving funds they manage must not have arrears of more than 5Z; and loans are made to final beneficiariesat market oriented rates, to cover operating costs and avoid decapitalizationof revolving funds. While the informal sector program works well overall, it was temporarilyaffected by weaknesses in the billing of debt service to NGOs, and introductionof different interest rates and repayment schedulesby another IBLS donor. These problems were resolved at the mid-term review when sub-loan conditionswere standardized. This program would continue to receive close monitoringunder the proposed project. 22

G. Resource Mobilizationand Needs

4.26 FHIS has been successful in mobilizing internationalfinancing for an estimated total project cost of US$68 million, as follows:

Government of Honduras 8.0 Beneficiaries 7.0 IDA 20.0 USAID 8.0 KfW 12.0 GTZ 0.2 Government of Canada 0.5 UNDP 0.6 UNICEF 0.1 Government of Netherlands 2.1 Government of Spain 0.6 Government of Japan 0.4 Others 8.5

TOTAL 68.0

4.27 As of December 31, 1991, FRIS had committedUS$50 million (742) of the total available funds of US$68 million. Regarding IDA assistance,FHIS had disbursed US$12.1 million, or 601 of the total IDA credit, i.e., considerablymore than the amount of US$7.5 million (381 of the total credit) expected at appraisal. Given that total remaining funds available from all sources are about US$18 million, based on a recent commitment rate of about US$3 million per month, FHIS would run out of funds for commitmentsas early as June 1992. This is why additional funds are urgently required to allow PHIS to continue its operations beyond mid-1992.

4.28 FHIS has clearly demonstratedthat it has a strong implementation capacity, and the Government has provided adequate counterpart funds. At the time of MIS-I appraisal, IDA appraised a project of more than US$100 million as the Honduran Government proposed. But at negotiations,IDA and the Government agreed to downsize the project to US$68 million because of uncertainty about FHIS's implementationcapacity and availabilityof counterpart funds. Based on the successful FPIS-I experience,PHIS could easily channel additional funds to finance subprojectstotaling about US$60 million by December 1993. 23

V. THE PROJECT

A. Obiective

5.1 The aim of the project is to help the Government sustain its poverty alleviationefforts and maintain LIcial cohesion while the line ministries strengthen their institutionalcapacities and complete their reform rograms. As stated in para. 2.10, the methods of operation and procedures of he FHIS would be transmitted to social ministries to the extent possible to &elp them improve their efficiency and equity of service delivery.

B. Description

5.2 The project would include financing of a range of small-scale subprojects sponsored by municipalities,community organizations,and NGOs, in four broad categories: (i) social infrastructure(54% of FHIS subproject costs); (ii) economic infrastructure(13%); (iii) social services (22%); and (iv) credits to small informal sector entrepreneurs (10.7%). Operating costs of the FHIS are projected to represent 9% of total project costs. Finally, the credit would assist the NLO (0.3% of total project cost) to: (i) promote the development of NGOs in Honduras; (ii) improve cooperationbetween NGOs and Government agencies for developmentprojects; (iii) provide training to NGOs to increase their project preparation and implementationcapacity; and (iv) attract internationalNGOs to operate in Honduras. Additional details on the NLO are provided in Annex 8.

5.3 The proceeds of the credit (US$10.2 million equivalent)would be lknt to the Republic of Honduras, which would pass on US$10.0 million as a grant to the FHIS. The FHIS, in turn, would use the credit, in conjunction with funds from other internationaldonors and the National Treasury, to finance subprojects in local communitiesimplemented by private contractors, NGOs, and public agencies under the technical supervisionof appropriate agencies. The Government would allocate the balance of US$0.2 million for the implementationof part (ii) of the project (NLO). As a condition for sffectiveness.a Subsidiary Agreement for makin. the funds available by the orrower to the FHIS. satisfactoryto IDA. would be entered into (para. 7.3 c)).

C. Implementation

5.4 The project would be implementedover a period of about two years. The main executing agency would be FHIS, which has clearly demonstratedits strong implementationcapacity over the last two years. During neRotiations. areement was reached that any future appointment of the Executive Director of HIS would be subiect to prior IDA consultationand atreement (para. 7.2 (c)). he other executing agency, the NLO, would receive appropriatetechnical assistance under the project to execute the NGO institutionaldevelopment component. As a condition for disbursement.the Borrower would appoint key staff to the NLO and issue the refulationsto the legislationthat established the NLO (para. 7.4). 24

D. Costs and Financina Plan

5.5 The total project cost, net of taxes and tariffs, expressed in January 1992 prices, is estimated at US$67.5 million equivalent. Foreign exchange costs (US$17.0million) represent 25% of the total project cost. A breakdown of costs and the financing plan are shown in Annexes 3 and 4, respectively. The disbursementschedule is shown in Annex 6. Since the project is essentially a financial intermediarytype operation and physical targets are not the main objectives of the proposed project, no contingencies have been provided. Any increase in the average oubprojectamount would be reflected in a reduced number of subprojectsexecuted. The cost estimates of the FHIS component are based on FHIS actual costs in 1991. The costs of technical assistanceto NLO, which would finance consultantsand studies, are based on the average cost of technical assistanceprovided by UN agencies in Honduras.

5.6 The estimates of FHIS subprojectsreflect a consensus of sector specialists (water and sewerage, rural roads, health and education) and NGOs. A large number of projects in all these sectors have been on the shelf of ministries for a number of years because of a lack of executing capacity and complicatedbureaucratic procedures. Total estimated demand exceeds FHIS capacity and the average project size was estimated on the basis of FHIS subprojectprocessing capacity together with capacity of private contractors, NGOs, Governmentagencies and municipalitiesto execute subprojects.

5.7 The proposed IDA credit of SDR7.445 million (US$10.2million equivalent)would finance 15% of total project cost. Local beneficiaries (includingultimate beneficiaries,m_.nicipalities, NGOs or other entities) would contributeUS$3.1 million. The Borrower's contributionwould be US$6.7 million. It would finance FHIS'S operating costs over two years up to a total of about US$5.6 million. The balance would be used to finance FHIS subprojects. During negotiations.agreement was reached that the Borrower would orovide funds as indicated in the nroiect financingplan and as needed to cover the operating costs of tho FHIS (para. 7.2 (d)). IDB has indicated that it intends to contributeUS$31.5 million, subject to its satisfactory appraisal of the project, which took place in April 1992. Other respective financing agencies would be KfW with US$6.0 million, the EEC with US$4.0 million, USAID with US$2.7 million, World Food Program with US$1.6 million, and the Netherlands,UNDP, Spain, France, and UNICEF whose financingwould total US$1.7 million. Durina nezotiations.the Borrower Provided evidence that financing of anproximatelyUSS30 million would be available from the IDB. and a total of ayproximatelyUSS10 million from other financing agencies and donors (para. 7.1 (e)). As a condition for effectiveness,the Borrower would agree that a fundina aareement of approximatelyUSS30 million between the THIS and IDB. and funding agreements totaling apt3roximatelvUSS10 million for the FHIS. with other financina agencies and donors. resnectively.would have been siRned (para. 7.3 (d)). The proposed financingplan is summarizedbelow: 25

Financina Plan: Local Foresin 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 RfW 4.0 2.0 6.0 EEC 3.2 0.8 4.0 USAID 2.0 0.7 2.7 World Food Program 1.6 0.0 1.6 Government of Netherlands 0.6 0.4 1.0 UNDP 0.2 0.0 0.2 Government of Spain 0.2 0.1 0.3 Government of France 0.1 0.0 0.1 UNICEF 0.1 0.0 0.1

TOTAL 50.5 17.0 67.5

E. Procurement

5.8 The FHIS law ensures regulation of its contracting of works and goods through procedures based on contract amounts. PHIS adopted procedures in conformitywith IDA requirements,which are much simpler than the complex Honduras procurement law. These special procurementprocedures instituted for PHIS proved successful in expediting project implementationand in ensuring competitiveprices. On the basis of a sample review of subprojects,FHIS has correctly applied the procurement procedures agreed with IDA, and the same procurementmethods would be applied for FHIS-II. Direct contractingwas accepted under FHIS because for some subprojects in remote locations it would have been the only alternative as no more than one contractorwas expected to show interest. In these cases, to ensure fair pricing, FPIS has established a system of standard unit prices by region on the basis of which FHIS negotiates the price directly with the contractor. This schedule of standard regionalizedunit prices has been updated by FPIS periodically. Items to be financed by IDA under the proposed project would be carried out in accordance with IDA procurement guidelineswhich would prevail over local public sector procurement legislationand practices. Items to be procured by otl r financing agencies would follow these agencies'procurement guidelines. Social infrastructuresubprojects to be financed by IDA are expected to total about US$11.1 million equivalent (includingGovernment counterpart funds) and to average about US$20,000, with the largest single project costing no more than US$500,000.

