Honduras Multiphase Program for Road Rehabilitation of Sections of the Ppp Tourism Corridor - Phase I (Ho-L1013)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

HONDURAS

MULTIPHASE PROGRAM FOR ROAD REHABILITATION OF SECTIONS OF THE PPP TOURISM CORRIDOR - PHASE I

(HO-L1013)

LOAN PROPOSAL

This document was prepared by the project team consisting of José Agustín Aguerre (INE/TSP), Project Team Leader; José Francisco Demichelis (ICF/CMF); Trinidad Zamora (COF/CHO and procurement specialist); Javier Jiménez Mosquera (LEG/SGO); Roberto Suárez Nicolini (consultant), Raúl Campos Montero (environmental consultant); and Caterina Vecco (ICF/CMF) and Giselle Apat (INE/TSP), who helped to produce this document.

CONTENTS

PROJECT SUMMARY

I. FRAME OF REFERENCE ...... 1

A. Socioeconomic framework...... 1 B. The road sector...... 1 C. The country’s sector strategy...... 7 D. The Bank’s sector strategy...... 7 E. Program strategy ...... 9

II. THE PROGRAM...... 10

A. Objectives...... 10 B. Program description...... 12 C. Cost and financing of phase I of the program...... 16 D. Evaluation of phase I and eligibility of phase II of the program ...... 17

III. PROGRAM EXECUTION ...... 18

A. Borrower and executing agency...... 18 B. Program execution and administration ...... 18 C. Revolving fund and audits...... 19 D. Procurement...... 20 E. Monitoring and evaluation...... 20 F. Execution period and disbursement schedule...... 21 G. Program readiness...... 22

IV. VIABILITY AND RISKS...... 22

A. Institutional and financial viability...... 22 B. Technical and economic viability...... 23 C. Environmental and social viability...... 25 D. Benefits and beneficiaries...... 28 E. Risks ...... 28

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ANNEXES

Annex I Logical framework

Proposed resolution

Electronic Links and References Basic socioeconomic data http://www.iadb.org/countries/home.cfm?id_country=HO&Language=English Status of loans in execution and loans approved http://ops/approvals/PDFs/HOen.pdf Tentative lending program http://opsgs1/ABSPRJ/tentativelending.ASP?S=HO&L=EN Information available in the INE/TSP technical files http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=1113590 Procurement plan http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=1113598

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ABBREVIATIONS

AADT Annual Average Daily Traffic CABEI Central American Bank for Economic Integration CESI Committee on Environment and Social Impact DGC Dirección General de Carreteras [Road Administration] EIA Environmental impact assessment EIRR Economic Internal Rate of Return ENPV Economic Net Present Value ESMP Environmental and social management plan ESMR Environmental and social management report FSO Fund for Special Operations GGPE Grupo Gerencial de Proyectos y Ejecución [Projects and Execution Management Group] HDM-IV Highway Design and Maintenance Standards Model IDB Inter-American Development Bank IRI International Roughness Index MCC Millennium Challenge Corporation OC Ordinary Capital PPP Puebla-Panama Plan RICAM International Mesoamerican Highway Network SINEIA National Environmental Impact Assessment System SOPTRAVI Ministry of Public Works, Transportation, and Housing UGA Unidad de Gestión Ambiental [Environmental Management Unit]

PROJECT SUMMARY HONDURAS MULTIPHASE PROGRAM FOR ROAD REHABILITATION OF SECTIONS OF THE PPP TOURISM CORRIDOR - PHASE I (HO-L1013)

Financial Terms and Conditions Loan conditions: 1 Borrower: Republic of Honduras OC financing FSO financing Executing agency: Ministry of Public Works, Transportation, and Housing Amortization period: 30 years 40 years (SOPTRAVI) Grace period: 5.5 years 40 years Disbursement period: 5 5 Source Amount (US$) % Phase I Phase II Interest rate: Adjustable 0.25% IDB (OC)2 28,000,000 37 43,000,0003 46,000,0003 Inspection and 0% 0% supervision: Local (FSO)2 12,000,000 16 18,000,000 19,000,000 Credit fee: 0.25% 0% Other/Cofinancing 35,000,000 47 46,000,000 117,000,000 Currency: US$, FU US$ Total 75,000,000 100 107,000,000 182,000,000 Project at a glance Project objective: The general objective of the multiphase program is to improve the efficiency and safety conditions of the San Pedro Sula – Trujillo road corridor (Highway CA-13), which will contribute to the sustainable economic development of the country’s northern region. The specific objectives include facilitating fluid, safe, predictable transit of the road in any season of the year, while reducing transportation costs and travel times, by improving the capacity and rehabilitating the primary road connecting the country’s commercial hub with the Caribbean zone, which has the best conditions in Honduras for investment in tourism infrastructure. Special contractual conditions: The first disbursement for activities to improve the El Progreso-Tela road is subject to delivery by SOPTRAVI, to the Bank’s satisfaction, of the final designs for the works, a document identifying the affected properties, and a plan of action for transacting the land purchases necessary to carry out the works (paragraph 3.15). Exceptions to Bank policies: None. Retroactive recognition of expenditures : Expenditures of up to US$50,000 incurred after 1 July 2007, but prior to the date of approval of the loan by the Board of Executive Directors, to contract consultants to support the Environmental Management Unit (UGA) and procure a vehicle may be recognized retroactively against the Bank’s loan (paragraph 3.15). Project consistent with country strategy: Yes [ X ] No [] Project qualifies as: SEQ [ ] PTI [ ] Sector [ ] Geographic [ ] Headcount [ ] Procurement: See paragraph 3.10 and Annex II. Verified by CESI on: 25 May and 3 August 2007 Environmental and social review: See paragraphs 4.23 to 4.27 and the environmental and social management report The interest rate, credit fee, and inspection and supervision fee mentioned in this document are established pursuant to document FN-568-3 Rev. and may be changed by the Board of Executive Directors, taking into account the available background information, as well as the respective Finance Department recommendations. In no case will the credit fee exceed 0.75%, or the inspection and supervision fee exceed 1% of the loan amount. With regard to the inspection and supervision fee, in no case will the charge exceed, in a given six-month period, the amount that would result from applying 1% to the loan amount divided by the number of six-month periods included in the original disbursement period. 2 Within the framework of the Bank’s approval of debt relief for countries that qualify for resources from the Fund for Special Operations (FSO), and in the case of Honduras, new loans during the 2008-2009 period will be financed with a blend of resources from Ordinary Capital (OC) and the FSO, in a proportion of 70% and 30%, respectively. 3 The amount of the Bank’s loans for phases II and III is subject to availability of resources.

I. FRAME OF REFERENCE

A. Socioeconomic framework 1.1 In recent years, the Honduran economy has performed strongly, compared with the modest growth of the 1990s. In 2006, figures showed growth of approximately 6%, and the projections for 2007 and 2008 are between 5.5% and 6%. This growth has been achieved with historically low inflation (5.3% in 2006, the lowest rate in 18 years). Under these conditions, increased fiscal revenues can be expected, which would boost investment spending in the near future. Despite a sizeable trade deficit, the external sector of the economy remains strong, due to growth in international remittances and exports. In 2006 exports grew 11.3%, and the Honduran Central Bank’s net international reserves climbed to the equivalent of 4.2 months of imports. 1.2 In fiscal terms, although there have been improvements, vulnerabilities persist. In 2006 the central government deficit was 1.4% (2.7% in 2005), and the combined public sector deficit came in at 2.1% of gross domestic product. This fiscal improvement resulted from an increase in tax revenue and some delays in capital spending (as reflected in the slow execution of the investment budget). In addition, the country benefited from significant cancellations of foreign debt, which has given it more fiscal headroom. Nevertheless, there are major pressures to be addressed in 2007, associated with increased current spending due to payroll adjustments, energy subsidies, and the financing of losses by state-owned companies (ENEE and HONDUTEL). With respect to the country’s relationship with the International Monetary Fund, the Honduran government has indicated its desire to continue, and even strengthen, its relationship with the organization through the implementation of a new macroeconomic program,1 for which talks are under way. B. The road sector 1.3 The road network. The road subsector is vitally important for Honduras. The country’s road network covers 14,036 km, with 3,276 km (23%) in the primary network, 2,555 km (18%) in the secondary network, and 8,205 km (59%) in the tertiary network. The primary network is 78% paved, compared to just 16%2 of the secondary network, much of which is in fair or poor condition. The density of the paved and total networks with respect to the population and area is low in Honduras, making it one of the Central American countries with the least developed road networks, as indicated in Table I-1.

