FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR11.7 MILLION (US$18.2 MILLION EQUIVALENT) TO THE REPUBLIC OF HONDURAS FOR A IMPROVING PUBLIC SECTOR PERFORMANCE PROJECT Poverty Reduction and Economic Management Central America Country Management Unit Latin America and the Caribbean Region November 1, 2011 Report No: HN This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document would be made publicly available in accordance with the Bank s policy on Access to Information. i

2 CURRENCY EQUIVALENTS (Exchange Rate Effective October 21, 2011) Currency Unit = Lempira (HNL) HNL18.90 = US$1 US$1.57 = SDR 1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CPS Country Partnership Strategy DA Designated Account DEI Department of Revenues and Customs (Dirección Ejecutiva de Ingresos) DPC Development Policy Credit FM Financial Management Honducompras National Procurement Platform HRM Human Resource Management IADB Inter-American Development Bank ICB International Competitive Bidding ICR Implementation Completion Report IFI International Financing Institution IFR Interim Financial Report IGR Institutional Governance Review IPSP Improving Public Sector Performance (this project) KfW German Development Bank (Kreditanstalt für Wiederaufbau) MCC Millennium Challenge Cooperation M&E Monitoring and Evaluation NCB National Competitive Bidding ONCAE National Procurement Office (Oficina Nacional de Contrataciones y Adquisiciones del Estado) PCU Project Coordination Unit PEA Project Executing Agency PRSTAC Poverty Reduction Strategy Technical Assistance Credit SEFIN Ministry of Finance (Secretaría de Finanzas) SIAFI Integrated Financial Management System (Sistema Integrado de Administración de Finanzas) ToR Terms of Reference UAP-SEFIN Project Coordination Unit (Unidad de Administración de Proyectos) UATP Presidential Technical Support Unit (Unidad de Apoyo Técnico Presidencial) UDEM Modernization Unit (Unidad de Modernización) UEPEX SIAFI Module for management of external resources Regional Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: Pamela Cox Carlos Felipe Jaramillo Rodrigo A. Chaves Arturo Herrera Carolina Rendon i

3 TABLE OF CONTENTS PAD DATA SHEET... iii I. STRATEGIC CONTEXT... 1 A. Country Context... 1 B. Sectoral and Institutional Context... 1 C. Higher Level Objectives to which the Project Contributes... 4 II. PROJECT DEVELOPMENT OBJECTIVES... 4 A. PDO... 4 B. Project Beneficiaries... 4 C. PDO Level Results Indicators... 5 III. PROJECT DESCRIPTION... 5 A. Project components... 5 B. Project Financing... 9 C. Lessons Learned and Reflected in the Project Design... 9 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements B. Results Monitoring and Evaluation C. Sustainability V. KEY RISKS VI. APPRAISAL SUMMARY A. Economic and Financial Analysis B. Technical C. Financial Management D. Procurement E. Social (including safeguards) F. Environment (including safeguards) Annex 1: Results Framework and Monitoring Annex 2: Detailed Project Description Annex 3: Implementation Arrangements Annex 4: Operational Risk Assessment Framework (ORAF) Annex 5: Implementation Support Plan ii

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5 PAD DATA SHEET Honduras Improving Public Sector Performance (P110050) PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSPS Basic Information Date: 1-Nov-2011 Sectors: General public administration sector (100%) Country Director: Carlos Felipe Jaramillo Themes: Public expenditure, financial management and procurement (40%), Administrative and civil service reform (20%), Other Sector Manager/Director: Arturo Herrera Gutierrez/Rodrigo accountability/anti-corruption (20%), Managing for development A. Chaves results (20%) Project ID: P EA Category: C - Not Required Lending Instrument: Team Leader(s): Technical Assistance Loan Carolina Rendon Does the project include any CDD component? No Joint IFC: No Borrower: Republic of Honduras Responsible Agency: Unidad Administradora de Proyectos UAP/SEFIN Contact: Daisy Mejia Title: Coordinadora General Telephone No.: dmejia@sefin.gob.hn Project Implementation Period: Start Date: 15-Feb-2012 End Date: 31-Dec-2015 Expected Effectiveness Date: Expected Closing Date: 15-Feb Dec-2015 Project Financing Data(US$M) [ ] Loan [ ] Grant [ ] Other [ X ] Credit [ ] Guarantee IDA credit with blend terms with a final maturity of 25 years including a grace period of 5 years. For Loans/Credits/Others Total Project Cost (US$M): Total Bank Financing (US$M): Financing Source Amount(US$M) BORROWER/RECIPIENT 0.00 International Development Association (IDA) Total Expected Disbursements (in USD Million) Fiscal Year Annual Cumulative iii

6 ..... Project Development Objective(s) The objective s of the Project are to strengthen the management of public finances and to establish a more efficient, effective and transparent public procurement system through: (i) upgrading the public financial management system; (ii) upgrading the e-procurement platform; (iii) enhancing the internal control systems over personnel expenditures; and (iv) building capacity of the Central Administration. Components Component Name Cost (USD Millions) Component 1. Strengthening and Consolidating Financial Management Systems 7.90 Component 2. Strengthening the Public Procurement System 4.70 Component 3. Improving Public Sector Human Resource Management 3.70 Component 4. Strengthening Government monitoring and evaluation capacity 0.80 Component 5. Project Coordination 1.10 Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ] Does the project require any exceptions from Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy exception sought from the Board? Yes [ ] No [ X ] Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 Forests OP/BP 4.36 Pest Management OP 4.09 Physical Cultural Resources OP/BP 4.11 Indigenous Peoples OP/BP 4.10 Involuntary Resettlement OP/BP 4.12 Safety of Dams OP/BP 4.37 Projects on International Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP 7.60 X X X X X X X X X Legal Covenants Name Recurrent Due Date Frequency Memorandum (MoU) on Inter-institutional Arrangements for project implementation Description of Covenant 01-Feb-2012 The Recipient, through SEFIN, shall enter into a memorandum of understanding (MOU) with Secretaria de Presidencia (SDP), under terms and conditions acceptable to the Association. (Section I.4, Schedule 2) Name Recurrent Due Date Frequency Financial Audit Company has been hired. 15-May-2012 iv

7 . Description of Covenant The Recipient shall, not later than 3 months after the Effective Date, hire independent auditors, for purposes of carrying out the annual audits of the Financial Statements: Section B.4, Schedule 2 Name Recurrent Due Date Frequency Compliance audit for results indicators. X Yearly Description of Covenant No later than 6 months after each year of Project implementation (starting with calendar year 2012), the Recipient shall cause the auditors to carry out annual operational audits (Section V.A, Schedule 2) Name Recurrent Due Date Frequency Operational Auditors have been hired. Description of Covenant 15-May-2012 The Recipient shall not later than 3 months after the Effective Date hire independent auditors (Section V.A, Schedule 2). Name Recurrent Due Date Frequency Project Coordination Unit Description of Covenant X The Recipient, through SEFIN, shall operate and maintain throughout Project implementation, a Project coordination unit (UAP), with functions, staffing, and responsibilities satisfactory to the Association (Section I.A.2, Schedule 2) Name Recurrent Due Date Frequency Publication of the Procurement Plan in SEPA Description of Covenant 09-Jan-2012 Supply SEPA with the information contained in the initial Procurement Plan within thirty (30) days after the Project has been approved by the Association. (Section III. A.4.k, Schedule 2). Team Composition Bank Staff Name Title Specialization Unit Gisela Durand Consultant Consultant LCSPF Henry Forero Ramirez Senior Information Officer Senior Information Officer TWICT Patricia De la Fuente Hoyes Senior Finance Officer Senior Finance Officer CTRLN J. Humberto Lopez Sector Manager Sector Manager AFTP2 Andres Mac Gaul Senior Procurement Specialist Senior Procurement Specialist LCSPT Anemarie Guth Proite Procurement Specialist Procurement Specialist LCSPT May Cabilas Olalia Senior Operations Officer Senior Operations Officer LCSPS Christian Yves Gonzalez Amador Senior Economist Economist LCSPE Mariano Lafuente Public Sector Mgmt. Spec. Public Sector Mgmt. Spec. LCSPS Jasmin Chakeri Sr Country Economist Sr Country Economist LCSPE Noris Janeth Salinas Reyes Team Assistant Team Assistant LCCHN Jose Simon Rezk Financial Management Specialist Financial Management Specialist LCSFM Ana Bellver Vazquez-Dodero Sr Public Sector Mgmt. Spec. Sr Public Sector Mgmt. Spec. LCSPS Fanny Weiner E T Consultant E T Consultant LCSPS David Santos Ruano Consultant Consultant LCSPS Juan Diego Alonso Education Economist Education Economist LCSHE Carolina Rendon Public Sector Specialist Team Lead LCSPS v

