Report No. PID9642
Project Name                     Honduras-FHIS V
Region                           Latin America and Caribbean Region
Sector                           Social Funds
Project ID                       HNPE64895
Implementing Agency
Address
Fondo Hondureno de Inversi6n Social (FHIS)
Edificio IPM, Colonia Alto de ToncontUn
(frente a la Iglesia Amor
Viviente),Tegucigalpa, Honduras
Contact Person: Lic. Moises Starkman Pinel,
Minister
Tel: (504) 234-5231; (504) 233-1730
Fax: (504) 234-5255
Email: mstarkman@fhis.hn
Environment Category             B
Date PID Prepared                October 31, 2000
Projected Appraisal Date         November 6-10, 2000
Projected Board Date             December 12, 2000
1. Country and Sector Background
Poverty in Honduras. Honduras is the third poorest country in the Latin
American and Caribbean Region, with a GNP per capita of US$730 (1998).
Over half of Honduran households live in poverty, almost one third in
extreme poverty. The majority of the poor, including of the extreme poor,
live in rural areas. Although Honduras had achieved impressive
improvements in health indicators (including increased life expectancy and
high immunization rates), many social indicators remain low. Adult
illiteracy stands at 27 percent (21 percent for females), infant mortality
at 35 per 1,000 live births, and maternal mortality rate at 221 per
100,000 births. Although three-quarters of the population had access to
water and sanitation systems, these percentages were lower in rural areas,
and poor functioning of systems often limited the benefits of increased
access. Impact of Hurricane Mitch. Honduras was devastated by the major
damages caused by Hurricane Mitch in November 1998. The hurricane had a
particularly devastating effect on low-income and disadvantaged
communities, and the poverty level is estimated to have increased by an
average of 49 in the entire country as a result of the hurricane.    Within
Central America, Honduras bore the brunt of Hurricane Mitch, which was
considered to be the worst natural disaster to have affected Honduras in
modern times. No part of the country escaped; about 4.8 million people
were affected (three out of four Hondurans), out of which about 285,000
had to be placed in temporary shelters, including about 85,000 children
under five. The hurricane damaged or destroyed about 60 percent of the
road network, water systems in all major urban centers, and over 1,500
rural water systems. Losses to public and private infrastructure were
estimated to over $3.5 billion (or over 70 percent of 1997 GDP). Human
suffering and damages to the infrastructure network were further
compounded by heavy rains in late 1999.Government Strategy, and the role



of the Honduran Social Investment Fund. The Government's approach to
poverty alleviation focuses on: (i) improving the delivery and quality of
basic social services; (ii) improving efficiency and targeting of safety
net programs; (iii) protecting vulnerable and disadvantaged groups; and
(iv) stimulating rural development to raise incomes and employment. An
overarching focus of these efforts is on helping communities devastated by
Hurricane Mitch and its aftermath to rebuild. In the social sectors, the
Government's basic strategy focuses on expanding and improving the quality
of primary services in health, nutrition, education, water and sanitation
and on targeting the poor. Public social expenditures prior to the
hurricane amounted to 9 percent of GDP, and were channeled to programs
designed to expand health care and education facilities and to improve the
efficiency and quality of health and education services. This policy
still stands although the major investments needed for hurricane damage
repair have changed the necessary allocation of resources during the past
two years.A key instrument to support the Government's efforts has been
the Honduran Social Investment Fund (FHIS), first established in 1990 to
fund small-scale investments targeted at the poor. Throughout the 1990s,
FHIS has become the principal--and frequently the only--Government agency
for financing small-scale civil works in the social sectors. FHIS's
comparative advantages include its abilities to operate efficiently, to
target the poor, to mobilize needed external financing, to produce
allocative efficiencies by empowering communities to allocate resources
cross-sectorally, to enhance sustainability through participation and
through training, and to mobilize local resources for investments and for
maintenance. IDA, in cooperation with other donors (mainly IDB and KfW),
has supported FHIS through four credits, including the ongoing Fourth
Social Investment Fund (SIF IV) Project (Cr. 3118-HO of August 27, 1998),
for which an emergency supplemental credit was approved in 1999 to assist
with reconstruction in the wake of Hurricane Mitch and subsequent rains.