1 Honduras’ Poverty Reduction and Growth Facility arrangement with the International Monetary Fund expired in February, as planned. 2 Of the total paved primary and secondary network, 67% is paved in asphalt concrete, 25% in double surface treatment, and 8% in hydraulic cement. - 2 -

Table I-1 Comparison of Network Indicators Paved network Paved network Total network Total network Indicators / population / area / population / area (km/1,000 inhab.) (km/1,000 km2) (km/1,000 inhab.) (km/1,000 km2) Costa Rica 2.00 154.5 9.10 702.1 El Salvador 0.31 94.4 1.56 476.7 Panama 1.38 58.1 3.78 158.7 Mexico 1.07 55.2 3.27 168.3 Guatemala 0.41 44.7 1.18 129.7 Honduras 0.41 24.8 2.00 121.4 Belize 1.84 21.3 10.83 125.1 Nicaragua 0.34 14.1 3.55 145.7 Latin America and the Caribbean 1.51 38.9 5.64 145.0 Middle- (low-) income countries 1.31 60.5 2.47 114.2 High-income countries 13.25 394.5 13.89 413.5

1.4 Within the framework of the Puebla-Panama Plan (PPP), Honduras has given priority to strengthening its roadway infrastructure for integration, as part of the International Mesoamerican Highway Network (RICAM),3 in order to enhance its economy’s connectivity and competitiveness. In Honduras, the highways included in RICAM cover 9,034 km, including 4,904 km of integration corridors and 4,130 km of feeder roads and complementary connections. The sections included in the Atlantic and Tourism corridors are particularly important in Honduras. 1.5 The Atlantic Corridor of RICAM represents vital transportation infrastructure for the competitiveness of Honduras and Mesoamerica. Covering 1,745 km, it connects Mexico, Belize, Guatemala, Honduras, and El Salvador. The Honduran portion includes sections of Honduran highway CA-5 Norte, the country’s main roadway corridor, which connects in the south to the future highway between Villa San Antonio and Goascorán, and to El Amatillo (on the border with El Salvador), and from there to Puerto de Cutuco in El Salvador. This route provides cargo access to and from Puerto Cortés, Central America’s only deepwater port and one of the best equipped, with a capacity to load and unload up to 10 vessels on its wharfs. The importance of this corridor extends to the regional context, as it connects Puerto Cortés to the future Puerto de Cutuco in El Salvador, establishing an Atlantic-Pacific corridor with great potential. The entire CA-5 corridor has financing, and works are under way to turn into it into a four-lane highway.

3 Within the framework of the Puebla-Panama Plan (PPP), based on the work of the PPP’s Technical Commission on the Mesoamerican Transportation Integration Initiative, and with the Bank’s support and participation, in 2001, the RICAM Memorandum of Understanding was prepared, establishing the expediency of adopting a common legal, institutional, regulatory, and operational framework for execution of the Initiative, and identifying the roadway corridors making up this integration network. The presidents of the PPP member countries approved the establishment of the RICAM in 2002. - 3 -

1.6 San Pedro Sula is Honduras’ main economic hub, which makes this city a potential regional trade center, and in particular, an international hub for business travel and tourism. It is home to the country’s largest commercial airport, allowing for the arrival of regional and international air travelers. 1.7 In its investment plan, the Honduran government has also prioritized the PPP’s 1,433-km Caribbean Tourism Corridor, which runs between the main tourist towns and resorts on the Caribbean, from Cancún, Mexico, to Trujillo, Honduras, passing through Chetumal, Belmopán, and Río Dulce. In Honduras, the route starts at the border with Guatemala, passes through Puerto Cortés, continues south to San Pedro Sula, and then turns east to become Highway CA-13, passing through the towns of El Progreso, Tela, La Ceiba, and Tocoa on its way to the port of Trujillo. 1.8 Highway CA-13. This highway links the city of San Pedro Sula (Department of Cortés) to El Progreso (Department of Yoro) and the Caribbean resort towns of Tela, La Ceiba, and Trujillo (Departments of Atlántida and Colón), as the final stretch of the Caribbean Tourism Corridor. These resort towns contain the initial infrastructure for providing services in this area, which has the greatest tourism potential on Honduras’ Caribbean coast. Significantly, Highway CA-13 is the only road in the primary network providing access to this tourism area. 1.9 The section of CA-13 between San Pedro Sula and El Progreso was built in 1973 and subsequently rehabilitated and improved between 1989 and 1994; it has two lanes in each direction. The next section, between El Progreso and Tela, is a standard two-lane asphalt road (3.65 m per lane), with narrow shoulders (1.35 m). The pavement is in relatively good general condition (with an IRI4 of approximately 4 mm/m), although it is showing signs of aging. This road has an Annual Average Daily Traffic (AADT) of 5,830 vehicles/day,5 of which 22% are cargo vehicles. 1.10 Traffic has increased steadily over the last two decades. According to counts done between 1991 and 2007, the average growth rate is 6.7% per year, and the subregion’s economic development (investment projects in the tourism sector and expansion of agricultural production, particularly for biofuels) is projected to generate additional demand. Considering a more conservative average traffic growth rate (5% per year), symptoms of congestion will appear on the existing road in 2010, inasmuch as the flow/capacity ratio reaches a value of 0.4. This would impede the subregion’s economic activities, in addition to making the roads less safe for users and inhabitants.6 1.11 Road safety in Honduras has long been poor. The Bank, together with other donor entities, is supporting policy reforms and road safety programs aimed at the entire

4 International roughness index (IRI) 5 Classified counts (24 hrs./day; 7 days) by the Ministry of Public Works, Transportation, and Housing (SOPTRAVI) during three seasons (March 2007). 6 See the Project Economic Viability Report. - 4 -

Honduran road system,7 and has included consideration of this factor in the projects financed in recent years. In particular, the Ministry of Public Works, Transportation, and Housing (SOPTRAVI) is working on improving the policy framework, oversight mechanisms, and early road safety education, and developing campaigns and interventions to increase public awareness of this serious problem. 1.12 On Highway CA-13 there are serious gaps in roadway safety, basically due to the lack of specific safety precautions in the highway design or construction (limited pavement markings and road signs, no bus bays, solutions for pedestrian crossings, etc.), posing high risks to users and residents of the towns along it. The expected increase in traffic will exacerbate the effects of these gaps, strongly increasing the likelihood of accidents for road users and nearby residents. 1.13 Roadway maintenance. The current condition of the road network, by type of pavement, is shown in Table I-3 below. Since the extensive damage caused by Hurricane Mitch in 1998, and the launch of the Roadway Fund in 2001, the network’s condition has begun to show signs of improvement.

Table I-3 Condition of the road network by length (km) Paved roads Unpaved roads Condition Total % AC HC DST Subtotal SGM E Subtotal Good 473 42 284 799 2,812 354 3,166 3,965 28% Fair 974 185 367 1,526 4,088 336 4,424 5,950 43% Poor 564 7 80 651 2,738 733 3,471 4,122 29% Total 2,011 234 731 2,976 9,638 1,423 11,061 14,036 100% AC: Asphalt Concrete; HC: Hydraulic Cement; DST: Double Surface Treatment; SGM: Select Granular Material; E: Earth

1.14 Financial position of the roadway subsector. Table I-4 shows investments in the roadway subsector (including resources from the federal budget and external financing) for 2003-2006 and projections for 2007.

7 Particularly, through loan 1106/SF-HO, for the Program for Sustainable Institutional Strengthening of the Road Sector. - 5 -

Table I-4 SOPTRAVI investments in the roadway sector (in millions of US$) Budget Cost of infrastructure Executed budget allocation 2003 2004 2005 2006 2007 New construction (highways with bridges) 1.8 8.9 10.4 12.9 13.8 Highway expansion or improvement 20.3 9.6 13.0 26.0 10.7 Pavement rehabilitation 17.1 30.5 31.4 0.4 6.3 Bridge or drainage construction 0.5 1.8 5.1 4.2 0.1 Studies, design, and supervision 0.3 1.9 0.0 0.7 4.3 Administration 2.1 2.3 2.3 2.4 1.9 Total Investment 42.1 55.0 62.2 46.6 32.8

1.15 The amounts spent on road network maintenance in 2003-2006 and projected for 2007 are presented in Table I-5, which shows rising spending and network coverage.

Table I-5 Roadway Fund resources spent on maintenance Executed budget / network maintained Execution Projection 2003 2004 2005 2006 2007 Execution (in millions of US$) Unpaved network 25.7 20.8 25.4 16.1 25.6 Paved network (routine maintenance) 2.2 2.6 2.8 4.3 6.5 Paved network (periodic maintenance) 9.5 8.8 10.9 16.5 10.8 Technical assistance and administration 1.8 2.1 Total maintenance execution 37.4 32.2 39.1 38.7 45.0 Maintained network (km) Unpaved network 5,180 4,399 4,271 3,081 4,500 Percentage of total unpaved network 48% 41% 40% 28% 41% Paved network (routine maintenance) 2,299 2,306 2,644 2,763 2,976 Paved network (periodic maintenance) 249 241 496 412 282 Percentage of total paved network 83% 78% 89% 93% 100% Total maintained network (with overlaps) 7,479 6,705 6,915 5,844 7,476