8 . Valerie Hermann Perez Team Assistant Team Assistant LCSPS Joao Nuno Vian Lanceiro da Veiga Malta Senior Procurement Specialist Senior Procurement Specialist LCSPT Jimena Garrote Counsel Counsel LEGLA Guillermo Lagarda Cuevas Junior Professional Associate Junior Professional Associate LCSPE Non Bank Staff Name Title Office Phone City Jorge E. Vargas Consultant Rafael Fuentes Consultant vi

9 I. STRATEGIC CONTEXT A. Country Context 1. Honduras is a lower middle income country with per capita gross national income of US$1, It is Central America s second most populated country, with 7.5 million people, and the second largest in size. About half of the population is rural, and 80 percent of these people live in hillside areas, practicing subsistence agriculture. Honduras social indicators are among the worst in the Latin America and Caribbean region but are comparable to other lower middle income countries in other regions. 2. Honduras remains one of the poorest and most unequal countries in Latin America. The country was severely affected by the economic crisis. As a result of the economic contraction in 2009, poverty in Honduras may have risen by more than 150,000 people between 2009 and Consumption-based figures for 2009 indicate that 44.5 percent of the population lived in poverty and 20.1 percent lived in extreme poverty. 2 According to official figures, the Gini coefficient that measures inequality in income distribution for 2007 stood at These figures are among the highest in Latin America. 3. Crime and violence have become a major development challenge. Deteriorating citizen security is undermining Honduras growth potential and investment climate, its social and human development progress, and its prospects for improving governance. The annual economic costs of crime and violence have been estimated at near 10 percent of Honduras GDP (nearly US$900 million). 3 Not surprisingly, citizens perceive violent crime as one of the major threats to their welfare, and the failure to curb this epidemic continues to undermine the legitimacy of government and the rule of law. B. Sectoral and Institutional Context 4. State capture and weak accountability pose significant challenges for development in Honduras. According to the 2009 Institutional Governance Review (IGR) (Report No HN), clientelistic practices and vested interests have a strong direct (or indirect) influence over the political and economic system in the country. Similarly, limited transparency and information around decision-making weaken the country s institutional framework. 5. Efforts to improve governance were made during the past years, but policy discussion lacks focus on performance. The IGR notes that, in general, policy discussion has focused on designing further reforms rather than on enforcing already approved initiatives. Although Honduras put forth several efforts in recent years aimed at improving its governance conditions, spaces created for dialogue are still limited and progress towards building consensus among different sectors has been unfruitful. Some advances were made in key reform areas, e.g., the approval and implementation of the Law on Transparency and Access to Information; the initial implementation of a Results-based Management System, and the expansion and improvement of the integrated public financial management system. However these were Atlas GNI per capita. 2 Honduras official figures may differ from these because they are based on household income and use a different methodology in the calculation. 3 Crime and Violence in Central America, A Development Challenge, World Bank

10 affected by the political crisis and compounded further by an environment of political and institutional conflict, insecurity, and deterioration of trust in public institutions. 6. Public trust in institutions is low. The political crisis of 2009 that resulted from the ousting of the then President, further polarized the country and reaffirmed the low levels of trust in public institutions. According to Latinobarometro 4, the Government in Honduras is perceived as very weak with only 32 percent of citizens considering that the Government is the most powerful actor in the public arena. Similarly, citizens perception that the country is headed in the right direction reaches only 10 percent, the lowest in the region. Furthermore, according to Transparency International s Corruption Perception Index for 2010, Honduras ranks 134th among 178 countries, ranking fourth in corruption perception in Latin America and first in Central America. 7. The current administration shows commitment to a continued governance reform agenda. Since taking office, the current administration, has acknowledged the need to strengthen the country s accountability framework, specifically of policy makers towards citizens and taxpayers. The Administration has developed a Transparency and Anticorruption Plan for (Plan de Transparencia y Lucha Contra la Corrupción, ) 5, which includes the design and implementation of a National Policy and System of Integrity. This Plan establishes a set of priority activities to foster accountability and transparency in public sector activities linking them to the objectives of the Plan Nación, especially in key areas such as procurement and management of financial resources. The Anticorruption Plan provides a set of activities for different Sector Cabinets (Gabinetes Sectoriales) to address major governance constraints. 8. Although these efforts represent important first steps towards strengthening governance in the country, challenges remain. These include consolidating reforms in areas such as public financial management, procurement, human resources management and building capacity to monitor and evaluate top policy priorities. 9. Honduras public financial management platform has major weaknesses. Although a financial management system (Sistema Integrado de Administración de Finanzas, SIAFI) was introduced in 2004, its technological infrastructure is outdated and contributes to the inefficient use of the system. SIAFI s initial implementation was focused on central government entities and the introduction of a Single Treasury Account, substantially improving the management of public resources. However, some initially designed modules (such as travel management and revolving funds) were never implemented; and others were only done so partially (including the human resources and administration of goods). 10. Expert assessments consistently agree that the conceptual model of the system is sound and that SIAFI fulfills all the basic functionalities that international best-practice recommends. 6 However, shortcomings of the IT system and some of SIAFI s functionalities are complicating its proper use and its planned expansion. A technological upgrade and the development of new functionalities are needed in order to allow larger number of users to access the system simultaneously, reduce access costs (i.e. through the Internet), ensure adequate 4 Latinobarometro: Centroamerica y sus democracias, Latinobarometro Plan de Transparencia y Lucha contra la Corrupción , Secretaría de Presidencia. June, Final Report: Informe de Consultoría, José Mauro Brusa. November

11 security levels, and enable linkages with other information systems such as the national procurement platform Honducompras and the national debt management system. 11. However, current shortcomings of SIAFI are leading to forms of non-transparent financing. Shortcomings of the system include the incomplete tracking of expenditures and obligations which the Government has entered into, which in turn have led to a high level of arrears. Underlying issues include inadequate commitment controls and budgeting for contracts, as well as lack of information. 12. Insufficient capacity of the institutions in charge of public procurement hinders advances in the improvement of the country s procurement system. The institutional framework of the Oficina Nacional de Contrataciones y Adquisiciones del Estado (ONCAE), the procurement regulator, lacks the decision-making strength and authority, and the current procurement platform Honducompras is not conditioned to act as a transactional platform. 13. Building capacity to formulate, monitor and to evaluate public sector programs and policies is a top Government priority. The institutional framework of the entities responsible for the oversight of public sector programs and policies is outdated and the capacity of said institutions limited. This hinders the capacity of the Government to evaluate if the programs and policies being implemented are achieving the results they are intended to. 14. Human resources management (HRM) continues to be one of the weakest areas in public administration. Regional studies 7 have defined the civil service in Honduras as a clientelism-based bureaucracy characterized by low autonomy and capacity. It is highly politicized and based on patronage with appointments made following clientelism rather than technical competence. In addition, its cost relative to GDP is higher than in comparable countries. Honduras wage bill as a percentage of GDP has increased substantially between 2008 and 2010, mainly driven by pay increases to teachers, lack of effective controls for payroll management, and the creation of new positions. This has resulted in the diversion of resources from investments needed in social sectors and other priority areas. 15. Since 2010 the Government has taken important initial measures to contain the education sector wage bill through stronger control over personnel expenditures. However, these efforts need to be extended across the administration. The Government has implemented a payroll audit for teachers and, based on its findings, is currently working to correct inaccurate payments. 8 In addition, after cleaning-up the database, the Government would strengthen controls over the payroll by processing salaries for teachers exclusively through SIAFI. Further legislation was approved establishing the procedures for the inclusion of new teachers, the processing of the payroll through shared controls between the Ministries of Education and Finance, and explicitly preventing teachers from receiving duplicated allowances, among other control measures. 7 Longo, Francisco and C. Remió (2008), La Profesionalización del Empleo Público en América Latina, Fundación CIDOB, Barcelona; World Bank IGR 2009; PETS 2011, and Honduras CGAC Report According to information provided by SEFIN, since the migration of the teacher s payroll to SIAFI, over 19,771 cases with irregularities (incorrect allowances, teachers with over 36 hours per week, teachers with jobs in schools in different regions of the country and dead teachers, among others) were found. These anomalies added up to L$84 million, or approximately 5% of the education sector wage bill. Some of these payments have been discontinued in August Legal procedures are being prepared to address the rest of them. 3