5.9 For civil works contracts below US$50,000, local shopping requiring at least three quotationswould apply, up to an aggregate amount of US$3.3 million. For some project components in remote locations direct contracting would be applied under exceptional circumstances,consistent with para. 3.5 of the IDA Procurement Guidelines. In cases where only one offer would be available, FHIS has agreed to establish a system of standard regionalizedunit prices on the basis of which it would negotiate the price of the contract directly with the implementingagency. This system of contractingwould apply 26

for contracts up to a maximum amount of US$35,000, and up to an aggregate amount of US$2.2 million, which is includedwithin the above aggregate amount of US$3.3 million for local shopping. This schedule of standard regionalized unit prices would be maintained and updated by FHIS at least every six months. During neaotiations.agreement was reached that the Borrower would, by no later than September 30 and March 31 of each year. startine on SeDtember 30. 1992. cause PHIS to review the standard reeionalizedunit prices for goods and works establishedby PHIS. iointlv with IDA. and cause FHIS to change Dromptlv such prices. in form and substance satisfactoryto IDA. if so recommendedby such a review (para. 7.2 (e)). This procedure would also apply for basic needs subprojectsto be carried out by NGOs or community organizations. This procedure is acceptable to IDA in view of: (a) the importance of administrativesimplicity for handling about 20 contracts per week; and (b) the operationalaudit system which would review procurement in subprojects on a quarterly basis (para. 5.22). This procedure is being successfullyapplied under the FHIS-I project now under execution. Monitoring procedures would be set in place to ensure that: (i) contracts are not divided into smaller packages for the purpose of awarding smaller contracts under direct contracting;and (ii) there is no excessive concentrationof contracts awarded to the same individualsor contractors. Local shopping is justified because the scale of most subprojectswould be quite small demanding little, if any, heavy equipmen.. Most works would be carried out in scattered places in 290 municipalitiesover a period of about two years. Under these circumstances, it is unlikely that large domestic contractorswould be interested in bidding for small civil works.

5.10 Civil works contracts between US$50,000 and US$500,000, up to an aggregate amount of US$6.2 million, would be procured through LCB. Although no internationalbidding (ICB) is expected because of the decentralizednature of FHIS operations and the small size of subprojects,to the extent possible, contracts for works would be combined in packages of US$500,000 or more and contractswould be awarded on the basis of ICB, in accordancewith IDA's guidelines.

5.11 For goods, ICB would apply to contracts above US$250,000. Although no contracts above US$250,000 are expected, and therefore no ICB is expected for equipment, to the extent practicable,contracts for goods would be grouped in bid packages estimated to cost the equivalent of US$250,000 or more. LCB would apply for contracts between US$25,000 and US$250,000, up to an aggregate amount of US$0.9'million, and local shopping for contracts less than US$25,000, up to an aggregate amount of US$0.2 million (Annex 5). Local and regional preferences,in accordancewith IDA's guidelines,may be granted only to local manufacturersunder ICB contracts for goods.

5.12 Consultantswould be selected in accordancewith IDA guidelines for the use of consultants. Taxes paid by foreign consultants on the foreign currency portion of their contractswould be borne or refunded by PHIS.

5.13 The legal documents include the following procurement provisions to avoid conflict with IDA's guidelines: (a) for works and goods to be procured under LCB: (i) contracts should be awarded to the lowest evaluated bidder; (ii) foreign firms should be allowed to bid without prior registrationand 27 should not be required to have a local agent or associate themselves with local firms; (iii) foreign firms should not be required to certify that, in their country of origin, Honduran firms are allowed to participateunder equal terms for contracting;(iv) in calculatingthe lowest price of bids, there should be no requirement to take into considerationthe financial cost of foreign expenditures; (v) there should be no preferences to award contracts to Honduran firms; and (vi) no slicing of contract amounts would be permitted for the sole purpose of reducing contract price amounts; and (b) for consultants' services: (i) foreign consultants shall be allowed to participate freely in the selectionprocess even if local consultantsshall be available for the concerned services; and (ii) no registrationwith national associationsshall be imposed on foreign consultants employed by foreign contractorsor consultants,and no mandatory associationwith local firms shall be required.

5.14 Propriety in contractingwould be safeguarded in a number of ways: (a) simple procurement practices, either in accordancewith IDA's guidelines or satisfactoryto IDA, are being included in operationalmanuals under preparation by FHIS; (b) provision is made for training and technical assistance for contracting and administrationof projects; (c) for most smaller municipalities,FHIS would provide consultant contract managers to assist in the implementationof project administrationand, concurrently, provide training and technical assistance; (d) projects would be supervised regularly by FHIS field staff or contracted specialists;and (e) external auditing of FHIS and executing agencies would be carried out on a continuous basis, covering both financial records and physical progress.

5.15 Prior review of procurement documents and decisions by IDA would be required for all ICB contracts, if any. For LCB contracts, the first two contracts of each kind (i.e., for goods and for works) would be reviewed by IDA. The balance would be subject to intensive ex-post review by IDA after the contract award through supervisionmissions and quarterly audits by independent auditors. Direct contractingwould be subject to a satisfactory review by IDA every six months of the standard regionalizedunit prices adopted by FPIS.

F. SuDervision and Reporting

5.16 Durine negotiations.aRreement was reached that FHIS would submit to IDA semi-annualreDorts (not later than three months after the end of each semester) (para. 7.2 (f)) including the following informationby region and sectort (i) projects presented, appraised, in execution, completed, and evaluated ex-post, including number of projects and beneficiaries,amounts committed and executed and average cost per beneficiaryper year; (ii) sources of funds for each subproject; (iii) FHiS's personnel and consultants indicating the changes that have taken place during the reporting period; and (iv) operating costs of FHIS. IDA would require ex-ante review and approval of subprojectscosting more than US$250,000. The total number of such projects is expected to represent about one percent of all FHIS subprojects, which is approximatelyequivalent to what was experiencedunder FHIS-I. 28

G. Disbursements

5.17 PresidentialDecree No. 19-92, published in the Official Gazette, extends the life of the FHIS to March 31, 1994. The proposed IDA credit would be disbursed over a period of about two and a half years, to be completed by December 31, 1994. The final date for presentationof subprojectsby EHIS to IDA would be September 30, 1993. Subproject activities supportedby the credit are expected to be completed by March 31, 1994, the expiration date for the life of FHIS. The project completion date would be June 30, 1994 (i.e., six months before the closing date). The disbursementschedule for subprojectsends June 30, 1994, i.e., three months after the terminationdate of FHIS. It would allow IDA to disburse for expenses made before the terminationof the life of FHIS in an account that would be opened by the Government to that effect, which would be audited through procedures satisfactoryto the Association.

5.18 The expected disbursementprofile for FilIS-Il(Annex 6) is in line with the experience under FHIS-I. This profile is shorter than the profile for LAC projects in the social sector, but is consistent with profiles for credit projects, which the proposed project resembles more closely.

5.19 Disbursementswould be made against the following categories of expenditure: (i) FHIS subproiects: 90% of disbursementsby FHIS approved on or before September 30, 1993 according to FHIS's project selection and evaluation procedures; (ii) TechnicalAssistance for NLO: 100Z of the cost of eligible training and consultants'services. Durina negotiations.agreement was reached that retroactivefinancing of up to USS1.0 million would be nermitted for eligible exDendituresincurred since April 1. 1992 (para. 7.2 (g)).

H. Documentationof Exoenditures

5.20 Withdrawal applicationsfor goods and services with a contract value of US$50,000 or more would be supported by full documentation. Contracts of less than US$50,000 and disbursementsagainst expenses not undertaken by contract would be made on the basis of Statements of Expenditure (SOEs), for which supporting documents would be maintained by FHIS and would be made available for review by IDA staff. A Special Account of US$1 million would be opened in the Central Bank of Honduras under FHIS-Il. Documentation forwarded to IDA for disbursement (SOEs or full documentation)would cover a number of projects whose aggregate sum would be at least US$1.5 million.

I. Accounts and Audits

5.21 Since its creation, FHIS has been audited every six months by private, independentexternal auditors and always found in good order. IDA only requires an annual audit, but, to ensure transparency,the President of Honduras, as chairman of the Board, requested bi-annual audits.

5.22 In addition to the above statement on audit requirements,FHIS was to be audited more thoroughly every quarter. This type of auditing combines financial review with physical inspection of works in the field. The signing 29

of the contract with auditors for the quarterly audits was, however, delayed because contract negotiationsand the bidding process took longer than expected. The contract was signed in November 1991, and the first quarterly audit was issued in January 1992. It provides individual audit reports on 30 subprojects selected randomly by the auditors. The latter found no significanterrors in the use of funds.