1.16 The roadway maintenance plan developed by the Roadway Fund has planned budgetary allocations of US$45, US$50, US$55, and US$64 million, for 2007, 2008, 2009, and 2010, respectively. These figures were negotiated with the Ministry of Finance and accepted by the Millennium Challenge Corporation (MCC) within the framework of its agreement with the Honduran government, which makes them commitments. While the annual budget commitments for the road network may still fall short of the ideal, they represent a significant increase in - 6 -

resources that will undoubtedly strengthen the Roadway Fund, so it is able to fulfill its mission. 1.17 Institutions. SOPTRAVI develops, coordinates, implements, and evaluates policies related to the roadway sector, public works concessions, urban development, air, sea, and land transportation, and the housing sector. It has two divisions, one for public works and housing and the other for transportation. The Office of Administrative Management (responsible for budget, human resources, and materials and service administration) and the Management Planning and Evaluation Unit provide support. 1.18 At the Executive level, the roadway sector is managed by: (i) The Road Administration (DGC), for construction of works and network management, with the support of the Projects and Execution Management Group (GGPE); (ii) The Roadway Fund, for routine, periodic, and emergency maintenance of the road network. The Roadway Fund is a deconcentrated agency that began operations in 2001, with the core objective of ensuring financial support and ongoing, adequate maintenance of the network. 1.19 The environmental and social aspects of road projects are managed by the Environmental Management Unit (UGA), which has the capacity to conduct environmental and social impact studies, in compliance with applicable Honduran legislation, for subsequent consideration by the apex agency, the Ministry of Natural Resources and the Environment, project classifications, and the respective environmental mitigation plans. 1.20 The agency responsible for routine, periodic, and emergency network maintenance is the Roadway Fund. For purposes of conservation of roadway assets and the sustainability of this program, it is further responsible for preserving the value of the investments made. The Roadway Fund was established by Legislative Decrees 131/93 and 286/98 of the National Congress, with the objectives of: (i) ensuring financial support and continual maintenance of the network; (ii) harnessing financial resources to be used in routine and periodic maintenance; (iii) promoting greater private-sector participation in resolving roadway maintenance service problems; and (iv) promoting job creation and rural employment through the microenterprise program (paved network) and the day labor program for clearing the right-of-way (unpaved network). 1.21 The Bank has supported the institutional strengthening of SOPTRAVI through loan 1106/SF-HO (2003), which focused on building the ministry’s capacities in planning, service procurement, and execution of works. In practice, in recent years an appreciable change has been noted in SOPTRAVI and its institutional capacity for administering the road network; it has markedly accelerated the pace of operations entrusted to it. Improvements are being made to its planning, environmental management, and procurement systems, and progress is satisfactory. - 7 -

These actions have also allowed the ministry to expand its capacity for simultaneously coordinating and executing projects financed by different financial and donor institutions. C. The country’s sector strategy 1.22 The Honduran government has established specific objectives for maintaining and adapting the country’s road infrastructure to the requirements resulting from regional integration processes and the need to make the country more competitive, and to promote economic activity. The government’s “National Plan” gives explicit priority to the rehabilitation, reconstruction, expansion, and maintenance of the country’s primary road network. In particular, there are plans to expand and improve the roads in the PPP Caribbean Tourism Corridor, since congestion and safety problems would otherwise hinder investments in tourism areas on Honduras’ Caribbean coast. Preliminary actions are also being promoted to expand private-sector participation in the sector. 1.23 The Honduran government supports this operation, which is a typical roadway improvement program justified by its benefits for roadway users that is also expected to enhance conditions for investment in the Honduran Caribbean tourism sector, as it concerns a highway in the Caribbean Tourism Corridor. Complementarily, the government is supporting the development of a tourism center in Bahía de Tela, the end point of this operation’s phase I, with sufficient infrastructure and lodging facilities to serve as a “distribution point” to other tourism circuits. The main components of the Bahía de Tela project include a public-private partnership to develop the “Los Micos”8 hotel project, a cruise port, incorporation of the protected areas into regional tourism, and complementary regional development actions to ensure its sustainability. D. The Bank’s sector strategy 1.24 In recent years the Bank has taken intensive action in the Honduran roadway sector. In response to what was a weak institutional framework, the Bank initially supported efforts to strengthen SOPTRAVI as an executing agency, and from there, pursued individual road investment operations aimed at strengthening major highways. Specifically, it helped design the Highway CA-5 improvement program, which is currently being implemented with financing from various actors. Upon completion of this first stage, the strategy seeks to support the development of other

8 This is a tourism development project that leverages the natural beauty of the Bahía de Tela area. The project is located in the Punta Sal National Park buffer zone, from the community of Tornabé to the village of Miami, on the Bahía de Tela. The zone covers 106.6 hectares, with three kilometers of beach, lake and river systems, coastal areas, marshes, foothills, and mountain systems, which, as a whole, offer the visitor a heterogeneous landscape of dynamic ecosystems. Phase I of the project calls for the construction of two five-star hotels, 250 villas, and other high-end tourism facilities. The Inter-American Development Bank (IDB) and the Central American Bank for Economic Integration (CABEI) recently expedited loans for US$35 million and US$14.8 million for infrastructure works and the construction of the first hotels, respectively. - 8 -

major roadways that help generate income-producing activities, as is the case with the Caribbean Tourism Corridor. 1.25 The program incorporates the Bank’s country strategy with Honduras for 2007-2010, whose preparation is well under way, and which is aimed at supporting poverty reduction by promoting sustainable growth, through greater competitiveness and increased production capacity for the poor. By helping lower transportation costs on the only primary road to the Honduran Caribbean tourism area, the program will benefit current and potential tourists and will help companies bring down the logistics costs associated with obtaining raw materials and marketing their products. 1.26 In accordance with the Honduran government’s desire that this program support and facilitate investment in the tourism sector, the Bank’s strategy also includes support for this sector. Specifically, it is supporting the abovementioned “Los Micos” project in Bahía de Tela. 1.27 Lessons learned and coordination with other donors. The Bank has a long tradition of extending loans to the transportation sector in Honduras, including several operations consistent with this program’s objectives that have either been completed or are in progress. It has also collaborated with other donors, coordinating actions and investments. A good example is the improvement and rehabilitation of a large portion of Highway CA-5, which extends from the Pacific to the Atlantic, with financing from the IDB, the World Bank, CABEI, and the MCC. The works on this corridor financed by the IDB, through loan 1565/SF-HO, have been tendered and are under way. To date, the programs listed in Table I-6, which are externally financed, have been completed or are in progress. Table I-6 Transportation infrastructure investment programs with external financing Program amounts (millions of US$) Operations No. Approval World Local IDB CABEI MCC Others Total Bank cont. IDB: Program for sustainable institutional HO-0116 17-Jun-2002 7.6 0.0 0.0 0.0 0.9 0.9 8.5 strengthening of the road sector IDB: Improvement of the PPP Atlantic HO-0207 7-Jul-2004 50.0 0.0 0.0 0.0 7.0 6.2 63.2 Corridor IDB: National sustainable tourism program HO-0195 4-May-2005 35.0 0.0 4.0 0.0 1.8 40.8 World Bank: Road reconstruction and P057538 7-Nov-2000 0.0 66.5 0.0 0.00 40.3 40.3 106.8 improvement project World Bank: Rural infrastructure project P086775 7-Jul-2005 0.0 47.0 0.0 0.00 7.8 7.8 54.8 MCC: Transportation project --- 13-Jun-2005 0.0 0.0 0.0 125.7 0.0 0.0 125.7 CABEI: Logistics corridor (San Antonio – CABEI 29-Jan-2007 0.0 0.0 50.0 0.0 0.0 10.0 60.0 Lamaní – El Quebrachal) 1689 Logistics corridor (El Quebrachal - (in development) 0.0 0.0 50.0 0.0 45.0 10.0 55.0 Goascorán)

1.28 Based on an analysis of the abovementioned operations and their performance, the first lesson learned is the importance of institutional continuity and ongoing support from the Bank for the development of various programs over the years. For this - 9 -

reason, this operation includes an institution-strengthening component supporting studies and activities conducted in prior operations, continuing to build SOPTRAVI’s planning capacities, maintaining the support system for the GGPE through a specialized firm, and contributing resources to build SOPTRAVI’s environmental management capacity. 1.29 During execution of the Bank’s last roadway operation in Honduras, program HO-0207, to improve various sections of Highway CA-5, the signing of contracts was appreciably delayed due to problems obtaining the right-of-way posed by setbacks in eminent domain processes for some properties. The Bank had initially required all available rights-of-way prior to signing the works contracts. The government requested authorization to sign the contracts, which the Bank granted, and execution of the works has commenced, with no anticipated delays. The eminent domain processes continue and will soon be completed. As a lesson learned, the need to start early and accelerate processes for obtaining right-of-way must be stressed. E. Program strategy 1.30 The Road Rehabilitation Program for Sections of the PPP Tourism Corridor is next in the series of investments being made in the PPP Caribbean Tourism Corridor with partial Bank financing, and aims to provide road users with safer, more affordable transportation infrastructure by increasing the road’s capacity. The program is important for the economic development of northern Honduras, as it will create conditions conducive to the development of the tourism sector and other income-generating activities in this region of the country and, in particular, the resort area on the Honduran Caribbean, providing the main tourist-generating areas in Honduras and abroad with better access to the area of the country with the greatest tourism potential. Thus, it aims to extend the core area of economic development located around San Pedro Sula to the north and east of the country. 1.31 Rationale for the multiphase program. A multiphase program to improve Highway CA-13 from El Progreso to Trujillo (with a total length of 329.7 km) is planned; each phase will include one section of this road. The rationale for using the multiphase modality is as follows: (i) the government plans to work on this corridor in stages; (ii) each successive stage will require considerable progress in the construction of prior sections, and time and resources to adapt the designs to traffic demands and growth projections; and (iii) the program will continue to give the Bank a presence in the sector for many years, supporting the institutional development of SOPTRAVI and contributing to the sustainability of the Honduran roadway system. 1.32 Phase I of the program calls for a full-scale improvement project for the highway between El Progreso and Tela. The road has been subdivided into five sections (sections I to V; see paragraph 2.6). Work on sections I, II, and III will take the form of traditional public works, with external financing from the Bank, while the Honduran government has agreed to undertake the expansion and improvement of - 10 -

sections IV and V, as well as the subsequent maintenance of all five sections, through a concession to a private firm, within the framework of the Concessions Law. To ensure consistency, the engineering designs for all five sections should be prepared in an integrated manner by a single consulting firm.9 1.33 The execution of works on sections not financed by the Bank is important to complete the investments for phase I. Nevertheless, the program has been designed so that Bank-financed works are considered sufficiently autonomous, so that they will remain viable in the framework of the program’s objectives and demonstrate their economic viability even if the other works are not completed. This is further analyzed below.