12 C. Higher Level Objectives to which the Project Contributes 16. The proposed Improving Public Sector Performance (IPSP) project is part of a package of Bank products for Honduras to be jointly delivered to the Board of Executive Directors. The new World Bank Group s Country Partnership Strategy for the Republic of Honduras FY (CPS) (Report No HN) to be discussed by Executive Directors on December 6, 2011 and the First Programmatic Reducing Vulnerabilities for Growth Development Policy Credit (P127331) are intended to be presented jointly with the IPSP. The proposed CPS aims to support: (i) consolidation of macroeconomic stability and fiscal management; (ii) poverty reduction and higher employment as the basis for social stability; (iii) efforts to improve governance; (iv) improve citizen security; and (iv) the continued implementation of the current portfolio in support of the CAS pillars. 17. The proposed project supports the Strategic Objective Three of the proposed CPS, which focuses on good governance and which explicitly names the proposed IPSP project as the instrument to achieve result 3.1 Improved public sector management. The proposed CPS points out that the project represents the continuation of a long-standing engagement by the Bank in strengthening core government institutions and financial management systems which was initiated more than a decade ago The proposed project also reflects country priorities. The IPSP project is aligned with the Country Vision (Visión de País) which defines as one of its goals to create a modern, transparent, responsible, efficient and competitive state. This goal is reflected in the National Plan (Plan de Nación) and the current Government Plan (Plan de Gobierno). Specifically, the IPSP supports the objectives of (i) implementing mechanisms for monitoring and evaluating public sector performance, (ii) transparency in the acquisition of goods, works and services, and (iii) access to information for civil society participation. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 19. The objectives of the Project are to strengthen the management of public finances and to establish a more efficient, effective and transparent public procurement system through: (i) upgrading the public financial management system; (ii) upgrading the e-procurement platform; (iii) enhancing the internal control systems over personnel expenditures; and (iv) building capacity of the Central Administration. B. Project Beneficiaries 20. The Government and its staff would benefit from more efficient business processes, and improved IT systems, which would enable them to better comply with the mandate of their jobs, and from increased knowledge and skills through training. On a broader level, private sector 9 Previous operations include the Economic and Financial Management Project EFMTAC (P060785), and the Poverty Reduction Technical Assistance Credit PRSTAC (P083851). 4

13 companies would benefit from more transparent and easier access to information and more possibilities to participate in public procurement processes. Ultimately, citizens would benefit from more efficient and transparent use of public resources. C. PDO Level Results Indicators 21. The following results indicators would measure progress towards the PDO: (a) PEFA Indicator PI-4: Stock and Monitoring of expenditure payment arrears 10 - to obtain a rating of A by the end of the Project. (b) Publication of bidding opportunities (including documents) and contract award information to reach a level of 80% compliance. (c) Improved control over payroll management in all central government institutions through the implementation of payroll management audits recommendations. III. PROJECT DESCRIPTION A. Project components 22. The proposed Improving Public Sector Performance (IPSP) (P110050) project builds on the Poverty Reduction Technical Assistance Credit PRSTAC (P083851) and would continue and consolidate achievements made under this project. It is also part of a broader donor coordination effort for public sector reforms in Honduras, which is supported by the Inter- American Development Bank (IADB), the German Development Bank (KfW) and the World Bank. Furthermore, the IPSP technical assistance would support the series of the Development Policy Credits (DPCs) in the area of human resource management. Annex 2 includes a detailed description of the project components and its activities. Component 1: Strengthening and Consolidating Financial Management Systems (US$7.9million) 23. The objective of this component is to upgrade the technological platform of the financial management system (SIAFI) and to strengthen its conceptual and functional framework in order to provide a more efficient processing and effective access to financial management information. 24. This component would include the following sub-components: (a) Subcomponent 1.1: Technological upgrade of SIAFI. Upgrading of SIAFI system to ensure a more efficient and sustainable operation and improved user access to said system, through, inter alia: (i) development and implementation of a new technological framework to enhance usability and access to SIAFI, including the design and development of applications and functionalities of SIAFI; (ii) design and implementation of ICT security measures for the SIAFI system, and carrying out of audits and certifications to ensure compliance with said ICT security measures; and (iii) creation of 10 PEFA Indicator 4 (P1-4). This indicator measures the extent to which there is a stock of arrears, and to which the systemic problem is being brought under control and addressed. 5

14 a disaster recovery center through the carrying out of minor works, in a manner acceptable to the Association. (b) Sub-Component 1.2: Strengthening of the conceptual and functional framework of SIAFI. Strengthening of the conceptual and functional framework of SIAFI, through, inter alia: (i) the design and implementation of a procurement module for SIAFI to be connected to the Recipient s procurement system ( Honducompras ); and (ii) the design of a connection system between SIAFI s budget module and the Recipient s public investment system. (c) Sub-component 1.3: Capacity building strategy. Design and implementation of a longterm capacity building strategy, through, inter alia: (i) the development of an accreditation program for SIAFI operators, including the development of training materials and training curricula; and (ii) the carrying out of pilot training and accreditation programs. 25. The estimated amount for this component is US$7.9 million. Activities would be implemented by the Modernization Unit (UDEM) in the Ministry of Finance. Activity (ii) under Subcomponent 1.2 would be closely coordinated with the National Procurement Office (ONCAE). This component would finance goods, minor works, Non-consultant Services, consultants services and Training/Workshops. Component 2: Strengthening the Public Procurement System (US$4.7 million) 26. The objective of this component is to support the Government's initiative to create a regulatory body with specific goals and objectives, thus strengthening overall governance in the public procurement system and to improve transparency and compliance. 27. The component would address three key areas: strengthening compliance and transparency through the existing e-procurement platform Honducompras, institutional strengthening and the introduction of new technology. It would include the following subcomponents: (a) Sub-Component 2.1: Strengthening compliance and transparency. Strengthening compliance and transparency of the Recipient s public procurement system, through, inter alia: (i) the development of a module to link said procurement system with SIAFI; and (ii) the development of a standard template for procurement plans. (b) Sub-Component 2.2: Institutional Strengthening of ONCAE. Institutional Strengthening of ONCAE, through, inter alia: (i) the preparation of an institutional strategic plan; (ii) the creation of a statistical unit to monitor and evaluate the performance of the procurement system mentioned in Sub-component 2.1; (iii) the creation of a unit specialized in the development and implementation of framework agreements; and (iv) the development of standardized procurement materials. (c) Sub-Component 2.3: Design and implementation of a new e-procurement platform. (i) Design and implementation of a new e-procurement platform, including software and 6