The objectives of the SIF IV project, which was seen as an integral part
of IDA's Country Assistance Strategy for alleviating poverty and
contributing to social development in Honduras, were: to increase access
among the poor to small-scale social and economic infrastructure in
accordance with local development priorities; to develop social assistance
programs for disadvantaged groups; and to contribute to the prospects for
sustainability of such investments. The SIF IV project was designed to
build upon the successful experience under the SIF I, II, and III projects
by adjusting FHIS's methodologies and by providing technical assistance to
support an increased role for communities and local governments in the
planning, management, and sustainability of local development projects.
Indeed, throughout 1998, as part of the preparation of the SIF IV project,
FHIS supported communities in conducting participatory needs assessments
to identify priority social and economic infrastructure projects to be
financed by FHIS. This work culminated in September 1998 with FHIS's
promotion of a national "participatory planning" effort, which for the
first time in Honduras brought communities and local leaders together in
nearly every municipality to identify and prioritize projects in the
context of Municipal Social Investment Plans (PISMs, from the Spanish
acronym). Although the implementation experience demonstrated room for
further improvement to the methodologies used for the participatory
planning exercise, there was widespread agreement that this effort marked
an important step toward increased local participation. These PISMs were
to form the basis for projects that FHIS would finance during the
1998-2001 period. Also as part of preparation for the SIF IV project,
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FHIS developed guidelines to test an even more decentralized model of
project cycle management in a number of "pilot" municipalities, and
initiated activities under special/pilot programs to attend to the needs
of indigenous communities, and to to further strengthen
demand-responsiveness and sectoral coordination in the rural water and the
social assistance sectors.When Hurricane Mitch struck in October 1998,
FHIS suspended its special and pilot activities, and diverted the
resources it had allocated to finance PISM projects to assist communities
in the reconstruction effort. FHIS's on-the-ground approach and close
ties with local actors enabled it to assume the leading role in responding
to communities' urgent needs for assistance in restoring access to basic
infrastructure: water and sanitation systems, roads, schools, and health
centers. With resources provided under the SIF IV project, FHIS was the
main agency supporting clean-up, rehabilitation, and reconstruction
efforts in rural areas, in response to the priorities identified by the
local communities and municipalities themselves. IDA resources were
particularly vital for these efforts, as Credit 3118-HO was the only major
source of financing available for the first three months of the emergency
period. In 1999, FHIS re-initiated its support for special programs
targeted at vulnerable groups and for communities of indigenous and ethnic
minorities, although on a limited basis. By the end of 1999, nearly all
of the original SIF IV resources were fully committed, and so to assist
with the ongoing reconstruction effort, IDA approved a supplemental credit
in the amount of US$22.5 million in December 1999. Resources under the
supplemental credit are now virtually fully committed, and the most urgent
of the community-level reconstruction needs now appear to have been met.
At the same time, expectations remain high in communities throughout
Honduras that FHIS will return to finance the projects that had been
identified through the 1998 local participatory planning processes. In
this context, the Government has requested IDA assistance to enable it to
turn its attention once again to the financing of locally-identified needs
for social and economic infrastructure, and to allow FHIS to further
develop and implement its special / pilot activities for strengthening
local planning, implementation, and maintenance capacities; programs of
social assistance for vulnerable groups; support to indigenous and ethnic
minority communities; and strengthening of demand-responsiveness and
sustainability of investments in the water & sanitation sector.Needs for
Infrastructure. Notwithstanding progress in improving social indicators
in recent decades, further investment is required to improve the coverage
and quality of basic social and economic infrastructure. Results of a
1998 analysis of infrastructure needs in the education, health, water and
sanitation sectors showed that the investment required merely to maintain
or to expand modestly current coverage rates in these sectors (i.e., in
the face of a population growing at 2-3 percent annually) were about US$45
million annually, even before the damage caused by Mitch. Continued
disparities in term of access, utilization, and quality of social services
and social and economic infrastructure between poor and less-poor
communities, and between rural and urban areas, make it essential to
ensure that scarce resources for such investments are distributed
equitably, that they respond to the highest priority demands, and that
completed subprojects are operational for as long as possible.Other issues
that inhibit improvements in living conditions and development
opportunities among the poor include:(a) inadequate attention to social
assistance programs. Although FHIS has played a central role in the
Government's social safety net program, including through support for,
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e.g., health and hygiene training, nutrition, early childhood education,
and attention to special, disadvantaged groups, these activities have
suffered from a lack of direction, as well as weak technical capacity in
FHIS to evaluate and oversee them.(b) issues in the water supply and
sanitation sector. Weak institutional arrangements have contributed to
insufficient services in the sector. The Government of Honduras is in the
process of implementing reforms which include the transfer of major urban
systems from the central sector agency (SANAA) to municipalities, and the
Ministry of Health's withdrawal from project execution in order to focus
on a normative role. (This reform is slated for support under the Potable
Water and Sanitation Investment Program being prepared for IDB
financing.) FHIS has been a significant investor in the water supply and
sanitation sector, and these reforms, which assign an important role to
municipalities and communities, are likely to result in an increased role
for FHIS in helping to address existing gaps in coverage in rural areas
and in poor urban areas. To fulfill this role and to improve the quality
and sustainability of its investments, FHIS will need to intensify and
strengthen its efforts and methodologies in this sector, including by
adopting more effective demand-driven implementation arrangements, working
more closely with communities and other local partners, and by increasing
the emphasis on cost recovery, based on successful experiences in Honduras
and elsewhere.(c) marginalization and special needs among indigenous and
ethnic minority communities. Approximately 12% of the Honduran population
is made up of autochthonous peoples. These groups have been the principal
beneficiaries of FHIS's Nuestras RaUces program, one of few Government
programs designed specifically to reach indigenous communities.