5.23 During nexotiations.agreement was reached that private independent external auditors. acceRtable to IDA, would undertake annual audits of FHIS (para. 7.2 (h)). Not later than six months after the end of each fiscal year, FHIS would submit to IDA certified copies of audit reports containing balance sheets, income statements and the auditor's opinion of financial statements, as well as separate opinions on: (i) project accounts; (ii) SOEs; (iii) the Special Account; (iv) whether procurement of all contracts was carried out in accordancewith agreed guidelines; (v) whether internal controls in place are adequate to minimize the possibility of misuse of funds or other improprieties;and (vi) a summary of quarterly audits of subprojects.

5.24 During negotiations,agreement was reached that private independent external auditors. acceptable to IDA. would undertake special quarterly audits of FHIS's operations on the basis of acceptable accounting norms and procedures (para. 7.2 (h)). The auditors would examine a sample of subprojects,review the individual contracts, ascertainwhether the terms of these contracts are complied with, inspect the progress of works, reconcile the physical progress with the financial expenses incurred, and state whether procurement guidelines are being respected. The auditors would prepare quarterly reports for the Board of FPIS and for IDA (to be submitted not later than two months after each quarter), and an annual summary for IDA. The auditors would review a representativesample of projects, acceptable to IDA. Quarterly reports would focus on subprojectswhere errors have been detected and would state that all other projects examined were in accordancewith the terms of their contracts.

J. Mid-Term Review

5.25 By February 28, 1993, the Government and IDA would conduct a mid- term review of progress in the implementationof FHIS, according to terms of reference detailed in Annex 7. The focus of the mid-term review would be: (i) the targeting of FHIS funds (in order to channel more resources to poorer municipalities);(ii) the quality of the subprojects financed by the FHIS; (iii) the impact of FHIS-financedsubprojects; (iv) the administrative efficiency and the financial soundness of the operations of the FHIS; (v) the prospects for the future of the FHIS; and (vi) an assessment of the extent to which the experience of the FHIS has been and can be transmitted to strengthen social ministries and improve their operations. The Borrower would prepare an action plan, acceptable to IDA, based on the results of the mid-term review and discussionswith IDA, and would thereafter implement the actions agreed upon as a result of this review for their implementation. During neRotiations. agreementwas reached that the Borrower would undertake a mid- term review of the FHIS-II Droject not later than February 28. 1993. prepare an action plan, based on discussionswith. and acceptable to. IDA. by March 30

31, 1993. and thereafter implement it in accordancewith the timetable included in the plan (para. 7.2 (i)).

VI. BENEFITS AND RISKS

A. Benefits

6.1 By providing resources to poor urban and rural communities,the PHIS would help to: (i) prevent a deteriorationin the living standard of the poor during the period of economic adjustment; (ii) improve the social infrastructureso that the beneficiariesenjoy better sanitation,health, lower transport costs, and less erosion damage in their communities; (iii) reduce the rates of mortality, malautrition,and illiteracy,particularly among women and children; and (iv) strengthen the Government experiencewith a decentralizedmechanism for delivering developmentassistance to municipalitiesand small businesses and mobilizing grass-roots efforts, which could subsequentlybe used by other agencies.

6.2 EnvironmentalEffects. Since its creation, FHIS has been concerned about issues of environment,culture, and ethnic minorities. For example, one subproject of FHIS-I has helped protect the Mayan culture's Copan ruins from erosion caused by occasional floods from a nearby river. In addition to protecting the country's cultural heritage, this project was also labor- intensive and has been a large employer in the Copan area. Another project consisted in providing basic sanitation to an isolated group of Jicaque Indians living on Montana de la Flor. Another potential positive contribution of the PHIS to the improvementof the environmentwould be the financing of reforestationprojects, which is one of the categories included in its list of potential projects. The OperationalManual of the PHIS stipulates that all subprojects financed by the FHIS in various sectors (water, roads, etc.) do not adversely affect the environmentand indigenous cultures. EHIS evaluators use a checklist of questions to undertake a short environmentalimpact assessment for each subproject. The main factors analyzed are the potential negative effects that may result from: (i) location of infrastructure;(ii) generation of sediments; and (iii) alteration of waterways.

6.3 Participationof Women. HIIShas programmed 22Z of its resources for subprojects in social se-.vices(health, nutrition and education). All these subprojectswould be presented and executed by NGOs and community organizations,thus providing a systematic channel for the participationof women in the improvementof their household's and communities'well-being. The main groups to which social services projects would be directed include women, particularlyfemale heads of households, and pregnant and lactating mothers, and their children up to 12 years of age. Within the social services program, high priority would be assigned to subprojectson maternal and child primary health care, health and nutrition education, and primary education. Based on experience under FHIS-I, about half of the beneficiariesof informal sector subprojects are expected to be women. 31 B. kRik

6.4 There is a risk that the Government may attempt to alleviate the socialcost of adjustmentswith excessive speed, and project funds might be poorly used and diverted to uses not envisaged in the project. Experience with PHIS-I has demonstratedthat this risk is small. Specifically,the risk would be mitigated as a result of FHIS's commendablemanagement, capable and motivated staff,its good information system, quarterly audits, and close supervision.

VII AGREEMENTSREACHED AND RECOMMENDATION

A. AarrementsReached

7.1 During negotiations,the Borrower provided evidence that:

(a) IHIS has prepared and started to promote a more diversified social services program, satisfactoryto IDA (para. 3.19);

(b) PHIS has revised the social services OperationalManual, but such revision has not yet been approved by EHIS Board (paras. 3.19, 7.3 (b));

(c) FBIS has confirmed that an additional number of supervision staff, satisfactoryto IDA, will be contracted by August 31, 1992 (para. 3.19);

(d) FHIS has prepared an action plan for 1992 and 1993, satisfactoryto IDA, to channel more funds than in 1990 and 1991 to poorer municipalities,based on a poverty index (para. 4.20); and

(a) financing of approximatelyUS$30 million would be available from the IDB, and a total of approximatelyUS$10 million from other financing agencies and donors (para. 5.7).

7.2 During negotiations,agreements were reached on the following points:

(a) by no later than November 30, 1992, the Borrower will carry out and furnish to IDA a study assessing the impact of the activities carried out by IHIS under IHIS-I, under terms of reference satisfactoryto IDA (para. 3.22);

(b) without IDA's approval, PBIS would not make new commitments of funds to "regular"and "acceptable"municipalities over and above the amounts programmed in the action plan for these municipalities(para. 4.20); 32

(c) any future appointmentof the Executive Director of PHIS would be subject to prior IDA consultationand agreement (para. 5.4);

(d) the Borrower would provide funds as indicated in the project financing plan and as needed to cover the operating costs of the FHIS (para. 5.7);

(e) the Borrower would, by no later than September 30 and March 31 of each year, starting on September 30, 1992, cause FHIS to review the standard regionalizedur.it prices for goods and works establishedby FHIS, jointly with IDA, and cause FHIS to change promptly such prices, in form and substance satisfactoryto IDA, if so recommendedby such a review (para. 5.9);

(f) PHIS would submit to IDA semi-annualreports (not later than three months after the end of each semester) (para. 5.16);

(g) retroactive financing of up to US$1.0 million would be permitted for eligible expendituresincurred since April 1, 1992 (para. 5.19);

(h) quarterly and annual audits would be carried out by private independentexternal auditors, acceptable to IDA, on the basis of acceptable accounting norms and procedures (paras. 5.23, 5.24); and

Mi) the Borrower would undertake a mid-term review of the FHIS-II project not later than February 28, 1993, prepare an action plan, based on discussionswith, and acceptable to, IDA, by March 31, 1993, and thereafter implement it in accordance with the timetable included in the plan (para. 5.25).