II. THE PROGRAM

A. Objectives 2.1 The general objective of the multiphase program is to improve the efficiency and safety conditions of the San Pedro Sula – Trujillo road corridor (Highway CA-13), which will contribute to the sustainable economic development of the country’s northern region. The specific objectives include facilitating fluid, safe, predictable transit of the road in any season of the year, while reducing transportation costs and travel times, by improving the capacity and rehabilitating the primary road connecting the country’s commercial hub with the Caribbean zone, which has the best conditions in Honduras for investment in tourism infrastructure. 2.2 The Multiphase Program for Road Rehabilitation of Sections of the PPP Tourism Corridor calls for the improvement of Highway CA-13 from El Progreso to Trujillo (total length of 329.7 km). It is proposed as a multiphase program and structured in successive phases, with execution periods of approximately four years each, which may overlap. The phases correspond to improvement of consecutive sections of Highway CA-13: (i) phase I: El Progreso – Tela, covering 68.1 km; (ii) phase II: Tela – La Ceiba, covering 96.7 km; and (iii) phase III: La Ceiba – Trujillo, covering 164.9 km, as shown in the following figure.

9 For these purposes, in July 2007, the Bank approved technical-cooperation project ATN/OC-10490-HO, “Environmental Studies and Designs for the El Progreso – Tela Tourism Corridor,” with resources from the Infrastructure Fund, which will be used to engage these consulting services. - 11 -

Caribbean Sea

Phase I

Phase II and III Pacific Ocean Scale

2.3 The Bank’s processing of phases II and III will take place after confirmation (by independent consulting services, hired according to terms of reference agreed upon by the Bank and the executing agency) that progress has been made in meeting the objectives of the preceding phases. The conditions required for presentation of phase II of the program to the Bank for consideration are described below (see paragraph 2.20). 2.4 The three phases will include Bank financing for US$40 million, US$61 million, and US$65 million, respectively, as presented in Table II-1. The figures for phases II and III are tentative, based on initial cost estimates for the program and a cost apportionment consistent with the availability of Bank resources.

Table II-1 Cost and financing of the multiphase program (in millions of US$) Phase I Phase II Phase III Category Honduran Honduran Honduran IDB Total IDB Total IDB Total gov. gov. gov. 1. Administration 0.6 0.1 0.7 2.4 1.6 4.0 2.8 5.0 7.8 2. Direct costs 39.3 34.9 74.2 58.6 44.4 103.0 62.2 112.0 174.2 3. Financial expenses 0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 Total 40.0 35.0 75.0 61.0 46.0 107.0 65.0 117.0 182.0 - 12 -

B. Program description 2.5 Phase I of the program includes two components described below. Component I: Improvement of Highway CA-13 between El Progreso and Tela (US$67.1 million) 2.6 Phase I of the program calls for the expansion and rehabilitation of Highway CA-13 from El Progreso to Tela, a stretch measuring approximately 68.1 km. For execution of the works, this stretch has been subdivided into five relatively similar sections, three of which are to be built with external financing from the Bank, and the remaining two through a private concession holder (see paragraph 1.32). These sections, presented in Table II-2, were divided in such a way to ensure that each has works of sufficient magnitude to achieve adequate economies of scale for construction, while maximizing competition between the potential bidders (national and foreign construction companies) in the bidding processes to be undertaken by the Honduran government, which will benefit the country economically.

Table II-2 Sections of the El Progreso – Tela stretch of road Section Beginning – End Cumulative(*) Length (km) Financing I El Progreso – Chindongo 0.0 – 12.0 12.0 IDB – Honduran government II Chindongo – Toyos No. 1 12.0 – 26.3 14.3 IDB – Honduran government III Toyos No. 1 – Puente Pajuiles 26.3 – 37.1 10.8 IDB – Honduran government IV Puente Pajuiles – La Hulera 37.1 – 51.6 14.5 Honduran gov., private concession V La Hulera – Tela 51.6 – 68.1 16.5 Honduran gov., private concession Total EL PROGRESO – TELA 0.0 – 68.1 68.1 NOTE: (*): Cumulative measurements from El Progreso.

2.7 Based on preliminary technical, economic, and environmental studies, SOPTRAVI has defined the general characteristics of the expansion and rehabilitation projects for the entire stretch of road (sections I to V). The basic design elements are: (i) expansion of the current road from two to four lanes, by building a new two-lane section next to the existing road or, in populated areas, expanding the existing road with a new two-lane section, forming a divided highway with two 3.65-meter lanes in each direction; (ii) pavement of the new road in asphalt concrete, as well as rehabilitation of the current road with a layer of asphalt concrete; (iii) construction of new major (24 bridges with a total length of 772 m) and minor drainage works, or expansion of existing works, consistent with improvements in the road’s capacity; (iv) alignment adjustments at certain points to improve the current design conditions; (v) construction of a bypass measuring approximately 10 km for the city of El Progreso, as well as a cloverleaf interchange at its access point; (vi) bypasses of approximately 8.1 km, to prevent impact on residents of towns along the road (Toyos, Las Delicias, Pajuiles, and Santiago), as well as specific environmental and social mitigation works; (vii) improvement of road safety conditions with pavement - 13 -

markings and road signs (the designs will follow the standards of the Central American Manual on Uniform Traffic Control Devices, applicable in Honduras), 2.40 m outer shoulders and 1 m inner shoulders, bays for bus stops, left-turn lanes, deceleration lanes, and pedestrian crossing solutions in populated areas. 2.8 For sections I, II, and III, to be executed with Bank financing and totaling 37.1 km, the general design characteristics expressed above pertain, as do the following specific works: (i) construction of the bypass for the city of El Progreso and the cloverleaf interchange at its access point; (ii) construction of 6.1 kilometers of bypasses in the towns of Toyos, Las Delicias, and Pajuiles. 2.9 Notwithstanding the fact that the planned expansion and rehabilitation works are intrinsic parts of a roadway improvement program that aims to lower operating costs, reduce travel times, and improve road safety, this stretch of road is part of the Caribbean Tourism Corridor, and so plans must also be made to gradually adapt it to this role. Accordingly, the route’s final design and related decisions by the Honduran government must consider the following: (i) a strip of land for visual protection (whose width will depend on the terrain crossed by the road) to protect, to the extent possible, the visual field of the traveler, while taking care to preserve the surrounding landscape; this involves preventing the visual contamination caused by billboards, factories, junkyards, or other operations near the roadway having a negative visual, olfactory, or auditory impact on users of the road; and (ii) measures to develop tourist services (gas stations, tire repair shops, mechanics, restrooms in good condition, places to eat and rest (rest stops)), meeting minimum quality standards. 2.10 Experience has shown that obtaining the right-of-way is critical at the beginning of these projects. To accelerate this process,10 loan proceeds will be used to contract a consulting firm to support the entire right-of-way acquisition process, including: (i) identification of the owners of the affected properties; (ii) survey of topographical, legal, and cadastral information; (iii) review and clearing of property titles; (iv) appraisal of personal and real property; (v) preparation of the respective file; (vi) negotiation (with SOPTRAVI authorities and the Office of the Attorney General); (vii) conveyance, registration, and monitoring of payment; (viii) survey of situations warranting involuntary resettlement, under the terms of Bank policy OP-710; and (ix) if circumstances so require, preparation of a resettlement plan. The consulting firm may be hired even prior to Bank approval of the program, and expenses will be recognized against the Bank’s contribution. 2.11 Private consulting firms will supervise program works. SOPTRAVI is planning to contract the works for a fixed total price, without contracts linked to the duration of the works (except, of course, for unforeseeable events and force majeure) and with incentives for supervisors to complete works ahead of schedule.