15 hardware; and (ii) the provision of training for civil servants and private sector in the use of the new platform. 28. The estimated amount for this component is US$4.7 million. Activities would be implemented by the National Procurement Office (ONCAE) within the Ministry of Finance and would finance goods, consultants services and Training/Workshops. Component 3: Improving Public Sector Human Resource Management (US$3.7 million) 29. This component has the objective to improve human resource management (HRM) in the public sector through: (i) enhancing controls over personnel expenditures, and (ii) improving the attraction and retention of qualified personnel to gradually increase professionalization of the public service in selected institutions. (a) Sub-Component 3.1: Enhancing controls over personnel expenditures. Enhancing controls over personnel expenditures of the Recipient s public sector through, inter alia: (i) the implementation of process-based payroll management audits; (ii) the implementation of transaction-based payroll management audits for selected ministries and/or agencies within Central Administration; and (iii) the development of a political economy and communications strategy for the Recipient s central government to communicate the results of the audits mentioned in (i) and (ii) herein. (b) Sub-Component 3.2: Improving attraction and retention of key personnel and supporting the professionalization of key positions in selected institutions. (i) Carrying out of a human resources diagnosis to support SEFIN s efforts to attract and retain qualified personnel by, inter alia: analyzing personnel turnover rates, update the profile manual for director positions; and (ii) provision of technical assistance to support professionalization efforts in selected ministries and/or agencies within Central Administration, through, inter alia: the certification of positions, the carrying out of a skills gap assessment, the external validation of recruitment or promotion processes, and the update of job profiles. 30. The estimated amount for this component is US$3.7 million. Activities would be implemented by the UAP-SEFIN within the Ministry of Finance, except for those activities under Subcomponent 3.2, (ii) supporting professionalization efforts outside SEFIN which would be implemented by the Unidad de Apoyo Técnico Presidencial (UATP) within the Secretary of the Presidency. This component would finance goods, consultants services and Training/Workshops. Component 4: Strengthening Government monitoring and evaluation capacity (US$0.8 million) 31. The objective of this component is to support the implementation and institutionalization of a results-based monitoring and evaluation system for two selected sector cabinets. 32. This component would include the following subcomponents: (a) Sub-Component 4.1: Conceptual and functional design of the results-based monitoring and evaluation system. (i) Design and implementation of a new technological platform 7

16 for the Recipient s monitoring and evaluation system; (ii) development of indicators and targets for the selected groups of the Recipient s ministries (Gabinetes Sectoriales) for purposes of implementing their functions and responsibilities; and (iii) design and implementation of an incentives system to promote use of performance information. (b) Sub-Component 4.2: Institutionalizing a results-based monitoring and evaluation system. (i) Definition of the institutional arrangements among the ministries and/or agencies within Central Administration for purposes of operating the monitoring and evaluation system referred to in Part D.1 above; and (ii) strengthening the technical, managerial and organizational capacities of the SDP to implement the monitoring and evaluation system. (c) Sub-Component 4.3: Elaboration and dissemination of methodologies for the institutionalization of M&E functions and systems. Development and dissemination of a series of methodological manuals for monitoring and evaluation work. 33. The estimated amount for this component is US$0.8 million. Activities would be implemented by the Unidad de Apoyo Técnico Presidencial (UATP) within the Secretary of the Presidency and would finance goods, Non-consultant Services, consultants services and Training/Workshops. Component 5: Project Coordination (US$1.1 million) 34. This component would include the following sub-components: (a) Sub-Component 5.1: Project Coordination. Provision of support for Project coordination to oversee Project implementation, including the carrying out of Project and operational audits. (b) Sub-Component 5.2: Transition Strategy. (i) Design and implementation of a strategy to ensure an adequate implementation of the Project, including the provision of technical assistance and training required thereof. Activities would include: (i) design of a transition strategy, (ii) systematization of information as well as its socialization to key stakeholders (through seminars, workshops and other dissemination activities), and (iii) capacity building activities for the incoming personnel assigned to the Project. 35. The estimated amount for this component is US$1.1 million. Activities in Subcomponent 5.1 would be implemented by the Unidad Administradora de Proyectos (UAP-SEFIN) within the Ministry of Finance and activities in Subcomponent 5.2 by the Unidad de Apoyo Técnico Presidencial (UATP) within the Secretary of the Presidency. This component would finance goods, consultants services and Training/Workshops. 8

17 B. Project Financing Lending Instrument 36. The lending instrument for the proposed IPSP is a four year Technical Assistance Credit (TAC). The project design is in line with key TAC characteristics, including a set of specific activities which would contribute to build institutional capacity in Honduras and a direct link with the implementation of national policies and the country s long-term development plan. Furthermore, project activities support the implementation of key components of the proposed series of DPCs. Project Components 1. Strengthening and Consolidating Financial Management Systems 1.1 Technological Upgrade of SIAFI 1.2 Strengthening of the conceptual and functional framework of SIAFI 1.3 Capacity Building Strategy 2. Strengthening the Public Procurement System 2.1 Strengthening compliance and transparency 2.2 Institutional Strengthening of ONCAE 2.3 Design and Implementation of a new e-procurement platform 3. Improving Public Sector Human Resource Management 3.1 Enhancing Controls over Personnel Expenditures 3.2 Improving attraction and retention of key personnel and supporting the professionalization of key positions in selected institutions 4. Strengthening Government monitoring and evaluation capacity 4.1 Conceptual and functional design of the results-based monitoring and evaluation system 4.2 Institutionalizing a results- based monitoring and evaluation system 4.3 Elaboration and dissemination of methodologies for the institutionalization of M&E functions and systems 5. Project Coordination 5.1 Project Coordination 5.2 Transition Strategy Project cost (in US$ million) Responsible Unit UDEM UDEM UDEM ONCAE ONCAE ONCAE UDEM/UAP-SEFIN UATP/UAP- SEFIN* UATP UATP UATP UAP-SEFIN UATP Total Baseline Costs Total Financing Required * UAP-SEFIN would implement the professionalization activity within SEFIN, while the UATP would implement the professionalization activities for DEI and the Commission of Banks and Insurance C. Lessons Learned and Reflected in the Project Design 37. Attention should focus on a few key stages in the policy-making process and on performance. The Institutional Governance Review (IGR) (Report No HN) suggests that 9

18 in order to make improvements to the quality of policy-making in the short term, public and political attention should focus on a few key stages in the policy-making process. Policy discussion should center on performance and enhanced accountability of political actors. The IPSP project reflects this approach, as the main focus is the improvement of processes in public financial management and procurement as well as human resources management. The project also has an overall approach on performance improvement through results and accountability and transparency of policy actions. 38. Project design and outcome expectations should be realistic and adapted to the country context and timeframe of the operation. The primary lesson learned from the PRSTAC (P083851) as described in its Implementation Completion Report (ICR) (Report No: ICR ) is the need for a simpler and more realistic project design and outcome expectations. Broad reform efforts that require strong political will and support have had little success in former projects or were discontinued because of changed policy priorities after government elections. The proposed operation supports fewer areas than the PRSTAC and has centralized the fiduciary responsibilities in one project coordination unit. 39. Implementation arrangements are set up to reflect the lessons learned and put special emphasis on capacity constraints. Implementation would mainly be channeled through the Ministry of Finance and the figure of a project coordinator dedicated solely to the proposed project would circumvent bottlenecks in administrative and communication processes with the executing agencies. Other suggestions for improvements made in the PRSTAC ICR are included in the operations manual, i.e. the preparation of operation plans on a medium term basis and the inclusion of the progress of indicators in each aide memoire. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 40. The responsibilities of the project implementation would be divided among a project coordination unit (PCU) and project executing agencies (PEA). The administration unit would be responsible for overall project coordination, fiduciary and safeguard aspects, including all procurement processes; the executing agencies would implement activities under the components and be in charge of all related technical aspects. The PCU would be the Unidad de Administración de Proyectos UAP-SEFIN within SEFIN. There would be three executing agencies: (i) the Unidad de Modernización UDEM within SEFIN in charge of Component 1 and Subcomponent 3.1, (ii) Oficina Nacional de Contrataciones y Adquisiciones del Estado - ONCAE within SEFIN in charge of Component 2, and (iii) the Unidad de Apoyo Técnico Presidencial - UATP within the Secretary of the Presidency for a Subcomponent 3.2 (for professionalization efforts outside SEFIN), Component 4 and Subcomponent 5.2. The interinstitutional arrangements and responsibilities between the Government agencies would be agreed upon in a Memorandum of Understanding (MoU) between SEFIN and the Secretary of the Presidency. Table 1 below summarizes the responsibilities of the units involved. See Annex 3 for more detailed information on the implementation arrangements. 10