7.3 The conditions for credit effectivenesswould be the following:

(a) a technical assistance contract between FHIS and UNDP, satisfactoryto IDA, would have been signed (para. 3.12);

(b) that the OperationalManual has been amended and approved by the FHIS Board, satisfactoryto IDA (para. 3.19);

(c) a Subsidiary Agreement for making the funds available by the Borrower to the PHIS, satisfactoryto IDA, would be entered into (para. 5.3); and

(d) a funding agreement of approximatelyUS$30 million between the FHIS and IDB, and funding agreements totaling approximatelyUS$10 million for the FHIS, with other financing agencies and donors, respectively,would have been signed (para. 5.7). 33

704 The condition for disburement for the NL would be the appointment of key staff to the NLO cnd the Issuance of the regulations to the Decree which establishedthe NLO (para.5.4). B. Recommndation

7.5 Subjectto the aboveassurances and condition.,the proposed projectwould constitutea suitablebasis for an IDA creditof SDR7.445 million (US$10.2million equivalent) to the Republicof Hondurason standard IDA terms with 40 yearsmaturity including ton years of grace. 34

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

ANNEx LIST

ANNEX s: SocioeconomicIndicators for Honduras

AUMM-2s Agreements Reached at Mid-Term Review of HIS-I

ANNEX 3s Project rasto

AJLA: Financing Plan AMEI St Methodsof Procurement ANNEX 6s DisbursementSchedule

hIND_Z: Terms of Reference for Mid-Term Review of 111S-II Ah Xg 8: NGO LiaisonOffice

ANNES 9: Social Infrastructure Projects Financed by FHIS

ANNEX 10: Economic InfrastructureProjects Financed by FHIS

ANNEX11: Social Services Pro1ects

ANNhX-12: Results of Promotion Efforts in the 80 Poorest Municipalities

ANNEX 13: Status of Water Comlittees in Charge of Water and Sanitation Projects

ANNEX14: Informal Sector Projects Financed by mRIS

ANNEX 15: Documents Included in the Project File 35

ANNEX I Page 1 of 1

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

SOCIOECONOMICINDICATORS FOR HONDURAS E~~~~~~~~~~~~~~O

GNP Per Capital' US$ 1990 590 CumulativeDecline in Per Capita GDP2" % 1981-1989 -18.2

Illiteracy"3 1988 32.4

Net Enrollment in Primary Schools41 Z 1988 91.2 Infant Mortality" Per 1,000 1990 66

______births ______MalnourishedChildren (Underweight)"' 1991 35 Low Weight at BirthW1 Z 1985 20 Maternal Mortality'/ Per 100,000 1990 221 livebirths Populationw/o Access to Primary Health 2 1985-1988 26 Care61 Births Unattended by Health Staff"' Z 1983-1988 50 Dependency Ratio'1 household 1990 4.3 members per earner

Sources: I/ World Atlas, 1991. 2/ Preliminary Balance of the Latin American & Caribbean Economy, 1989, ECLAC. 31 World Bank DeveloymentReDort, 1991. 4/ Enrollment of children of primary school age which is less than total enrollment,since the latter includes children above primary school age. UNESCOCentral America y Panama, Situaci6n avances. limitacione.v Dersoectivas de la escolarizaci6nmalfabetizaci6n v calidad de la oducaci6n, San Jose, Costa Rica, 1991. 5/ UNICEF, State of the World's Children, 1990. 6/ School Nutrition Census (Height-Age;Age 6-9), 1991. See Servicio de Alimentaci6nBscolar de Honduras (SAEH), II Censo Nacional de Talla en Escolares de Primer Ingreso, March 1992. 7/ Maternal Mortality Survey, MOH, 1990. 8/ UNDP, Human DeveloimentReiort, 1991. 9/ Encuesta de Hogares, 1990, Secretaria de Planificaci6n. 36 ANNEX2 Page 1 of 3

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

AGREEMENTSREACHED AT MID-TERMREVIEW OF FHIS-I

.~ .... .I....O Infrastructure

FHIS will reprogram its operations Done. Average project size is to review average subproject size projected to increase by 25% from and the content of its investment US$14,500 to US$18,600. program. _*I PHIS will take action to acquire 5 Done. computer terminals for the evaluation department and 3 printers. l FRIS will ask additionalguarantees Done. FHIS has started to ask for from contractors to reduce the risk these guarantees. of non-completionof projects. FHIS will increase its supervision FHIS has contracted6 additional staff to reach a ratio of about 40 staff, which will be sufficientfor subprojectsper supervisor. the present workload. By August 31, 1992, EHIS will contract 13 additionalsupervisors, which will be sufficient for the expansion of operations in 1992 and 1993. To improve its supervision Done. FHIS has started implementing department, the EHIS will: (i) the system. implement the "continuous information system" already designed, providing informationon status of subprojects according to their processing status; and (ii) develop and implement an adequate management informationsystem and implement the system in the supervision department. FHIS will sign a contract with Agua Done. The contract was signed in para el Pueblo (APP) for water November 1991. sanitationmaintenance. 37 ANNEX 2 Page 2 of 3

.. , , .- ,, ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. _......

FHIS will report to IDA on the Done. First draft report prepared sustainabilityof its water and and found satisfactory. sanitationsubprojects every 3 months. To finance maintenance equipment for FHIS is currently contacting water and sewerage systems, PHIS suppliers of equipment, in will contact suppliers of equipment. collaborationwith APP. EHIS will enter into an agreement Done. FHIS has entered into with MOBand NGOs implementing agreement with MOHand NGOs. latrine subprojects to provide training to beneficiaries. mHISwill prepare maintenance Done. manuals for schools and health centers. IHIS will update operationalmanuals Done. for infrastructure. Social Services

FHIS will revise the promotion and Presented at negotiations. appraisalmanuals to: (i) put more emphasis on the institutional analysis of the executing agency, (ii) strengthenanalysis of community participation, (iii) improve project analysis document prepared by sponsoringagency, and (iv) provide a better breakdown of project costs. IBIS will separate promotion and Done. evaluation functions. FBIS will improve the balance of its FHIS has started to discuss with the social services portfolio. MOH the promotion of the following programs: (i) training of midwives, (ii) vaccination,and (iii) furniture and equipment for health centers. FBIS will strengthensupervision by Done. IBIS has contracted 4 increasingthe number of additional staff, which is adequate. supervisors. 38 ANNEX 2 Page 3 of 3

FHIS will revise the supervision Manuals presented at negotiations, manual (part of the operational but not yet approved by FHIS Board. manual) in line with recommendations made above. Informal.Sector

M S vill unify lending criteria for Done. all loans. FRIS will improve its management Done. informationsystem, especially the monitoring of debt service. PHIS will adjust operationalmanuals Done. in accordance with above recommendations. Adminietration

FHIS will carry out special Done. By the end of January 1992, promotion efforts in 80 of the FHIS provided a report showing that poorest municipalities and will help the results of these promotion local groups prepare more efforts have been positive (Annex subprojects. 12). In numerous cases, actual disbursementsper municipalityhave exceeded the targeted programming of funds for 1991 based on the poverty l ______ma p . FHIS will create a small unit to Done. FHIS has created the unit. monitor the impact of FHIS subprojectsthrough impact studies. FEIS will strengthen its financial FlIS has selected a candidate for analysis capacity through the the position of financial analyst. recruitment of a financial analyst. I 39

ANNE 3 Page 1 of 1

SECOND)SOCAL INVESTMENTFUND PROJECT

PROJECT COSTS (US$ million)

Foreign Exchange Percentage of -- ...... - ...... Amount X Amount Total Cost Cost FNIS

1. SOCIAL INVESTMENTFUND A. Subprojects Social Infrastructure (54 ) 33.06 30 9.92 49.0 49.1 Economic Infrastructure (13X) 7.96 20 1.59 11.8 11.8 Social Services (22X) 13.47 15 2.02 20.0 20.0 Informal Sector (ilK) 6.73 25 1.69 10.0 10.0

SubtotaL (100) 61.22 25 15.22 90.7 91.0

S. OperatingCost Salaries (46X) 2.82 0 0.00 4.2 4.2 Professional& Tech. Svcs. (25X) 1.52 90 1.37 2.3 2.3 Promotion and Advertizing (8X) 0.51 0 0.00 0.8 0.8 Travel (6K) 0.33 50 0.16 0.5 0.5 Rent, Maintenance,etc. (14K) 0.90 20 0.18 1.3 1.3 ......

Subtotal (100) 6.08 28 1.71 9.0 9.0

SUBTOTAL FNIS 67.30 25 16.93 99.7 100.0

II. TECHNICALASSISTANCE TO NLO 0.20 25 0.05 0.3

TOTAL PROJECT COST 67.50 25 16.98 100.0 uuu==u= ==-=uu.uuu.uuua 40

ANNEX4 Page I of 1

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

FIILANCINGPLAN (US$ million)

------__------FHIS Senfj'GOs X Govt. X Donors X Total

SocialInfrastructure 1.65 5.0 1.65 5.0 29.76 90.0 30.06 Econcmic Infrastructure 0.40 5.0 0.40 5.0 7.16 90.0 7.96 Socil Services 0.67 5.0 0.67 5.0 12.12 90.0 13.47 Informtl Sctor 0.67 10.0 0.34 5.0 5.72 85.0 6.73 Salarfes 0.00 0.0 2.54 90.0 0.28 10.0 2.82 Professal A Toehnical Svcs. 0.00 0.0 1.37 90.0 0.15 10.0 1.52 Prootion aW Advertfaing 0.00 0.0 0.51 100.0 0.00 0.0 0.51 Travl 0.00 0.0 0.29 89.0 0.04 12.1 0.33 Rent,Naintenance, etc. 0.00 0.0 0.86 95.0 0.05 5.1 0.90 Subtotal fHIS 3.40 5.0 8.62 13.0 55.28 82.1 67.30 Technical Assistane to ILO 0.00 0.0 0.00 0.0 0.20 100.0 0.20 ......