Nonetheless, poverty among indigenous communities remains severe. Except
for the Lencas, all of the eight groups (ChortU, Tawahka, Pech, GarUfuna,
Miskito, Nahua, Tolupan and Creoles) live in municipalities marked by the
Poverty Map as extreme poor. The indicators of health are the worst in
the country mostly due to their remote location. Although efforts are
being made by the Secretariat of Education to improve access of indigenous
to community-based basic education PROHECO, schooling continues to be
lower for indigenous than for the non-indigenous counterparts. A needs
assessment carried out in August 2000 identified lack of access to
markets, and to financial resources to initiate productive activities, as
a significant barrier to development among indigenous communities. Also,
notwithstanding the progress FHIS has made in requiring local
participatory planning in the identification and prioritization of social
investments, many autochthonous peoples feel marginalized from the Social
Municipal Planning process in municipalities with large non-indigenous
populations. Decentralization and Local Development. In the last decade
Honduras has made important steps in terms of strengthening the role that
local governments and communities play in improving local living
conditions. These steps include: (i) establishing a legal and
institutional framework favorable to decentralization; (ii) a
constitutional mandate to transfer 5% of the national budget to
municipalities; and (iii) a network of public and private, local and
international actors supporting local institutional strengthening
efforts. There is a recognition of the potentials for local governments
to play a more effective role in opening spaces at the local level for
participation and inclusion, to manage the implementation of local
investments, and to help ensure that such investments are sustained. At
the same time, institutional, managerial, and economic constraints hamper
the potential contributions that local actors are able to make to reduce
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poverty. Notwithstanding participatory experiences such as the one
leading to the 1998 PISMs, ineffecient and often non-transparent local
planning practices are common. Due to budgetary constraints, central
government transfers to municipalities have averaged only 1.9% instead of
5%.  Needs for a concerted effort to strengthen the role of local
governments have proved greater than the capacities of the chief
Government agency charged with the task (Direcci6n General de AsesorUa y
Asistencia Tecnica a los Municipios-DGAATM).Despite these weaknesses and
constraints, however, there is consensus in Honduras that a strategy to
combat poverty must include an effort to strengthen the roles of local
actors, with an ongoing debate about exactly how much power and
responsibilities local actors should and will be able to command. In this
context, the GOH has expressed a willingness to experiment with a gradual
increase in the responsibilities of local actors, and has assigned FHIS,
which is recognized as a key link with local governments and communities,
with developing such an experiment.FHIS in the Context of the Poverty
Reduction Strategy. The Government submitted an Interim PRSP to the Bank
in March 2000; this was discussed by the Executive Directors in July. The
staff appraisal contained in the Joint Staff Assessment indicated that the
document met the conditions for an IPRSP under existing guidelines. The
authorities are now embarked in a process of consultation with Civil
Society that in addition to the contacts in the capital, Tegucigalpa,
include about 12 regional meetings. The draft Poverty Reduction Strategy
(PRS) is based both on creating the environment for fast and sustained
economic growth, and on providing better access to production factors,
including human capital, health, markets and information, for the poor
population. In addition to those measures aimed at poverty reduction, the
draft PRS also includes short-run measures aimed at mitigating the effects
of poverty for the most vulnerable groups. FHIS is considered a crucial
actor in the context of the PRS for the medium and long run targets of the
strategy. In particular, FHIS is expected to play a key role in expanding
the provision of basic social services and targeting resources to poor and
excluded groups, and in promotion the processes of decentralization and
deconcentration with community participation.