10 The compulsory purchase of approximately 50 properties is considered necessary to obtain the right-of-way. For these purposes, an investment of approximately US$4.5 million is planned from the program’s local counterpart funds. - 14 -

2.12 The contract for the expansion and rehabilitation works planned along the various sections of Highway CA-13 between El Progreso and Tela will require the contractor to perform maintenance during the period of execution of the works and for the period between the provisional and final acceptance of the works by SOPTRAVI. Once the works are completed and final acceptance has been issued, maintenance of the respective section will fall to the concession holder responsible for construction of sections not financed by the Bank, or, in the absence thereof, the Roadway Fund. In either case, the Honduran government agrees: (i) to ensure that works along sections of the road improved with loan proceeds will be properly maintained and operated, in accordance with generally accepted technical standards; (ii) to deliver to the Bank, within three months following completion of the respective works, an operations and maintenance plan for the road, which will identify the tasks and activities necessary to achieve the expected life cycle of the road, the sources, and resources that will be used for these tasks and activities, and the technical and institutional structure to implement the plan, indicating the responsibilities of the Roadway Fund or the private entity that assumes management of the maintenance; and (iii) to submit an annual report on operations and maintenance to the Bank, up to three years after the last disbursement and in the first quarter of each calendar year. 2.13 Concession of Highway CA-13. For purposes of construction works in sections IV and V, as well as for maintenance along the entire El Progreso – Tela stretch of Highway CA-13, the Honduran government and SOPTRAVI have started preparing for the concession process. This process will be conducted within the framework of the Concessions Law (Decree No. 283-98 of the National Congress), with SOPTRAVI in charge of designing the concession and bidding process, and Superintendencia de Concesiones y Licencias [Superintendency of Concessions and Licenses], attached to the Tribunal Superior de Cuentas [Auditor General’s Office], responsible for the regulation, control, and supervision of the provision and indirect management of the services. 2.14 Program resources will support SOPTRAVI in designing the concession and preparing the bidding documents (see paragraph 2.16 (ii)). Conceptually, the concession includes: (i) Construction of additional lanes and rehabilitation of existing lanes in sections IV and V, according to designs agreed upon with the Bank; (ii) Maintenance of the entire stretch (five sections), throughout the concession period. Sections I, II, and III will be turned over to the concession holder upon final acceptance of the contracts by SOPTRAVI; (iii) Operation of the program, receiving as compensation the collections from the toll booth(s) to be installed, whose best location will be determined soon. - 15 -

2.15 Although all works on the El Progreso – Tela section are planned for relatively simultaneous execution, the possibility that the construction of sections IV and V may fall behind the execution of the Bank-financed works has been considered. In such a case, the design of section III will include a temporary road solution for the junction of this section (four lanes) with the existing road (two lanes). The possibility that works along sections IV and V experience excessive delays or are not executed has also been considered in the economic evaluation, by means of an additional viability analysis exclusively for the works on sections I, II, and III, to be financed by the Bank. Component II: Institution-strengthening (US$2.6 million) 2.16 Resources have been included in the program to provide continuity to the efforts to improve planning, procurement, and works execution systems. This component includes financing for the following: (i) Support for release of the right-of-way and resettlement plan. Financing will be provided for the complete cycle of eminent domain acquisition of the properties required for execution of phase I works, and if conditions require application of policy OP-710, for the preparation of a resettlement plan as well (see paragraph 2.10); (ii) Support for SOPTRAVI for the concession of the section not financed by the Bank. Financing will be provided to formulate and prepare the business plan for the concession for the section not financed by the Bank; (iii) Studies for phase II of the program. Program preparation is planned for the Tela – La Ceiba section, including engineering designs and the economic and environmental feasibility studies; (iv) Strengthening of the SOPTRAVI Management Planning and Evaluation Unit. Financing will be provided for: (a) design of a national traffic statistics system (vehicle traffic data) and a plan for implementation, training, and partial application of the plan (one section of the primary network), including measurement equipment; (b) design of a plan to measure indicators of road network condition, training, and survey of the paved network, including a deflectometer, a roughness gage, and computer equipment; (c) specialized technical personnel to update the Strategic Transportation Plan and the Multiyear Investment Plan; (v) Strengthening of the Environmental Management Unit (UGA). Financing will be provided for technical staff to support the UGA, to increase its capacity to assess the environmental impact of road works; and (vi) Training. Training courses are planned in three thematic areas: (a) quality control of the construction and supervision mechanisms for - 16 -

road works, for SOPTRAVI technical staff, construction companies, and consultants (design and supervision); (b) performance and analysis of environmental impact studies on road works, for UGA staff; and (c) survey and analysis of traffic accident statistics, for staff of the Dirección Nacional de Tránsito [National Traffic Office] at the Ministry of Safety, and the Direcciones Generales de Tránsito y de Carreteras [Transportation and Roads Offices] at SOPTRAVI. Program administration (US$800,000) 2.17 As part of the engineering and program administration expenses appearing in a separate category in the cost and financing table, several additional activities will be financed to support the program, as follows: (i) Support for the GGPE. Resources are included to finance the GGPE’s technical staff, hire a new specialized firm to support the GGPE (upon completion in August 2009 of the current firm’s contract, financed under loan 1565/SF-HO), and purchase vehicles; and (ii) External audits and evaluations on financial, technical, operations, and environmental aspects of the program. C. Cost and financing of phase I of the program 2.18 Phase I of the program will have a total cost of US$75 million, as indicated in Table II-3, of which US$40 million will be contributed by the Bank in the form of a loan, and US$35 million will be contributed by the Honduran government in resources and investments to be made within the framework of the concession. The loan will be disbursed over five years. - 17 -

Table II-3 Cost and financing of phase I of the program (in millions of US$) Honduran Category IDB Total (%) gov.(*) 1. ADMINISTRATION 0.7 0.1 0.8 1.0% 1.1 Evaluation and auditing 0.2 0.1 0.3 1.2 Executing agency and support for the GGPE 0.5 --- 0.5 2. DIRECT COSTS 39.3 34.9 74.2 99.0% 2.1 El Progreso – Tela expansion and rehabilitation 34.6 32.5 67.1 89.5% 2.1.1 Expansion and rehabilitation of roads and bridges 17.4 23.3 40.7 2.1.2 Construction of bypasses (mitigation of social effects) 13.3 1.5 14.8 2.1.3 Mitigation of environmental and social impacts 2.4 2.0 4.4 2.1.4 Expropriations for right-of-way - 4.5 4.5 2.1.5 Technical and environmental supervision 1.5 1.2 2.7 2.2 Institution-strengthening 2.6 --- 2.6 3.5% 2.3 Contingencies 2.1 2.4 4.5 6.0% 3. FINANCIAL EXPENSES ------3.1 Commitment fee ------3.2 Interest ------3.3 Inspection and supervision ------PROGRAM TOTAL 40.0 35.0 75.0 100% Share of financing 53% 47% 100% Note: (*): Local counterpart contribution plus investments to be made by the concession holder in Sections IV and V. It is understood that, if the proposed concession process materializes, the cash contributions to the program by the government would be the amounts indicated on lines 1.1 and 2.1.4, for a total of US$4.6 million.

2.19 The budget includes specific environmental and social mitigation works and activities: (i) a bypass for the city of El Progreso of approximately 10 km (included in section I, to be financed by the Bank) and bypasses for smaller towns (Toyos, Las Delicias, Pajuiles, and Santiago), covering a total of approximately 8.1 km (approximately 6.1 km are included in sections II and III, to be financed by the Bank); (ii) complete pavement markings and road signs and construction of road safety features; and (iii) implementation of the measures included in the environmental and social management plan (ESMP). D. Evaluation of phase I and eligibility of phase II of the program 2.20 Phase II of the program may be delivered to the Bank’s Board of Executive Directors for consideration when phase I targets are substantially met, including the satisfactory execution of the expansion and rehabilitation works, the institution-strengthening component, and the ESMP. These targets will be evaluated by independent consulting firms, based on terms of reference agreed upon by the Bank and the executing agency. Specifically, substantial fulfillment of the following targets and indicators will be verified: - 18 -

Table II-4 Prerequisites for consideration of phase II of the program Concept Condition Level of execution At least 75% of loan proceeds for phase I have been committed, and 50% disbursed. Sections IV and V The government has started the concession process for Highway CA-13 and issued a call for bids, or, failing this, identified another option for the construction of these works, as described in 4.30(3)(v). Roadway maintenance A sustainable execution and maintenance mechanism has been established for the El Progreso – Tela road, by granting a concession for the section, through the Roadway Fund, or another method acceptable to the Bank. Environmental considerations The ESMP has been implemented satisfactorily for all expansion and rehabilitation works along the El Progreso – Tela section. Institution-strengthening Progress has been made in implementing the planned strengthening plan, and SOPTRAVI has: (i) designed the traffic statistics system and prepared a plan to install and run it for at least 50% of the primary network; (ii) formulated a plan to measure road condition indicators and survey the paved network; (iii) updated the Strategic Transportation Plan and Multiyear Investment Plan; and (iv) contracted designs and studies for the Tela – La Ceiba section.