TOTAL 3.40 5.0 8.62 12.77 55.48 82.2 67.50

------= 41

AYNXE 5 Page 1 of 1

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

METHODSOF PROCUREMENT (US$ million)

Civil Works and Materials -.- 6.2 3.321 47.1 56.6 _._ (5.7) (3.1) (8.8)

Furniture and Equipment -.- 0.9 0.231 2.9 4.0 -.- (0.8) (0.2) (1.0)

Consultants Training and -.- -.- 0.4 0.4 0.8 Auditors' Services -.- -.- (0.4) (0.4)

Salaries, Allowances and -.- -.- -.- 6.1 6.1 OperatingCosts of PHIS and NLO -.- -.- -.- (0.0)

.- 7.1 3.9 56.5 67.5 TOTAL PROJECTCOSTS - - (6.5) (3.7) (10.2)

Notes: Numbers in parenthesesreflect IDA financing.

1/ Not IDA-Financed. 2/ Includes local shopping and direct contracting,with direct contractingup to an aggregate amount of US$2.2 million. 3/ Shopping. 42

ANNEX6 Page 1 of 1

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

DISBURSEMENTSCHEDULE

IDA Fiscal Year and Semester Semester Cumulative X Semester

1993

First (July 1992-December1992) 3.0 3.0 29.4 1 Second (January 1993-June 1993) 2.5 5.51 53.9 2

1994

First (July 1993-December1993) 2.5 8.0 78.4 3 Second (January 1994-June 1994) 2.2 10.2 100.0 4

Closing Date: December 31, 1994

J Includes the in'tial deposit of US$1.0 million to the Special Account and US$L.0 million of retroactive financing. 43 ANNEX 7 Page 1 of 3

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

TERMS OF REFERENCEFOR MID-TERMREVIEW OF FHIS-II

Background

1. The purpose of the mid-term review is to evaluate project performance during implementation,to provide project management with immediate feed-back on project achievements as well as on areas needing improvement,to justify and orient eventual changes in project design, and to document the status of project execution thoroughly for the benefit of the Borrower and the financing agencies. The mid-term review procedure consists of an initial period of approximatelytwo weeks when specialists contracted by the Borrower collect data and review information,assembled by the project management since the beginning of project implementation,focusing on technical, administrative,and financial aspects of the project (this includes regular monitoring information). Field visits to subproject sites are part of this process. Following this fact-findingperiod, the review team analyzes the information collected, reviews progress against original targets, and prepares a brief report highlightingstrengths and weaknesses, and makes recommendationsfor management action. The mid-term review team then joins the project management to discuss its findings and recommendations,and arrive at concrete agreements regarding targets to be reached and changes to be made in project management and implementation. This procedure has been successfullyused for the mid-term review of the first FHIS project, its recommendationsproved useful to the project management and to IDA, and have served as the basis for the preparation of the second FHIS project.

Obiectives of the Mid-Term Review of the Second Social Investment Fund Proiect

2. The main objectives of the mid-term review of the Second Social Investment Fund project are to determine: (i) the targeting of FHIS funds (in order to channel more resources to poorer municipalities);(ii) the quality of the subprojects financed by the FPIS; (iii) the impact of FHIS-financed subprojects; (iv) the administrativeefficiency and the financial soundness of the operations of the FIS; (v) the prospects for the future of the FHIS; and (vi) an assessment of the extent to which the experience of the FHIS can be transmittedto strengthen social ministries and improve their operations,and to agree on remedial actions, if necessary.

Comoosition of the Mid-Term Review Team

3. The mid-term review team should be led by IDA staff responsible for managing the project and should include: (i) an engineer to review social and economic infrastructureprojects; (ii) a social scientist,with extensive project experience, to review social services subprojects;(iii) a credit analyst, with experience in informal sector lending programs, to review the informal sector credit subprojects;(iv) an economist,with extensive experience in project impact analysis, to review the impact of the FHIS 44 ANNEX 7 Page 2 of 3

subprojectsbased on a sample survey and other data; (v) a management specialist,with experience is management informationsystems, financial analysis, and procurement,to review the administrativeand financial aspects of the operations of the PHIS; and (vi) a statisticianto assist in assembling and processing data.

Specific As2ects to be Reviewed in each Area

4. The review of tarnetinawould: (i) compare the amount of funds channeledby FHIS to municipalitiesclassified in five degrees of poverty (very poor, poor, deficient, regular, and acceptable)with the amounts allocated at the start of the project; (ii) determine the degree to which the targeting objectives have been reached; (iii) review measures taken by FHIS to improve channeling of funds to poorer municJnalities;and (iv) make recommendationsfor improvementsand reach agreement, when applicable.

5. The technical review of the four subproject categories will include assessmentsof: (i) the quality of subprojects; (ii) the sustainabilityof subprojects;(iii) the size and distributionof subprojects;(iv) the procedures for processing projects from identificationto supervision; (v) the observance of criteria establishedin the operationalmanuals for subproject identification,appraisal, and supervision;(vi) efficiency of subproject execution, procurementand contractualpractices; (vii) proportion of a subproject category in the overall portfolio of the FHIS and comparisonwith I-portion expected at appraisal; (viii) institutionalcapacity of executing a&ancies; and (ix) performance of NGOs when applicable.

6. The impact analysis to be carried out by November 30, 1992 will be based on monitoring and evaluation data collected by the FHIS and by other agencies, including national household sample surveys, and sample surveys of IBIS beneficiaries. The analysis will focus on: (i) the extent to which the IHIS allocates investmentsin accordancewith the targeting criteria established at appraisal; (ii) direct and indirect benefits of the subprojects financed by the FHIS in the communitiesaffected; (iii) estimation of employment generated by the IHIS;(iv) estimation of the institutionalimpact of the FHIS on executing agencies; (v) eventual negative impacts of subprojects;and (vi) replicabilityof the PHIS targeting mechanisms for social investments in other governmentalagencies.

7. The administrativeand financial review will focus on: (i) overall performance of FHIS departments; (ii) personnel administration,remuneration scale, recruitmentand retention of quality staff; (iii) accounting procedures and results of financial audits; (iv) efficiency of management information systems; (v) analysis of overhead costs to determinewhether FHIS is achieving its objectives in a cost-effectiveway; (vi) financial projections; (vii) procurement and contract administration;(viii) disbursementsof funds for subprojects;(ix) disbursementsof external loan funds; (x) distributionof expendituresby sources of funds; (xi) co-financingarrangements; (xii) enforcement of financial controls; (xiii) coordinationbetween the FBIS, line ministries, and public utility agencies; and (xiv) participationof the Board of Directors. 45 ANNEX 7 Page 3 of 3

8. The possible future vrosvecs uf the EHIS vill be jointly analyzed by the mid-term review team, taking in o account the Government'sprogram of modernization of the state and the actual and anticipated capacity improvements of the principal social sector agencies to carry out investment programs aimed at poverty alleviation and social development. 46 ANNEX8 Page 1 of 3

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

NGO LIAISON OFFICE

Background

1. As a means of fostering increased collaboration with nongovernmental organizations (NGOs) to address the urgent poverty alleviation needs of Honduras, President Callejas hosted an international NGO Conference at the World Bank on September 26, 1991. The proceedings of this conference highlighted the need to increase the effectiveness of NGOs development activities in Honduras, through the implementation of following measures: (i) improved coordination between the Government and NGOs, among NGO working in the same sector, and between NGOs in different sectors; (ii) development of a centralized information facility that is easily accessible to NGOs and to government agencies; (iii) documentation and simplification of procedures for NGOs to operate in Honduras; (iv) training and institutional strengthening for local NGOs; and (v) increase contacts between NGO1 and donor agencies to expand participation of NGOs in development projects execution.

Creation of an 10Q Liaison Office

2. Following this Conference, the Government of Honduras decided to create a NGO Liaison Office (NLO), as the focal point for coordinationof NGO activities in the country. The decision reflects the awareness of the GOH of the importance of NGOs in the Honduran developmentprocess as a means to complement Government action in the social sectors, and particularlyas a means of alleviatingpoverty.

Oraanizationof the NLO

3. The NLO will be located at the Offiee of the Presidency. Its organizationwill consist of: (i) a Board of Directors composed of representativesfrom NGOs and Government social agencies; (ii) an executive director; (iii) legal counsel; and (iv) four operating departments including promotion, informationand communications,consultative groups, and administration.

Work Proaram of the NLO

4. The work program for the NLO operating departments consists of the following:

4.1. the promotion departmentwill function through a liaison unit and a service unit, working to simplify registrationand operation of NGOs in Honduras, foster the formation of local NGOs, and promote and execute programs to strengthen the N%Os operational capacity;

4.2. the information and communicationsdepartment has two main areas of activity: (i) establishingefficient communication 47 ANNEX 8 Page 2 of 3 channels between NGOs and government agencies, and among NGOs, by collectingand disseminatinginformation through various forms such as publicationof a QuarterlyBulletin of Activities,creation and updatingof an NGO directory,and mappingof NGO projectsin relationto the Honduraspoverty map; and (ii) institutional strengtheninaof NGOs throughthe organizationof, and participationin local and internationalconferences, seminars, and workshopsrelated to training,plunning, and programing of NGO activities; 4.3. the consultativeRroups department consists of four joint Government-NGOworking groups whose work focuseson strengthening the legal frameworkfor the operationof NGOs in Honduras,and on removinglegal and regulatorybarriers for the efficient collaborationof NGOs and governmentagencies; and 4.4. the administrativedepartment will supplythe necessaryhuman and materialresources, and the logisticsupport for the operation of the NLO, and will be responsiblefor managingthe office.