2. Objectives
The proposed project would continue IDA's support for the successful FHIS
program, aiming to increase access among the poor to small-scale social
and economic infrastructure, in accordance with local development
priorities; to develop social assistance programs for disadvantaged
groups; and to contribute to the prospects for sustainability of such
investments. It would substantially aim at achieving what the earlier
Fourth Social Investment Fund project (Cr. 3118-HO), which was signed in
August and became effective in November 1998, was expected to have
achieved, but could not because its resources (and those of a Supplemental
Credit approved in December 1999) were utilized in their entirety to help
with Honduras's reconstruction efforts following the devastating damage
caused by Hurricane Mitch in November 1998.
3. Rationale for Bank's Involvement
Ability to mobilize international resources and to encourage donor
coordination.Mobilization of high-quality technical assistance for
institutional improvement under the project.Bank's broader program of
assistance (i.e., beyond FHIS) will provide a context to support
complementary reforms needed to sustain innovations under the proposed
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project.
4. Description
The project's basic structure is essentially the same as that of the SIF
IV project, resources of which were diverted to finance community-level
reconstruction following Hurricane Mitch. The operations guidelines and
instruments for the four special / pilot programs have been analyzed and
developed in more detail since the SIF IV project, and these four programs
have been regrouped into a single component (with four subcomponents) to
enable a more effective monitoring of these activities. Specific
monitoring and evaluation activities are foreseen within each component
and subcomponent in order to focus increased attention on drawing lessons
from experience. Some activities have also been re-costed.The project
components are as follows:1. Subproject Financing. This component would
constitute the core of the program and would continue IDA's provision of
financing for a wide range of small-scale social and economic
infrastructure subprojects, as well as training to enhance sustainability.
Subproject proposals would be identified by beneficiaries, prioritized
through local participatory planning processes, and processed according to
technical, financial, economic, social, and environmental criteria set out
in the Operations Manual and PIP. For the first two years of the program,
it is expected that the 1998 PISMs would be the basis for subprojects to
be financed. (Most municipalities have confirmed that those plans reamin
valid, although a number have asked for, and have received [or would under
the project] TA to update their plans.)2. Special / Pilot Programs.(a)
Pilot Program for Local Institutional Strengthening. This component would
constitute a set of structured experiments designed to develop, test, and
draw lessons regarding innovative approaches and methodologies for
encouraging and enabling communities and local governments to work
together more effectively, and in (better) coordination with stakeholders
at the local, regional, and national levels. The component would cover
three interrelated aspects: (a) participatory local planning; (b)
preventive maintenance; and (c) tranfer of (some) functions and
responsibilities for subproject processing from FHIS to municipalities and
communities. The component would finance training, technical assistance,
and investment subprojects in a small group of "pilot" municipalities.(b)
Pilot Program to Strengthen Rural Water & Sanitation Services. This
component would provide technical assistance, training, and supplemental
subproject financing to develop and test innovative methodologies and
creative partnerships aimed at improving attention to rural communities'
needs for water systems and the sustainability of such investments, and at
drawing lessons for improved attention to, and sectoral coordination in,
the water sector. The component's design would emphasize
demand-responsiveness, cost-recovery, and community control in the
subproject process, and would rely significantly on the involvement of
local governments, NGOs, and private service providers. (c) Social
Assistance Innovations Fund. This component would foster the development
of innovative approaches to address the needs of key vulnerable groups, by
providing financing for proposals (submitted by NGOs, community
organizations, the private sector, etc.) on the basis of a competition
overseen by a Steering Committee of key stakeholders; the component would
also include resources for training and TA to improve capacities of actors
in the sector.(d) Nuestras RaUces ("Our Roots"). Nuestras RaUces seeks to
improve the living conditions and promote social capital in indigenous and
Afro-Honduran communities by financing small-scale subprojects (identified
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by the communities and selected according to eligibility criteria
established by FHIS and the indigenous peoples' federations) using paid
labor of community members, and then providing training to such community
members to help them organize, establish / develop small community banks,
and finance agricultural and commercial income-generating activities
initiated and identified by the communities themselves.     Institutional
strengthening of ethnic federations, capacity building of communities,
coordinators, FHIS, and ethnic liaisons are substantial elements of the
program.3. Project Management. This would include FHIS operating costs,
institutional strengthening, equipment and vehicles, and external
auditing.