19 Role Project Coordination Unit (UAP-SEFIN) Project Executing Agencies (UDEM, ONCAE, UATP) Table 1: Division of Responsibilities Responsibilities Coordination Organization and chair of regular meetings with all executing agencies on progress of project implementation Communication with the Bank on overall project implementation progress and issues Coordination and communication with other related donor projects (KfW, IADB) Preparation and up-dates of medium-term operation plans and the operation manual Procurement Consolidation of procurement plans and publication in SEPA Preparation of Terms of Reference (ToR) and Technical Specifications Preparation of bidding packages based upon technical inputs provided by executing agencies. Publication of all procurement processes in Honducompras Leading bid and proposal evaluation committees with the participation of experts from executing agencies Filing of procurement documents Correspondence and dialog with the Bank as procurement is concerned Financial Management Management of funds (including applications for withdrawal, financial reports, payment of goods and services purchased with project funds) M&E Overall monitoring of indicators, consolidation of data on indicators and reporting of indicators to the Bank Supervision of progress as per medium-term operation plans (18 months) Safeguards Ensuring compliance with the environmental management plan Implementation Implementation of project activities and supervision of consultants and delivery of other services related to project activities (i.e. firms) Attendance of regular meetings called by the Project Coordination Unit Communication with the Bank on component related issues Procurement Technical input for preparation of Term of Reference (ToRs) and technical specifications Support the preparation of bidding packages in particular by the definition of qualification requirements for bidders, shortlists, and evaluation requirements for consultants M&E Monitoring of indicators, collection of data to measure indicator progress Reporting of progress of component activities and indicators to UAP-SEFIN 41. The country s history of weak fiduciary capacity and the fact that project implementation involves several actors, bears the risk of slowing down implementation. However, the project coordination unit has extensive experience in the implementation of Bank-funded projects and would count on a project coordinator and additional fiduciary staff dedicated to the IPSP project. During project preparation, fiduciary staff has received additional training; the Bank would give continuous support during implementation. 11

20 B. Results Monitoring and Evaluation 42. Each executing agency would be responsible for the collection of the data measuring the progress of the indicators related to their respective components. The coordination unit would be responsible for the consolidation of the information and reporting to the Bank and the Minister of Finance. It would be supported by an annual compliance audit (part of the project coordination component), which would gather evidence to confirm the progress of the indicators. Annex 1 states the responsible executing agency for each indicator as well as the indicators to be included in the compliance audit. 43. The Bank would closely monitor indicator progress to detect potential risk to achieving the PDO. During implementation, the Bank would pay special attention to the achievements of the annual targets and include a section on their progress in each aide memoire. This steady supervision of the M&E process would flag the possible non-achievement of the target value, which has direct influence on the achievement of the PDO. It would also function as an early-warning system for the Bank to discuss and initiate corrective measures, such as restructuring. C. Sustainability 44. The Government has shown high commitment to the project and its development objectives and the improvement of the procurement and financial management system are actually among the top priorities of the administration. During project preparation, the Government has appointed senior advisors to act as liaison with the Bank, and has modified institutional arrangements to adapt to project needs, i.e. through the re-mapping of ONCAE to the Ministry of Finance. 45. The project design includes a transition strategy for the administration taking office in early In preparation of the eventual change in administration at the end of the second year of the project, the project design includes arrangements to support a smooth hand-over of project activities to the incoming administration and ultimately ensure sustainability in the achievement of the PDO. To support the sustainability of the development objectives in the longrun, the project design focuses on the improvement of processes and upgrading of systems, which are less likely to be reversed or discontinued due to changing political directions. V. KEY RISKS A. Risk Rating Summary Table Risk Stakeholder Risk Rating Substantial Implementing Agency Risk - Capacity High - Governance Moderate Project Risk 12

21 - Design Substantial - Social and Environmental Low - Program and Donor Low - Delivery Monitoring and Sustainability Substantial Overall Implementation Risk High B. Overall Risk Explanation 46. Key risks include the volatile political environment, changing policy priorities after elections, and the shortage of skilled technical and fiduciary staff for project implementation. The involvement of three executing agencies and two ministries constitutes the risk that commitment and interests from the actors involved might not be completely aligned. Furthermore, the next presidential elections scheduled for November 2013 would probably impact project implementation. This event also presents the risk of staff rotations with the risk that key positions would be replaced by staff without the proper qualifications. 47. Measures to mitigate those risks have started during the preparation phase with the preparation of the operations manual and procurement plans, as well as fiduciary training delivered to the participating government agencies. A project coordinator exclusively dedicated to the project and other fiduciary staff to support project implementation would be hired. During implementation a close dialogue and supervision activities would be crucial to prevent and detect other possible risks. VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 48. As the proposed operation would focus on capacity building and institutional strengthening activities, it is difficult to quantify project outputs and benefits or to precisely calculate rates of return. Nevertheless, since positive fiscal impacts are anticipated, project implementation is expected to generate economic gains. The most noteworthy economic and fiscal gains are expected to result from: (i) more efficient use of public finances through improved public procurement processes, (ii) proper budget execution, and (iii) enhance controls of public sector wage bill. B. Technical 49. Not applicable. C. Financial Management 50. The approach to project implementation would be to use existing capacity in the (Unidad Administradora de Proyectos- UAP-SEFIN) to manage operational financial management (FM) aspects, while the technical implementation of the project would be done through executing agencies; Organismo Nacional de Contrataciones y Adquisiciones del Estado 13

22 - ONCAE and Unidad de Modernización UDEM in SEFIN and the Unidad de Apoyo Técnico Presidencial - UATP of the Secretary of the Presidency. Annex 3 provides a detailed description on financial management arrangements. 51. A financial management capacity assessment of the Project Coordination Unit UAP- SEFIN was carried out in accordance with OP/BP and applicable guidelines. The unit already has the capacity necessary to administer the financial aspects of the proposed project, including a basic administrative structure and FM systems in place. Therefore, UAP-SEFIN would be in charge of FM tasks for all the components, including (i) the overall financial management reporting activities of the project for all the components, (ii) consolidation of information, and (iii) preparation of the reports, and managements of the Designated Account. UAP-SEFIN would carry out its functions with its existing staff and be required to maintain professional staff in numbers and with qualifications and experience acceptable to the Bank according to the Project s Operational Manual. It is expected that an additional staff would be necessary for financial management, which would be dedicated to FM tasks for this project. 52. Use of country systems. It is important to note that the project would use country systems (SIAFI and UEPEX) for accounting and reporting purposes, as these systems would provide adequate information for monitoring specific project expenditures. No additional system is expected to be needed for FM purposes. 53. The project should be consistent with the budget preparation policies provided by the Ministry of Finance. On the basis of the approved budget, UAP-SEFIN would adjust the medium-term operations plan and procurement plan as needed. Under this project, UAP-SEFIN would have a specific budgetary line that would be used for recording budget execution in SIAFI and thereafter, to report project execution with the UEPEX module. 54. Internal Audit and External Audit. In the course of its regular internal audit activities vis-à-vis the institutional budget, internal auditors for SEFIN may include project activities in their annual work plans. The annual project financial statements prepared by the UAP-SEFIN would be audited following International Standards on Auditing (ISA), by an independent firm. D. Procurement 55. Procurement activities would be carried out by the Procurement Division of the Project Coordination Unit (UAP-SEFIN). The organizational structure for implementing the project was assessed in September 2011 and found adequate; information systems are modern and comprehensive. Procurement staff capacity is limited to simple procurement operations. 56. Key issues and risks. The key issues and risks concerning procurement for project implementation have been identified and include: (i) limited capacity of UAP-SEFIN staff to handle the complex procurement of IT packages under a single responsibility approach, (ii) the probability of staff turnover resulting from the eventual change of administration, (iii) the application of several articles of the Procurement Law, which are inconsistent with internationally accepted procurement practices, (iv) the common practice of signing contracts other than those approved by the Bank, and (v) the high country procurement risk. 14