III. PROGRAM EXECUTION

A. Borrower and executing agency 3.1 The borrower will be the Republic of Honduras, and the executing agency will be the Ministry of Public Works, Transportation, and Housing (SOPTRAVI), which will act through the Projects and Execution Management Group (GGPE) under the Road Administration (DGC). The DGC’s general functions are planning, programming, construction, contracting, supervision, and improvement of the roads and bridges making up the road network. B. Program execution and administration 3.2 SOPTRAVI will be responsible for program execution. This includes carrying out preparatory activities, contracting program works and consulting services (including preparation of documents and the respective bidding processes), overseeing works contracts, performing supervision and studies, and confirming compliance with applicable technical and environmental standards to ensure the quality of construction and maintenance of the expansion and rehabilitation works planned as part of this operation. SOPTRAVI’s program administration functions include: (i) preparing annual work plans and any necessary modifications; (ii) coordinating formulation of the annual budget; (iii) verifying and ensuring compliance with the works budgets; (iv) proposing, preparing, reviewing, and ensuring compliance with studies and bidding documents; (v) planning, coordinating, directing, and evaluating execution of works; (vi) working with the Ministry of Finance to coordinate measures for the timely allocation of local - 19 -

counterpart resources and the approval of disbursements charged against the loan proceeds; and (vii) promoting studies and letting the concession for the El Progreso – Tela section of the road, under the terms described above. 3.3 The GGPE is part of the DGC’s organizational structure. Its staff are trained and efficiently organized to supervise the physical and financial aspects of its projects, and it has been equipped and undergone institutional strengthening under previous Bank programs. A specialized firm, which is currently financed under loan 1565/SF-HO, but will be financed under this operation upon completion of the former, provides assistance with technical issues and administrative processes related to program implementation. The GGPE has successfully administered the Bank’s prior operations in the sector and has the capacity to fully administer the program, handle the accounting, and deliver the semiannual progress reports on the program. SOPTRAVI’s Environmental Management Unit (UGA) will monitor and control activities of an environmental and social nature arising from the program’s environmental and social strategy. 3.4 On behalf of the executing agency, the GGPE’s duties and responsibilities will include: (i) monitoring program execution on a daily basis; (ii) preparing bidding documents; (iii) coordinating with other SOPTRAVI agencies; (iv) coordinating activities related to the management of rights-of-way and the environment; (v) drafting semiannual progress reports and delivering them to the Bank; (vi) preparing the technical reports required by the Bank; (vii) opening separate bank accounts for loan proceeds and the local counterpart contribution; (viii) delivering disbursement requests and the corresponding supporting documentation to the Bank; (ix) maintaining adequate systems for procurement administration and for accounting and financial records of program transactions, based on the Bank requirements set forth in Clause 7.01 of the General Conditions; (x) preparing and delivering to the Bank the program’s annual financial statements, duly audited by independent auditors acceptable to the Bank, as well as semiannual reports on the revolving fund; and (xi) maintaining an internal control system acceptable to the Bank. In addition, the GGPE will monitor the indicators set forth in the logical framework. 3.5 Through its Country Office in Honduras, and with the support of the project team and the Transport Division, the Bank will monitor execution of the program’s components. C. Revolving fund and audits 3.6 Revolving fund. For program disbursements, a revolving fund equivalent to 5% of the loan (US$2 million) will be established according to Bank procedures. SOPTRAVI will deliver semiannual reports on the revolving fund to the Bank, within 60 days following the close of each six-month period, supervise use of the fund, and prepare disbursement requests on behalf of the borrower. 3.7 External audit. Every year throughout the execution period, SOPTRAVI will deliver financial statements on the program to the Bank. The program’s external - 20 -

audit will be conducted by an independent auditing firm acceptable to the Bank and in accordance with its requirements, based on the guidelines established in the terms of reference for external audits of Bank-financed projects (document AF-400). The firm will be selected and contracted in accordance with the Bank’s procedures on the procurement of external audit services (document AF-200). The costs of the audit will be included as part of program costs and will be charged against the Bank’s loan. D. Procurement 3.8 Expansion and rehabilitation contracts. The program will be executed by means of independent works contracts for each section of roadway covered by this program. This will not prevent a contractor from being awarded works on more than one section, assuming sufficient technical (equipment, professional team, etc.) and financial capacity. In all cases, construction works will be executed in a maximum of 24 months following the date of the order to proceed. 3.9 Contract supervision. SOPTRAVI has sufficient experience in supervising road rehabilitation contracts. For this program, technical and environmental supervision will be handled by private consulting firms, which will have proven experience in the field and will designate an environmental specialist to ensure compliance with the specifications provided in the bidding documents and environmental manuals. 3.10 Procurement. Goods, works, and services, including consulting services, will be procured in accordance with the Bank policies set forth in documents GN-2349-7 and GN-2350-7, approved in February 2006. 3.11 Annex II includes the procurement plan for phase I of the program and describes in detail the various procedures to be followed, the application thresholds for each, and other characteristics of the operation. E. Monitoring and evaluation 3.12 Bank supervision. Program supervision will be carried out by the Bank’s Country Office in Honduras, which maintain regular contract with SOPTRAVI authorities and technical agencies, for procurement processes and the technical and financial decisions required by the operation. 3.13 For program monitoring purposes, the GGPE will prepare and deliver semiannual progress reports to the Bank prior to 30 June and 31 December of each year, covering the outcomes of the various projects, evaluated based on the performance indicators established in the logical framework. The reports will also include the following information: (i) progress made with respect to the performance indicators and disbursement schedule agreed upon for the program; (ii) updated execution and disbursement schedules for the remainder of the program; and (iii) a work plan and detailed plan of action for the following year, including the updated procurement plan. - 21 -

3.14 In addition, at least one annual program administration and monitoring meeting is planned with the participation of the project team, in order to analyze progress and the annual investment plans. 3.15 Conditions precedent and retroactive recognition of expenditures. The first disbursement for activities to improve the El Progreso-Tela road is subject to delivery by SOPTRAVI, to the Bank’s satisfaction, of the final designs for the works, a document identifying the affected properties, and a plan of action for transacting the land purchases necessary to carry out the works. During the analysis mission, the Bank and SOPTRAVI agreed to recognize expenditures incurred as of the mission (July 2007) against the Bank’s loan, in accordance with Bank procurement procedures. Expenditures incurred for strengthening the GGPE’s institutional framework and procuring a vehicle, for up to the equivalent of US$50,000, may be included under this item. 3.16 Midterm, final, and ex post evaluations. Upon fulfillment of the conditions for the commitment and disbursement of the planned resources, in order to consider approval of phase II of the program, the executing agency will contract an external consulting firm to perform a midterm evaluation, regardless of the parties’ desire to proceed to phase II. 3.17 The executing agency will contract an external consulting firm to conduct a final evaluation of phase I of the program, once 95% of the loan proceeds have been disbursed. The evaluation will follow the procedures established for project completion reports. The objective of the final evaluation will be to analyze program outcomes and with the fulfillment of the proposed targets. The indicators used to measure the program’s impact will be also reviewed and updated. 3.18 The project team analyzed the need for an ex post evaluation of this program with the authorities. Both parties agree that, since this is a road improvement and rehabilitation program whose activities and benefits are widely known and documented, an ex post evaluation is unnecessary. SOPTRAVI and the Roadway Fund have, as a normal part of their regular activities, the resources, means, and information systems necessary to collect the data to perform this evaluation in the future, if asked to do so. In such a case, the baseline would be the same used in the logical framework. The information will be available to the Bank and authorities in the event that they decide to perform an ex post evaluation of the operation in the future. F. Execution period and disbursement schedule 3.19 The disbursement period planned for the program is five years, beginning on the effective date of the loan contract. Table III-1 shows the estimated disbursement schedule (without considering contingencies).

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Table III-1 Disbursement schedule (millions of US$) Source Year 1 Year 2 Year 3 Year 4 Year 5 Total % IDB 2.2 11.4 15.3 10.0 1.1 40.0 53% Honduran government 4.5 9.0 9.0 8.4 4.1 35.0 47% Program total 6.7 20.3 24.2 18.4 5.4 75.0 100% 8.9% 27.1% 32.3% 24.5% 7.2% 100%

G. Program readiness 3.20 The Bank has approved the technical-cooperation operation under which consultants will be hired, using funds from the Infrastructure Fund, to complete the final designs for program works, and the GGPE has initiated the corresponding bidding process. The final studies and bidding documents for the works are expected to be ready in March 2008. The GGPE has also begun the contracting process with the consulting firm that will support acquisition of the right-of-way (see paragraph 2.10); the firm is expected to be contracted in October 2007.