1.    Subproject Financing
2a.   Pilot Program for Local Institutional Strengthening
2b.   Pilot Program to Strengthen Rural Water & Sanitation Services
2c.   Social Assistance Innovations Fund
2d.   Nuestras Raices ("Our Roots")
3.    Project Management
5. Financing
Total ( US$m)
GOVERNMENT               28.05
IBRD
IDA                      60
INTER-AMERICAN
DEVELOPMENT BANK         60
KREDITANSTALT FUR
WIEDERAUFBAU             7
BILATERAL AGENCIES
(UNIDENTIFIED)          21
Total Project Cost       176.05
6. Implementation
Project Implementation and Coordination. FHIS would be responsible for
overall project implementation and coordination. In general, subprojects
would be identified and sponsored by communities, NGOs, and/or local
government representatives, executed by qualified private contractors or
NGOs, and supervised by FHIS. Under the Pilot Programs for Local
Institutional Strengthening and for Rural Water and Sanitation, certain
municipalities, communities, and/or other local agents would assume
increased responsibilities for all or parts of the subproject cycle, with
supervision for such involvement provided by FHIS in coordination with
sector agencies, NGOs, and others. Detailed criteria and procedures set
out in FHIS' Operational Manual and the Project Implementation Plan (PIP)
would govern all aspects of project management, including ex-ante
allocation of funds, criteria for access to funds, evaluation and
processing of subprojects proposals, contracting, execution, and
supervision of subprojects, and implementation of the pilot programs.
Revisions to the Operations Manual and a draft PIP were reviewed during
project preparation and found generally acceptable; a final revision to
both documents would be provided as a condition of effectiveness. The
Operations Manual and PIP could be modified as necessary during project
preparation and implementation, subject to agreement with IDA. Also, to
ensure that its activities are consistent with the policies and
development strategies of line agencies and other relevant stakeholders,
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FHIS has established and would update framework agreements with the
Ministries of Education; Health; Culture, Arts and Sports; the Environment
(SERNA); the Honduran Institute for Child and Family Welfare (IHNFA); and
the Association of Honduran Municipalities (AMHON). Implementation and
inter-institutional coordination under past IDA credits have both been
satisfactory, although the project would aim to further improve
coordination in design and supervision of subprojects, which has been
identified as an issue in past evaluations.Project Oversight. FHIS'
enabling law permits FHIS to operate relatively free from political
interference, and exempts the institution from normal government
budgeting, procurement, and disbursement regulations. Oversight is
provided by a Board of Directors, chaired by the President of the
Republic, and including top government and congressional officials and
representatives of the private sector, cooperatives, and NGOs. The
Executive Director has the rank of Minister and is a member of the
Cabinet.Accounting, Financial Reporting and Auditing Requirements. FHIS's
financial management system has been reviewed and found satisfactory: this
includes adequate staffing in all relevant units; and satisfactory
accounting systems, internal controls and auditing arrangements.
Completed audits have been submitted in a timely manner, and have found no
significant issues. Financial audits would be carried out by an
independent auditor acceptable to IDA; audit reports would be submitted
annually in accordance with IDA standards, and updates, containing the
results of concurrent auditing activities, would be submitted quarterly.
As in the past, the quarterly and annual auditor's opinion would include
the results of an "operations audit", including a financial review of
subprojects and a physical inspection of a sample of subprojects in the
field. FHIS would also prepare annual progress reports each April, and
annual planning reports each October. FHIS has adapted its financial
management systems in line with IDA's Loan Administration Change
Initiative (LACI), and conversion to LACI-style disbursements was
introduced in early-1999.Monitoring and Evaluation. In recent years,
great strides have been made in improving monitoring and evaluation in
social funds in general, and in FHIS in particular. Significant attention
to monitoring and evaluation activities is foreseen under the proposed
project:Monitoring of operational performance and program outputs. As
part of the institutional strengthening program financed under the SIF III
project, FHIS developed a sophisticated management information system with
about 50 key performance indicators that allow each administrative unit,
and managers and most staff within units, to set productivity targets and
monitor compliance. Principal technical staff meet regularly to discuss
these indicators and to recommend actions in response to any problems
identified. As part of project preparation, FHIS has been fine-tuning
this system, as well as incorporating additional quality-oriented
indicators. Improvements would be reviewed as part of the revised
Operations Manual to be submitted prior to effectiveness.