23 57. Mitigation measures. The mitigation measures that have been agreed are: (i) an experienced procurement specialist would be hired by UAP-SEFIN under terms acceptable to the Bank (ii) the indication in the Legal Agreement that UAP-SEFIN staff might be replaced only based upon lack of performance, (iii) the inclusion in the Legal Agreement of Special Procurement Provisions aimed at restricting project procurement from applying clauses of the national procurement law that are in conflict with Bank Guidelines, and (iv) the indication in the Legal Agreement that the signature of contracts other than those approved by the Bank would result in a declaration of misprocurement and (v) the adoption of prior review thresholds consistent with high risk projects. 58. Procurement documents would be published on Honducompras. In order to ensure transparency, procurement documents would be published at Honducompras and procurement plans at Sistema de Ejecución de Planes de Adquisición, SEPA (the Bank procurement plan information system). Lastly, in order to expedite project implementation, national competitive bidding (NCB) documents agreed with ONCAE would be used for project implementation. E. Social (including safeguards) 59. There are no social issues or safeguards; the project is rated C category. F. Environment (including safeguards) 60. As project activities might include minor civil works for a Disaster Recovery Center, the OP 4.01-Enviromental Assessment, has been triggered. Consequently, an environmental management framework has been developed and disclosed (published both in SEFIN s and in the Bank s website on October 19, 2011). This safeguard does not impact the C category rating for this project. 15

24 Annex 1: Results Framework and Monitoring HONDURAS: Improving Public Sector Performance Project Development Objective (PDO): The objectives of the Project are to strengthen the management of public finances and to establish a more efficient, effective and transparent public procurement system through: (i) upgrading the public financial management system; (ii) upgrading the e-procurement platform; (iii) enhancing the internal control systems over personnel expenditures; and (iv) building capacity of the Central Administration. PDO Level Results Indicators* Indicator One: PI-4: Stock and monitoring of expenditure payment arrears Indicator Two: Publication of bidding opportunities (including documents) and contract award information Indicator Three: Improved control over payroll management in all central government institutions INTERMEDIATE RESULTS Unit of Measure PEFA indicator Custom/ Percentage Custom Baseline B in the PEFA Report 2011 Less than 10% of bidding opportunities are published Weak controls over payroll processing in central administration institutions Cumulative Target Values** YR 1 YR 2 YR3 YR 4 Link between Honducompras and SIAFI system B+ A 60% of publication of bidding opportunities (incl. documents) and contract award information Payroll management audits in central administration initiated. Intermediate Result Component 1 - Strengthening and Consolidating Financial Management Systems The current framework (used by 100% of Central Intermediate Result Conceptual and 100% of Central Government and 3 Indicator 1: Percentage functional Government operate decentralized Institutional coverage of and custom framework with the updated institutions) the updated SIAFI updated SIAFI complies with international bestpractice but needs to be updated 70% publication of bidding opportunities (including documents) and contract award information Payroll management audits in all institutions of Central Administration completed. Payroll leakages are eliminated, leading to a significant reduction in floating debt related to personnel expenditures 100% of Central Government and 30% of decentralized institutions operate the updated SIAFI 80% publication of bidding opportunities (including documents) and contract award information Payroll management audits action plans are fully implemented in all central government institutions. 100% of Central Government and 70% of decentralized institutions operate with the updated SIAFI Frequency Biannual Annual Annual Annual Data Source/ Methodology Internal evaluations and PEFA reports Bidding documents, Compliance Audit and Internal Reports Bidding documents, Compliance Audit and Internal Reports Compliance Audit/Intern al Reports Responsibility for Data Collection SEFIN ONCAE/ SEFIN SEFIN SEFIN 16

25 Intermediate Result Indicator 2: Open Budget Index Intermediate Result Indicator 3: Additional functionalities to the SIAFI system implemented Intermediate Result Indicator 4: Accreditation of SIAFI users in central government institutions. OBI indicator 11 Custom Custom Score of 11 out of 100 in OBI 2010 Some functionalities have not been implemented; others have been implemented partially (travel, HR, administration of goods) No accreditation in place Capacity building and accreditation strategy is prepared and approved. Intermediate Result Component 2 - Strengthening the Public Procurement System Intermediate Result Indicator 1: New e-procurement platform implemented and at least 25% of procurement transactions carried out online Intermediate Result Indicator 2: Number of framework agreements implemented for common use goods Intermediate Result Indicator 3: Institutional strengthening of ONCAE Custom Custom Custom No transactional e- procurement platform in place No framework agreements in place Limited institutional capacity of ONCAE to fulfill Bidding documents for e-procurement platform approved 1 framework agreement Training strategy to build capacity in ONCAE Improvement on OBI index (at least 25 out of 100) All additional functionalities have been developed All financial management directors (jefe de unidades) of central government institutions are accredited E-procurement platform implemented and 5% of procurement transactions carried out online 2 framework agreements 15% of procurement transactions carried out online 4 framework agreements Training strategy to build capacity in procurement units of central government Improvement on OBI index (at least 50 out of 100). User satisfaction has improved as per user survey All additional functionalities are in place and operating All SIAFI users in financial management units of central government institutions are accredited. At least 25% of procurement transactions carried out online 6 framework agreements Procurement units in all central government institutions have received training in Biannual Biannual Annual Annual Annual Annual OBI Index Compliance Audit and Internal Reports Signed agreements, Reports on training statistics Compliance Audits Bidding documents, Compliance Audit and Internal Reports Compliance Audit and Internal Reports Compliance Audit and Internal Reports SEFIN SEFIN SEFIN ONCAE/ SEFIN ONCAE/ SEFIN ONCAE/ SEFIN 11 The Open Budget Index assigns countries covered by the survey a transparency score on a 100-point scale using 92 questions from the Survey these questions focus specifically on whether the government provides the public with timely access to comprehensive information contained in eight key budget documents. The Open Budget Index measures the overall commitment of countries to transparency and allows for comparisons among countries. 17

26 mandate Intermediate Result Component 3 Improving Public Sector Human Resource Management Intermediate Result Indicator 1: Enhanced control over personnel expenditure in identified high risk areas Intermediate Result Indicator 2: Improved professionalization of public service in selected institutions Custom Custom Weak control over personnel expenditure in high risk areas Appointments to professional positions in key institutions are highly politicized DEI has completed a revision of career and pay structures Bidding documents for transactionsbased payroll audits in Health and Public Works approved by the World Bank Activities supporting the implementation of the tax administration and customs career at DEI are completed Transactions-based payroll audits for contracted personnel in the Health Ministry and the Public Works Ministry are completed Bidding document for strategic HRM study for SEFIN approved by the World Bank. Intermediate Result Component 4 Strengthening Government monitoring and evaluation capacity Intermediate Result 2 sector cabinets Indicator 1: Number of 1 sector cabinet using the indicators sector cabinets using the using the and goals indicators and goals No M&E system indicators and Custom established in the established in the M&E in place goals M&E system. system and basing their established in Conduction of user decisions on information the M&E system satisfaction survey provided by the system Intermediate Result Component 5 -Transition Strategy Intermediate Result Indicator1: Successful transition of project management Custom No transition strategy Transition strategy elaborated Dissemination of transition strategy key stakeholder entities and implementation plan developed Implementation of corrective measures following findings of transactions/based payroll audit for contracted personnel in the Health Ministry and in the Public Works Ministry are initiated Implementation of recommendations of strategic HRM study for SEFIN is initiated. 4 sector cabinets using the indicators and goals established in the M&E system Successful transition operation of new e- platform Implementation of corrective measures following findings of transactions-based payroll audit for contracted personnel in the Ministry of Health and in the Ministry Public Works are completed, leading to at least 3 % savings in contracted personnel expenditures in both institutions on an annual basis Activities supporting professionalization in one more institution is completed. 6 sector cabinets using the indicators and goals established in the M&E system. An increase in user satisfaction 12 Annual Annual Annual Annual Compliance Audit and Internal Reports Compliance Audit and Internal Reports Sector Cabinet reports Compliance Audit and Internal Reports User survey Compliance Audit and Internal Reports SEFIN SEFIN UATP UATP 12 To be defined on the basis of the survey conducted in Y2 18