Cost and Financing 5. The cost for operatingthe NLO duringa periodof two years,is estimatedas follows: COST ESTIIATESAND SOURCESOF FINANCING (US$ thousand)

PROGRAMS TOTAL GOH IDA GRANTS Promotionand Information 100 - 84 16

Institutional Development 110 - 25 85

Consultative Groups 33 - 33 -

Administration(*) 135 135 - -

Office equipment 50 - 16 34

Contingencies 22 - 17 5 ------TOTAL 450 135 175 140 ------Notes: (*) Administrativecosts includesalaries and officerent. The cost of officesupplies and materialsis allocatedproportionally to the operatingprograms. A possibleneed for reducingthe Government'sfinancing share will be reviewedat negotiations. 48 ANNEX 8 Page 3 of 3

Dlsbuhmmnta

.00 Disbursementsof IDA fundswould be made againstconsultant fees and officeequipment. The creationof the NLO is a conditionfor disbursement. HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

SOCIAL INFRASTRUCTUREPROJECTS FINANCEDBY FHIS

Repalr of Schools Building, playground, fence, or other Only schools in operation 1 Infrastructure used in public schools Extension or Construction of Schools Building, playground, fence, or other Only schools in operation 1 infrastructure used in public schools Rapair of Health Centers Health Centers Only health centers in operation 1 Extenion or Construction of Health Health Centers Equipment and operation to be ensured 1 Centers by sponsor Repair of Day-Care Centers and Public Day-Care Centers, Orphanages, Only facilities in operation 1 Shelters and Shelters o Extension or Construction of Day-Care Public Day-Care Centers, Orphanages, Equipment and functioning mot be 1 Centers and Shelters and Shelters ensured by sponsor Sanitation (Latrines) For rural and uarSinal urban areas Sponsor mist undertake to train 1 beneficiaries Public Laundries Small infrastructure Including Operation and maintenance to be 3 provision of water and sanitary ensured by sponsor facilties Severege Smrage systems, septic walls, Includes house conmections 1 treatent plants Potable Water Repalr or constructlon of tanks, pipes Excludes house connections I and outlatsl public *ystm

_.

US HOINDURAS

SECONDSOCIAL INVESTENT FUND PROJECT

ECONOMICINFRASTRUCTURE PROJECTS FINANCEDBY FMIIS

Markets Refurbishing of roofs and sanitation. Rents for use of space to be charged 3 Construction of small markets by sponsor Rehabilitation of ruins to protect Repairs of historical cultural heritage monuments, Excludes privately-owned monuments and archaeological excavations theaters 4 Road Imprwvment Paved with stones or bricks, sidewalk Sidewalk borders paving excluded 3 Bridges Small urban or rural bridges, pedestrian passages 2 Road Improvement Improvement of embanklments and slopes Road surface excluded 2 Drainage Drainpipes, canals, ditches, and Drains and covering of canals, 3 gutters ditches, etc., excluded Retention Walls Economic justification required 3 Irrigation Small Irrigation ditches, main and Piping excluded secondary canals 2 Forestation Sponsor to ensure maintenance; 4 planting material excluded Collection Centers Silos and warehouses Sponsor to ensure operation and 3 maintenance

_Q ooI- *0) o0 Ph~ 51 ANNEXll Page 1 of 4

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

SOCIAL SERVICES PROJECTS

I. Obiectives

1. Honduras is one of Latin America's poorest countries,with per capita GNP estimated at US$590 for 1990. It is in the midst of a structural adjustment process that has fundamentalimplications for the social sectors. Social indicatorsin Honduras show that poor health, malnutrition,and continuing low levels of educationalattainment are fundamentallyrelated to the continuingbackwardness of poverty groups, especially those in rural areas of the country. The GOH has devoted a quarter to a third of its spending to public education and health each year over the past decade. Both sectors absorb substantialproportions of resources from the public sector budget (28Z in 1988). Taken together9 the Ministries of Health and Education and semiautonomousinstitutions are budgeted to spend about 14Z of the GDP. However, current programs do not provide sufficientbenefits to the poor. The sectoral balance that currently exists is one of the causes of underserving the poorest groups. Within the health and education sectors, resource allocation is inefficientand inequitable,emphasizing curative care, technical and higher education that serve middle income groups. The figures of Annex 1 present selected social indicatorsfor Honduras.

2. The Ministries of Health and Education recognize that today, programs are not targeted to the poor, the young, or to rural areas. To avoid a deteriorationof social indicatorsduring the period of economic adjustment, they recognize PHIS's role as a social safety net for the poor which could complement existing service gaps at the local level through subprojects carried out by NGOs, local communities,and the private sector.

3. In line with this concept, the target populations for the FEIS subprojects in the social sectors have been defined as follows: (a) pregnant and lactatingmothers, and children aged 0-5 years for health and nutrition subprojects; (b) children of pre-primary and primary school age (5-12 years) for education subprojects.

4. In the health and nutrition sector, the objectives of the FHIS are to: (i) contributeto the reduction of mortality,morbidity and malnutrition among children aged 0 to 5 years; and (ii) contributeto the reduction of maternal mortality through the increase in the provision of maternal and child primary health care. In the education sector, the objectivesof the PBIS are to: (i) increase the coverage of targeted early childhood programs for children under 6 years includingnutrition, health and hygiene, early stimulationand pre-school education;and (ii) support MOE programs for primary education (childrenaged 7-12 years). 52 ANNEX11 Page 2 of 4 II. Proiect Components

5. The FHIS would finance the following types of subprojects:

6. Health and Nutrition Prolects: (a) support to lactarios (feeding places for mothers and pre-school children) including nutritional support, growth monitoring,nutritional surveillanceand nutrition education programs; (b) support to food production in community farms (microaraniasand huertas); (c) development of primary health care training programs for community midwifes (Darterasemoiricas), health promotors and communityhealth guardians, includingprovision of basic tools and medicines; (d) vaccination programs; (e) support to primary health care facilities including furniture and equipment and maintenanceprograms for the cold chain (vaccines);and (f) support to community health programs such as vector control, environmentaland health education.

7. Education Proiects: (a) targeted school breakfast program via parent associationsprovided that they: (i) use local foods; and (ii) transfer monetary resources to executing agencies for food purchase and preparation at the community level; (b) targeted provision of educational materials, a small school library and teacher training on management of class time, use of materials, etc.; (c) provision and repair of school furniture (bipersonaldesks and chairs); and (d) targeted early stimulationand pre- primary non-formal educationprograms consistingof training local personnel, and providing teaching materials and furniture for pre-primary centers, and nutritional assistance (growthmonitoring and nutrition education).

III. Amproach and Targeting

S. To target resources for social projects, FHIS identifiesthe poorest groups among potential beneficiariesusing the most illustrative indicators of extreme poverty in Honduras at the municipal level: child malnutrition rates, access to clean water and latrines. FHIS ranks departments and municipalitiesaccording to the above mentioned indicators, and allocates more resources to poorer municipalities. In addition, as part of the criteria to select beneficiaries,the social sectors program will use some of the following eligibility indicators at the community level: (i) infant mortality rates, acute respiratory infections and diarrhea incidence among children under 5 years; (ii) malnutrition (severe) among children aged 0 to 5 years; (iii) availability of potable water and latrines; (iv) percentage of school age children (7 to 12 years) attending school; and (v) existing social infrastructure: CESAMO, CESAR, health promotor, health guardian, primary school (grades, teachers).

IV. Conditions and Reauirements for Suboroiects

9. Besides ensuring that geographical and eligibility criteria are met, FBIS field staff (promotors) will be responsible for ensuring that social sector subprojects meet the following conditions: (a) community participation through money, kind or labor. This is one of the essential components of the social sector subprojects to be presented for FHIS financing because it: (i) mobilizes additional re# arces; (ii) indicates effective demand for health, 53 ANNEX11 Page 3 of 4 nutrition and education services through willingness to pay; and (iii) augments the sustainabilityof projects; (b) contributionof sponsoring agency because this: (i) would induce agencies to reveal their own priorities for funding; (ii) would give executing agencies more of a stake in the project; and (iii) would discourage the creation of non viable agencies from simply taking advantage of the FHIS; and (c) prolects are sust inable, meaning that a combinationof local, third party, and/or public sector agencies are committed to support recurrent costs of the project beyond PHIS support.