Subproject Financing - Impact Evaluation. Under the program, impact
evaluation practices will be updated and mainstreamed to track FHIS'
success in achieving the desired outcomes and impacts outlined in the
logical framework regarding: (i) poverty targeting; (ii) correspondence
between FHIS investments and community priorities; (iii) changes in
national coverage rates of basic social infrastructure; (iv) the quality
and sustainability of subprojects; (v) beneficiaries' access to and
utilization of basic social infrastructure in communities served by FHIS;
and (vi) subprojects' impact on beneficiaries' health and education
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status. The first external impact evaluation of FHIS (and one of the
first for a Bank-financed social fund) was conducted in 1998-99 to assess
the targeting, community participation, sub-project quality,
sustainability, and household impacts of FHIS-financed subprojects in
health, education, water and sanitation (see Annex 4 for a summary of key
results). The evaluation methodology compared results from households and
projects benefiting from FHIS projects to a control group of pipeline
projects that had yet to receive FHIS funding. The use of pipeline
projects as a control group allows for both "with and without" comparisons
using treatment and control groups as well as "before and after"
comparisons using baseline and follow-up data. The evaluation also
included the application of beneficiary assessments to samples of
FHIS-financed subprojects, which allowed for triangulation of the
evaluation results using two separate methodologies and providee depth to
the impact analysis results by lending voice to community-based focus
groups and key informants. Financing is provided under the project to
mainstream these methodologies, with a full evaluation to be conducted by
the end of the project implementation period, and supplemented with
partial work (including beneficiary assessments) periodically. The
external evaluation will continue to harmonize its data collection efforts
with the existing system of household surveys using the established
poverty measures in Honduras in order to evaluate the project's success in
poverty targeting. In addition, FHIS's updating of the MIS (mentioned in
the previous paragraph) will include adjustments to ensure the collection
of data as part of the subproject appraisal process, which will be used as
(i) baseline data serving as an input to the external impact evaluation;
and (ii) data for enhancing the economic analysis of subprojects.
External random monitoring of FHIS's environmental screening mechanisms
would be included as part of M&E activities.
Special / Pilot Programs. The drawing of lessons to inform future
practices and policies is a key goal under all of the special / pilot
components (Local Institutional Strengthening, Rural Water and Sanitation,
Social Assistance Innovations Fund, and Nuestras Raices). As such, each
of those components includes provisions for conducting external analyses
of quantitative and qualitative aspects of the respective programs, at
mid-term and at program completion; and distinct methodologies have been
or are being developed to reflect the specific objectives and results
foreseen under each component.FHIS's planning unit would be responsible
for overseeing monitoring and evaluation activities. The project would
also be subject to regular supervision by IDA staff, including their
participation in annual project implementation reviews.Co-financing. As
has been the case under the earlier FHIS projects, FHIS is expected to
mobilize significant amounts of external co-financing during the project
implementation period. Project was developed in close collaboration with
KFW and IDB, and these agencies also intend to support the proposed
program. Nonetheless, since all external financing expected under the
project would be parallel rather than joint, no adverse effects on
implementation would result if any external co-financing amounts were to
be different from the expected amounts.
7. Sustainability
a. Continued coordination with line agencies and agreement on their
responsibilities for operation and maintenance costs.b. Beneficiary
participation in all phases of subproject cycle, including up-front
contributions and commitments.c. Improvements in the capacities of local
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governments to work with communities and with relevant national
authorities, to ensure operations and maintenance of local investments.d.
Improvements in subproject appraisal criteria to include assessments of
institutional, technical, and financial capacities of
municipalities/communities to handle maintenance; these assessments would
include a review of plans, commitments and contributions (in the form of
maintenance contracts") from all relevant actors. The project could
include support to help municipalities/communities improve weak
capacities.e. Training of beneficiaries in subprojects use and
maintenance, formation of user committees. The proposed project's
development objectives would not depend upon the sustainability of FHIS as
an institution per se, and therefore the project does not provide for a
continuation of FHIS beyond the time period for which financing would be
provided. It is worth mentioning however, that, to the extent that
external financing remains available after completion of the proposed
project, and as pointed out in the"Lessons Learned" section above,
dissolution of FHIS is not expected any time soon. With regard to the
sustainability of the project's institution building initiatives, it is
hoped that the stakeholder alliances that are sought under the Social
Assistance Innovations Fund, the Pilot Program to Strengthen Rural Water
Systems, and the Nuestras RaUces program will lay the groundwork for more
lasting associations in these sectors. It is also hoped that the
local/municipal development activities to be piloted under this project
will also have a more general impact in contributing to better, and
lasting, local capacities for designing, financing, managing, and
sustaining development strategies. However, major improvements in such
local governance capacities are not expected as a direct consequence of
the project, since these would require national policy reforms (e.g.,
fiscal decentralization, tax reform, etc.) that fall well beyond the scope
of this project.