27 Annex 2: Detailed Project Description 1. The proposed Improving Public Sector Performance (IPSP) (P110050) project builds on the Poverty Reduction Strategy Technical Assistance Credit - PRSTAC (P083851) and would continue and consolidate achievements made under this project. This continues a series of longstanding Bank engagement with Honduras in the area of public sector management and in particular public financial management systems. In 2004, the financial management system SIAFI was launched supported by the Economic and Financial Management Project EFMTAC (P060785), and extended consecutively under the following PRSTAC project. 2. It is also part of a broader donor coordination effort for public sector reforms in Honduras, which is supported by the Inter-American Development Bank (IADB), the German Development Bank (KfW) and the World Bank. In that sense, the IADB has approved financing of US$28.6 million through the Fiscal and Municipal Management Consolidation Program (2032/BL-HO/HO-L1015) 13 supporting customs administration, the Central Bank, and the expansion of the integrated public financial management system SIAFI to the municipal level. The KfW is currently preparing a project of 10 million (approx. US$13.5 million) that would support the Supreme Audit Institution (Tribunal Superior de Cuentas). Furthermore, the IPSP would give technical assistance to the series of Development Policy Credits (DPCs) in the area of human resource management. 3. The objectives of the Project are to strengthen the management of public finances and to establish a more efficient, effective and transparent public procurement system through: (i) upgrading the public financial management system; (ii) upgrading the e-procurement platform; (iii) enhancing the internal control systems over personnel expenditures; and (iv) building capacity of the Central Administration. 4. The overarching goal of the proposed project is to improve public sector performance through enhanced efficiency, transparency, and accountability in the areas of public financial management, procurement and human resource management. Activities mainly concentrate on improving processes and upgrading the functional and technological frameworks of current IT systems. Finally, enhanced monitoring systems would ensure the alignment of budget execution with policy priorities and measure the advances towards achieving priority policy goals. 5. The Project would consist of five components: (a) Component 1: Strengthening and Consolidating Financial Management Systems (b) Component 2: Strengthening the Public Procurement System (c) Component 3: Improving Public Sector Human Resource Management (d) Component 4: Strengthening Government monitoring and evaluation capacity (e) Component 5: Project Coordination 6. In order to align the proposed project with the approach suggested by the CPS, project components have been designed - to the extent possible - to increase the likelihood that the majority of proposed activities could be implemented within the first two years of project implementation. 13 Approved February 27,

28 Project Components 1. Strengthening and Consolidating Financial Management Systems 1.1 Technological Upgrade of SIAFI 1.2 Strengthening of the conceptual and functional framework of SIAFI 1.3 Capacity Building Strategy 2. Strengthening the Public Procurement System 2.1 Strengthening compliance and transparency 2.2 Institutional Strengthening of ONCAE 2.3 Design and Implementation of a new e-procurement platform 3. Improving Public Sector Human Resource Management 3.1 Enhancing Controls over Personnel Expenditures 3.2 Improving attraction and retention of key personnel and supporting the professionalization of key positions in selected institutions 4. Strengthening Government monitoring and evaluation capacity 4.1 Conceptual and functional design of the results-based monitoring and evaluation system 4.2 Institutionalizing a results- based monitoring and evaluation system 4.3 Elaboration and dissemination of methodologies for the institutionalization of M&E functions and systems 5. Project Coordination 5.1 Project Coordination 5.2 Transition Strategy Project cost (in US$ million) Responsible Unit UDEM UDEM UDEM ONCAE ONCAE ONCAE UDEM/UAP-SEFIN UATP/UAP-SEFIN* UATP UATP UATP UAP-SEFIN UATP Total Baseline Costs Total Financing Required *UAP-SEFIN would implement the professionalization activity within SEFIN, while the UATP would implement the professionalization activities for DEI and the Commission of Banks and Insurance Component 1: Strengthening and Consolidating Financial Management Systems (US$7.9 million) 7. SIAFI s underlying conceptual model is sound and meets international bestpractice. The Integrated Financial Management System (SIAFI) was designed in 2004 and developed in 2005 and Its initial implementation was focused on central government entities and the introduction of a Single Treasury Account, which substantially improved the management of public resources. SIAFI comprises modules on budget, accounting, treasury, human resources, administration of goods, travel management, revolving funds (fondos rotatorios), and management of externally financed projects (Administración de proyectos con recursos externos UEPEX). Expert assessments consistently agree that the conceptual model and functionalities are sound and adequate, and that SIAFI fulfills all the basic functionalities that international best-practice recommends Final Report: Informe de Consultoría, José Mauro Brusa. November

29 8. However, its technological platform and functionalities need to be updated. The initially designed modules on travel management and revolving funds have never been implemented; and others such as human resources, administration of goods and UEPEX have only been implemented partially. In addition, the Ministry of Finance is currently undertaking efforts to expand SIAFI coverage to the decentralized government levels, but it is challenged with shortcomings of the IT system and SIAFI functionalities, interfering with the planned expansion. 9. The main issues of the current system, both on central as well as on the decentralized level are the following: (a) Outdated platform and information systems. The technological platform needs to be updated in order to allow it to perform adequately. Likewise, the information system requires upgrades (including both hardware and software) to better operate and to provide better access for users. (b) Missing functionalities and links among other databases. Some of the current functionalities need to be re-designed and others developed in order for SIAFI to perform adequately. As of today, some complementary functions are being executed manually. Missing linkages between SIAFI and Honducompras lead to double entries and consequently inconsistencies of information. (c) Capacity constraints. Limited technical capacity results in lack of empowerment and transfer of decision-making authority to the administrative bodies of SEFIN to define new requirements or updates for SIAFI. (d) Administrative hurdles. Although payments through SIAFI can be made promptly and decentralized, hardcopies of documents are required to be sent to central offices before the actual payment can be processed. This not only results in delays in the processing of payments, but also in higher purchasing prices. 10. During the past years, arrears have been calculated on an ad hoc basis. Hence this information is not the result of a proper conciliation or a comprehensive methodology between the various modules and elements of SIAFI. The B rating obtained by Honduras for PEFA Indicator 4 (P1-4) in 2010, reflected the extent to which the stock of arrears was a systemic problem and the need for actions to be taken to control and address the situation. The rating reflects the continuous challenge to tackle commitment controls, cash rationing, inadequate budgeting for contracts, under-budgeting of specific items and the need to further improve access to information and transparency. 11. The objective of this component would be to upgrade the technological platform of SIAFI and to strengthen its conceptual and functional framework in order to provide a more efficient processing and effective access to financial management information. This would include: (a) The technological upgrade of SIAFI to ensure a more efficient and sustainable operation and improved user access to the system, increasing security levels, and enabling linkages to other information systems, such as Honducompras, the debt management system 21