IV. VIABILITY AND RISKS

A. Institutional and financial viability 4.1 The proposed operation represents continued support of SOPTRAVI’s efforts to improve the standards of the country’s roads. SOPTRAVI is an institution with solid management capacity for executing a program with the characteristics of the proposed operation, as demonstrated by the satisfactory execution of previous programs financed by the Bank or the World Bank. It has been the subject of prior strengthening programs that have confirmed its execution capacity, which has been thoroughly evaluated by the Bank. 4.2 The GGPE has satisfactorily executed projects financed by the Bank and other multilateral institutions. The GGPE is part of SOPTRAVI’s organizational structure, has its own staff and support consultants, and an efficient organizational structure for physical and financial control of its projects, and, like other key SOPTRAVI agencies, has been equipped and has undergone institutional strengthening. The GGPE has the capacity to fully administer the program, handle the accounting, and deliver the corresponding reports. Based on its prior experience in investment program design, all indications are that the GGPE will execute this operation satisfactorily. 4.3 Moreover, the outcomes of road improvement programs in progress point to SOPTRAVI’s adequate environmental management capacity. It has trained staff to support activities related to environmental protection and conservation through its UGA, which will be strengthened with resources from this operation. There are also procedures in place to ensure the quality of the environmental designs and to mitigate the potential socioenvironmental impacts of the program. - 23 -

4.4 With respect to SOPTRAVI’s capacity to come up with counterpart resources, the program was scaled to ensure its financial viability, considering budgetary availability, as well as other short- and medium-term investment commitments. The operation’s financial viability has been examined in light of SOPTRAVI’s capacity to produce the counterpart resources necessary for execution of the program’s components. 4.5 Furthermore, the capacity of the road sector will not be exceeded with the initiation of this new investment plan, as other programs are ending concurrently, and there is local and regional capacity to perform the works to be let. Moreover, the road sector’s response capacity is rapid in terms of its potential to equip itself and accelerate the pace of execution, assuming a viable, long-term plan is presented that justifies the investments. B. Technical and economic viability 4.6 Technical viability. The projects and activities planned for the program are similar to those normally executed by SOPTRAVI. Contracts for program expansion and rehabilitation works will be tendered using Bank processes and procedures known to the executing agency, which has executed and is executing works within this framework. The Bank has reviewed the design guidelines for the works and found them to be acceptable. They provide suitable technical solutions and construction cost estimates in line with current market prices. The road safety measures have been considered an integral part of the designs, thus ensuring their implementation. 4.7 The technical viability of the independent execution of sections I, II, and III is supported by plans to build a temporary junction connecting section III, expanded to four lanes, and section IV, which is two lanes, in the event that works on section IV are delayed (see paragraph 2.15). 4.8 Private consulting firms that have the necessary skills and tools will supervise the works. 4.9 Economic viability. The socioeconomic viability of the projects to be included in the program was evaluated using a cost-benefit analysis and economic feasibility indicators.11 This evaluation is also consistent with the methodology used for the preparation and analysis of SOPTRAVI’s investment plan. 4.10 Considering the impact the program will have on the speed and operating conditions of the vehicles, the Highway Design and Maintenance Standards Model (HDM-IV) has been used to evaluate its economic costs of operation and travel time, the initial investment costs, and the annual costs of ordinary (routine) and extraordinary (periodic) maintenance comprising the total quantifiable transportation cost. 4.11 The program’s main benefits, when comparing scenarios with and without the program, revolve around: (i) the reduction of vehicle operating costs and travel

11 See the Project Economic Viability Report. - 24 -

time, due to the road’s increased capacity and improvements in the road surface and the routing of the expanded and rehabilitated sections; and (ii) the increased safety for road users and residents of nearby communities, with the inclusion of modern road safety criteria in the road’s design. These improvements may also benefit the owners and consumers of the cargo transported on the road. The methodology used does not include the assessment of benefits from the increase in road safety specifically or the resulting projected reduction in accidents on the road. 4.12 Traffic data, the design parameters for the current and projected route (including other conditions specific to the environment in Honduras), unit work costs, costs of vehicle inputs, costs of time (time value), etc. applicable to the country were entered into the HDM-IV model. The baseline was also prepared for the subsequent evaluation of the program. This data is reflected in the operation’s logical framework. 4.13 The economic evaluation was performed for two variations on program execution: (i) base program (sections I to V) completely covering execution of phase I of the program (El Progreso – Tela, 68.1 km); (ii) partial program (sections I, II, and III), covering execution of the portion that will be financed by the Bank (El Progreso – Puente Pajuiles, 37.1 km). 4.14 In both cases, criteria consistent with actual road conditions in Honduras were used to develop reasonable, conservative hypotheses. The main assumptions are: (i) Growth of the AADT at an average annual rate of 5% during the first 10 years and 4% per year for the next 10 years of the period considered (20 years), for scenarios with and without the program; (ii) A demand of 3% over the current AADT, generated for the scenario including the program once the works are completed, in the event the base program is executed (sections I to V); (iii) A demand of 0% (no demand) generated for the scenario including the program, in the event the partial program is executed (sections I, II, and III only); and (iv) Without the program, the route maintains stable quality conditions, assuming ordinary and extraordinary maintenance for a road surface similar to the current one (average IRI of 4 mm/m). 4.15 The economic evaluation determined an economic internal rate of return (EIRR) of 17.5% for the base program (sections I to V), and an EIRR of 17.3% for the partial program (sections I, II, and III); both levels of return were deemed satisfactory. A standard sensitivity analysis showed that there is a low risk of the program not being economically viable, even under adverse conditions (a 20% increase in investment or a 20% decrease in traffic benefits). In both cases, the EIRR remains above 12%. Tables IV-1 and IV-2 summarize the return indicators for the cases studied.

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Table IV-1 Economic internal rate of return (EIRR) Option EIRR EIRR(1) EIRR(2) Base program (sections I to V) 17.5% 14.5% 14.1% Partial program (sections I, II, and III) 17.3% 14.3% 13.9% Notes: (1): 20% increase in investment cost. (2): 20% decrease in traffic benefits.

Table IV-2 Economic net present value (ENPV). Millions of US$ Option ENPV ENPV(1) ENPV(2) Base program (sections I to V) 19.9 10.6 7.4 Partial program (sections I, II, and III) 10.6 5.4 3.8 NOTES: (1): 20% increase in investment cost. (2): 20% decrease in traffic benefits.

C. Environmental and social viability 4.16 Potential environmental and social impacts. As is common in road projects, potential direct impacts may occur during construction and in the operation phase. During construction, they are primarily related to the generation of construction waste and garbage; the location and installation of camps, site facilities, and grinding plants; the management of asphalt mixing operations; the use of heavy equipment and machinery; the exploitation of natural material deposits; the erosion of slopes; the contamination of riverbeds; the movement of earth; the generation of noise and dust; etc. During operation, the potential direct impacts are related to the road safety of pedestrians from adjacent towns. 4.17 The indirect impacts of road construction are often greater than the direct impacts, as improved accessibility normally invigorates, over time, sectors of the economy that were not competitive. Because this program involves the expansion and rehabilitation of an existing road currently in good operating condition, the operating conditions do not represent restrictions on the economic dynamics of its area of influence. For this reason, the indirect impacts are not deemed particularly important. The program is not expected to generate new economic activities or modify existing urban settlement patterns, and, therefore, indirect impacts of a significant magnitude are not expected. The most important indirect effects may be related to the growth of tourism in the city of Tela, but this effect is being considered within the environmental management plan in the environmental impact assessment for tourism development in Bahía de Tela, cofinanced by the Bank. 4.18 The potential impacts of this expansion and rehabilitation program, inasmuch as they do not involve environmentally sensitive areas, are primarily identified with the operation of the road, specifically the risk for pedestrian residents of current and future urban areas along the road’s current route. These impacts were mitigated by - 26 -

requiring the design to include bypasses around the city of El Progreso and the towns of Toyos, Las Delicias, Pajuiles, and Santiago. Design details and all requirements will be included in the bidding documents as part of the obligations of the consulting firm responsible for the engineering design; SOPTRAVI is responsible for their final approval. 4.19 Summary of the environmental and social management framework. In addition to complying with Bank policies, the program and its activities will be governed by the national environmental protection and improvement regulations. 4.20 Article 5 of the General Law on the Environmental establishes that projects, industrial facilities, or any other public or private activity that may contaminate or harm the environment, natural resources, or national cultural and historical properties must be subject to a prior environmental impact assessment (EIA) to prevent potential negative impacts. The environmental or natural resource protection measures resulting from these assessments will be binding on all parties during execution and throughout the life cycle of the works and installations. For such purposes, the Dirección de Evaluación y Control Ambiental [Environmental Assessment and Control Unit] at the Secretary of State’s Environmental Bureau administers the National Environmental Impact Assessment System (SINEIA). SINEIA, which was approved by Ministerial Resolution No. 1085-2002 of 17 September 2002, establishes three categories of projects (categories 1, 2, and 3), based on their level of environmental impact: category 1 for projects having the lowest impact and category 3 for those with the highest impact. In addition, a category 4 has been established for projects that may not be executed under any circumstances, due to severe implications for the environment. 4.21 Projects identified as category 3 are those whose impacts may be subject to an EIA in accordance with SINEIA regulations. According to current standards, there are two subcategories: category 3-I, for projects that do not require an EIA, and category 3-II, for projects that are required to submit an EIA. The Ministry of Natural Resources and the Environment has classified the proposed program as category 3-I, and SOPTRAVI and the Ministry of Natural Resources and the Environment are in the administrative process of signing the mitigation measures compliance contract, to formalize the programs environmental permit. 4.22 The program’s environmental management will be under the supervision of SOPTRAVI’s UGA, an institution with both solid experience executing Bank- financed programs and staff with extensive environmental experience in the road sector. 4.23 The program’s environmental and social management report (ESMR).12 To ensure the program’s socioenvironmental feasibility, an ESMR was drafted, describing the methodological scope and the resulting specific socioenvironmental recommendations, and taking particular account of the following: (i) application of