8. Lessons learned from past operations in the country/sector
The project design reflects lessons learned from international experience
with social funds, as well as from IDA's experience with FHIS under Cr.
2212-HO, 2401-HO, and 3118-HO (Mid-Term Review for IDA Credit 2766-HO,
Implementation Completion Report for IDA Credit 2401-HO, Performance Audit
Report for Credits 2212-HO and 2401-HO, and ICR for IDA Credit 2766-HO),
as well as the 1998 FHIS Impact Assessment study. Among the most
pertinent of these lessons are the following:Committed Objectives and
Consistency with National Development Strategies. FHIS, like all SIFs,
needs to maintain clear and limited objectives. Efficiency of operational
policies and procedures, as well as overall program effectiveness, depend
upon clear understanding of FHIS's role in an overall development strategy
framework. When objectives are unclear, or when SIFs become responsible
for numerous (and sometimes conflicting) development goals, efficiency and
effectiveness can become compromised. It is particularly important for
governments to clarify SIFs' roles in the context of national policies for
social development, poverty alleviation, and local/municipal development.
Furthermore, it is important to remember that SIFs are designed to finance
and oversee implementation of subprojects and not to make policies; while
SIF managers and staff may bring important perspectives to inform policy
discussions on the above-mentioned topics, participation and coordination
of all actors relevant to such discussions including from the public,
private, and NGO sectors) should be assured. Thus the project design
recognizes that "Subproject Financing" will remain the core activity of
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the project.Potentials for Innovation and Laying Groundwork for Future
Reform. At the same time, even while the project focuses on subproject
financing as FHIS's "core business", it also responds to the recognition
that SIFs can serve effectively as incubators for innovation, and can
demonstrate through practice the potentials for and directions of
strategic reform in key sectors affecting the poor. In this respect, the
project's special and pilot programs, under component 2, would focus
attention on drawing lessons, even as they realize immediate impacts, in
four areas viewed as critical to address poverty in Honduras over the
longer-term.Key Institutional Characteristics. The project would place
due emphasis on the institutional characteristics that are considered most
critical for success of SIFs: (i) operational efficiency; (ii)
transparency and accountability, which are bolstered by clear resource
allocation criteria and operational guidelines, reliable independent
audits and evaluations, an effective management information system, and
vigilant supervision by external financing agencies; (iii) clear and
simple procurement and disbursement procedures (this applies to both FHIS
and IDA's procedures); (iv) competitive salaries and freedom from normal
government personnel restrictions, in order to permit
recruitment/retainment of a highly qualified staff; (v) proper targeting
mechanisms; (vi) integration of the environmental viewpoint into
operations; and (vii) improved attention to monitoring and evaluation
activities, including beneficiary assessments.Sustainability. Subproject
sustainability requires a participatory process that seeks open
consultation with communities on their needs and priorities and an
involvement of communities throughout the project cycle to secure their
commitment to subproject operation and maintenance. FHS resources also
need to be allocated for training. However, community support alone
cannot assure subproject sustainability. To be fully successful,
subproject sustainability requires the coordinated support of both the
central and local governments, NGOs, and FHIS, with clearly defined roles
and responsibilities for each.Role of Local Government. Local (municipal)
governments can play an important role in ensuring participatory
priority-setting, and in contributing financial resources for
subprojects. This can in turn lead to more efficient and equitable
distribution of resources within municipalities, and can improve prospects
for subproject sustainability. FHIS has demonstrated that it is possible
to strengthen local governments' capacities to carry out these functions,
which was further confirmed during and following the emergency. However,
greater coordination with other actors involved in local/municipal
development will be required in order to achieve more widespread and
sustained strengthening of municipal capacities."Temporary" Nature of
SIFs. The notion that SIFs are temporary needs to be reevaluated in
general, and in Honduras in particular. FHIS's creation ten years ago as
a temporary agency was based on assumptions that the economic adjustment
program was of a limited duration, and that the line ministries would be
strengthened to prepare and implement programs and projects targeted to
the poor, so that there would be no long term need for FHIS. However,
chronic poverty continues to be pervasive, and constraints on government
expenditures and economic activity that could adversely affect the poor
are likely to persist for some time. Moreover, FHIS's role in efficiently
financing small social infrastructure on a massive scale throughout poor
areas of the country remains relevant, which was clearly proven after
Hurricane Mitch. It is not clear that this function would be better
executed by traditional line ministries, whose capacities in this area are
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still limited. FHIS has also shown that it can play an important role as
a catalyst to strengthen local governments and their abilities to foment
participatory processes for identifying, implementing, and sustaining
priority investments. Also, FHIS has piloted a number of new initiatives
that later achieve sustainability on their own (e.g., PRAF). Thus, the
comparative advantages of FHIS will probably remain relevant for quite
some time.Preparedness for Contingency Responsibilities during Disasters.