10. As a general principle for social services subprojects,FHIS will require a minimum of 5% counterpart financing from beneficiaries (for example in land, physical facilities,materials, money or time). Counterpart financing of up to 10% is also required from the other participating institutions(municipalities, line ministries, NGOs) on an individual subproject basis.

V. The Cycle of Subvroiects

11. Identificationand Preparation. The field staff (promotors)of the FHIS play an active role in the identification and assistance to preparation of social sector subprojects. They inform communitiesand potential executing agencies about the alternative social sector subprojectsPHIS might finance, and provide advice and technical assistance. One of their duties is to complete the community profile filled up by the requesting agency. They are responsible for ensuring coordinationwith relevant public sector agencies, including arrangementsfor the sustainabilityof the subprojectsbeyond IHIS.

12. Evaluation. In approving social sector subprojectsthe FHIS follows the following steps: (a) verificationthat targeting criteria are met including: (i) location in high priority departments and municipalities; (ii) beneficiary groups to which assistance would be directed; and (iii) expected impact on target population; (b) assurance that the project is sustainableby obtaining written agreements by relevant public sector agencies, municipalitiesor others to pick up recurrent costs beyond PHIS; and (c) evaluation of the prospectiveexecuting agency. The FHIS evaluates: (i) the efficiency of the subproject'spurpose; (ii) the implementationcapacity of the agency submitting the application; (iii) the agency's financial state; (iv) the cost of the subproject independentlyof the estimates presented by the agency; and (v) the ratio of administrativecosts over total project cost.

13. Implementation. Social services subprojectsare typically carried out by NGOs. Each subprojectwould be covered by a three party contract among IHIS (as the funding agency), the executing agency, and the supervising agency (if it exists). Upon subproject approval, FHIS establishes a project account and authorize the disbursement of an advance to start up the subproject. Schedule and conditions for subsequent disbursementsare established at subproject approval. Subproject contracts provide for suspension of disbursementsif the purposes of the subprojectsare not being achieved or funds are being diverted from the agreed activities. 54 ANNEX 11 Page 4 of 4

Supervision and Monitoring. FHIS supervisorsvisit subprojectsin the field regularly to verify that funds are being used for the purpose for which they were intended. Visits are more frequent if special problems arise or are suspected. The supervision of social sector projects reviews the need for technical assistance to support and strengthenboth community organizationsand NGOs' executing capacity. In addition, quarterly operationalaudits include a sample of social sector projects.

14. Ex-post EvaluAtion. The demonstrationof FHIS's accomplishments requires precise measurementsex-ante and ex-post. Evaluations of the results achieved by completed subprojectswould be carried out. These evaluations would use the baseline informationgathered at the time of project preparation in the appraisal form, and estimate the changes in the basic indicators once the subproject is completed, such as the number of midwifes trained, the number of school breakfasts provided and the increase in school attendance rates.

VI. Social Services Menu of Subvroiects

15. A summary of the IBIS social services subprojects is provided below.

Nutrition

Lactarios School Breakfasts Community Farms

Health

Primary Health Care Training

Traditional Birth Attendant Health Promotors Health Guardians Vaccination Programs

Support to PHC Facilities Furniture & Equipment Community Training in Health and Basic Sanitation Cold Chain

Education

Pre-PrimaryPrograms

Primary Programs EducationalMaterials, Libraries, Teacher Training

School Furniture New Desks/Chairs Repair of Desks/Chairs SECONDSOCIAL INVESTMENTFUND PROJECT

RESULTS OF PROMOTIONEFFORTS IN THE 80 POORESTMUNICIPALITIES

:NI C IP:|TE APPRVED9 : X APRO.VED PERtT: Dot (US$) .(US)8 UDGETED INDEX I San Francisco de Coray 22,252 45,411 204 73.6 VALLE 2 San Marcos de la 36,166 42,792 118 71.1 INTIBUCA Sierra 3 Santa Cruz 25,559 41,213 161 70.1 LEMPIRA 4 Gualcince 57,405 56,076 98 69.8 LEMPIRA 5 Vado Ancho 21,294 22,331 105 68.8 EL PARAISO 6 Esquipulas del Norte 25,804 15,185 59 68.0 OLANCHO 7 Curaren 76,880 65,602 85 66.8 F. MORAZAN 8 Iriona 55,346 11,319 20 66.8 COLON 9 Belen 19,728 42,942 218 66.8 LEMPIRA 10 Brus Laguna 81,550 119,588 147 66.7 GRACIAS A DIOS 11 Yocon 77,846 64,569 83 66.3 OLANCHO 12 Candelaria 36,523 65,952 181 66.2 LEMPIRA 13 San Juan 18,879 34,006 180 66.2 LA PAZ 14 La Libertad 12,770 57,931 454 66.2 F. MORAZAN 15 Dolores 19,030 19,976 105 66.1 INTIBUCA 16 San Andres 55,015 65,627 119 65.3 LEMPIRA 17 El Triunfo 184,511 288,089 156 65.3 CHOLUTECA 18 Piraera 65,167 88,933 136 65.1 LEMPIRA 19 Virginia 17,493 31,654 181 64.2 LEMPIRA 20 Yamaranguila 109,387 88,764 81 64.0 INTIBUCA 0Q 21 San Manuel Colohete 51,546 37,826 73 63.7 LEMPIRA 22 Guata 70,165 22,749 32 63.5 OLANCHO o 23 Santa Rosa de Aguan 24,296 16,336 67 63.4 COLON Ph 24 El Rosario 28,897 20,697 72 63.2 OLANCHO 25 Gualaco 113,538 63,980 56 63.1 OLANCHO . _ ...... )'.(08$)_ ...... _...__...._.._..__. 26 Liure 56,311 30,241 54 62.3 EL PARAISO 27 Colomoncaus, 81,420 104,732 129 61.8 INTIBUCA 28 Concepcion de Mari 146,502 70,955 48 61.3 CHOLUTZC& 29 Puerto Le pira 122,325 179,264 147 61.0 GlACIASA

30 Alubaren 21,170 45,579 215 61.0 T. HORAUU 31 Marcovia 189,259 147,976 78 60.9 CHOLUTICA 32 Concepcion 27,809 21,789 78 60.4 COPN 33 Manguile 59,712 35,397 59 60.1 OLANCRO 34 Taxiguat 47,041 25,337 54 60.$ EL PARATSO 35 Langue 94,878 108,486 114 60.4 VALLE 36 Jano 20,750 8,199 40 60.1 OLANCHO 37 Guajiquiro 62,207 57,615 93 60.0 LA PAZ 38 San Miguelito 21,830 30,758 141 59.7 IDTIBUCA 39 Mapulaca 20,656 48,918 237 59.7 LENPIRA 40 Reitoca 40,765 70,392 173 59.4 F. HORAZAN 41 San Antonio de Flores 30,165 19,001 63 59.2 CHOLUTECA 42 Alauca 40,779 126,220 310 58.9 EL PARAISO 43 Marale 36,758 84,749 231 58.9 F. MDRAZAN 44 Santa An& 45,617 24,388 53 58.5 LA PAZ 45 Yarula 27,650 31,556 114 58.5 LA PAZ 46 San Jose 18,984 28,545 150 57.7 CHOLUTECA 47 Santa Elena 38,698 49,769 129 57.7 LA PAZ 48 Valladolid 22,657 42,132 186 57.6 LUMPIRA 49 Dulce Nombre de Culni 132,478 26,621 20 57.0 OLANCHO 50 San Francisco 37,671 43,430 115 57.0 LEMPIRA 51 Concepcion 55,105 61,546 112 56.9 INTIBUCA 52 Lepaterique 53,416 0, 86,557 162 56.8 F. HORAZAN o 53 r7lores Merendon 8,681 17,295 199 56.6 OCOTEPEQUE 54 San Esteban 125,173 3,557 3 56.4 OLANCHO 55 Ojojona 34,236 72,115 211 56.0 F. MORAZAN 56 124 57 Las Trojes 153,446 25,718 17 55.6 EL PARAISO 58 Apacilagua 51,646 57,944 112 55.5 CHOLUTECA 59 Mercedes de Oriente 5,997 41,573 693 55.5 LA PAZ 60 Caridad 19,299 17,869 93 55.1 VALLE 61 Limon 31,658 14,215 45 55.0 COLON 62 Namasigue 104,992 156,966 150 54.9 CHOLUTECA 63 San Miguelito 9,535 68,250 716 54.9 F. MORAZAN 64 Masaguara 54,239 35,980 66 54.9 INTIBUCA 65 San Juan 28,087 44,802 160 54.9 INTIBUCA 66 Soledad 55,213 40,927 74 54.8 EL PARAISO 67 El Corpus 122,861 79,247 65 54.8 CHOLUTECA 68 San Juan Guarita 15,346 31,036 202 54.6 LEMPIRA 69 San Isidro 19,421 40,641 209 54.4 CHOLUTECA 70 San Sebastian 35,658 36,669 103 54.0 LEMPIRA 71 Copan Ruinas 146,052 158,700 109 53.9 COPAN 72 La Campa 35,347 54,766 155 53.7 LEMPIRA 73 Santa Maria 38,220 40,817 107 53.7 LA PAZ 74 Nacaome 213,393 390,006 183 53.4 VALLE 75 Cabaflas 11,118 18,345 165 53.4 LA PAZ 76 San Antonio 28,482 27,463 96 53.2 IUTIBUCA 77 Morolica 25,331 36,440 144 53.0 f.'HOLUTECA 78 Alianza 42,759 56,576 132 53.0 VALLE 79 San Juan de Opoa 39,622 61,798 156 52.9 COPAN 80 Intibuca 148,881 202,101 136 52.9 INTIBUCA