12 See the Environmental and Social Management Report (ESMR). - 27 -

the Bank’s Environment and Safeguards Compliance (OP-703) and Involuntary Resettlement (OP-710) policies; (ii) the “B” rating of the operation, based on the Bank’s safeguard screening toolkit and its recommendations; (iii) identification and characterization of potential direct and indirect environmental and social impacts as part of the program’s environmental and social impact review; (iv) the development of the ESMP, including measures for the adequate control of the direct negative impacts and those related to operation and maintenance, following national policies, the Bank’s environmental policy, and the recommendations of the Committee on Environment and Social Impact (CESI)(during preparation of the construction and environmental designs for the works, the ESMP will be adjusted to the reality of each of the projects, describing the specific measures for each case, proposals to be included in each set of bidding documents); and (v) institutional strengthening of the UGA, within SOPTRAVI. The ESMR also includes observations made by the CESI during meeting 20-07 of 25 May 2007. 4.24 The ESMR concludes that: (i) the program involves an existing road running through the Tela River Valley in an area used primarily for extensive agricultural, and therefore the program will not have environmental or social impacts in the area and will contribute to the growth of the area’s emerging tourism industry; (ii) as in any works project, environmental and social impacts are inevitable, but in this case, they will be minor and adequately mitigated by the implementation of the measures proposed in the ESMP; (iii) the main impacts will be in the area of direct influence of the road rehabilitation; (iv) the only item of interest in terms of conservation is the Lancetilla Biological Reserve, located in the road’s area of influence, and impacts on the reserve will be prevented through a rerouting of the two lanes to be built, already proposed in the ESMP; (v) the UGA has sufficient institutional capacity to handle the program’s environmental monitoring, based on similar experience with other operations; (vi) compliance with Honduran environmental legislation is assured, with respect to spoil banks, felling of trees, and cultural properties, among other things, as applicable and required, with measures to be incorporated into the final designs; (vii) no planned actions represent a significant modification of degradation of critical natural habitats or involve damage to important historical or cultural sites; and (viii) potentially impacted housing is estimated at 48 units; however, after construction of the planned bypasses, this number is expected to fall (the figure will be determined once the respective designs are completed). The resulting relocation of homes, based on the final design, will be carried out in strict compliance with policy OP-710. For such purposes, SOPTRAVI will deliver a specific plan to the Bank, prior to initiating the right-of-way acquisition process. 4.25 Additional fieldwork has enabled the project team to identify the environmental measures and budgets needed to mitigate the program’s environmental and social impacts, and the environmental permitting process has been completed, leaving only the ministerial signoff, to be obtained prior to tendering the works. - 28 -

4.26 To ensure monitoring of the measures recommended in the ESMP, the loan contract will include a clause requiring inclusion of all recommendations in the bidding documents and contracts for design, construction, and supervision; the contracts will additionally specify that every technical team must include an environmental specialist. Compliance will be mandatory for contractors and the supervisor. The measures recommended for the operating phase will be transferred to the concession holder in the concession contract. In the event the concession is not granted, responsibility will be transferred to the Roadway Fund. 4.27 The program will provide resources for: (i) contracting independent environmental audits; and (ii) strengthening the UGA, by hiring two fulltime professionals to support its regular work and program monitoring. D. Benefits and beneficiaries 4.28 The main benefits expected from the proposed program are: (i) reduction of vehicle operating costs and travel times, due to the road’s increased capacity and improvements in the road surface; and (ii) a reduced risk of accidents, due to the road’s increased capacity and the inclusion of specific works to maximize road safety. 4.29 The users of the improved sections of road will be the primary beneficiaries, with the reduction in vehicle operating costs, reduced travel times, and fewer accidents due to improved driving conditions. Residents of the city of El Progreso and the communities currently located along the road will also benefit directly from increased road safety, due to the implementation of specific protection works for them. E. Risks 4.30 Table IV-3 summarizes the critical risks to the program and the planned mitigation measures:

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Table IV-3 Critical program risks Risk Mitigation measures 1. High cost of works: To mitigate this risk: Unforeseen circumstances may arise, e.g., higher oil (i) The program calls for execution of the works in prices or limited competition on bids for works sections, with amounts allowing satisfactory contracts, driving up the budget. economies of scale while being attractive to domestic and foreign construction companies, in order to maximize participation and competition. 2. Delayed execution: To mitigate this risk: Problems may arise that delay the works (i) A single set of engineering designs will be completed procurement processes. for all sections of the road, keeping the entire program on track; (ii) The program plans to support the right-of-way acquisition and expropriation process, by engaging the services of a specialized consulting firm at program startup. 3. Partial execution of the program: To mitigate this risk: There may be difficulties completing execution of (i) A single set of engineering designs will be completed the works by concession on the sections of the road for all sections of the road, keeping the entire without Bank financing. program on track; (ii) The program calls for technical support for the financial analysis and development of a business plan for a private investor, including toll price studies and their relation to demand, tollbooth locations, etc.; (iii) The works designs calls for a junction connecting the expanded, four-lane final section of the road (section III, financed by the Bank) with the next two-lane section of road (section IV), for the period it remains unexpanded; (iv) The economic viability of the partial program executed with Bank financing was verified in order to ensure its feasibility as a standalone project; (v) Given the importance of the program, if the concession does not materialize, the government plans to seek additional financing from the Bank, advance to phase II of the program, including the two remaining sections, or obtain cofinancing to complete the investments.

Annex I Page 1 of 3

MULTIPHASE PROGRAM FOR ROAD REHABILITATION OF SECTIONS OF THE PPP T OURISM CORRIDOR - P HASE I LOGICAL FRAMEWORK

Descriptive summary Indicators Means of verification Assumptions Goal (Impact) To improve the efficiency and safety • A significant change in the levels of • Statistics from the Ministry of the • The macroeconomic and commercial conditions of the San Pedro Sula-Trujillo economic activity in the program’s area of Economy and specific economic activity environment is favorable for program road corridor (Highway CA-13), by influence at the time of the final impact surveys. objectives. • expanding and rehabilitating 68.1 km of evaluation. Final impact evaluation report. that road, contributing to the economic development of the country’s northern region. Purpose (Outcomes) To improve conditions on the road from • Results of the economic analysis: IRR • Evaluation reports on the sections • The operations and maintenance plan El Progreso to Tela, including improved and NPV for the improved sections and using the HDM -IV model to be applied for the roa d section to be improved is safety for users of the road to be expanded comparison with values estimated in the to each rehabilitated section one year implemented, and the necessary and rehabilitated as part of the PPP in feasibility study. after completion of the works. Trips to resources are provided for such Honduras. • Reduction of economic operating costs be made by SOPTRAVI. purposes . for vehicles, (measured in US$ and • A specific road safety campaign is constant values for vehicle-km, with the implemented. HDM-IV) with respect to 2007, as follows: Vehicle 2010 Automobile 15% Bus 9% Medium 12% Truck Heavy 5% Semi 14% • Reduction of travel times (calculated using the HDM-IV model) with respect to 2007, as follows: Vehicle 2010 Automobile 32% Bus 30% Medium 28% Truck Heavy 31% Semi 27% Annex I Page 2 of 3

Descriptive summary Indicators Means of verification Assumptions Component I: • In the 4 years of program execution, 68.1 • Supervision reports. • There are no unexpected problems with km of the Caribbean Tourism Corridor • Certificates of final acceptance of works. expropriations, or they are promptly resolved • The section of Highway CA-13 has its (PPP) in the north of Honduras are expanded • Midterm evaluation reports. before or during execution. transportation capacity expanded and its from two to four lanes. • Project completion report. • The executing agency manages and obtains driving conditions improved. • By program completion, 68.1 km of the the financial resources it needs for the timely Caribbean Tourism Corridor (PPP) have: and proper execution of the program. • The section of Highway CA-13 is improved (i) roadway signage meeting international • The selected contractors perform their work in terms of road safety. standards; (ii) bus bays; (iii) on and off well. ramps; and (iv) pedestrian crossing solutions in residential areas. Component II: SOPTRAVI has: • Reports by consulting firms. • SOPTRAVI authorities support the • A traffic statistics plan with an • Executing agency’s progress reports. institutional strengthening process and SOPTRAVI is strengthened. implementation strategy by month 18 of the • Midterm evaluation reports. implement the recommendations to improve program. management. • A plan to measure indicators of road conditions, applied to the primary road network by month 24 of the program. • The updated strategic transportation plan and the multiyear investment plan by month 24 of the program. • Support for the right-of-way acquisition process by month 6 of the program. • Design and feasibility studies for phase II by month 24 of the program. • Environmental management consultants financed by the program by month 3. • SOPTRAVI, construction companies, and consultants have completed quality control courses by month 12 of the program. Component I “Improvement of Highway • Works and supervision services are procured • Executing agency’s progress reports. • Contractors, consulting firms, and suppliers CA-13 between El Progreso and Tela” is in accordance with the procurement plan. • Supervisor’s reports. with sufficient technical and financial executed: • The works progress according to the capacity are interested in executing program schedules agreed upon with the contractors. works and providing supervision and • Selection, contracting, and execution of the supplies. works. • Counterpart resources are available to finance • The environmental and social management executing agency operations. plan (ESMP) is followed. • There are no problems or delays in procurement processes. Annex I Page 3 of 3

Descriptive summary Indicators Means of verification Assumptions Component II “Institution-strengthening” • Studies are procured in accordance with the • Executing agency’s progress reports. is executed: procurement plan. • The studies progress according to the schedules agreed upon with the consultants.