The effective roles played by several regional SIFs following Hurricane
Mitch underscored the fact that SIFs can be effective instruments to help
governments respond to natural disasters. To be better prepared for such
situations in the future, FHIS has drafted and is currently finalizing a
"Contingency Manual" to describe temporary procedures that could be
employed in the case of national states of emergency. Additionally, FHIS
and the Disaster Management project team have established mechanisms of
coordination with the aim of improving disaster preparedness at the
community / municipal level.
9. Program of Targeted Intervention (PTI)     Y
10. Environment Aspects (including any public consultation)
Issues        As part of project preparation, an Environmental
Assessment was carried out, including:    (i) a field visit to a random
sample of subprojects FHIS executed since 1998 with emphasis on water and
sanitation, health, and education subprojects financed financed by IDA, as
well as a sample of environmental subprojects executed by FHIS and
financed under the Environmental Development Project (Cr. 2653); (ii) an
assessment of FHIS environmental management capacity, including its
environmental unit (Direcci6n de Medio Ambiente) staff and current
coordination with sector agencies, including Ministry of Natural Resources
and the Environment (SERNA); (iii) an assessment of the environmental
impacts associated with the proposed project, including its pilot
components; and (iv) discussion with FHIS officials an Environmental
Management Plan (EMP) for proposed operation, based on the findings of the
assessment. Field visits included discussions with municipal officials to
assess their needs and capacities in terms of subproject environmental
management at the municipal level. Field visits also included a sample of
pilot environmental management subprojects for watershed erosion control,
financed under the FHIS IV Supplemental Credit.Significant issues to be
addressed under the proposed operation include: (i) strengthening FHIS
environmental field monitoring capacity and strategic environmental
planning to improve overall environmental quality of subprojects; (ii)
expansion of water erosion control pilot subprojects; (iii) strengthening
municipal capacities to monitor and follow up on environmental assessments
carried out during each subproject's preparation; and (iv) strengthening
of coordination between FHIS and SERNA to improve subproject environmental
quality at the municipal level. An EMP addressing significant issues has
been drafted, discussed and agreed with FHIS officials.During
implementation, periodic evaluations and monitoring (including random
assessments of subproject quality to be carried out by external
consultants) would verify adherence to subproject environmental assessment
mechanisms, and impact evaluations would include assessments of
sustainability of environmental impacts. Monitoring will be closely
coordinated with the Environmental Unit established since 1995 inside FHIS
(Direcci6n de Medio Ambiente). Current DMA functions include monitoring
of subproject design and execution reporting of findings to FHIS's
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management.As a result from this process, it was concluded that the
proposed operation would have no significant environment risks. No
resettlement would occur as a result of project investments. The
environmental assessment policies and procedures, defined in FHIS's
Operational Manuals and currently used to screen subprojects for possible
environmental implications were assessed and found in compliance with Bank'
s guidelines for sub project assessment. The majority of subprojects are
expected to have a positive or neutral impact on the environment.
11. Contact Point:
Task Manager
David Seth Warren
The World Bank
1818 H Street, NW
Washington D.C. 20433
Telephone: 202-473-9777
Fax: 202-522-1201
12. For information on other project related documents contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-5454
Fax:        (202) 522-1500
Web: http:// www.worldbank.org/infoshop
Note: This is information on an evolving project. Certain components may
not be necessarily included in the final project.
This PID was processed by the InfoShop during the week ending November
3, 2000.
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