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O >4

: I HOIDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

STATUSOF WATERCOtMITTEES IN CHARGEOF WATERAID SANITATIONPROJECTS (February 29, 1992)

Santa Lucia, Francisco Morazan Potable System 260.0 Lps. 6, 12, J.A.A. X 20, 10, 15 EL Paralso, E1 Paraiso Sewerage System 612.0 Lps. 5, 8, 10, Municipality % 12, 40 Trojes, E1 Paraiso Sewerage System 978.0 Lps. 3 J.A.A. 1 Olancho Catacamas, Potable System 730.7 Lps. 8 SANAA X Nina. de Oro, Co.ayagua Potable System 898. 0 Lps. 4 J.A.A. X Napulaca, Lempira Potable System 285.1 Lps. 4 J.A.A. X Candelaria, Lempira Potable System 135.3 Lps. 3 J.A.A. X grandiLqtue, Lempira Potable System 248.4 Lps. 4.5 unicipality X Guarita, Leupira Potable System 309.2 Lps. 2 J.A.A. X Terlaca, Lempira Potable System 155.5 Lps. 2 J.A.A. X Junigual, Lempira Potable System 40.7 Lps. 0.5 Local Committee X F1 Sitlo, Gcarlta, Lempira Potable System 54.0 Lps. 1.5 Local Committee X Nweva, Ocotepeue Potable System 1,419.3 Lps. 5, 0.5 Mlnicipality X Antigna, Ocotepeque Potable System 211.0 Lps. 5, 0.5 J.A.A. X Santa Fe, Ocotepeque Potable System 119.7 Lps. 2 Municipality X Dolores Herendon, Ocotepeque Potable System 177 7 X Santa San Luis, Barbara Sewerage System 301.3 Lps. 6+1I unicipality X San licolas, Santa Barbara Potable System 728.5 Lps. 34 0.75 Municipality X Trinidad, Santa Barbara Potable System 348.6 Lps. 6 lunicipality X Las Vegas, Santa Barbara Potable System 1,000.0 Lps. 3 + 0.5 Municipality X Concepcion, Copan Potable System 234 0 X San Antonio, Copan Potable System 238.8 Lps. 5 + 0.5 J.A.A X Chalmeca, Copan Potable System 135.0 Lps. 3 + 0.5 J.A.A. X Villanueva, Cortes Sewerage System 744 0 Lps. 6 5 Municipality X C. Lopez A., Choloma, Cortes Potable System 0.0 Lps. 4.5 Municipality XK Norazan, Yoro Potable system 700.0 Lpa. 2 municipality K CiI(UM , VE 0T PROJEfl.9J. CT.T AMOUNT01. . .. U CY0..WA-E m - T: ~~~~~~a. .:..::: .t CO.ST TAIF 1 ik..:SI.:SX: L ; 0~~~~~~~~~~~~ISZ~ f0ORATING.:.I

Yoro, Yoro Potable System 1,870.0 Lps. 2 + 1 Municipality I San Francisco de Yojoa Sewerage System 1,180.0 Lps. 2 S&NIA X Marcala, La Pat Sewerage System 967.0 Lps. 8 Municipality X Lamani, Ccmayagua Potable System 0.0 Lps. 2.5 J.A.A. X Lejamani, Comayaguna Potable System 406.3 Lps. 2.5 + 0.5 J.A.h. X Oak Rldge, Islas de la Bahia Potable System 205.0 Lps. 5, 8, 10 J.A.A. X Cozen Role, Islas de la Blaia Potable System 205.0 Lps. 5, 8, 10 X Mogotes, Francisco Morazan Potable System 27.4 Lps. 1.5 J.A.A. X Orocunna, Choluteca Potable System 447.8 Lps. 1.5 J.A.A. S Cofradia, Francisco Morazan Potable System 529.0 Lps. 4 J.A.A. X

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h o 60 ANNEX Page 1 of

HONDURAS

SECONDSOCIAL INVESTMENTFUND PROJECT

INFORMALSECTOR PROJECTS FINANCEDBY FHIS

I. Financing of Informal Sector by FHIS

1. The FHIS provides funds, to be administeredby qualified NGOs who woul.d lend the fundn at market rates to final beneficiaries. When deemed necessary, NGOs provide technical assistance to final beneficiaries (to be financed by the FHTS under the form of grants). Financing terms and conditions are included in the OperationalManual of the FHIS and are summarized below.

FinancialArraneements

2. Arrangementswhereby an NGO acts on behalf of FHIS to undertake lending to informal sector beneficiariesaccording to terms and conditions spelled out in the OperationalManual

Principal Financing Conditions

3. Loan principal and interest to be repaid to FHIS (or successor of FHIS) according to an amortizationschedule to be specified 4. NGO will be fully responsiblefor debt service and required to absorb any loan losses 5. Use of funds by NGO for purpose other than those agreed with the FHIS results in automatic recall of funds by FHIS

AvDroval

6. FinancialArrangements between EHIS and NGO approved by Operations Committee of EHIS 7. Individual subloans approved by management committee of NGO

Taraet Beneficiaries

8. Small and micro-entrepreneursin productive and service sectors located in marginal urban zones and rural zones with high unemploymentrates and low income who do not have access to formal credit at present. Small entrepreneursare those whose subprojectshave a cost between US$5,000 and US$10,000. Micro-entrepreneursare those whose subprojectsare less than US$5,000. 9. Examples of beneficiariesare shoemakers,handicraft makers, market or street vendors of food, clothes, utensils,mechanics, hairdressers,small tire repair shops, small farmers, etc. 10. OperationalManual includes other parameters to define target beneficiaries includingmaximum number of employees, sales per month, according to sectors 61 ANNEX 14 Page 2 of 2 Requirements for ParticipatingNGOs

Must be properly registeredlegally At least three years experience in their field Adequate administrativeand financial structure to undertake loan appraisal,recovery, and supervision Satisfactoryrecovery on existing portfolio (at least 95 percent) Adequate capacity to provide technical assistanceto beneficiaries Quarterly financial reporting to FHIS * Audit by external, private, independentauditors

Proiect Criteria

Loans to final beneficiariesto be appraised according to technical and financial criteria appropriatefor this type of operation 19. Projects to promote individualand group savings

Size of Loans

20. Maximum size of loan: L10,000

Lendint Terms

21. Repayment Period: in accordancewith the type of activity being financed (expectedto vary between 3 months for working capital to 24 months for equipment) Interest Rate: market rate to be applied by NGO, adequate to cover lending and recovery costs and ensure reasonablenet income, as agreed with FHIS 23. Net income from lending operation to be shared between NGO and FHIS according to a proportion establishedbetween FHIS and NGO 24. Solidarity group guarantee, (or in some cases fiduciary guarantee) required from beneficiary

rants for Technical Assistance

Technical assistanceto be provided by NGOs to final beneficiariesin simple administrative,accounting, and technical aspects 62

ANNEX Page 1 of

SECONDSOCIAL INVESTMENTFUND PROJECT

DOCUMENTSINCLUDED IN THE PROJECT PILE

A. Selected Reports and Studies Relatins to the Pro1ect

A.1. Mid-Term Raview of m S-I

Honduras Social Investment Fund Project (Credit 2212-HO), Mid-Term Review, January 15, 1992, Report No. 10281-HO.

A.2 mRS Action Plan

PHTS Action Plan for 1992 and 1993 to channel more funds than in the past to poorer municipalities,based on a poverty index, dated May 1992.

A.3 Staff Appraisal Report of HIS-I1

Honduras Social InvestmentFund Project, Staff Appraisal Report dated February 6, 1991, Report No. 9148-HO.

* All documents listed in Annex 12 of the above report remain relevant for the present FmIS-II project.

A.4 Yellow Cover Retort of Review of the PRAF Food Counon Prozrsm

Honduras PRAF Food Coupon Program, Review, Yellow Cover Report dated May 12, 1992, Report No. 10488-HO.