30 SIGADE (Sistema de Gestión y Análisis de la Deuda) and the Department of Revenues and Customs (Dirección Ejecutiva de Ingresos DEI). (b) Strengthening the conceptual and functional framework of SIAFI to consolidate the already defined concepts with new functionalities; and (c) The implementation of a strategy to support capacity building activities in the area of public financial and administrative management to guarantee the compliance with the conceptual and functional framework. 12. Sub-Component 1.1: Technological upgrade of SIAFI. During the past six years, SIAFI has become the single tool for financial management used within the central government. However, the system has several limitations including: (i) outdated technological platform, (ii) outdated software, (iii) high operating and expansion costs, (iv) missing functions to produce adequate financial reports, and (v) lack of complementary functionalities. In conclusion, this sub-component would make use of the current modules and functional design to upgrade the system into a faster and scalable system, with high security standards, and which would allow a steady integration of additional functionalities. 13. The activities under this sub-component would include the following: (a) Implementation of the new technological framework. This activity would include, inter alia, the definition of the new framework, and the analysis, design, construction and test runs of the different modules, which would gradually substitute and complement the current SIAFI. These would include the development of specific functionalities, crosscutting applications, and the construction of a database to solve the current lack of report generation. (b) The implementation of security updates required for the system. This activity would implement the required security updates, carry-out security audits and certifications, and implement security policies. (c) The implementation of security measures in case of contingencies. This activity would include the purchase and installation of basic IT infrastructure to ensure the back-up copy and storage of key financial information, as well as the possibility of recovery of the system in case of contingencies (through the Disaster Recovery Center). 14. Sub-Component 1.2: Strengthening of the conceptual and functional framework of SIAFI. Despite the fact that the conceptual framework of SIAFI meets all requirements of a public financial management system, its implementation has not been fully completed and, in some cases, requires operational adjustments. The main shortcomings of the current system are: (i) the lack of linkages with Honducompras, and the budget and public investment systems, (ii) missing functions for contract management, including but not limited to control of advances and embargos, recovery of undue payments, and control of deductions for guarantees paid to suppliers, (iii) teacher wage bill and contracts for consultant services are not incorporated, and (iv) there is a need for updating various sub-modules including those for travel management, revolving funds (fondos rotatorios), stock and consumer goods. 15. The strengthening of the conceptual model and the related operational adjustments would allow tackling the above mentioned issues. Similarly, upgrading the technological 22

31 platform would facilitate the expansion of institutional coverage of SIAFI and gain better control on the management of public resources. 16. Main activities under this sub-component would consist of an assessment to identify the detailed shortcomings of the conceptual and functional framework of SIAFI. Specific activities would include: (a) Strengthening of SIAFI s conceptual and functional framework. This would include developing new and updating already existing functionalities, with the overall objective to improve SIAFI as a tool for institutional management. (b) Definition and design of a procurement/purchasing model integrated to SIAFI. This activity would be conducted in coordination with Component 2 (Strengthening of the Public Procurement System); it would help define the cross-cutting functionalities for SIAFI and Honducompras and the necessary linkages between both systems. (c) Linkage between SIAFI and the public investment system. This activity would link SIAFI to the Public Investment System (Banco Integrado de Proyectos), in order to facilitate project evaluation, improve identification of social infrastructure investment, and their link to each budget phase, obtaining real-time information of physical and financial project execution and its multi-annual management. 17. Sub-Component 1.3: Capacity Building Strategy. This sub-component would support the design and launch of a long-term training and accreditation program. The program would be introduced through pilots to build a critical mass of government staff and SIAFI users able to use the new conceptual model and to introduce best-practice at all levels of the public administration. 18. The main activities of this sub-component would consist of designing the training scheme and accreditation program, agreements with educational institutions, and the launch of pilot programs: (a) Design and implementation of a capacity building strategy. This activity would include the design and implementation of a strategy to ensure the generation of related public financial management capacities at different levels within the public administration. (b) Development of training curriculum and accreditation program. This activity would consist of promoting agreements with universities, training centers and other educational institutions to develop and incorporate into their curricula, modules on public financial management and administration preparing professionals for SIAFI accreditation. This would guarantee a continued education of professionals with skills and knowledge on SIAFI. (c) Pilot training and accreditation programs. This activity would finance the hiring of trainers and training material for the roll-out of the SIAFI accreditation within central government institutions. 19. The estimated amount for this component is US$7.9 million. Activities would be implemented by the Modernization Unit (UDEM) in the Ministry of Finance. Activity (ii) under Subcomponent 1.2 would be closely coordinated with the National Procurement Office (ONCAE). This component would finance goods, minor works, non-consultant services, consultants services and training/workshops. 23

32 SIAFI Purchasing Purchase Request Box A2.1: Coordination between ONCAE and UDEM Linkage between SIAFI and Honducompras (tendering module) HONDUCOMPRAS e-procurement Publication Budget Purchase order Bidding docs Offer Reception Commitment Evaluation Accrual Award Payment Monitoring Component 2: Strengthening the Public Procurement System (US$4.7 million) 20. Public procurement reform in Honduras has failed in the past. In spite of the significant resources that have been invested to improve the transparency, efficiency and compliance of the public procurement system, reform has failed to take traction. The current administration has signaled not just its intent to reform the public procurement system but has also taken significant steps to that effect. Perhaps the most important of these is the reassignment of ONCAE to the Ministry of Finance, traditionally one of the most respected and strongest institutions in the Honduran public service. This re-assignment has the potential to strengthen and provide technical sustainability to ONCAE, as well as minimizing political interference in its activities. The current administration has also started to develop a core team to implement some of the cost saving measures identified in the Quick Gains analysis carried out by the Bank at the Government's request. In order to overcome previous challenges the current administration has sought to recreate ONCAE as a regulatory body with specific and identified functions. 21. The objective of this component is to support the government's initiative to create a regulatory body with specific goals and objectives, thus strengthening overall governance in the public procurement system and to improve transparency and compliance. The component would address three key areas: strengthening compliance and transparency through the existing e-procurement platform Honducompras, institutional strengthening and introducing new technology. 22. Sub-Component 2.1: Strengthening compliance and transparency. This subcomponent would strengthen the existing, non-transactional e-procurement platform Honducompras. It would include the following activities: 24

33 (a) Development of a module connecting Honducompras with SIAFI, by linking publication of procurement activities with budget authorization, thus ensuring full compliance with current legal requirements to publish procurement information in the Honducompras portal, and (b) Development of the standard template for procurement plans in order to ensure that government entities plan, monitor, and execute their procurement activities in a transparent and compliance environment. 23. Sub-Component 2.2: Institutional strengthening of ONCAE. This sub-component would support the institutional strengthening of ONCAE and its ability to exercise its regulatory function. It would include technical assistance to create a unit tasked with monitoring and evaluating the performance of public procurement activities. This sub-component would also provide the technical assistance required to develop, implement, and manage the use of framework agreements for the procurement of common use goods and services procured by the government. This sub-component would also support the development of materials to standardize and strengthen compliance with public procurement laws, regulations and processes. 24. The main activities of this sub-component would consist of: (a) Strategic and Organizational Plan to ensure the sustainable functioning of ONCAE. This activity would finance the development of a strategic and organizational plan determining the role and scope of the functions assigned to ONCAE. (b) Monitoring and evaluation. This activity would support the development of methodologies as well as provide training to support the creation of a statistical unit tasked with monitoring and evaluating the performance of the public procurement system. (c) Framework Agreements. This activity would finance the development of a unit specialized in the development and implementation of framework agreements; and would include knowledge exchange with other jurisdictions as well as in situ consultants. It would also include the development of monitoring and evaluation methodologies to ensure the efficient and transparent use of Framework Agreements. (d) Standardized materials. This activity would finance the development of standardized procurement materials, such as bidding documents, procurement plans, manuals, guides, etc. 25. Sub-component 2.3: Design and implementation of a new e-procurement platform. This sub-component would support the design, development and implementation of a new transactional e-procurement platform. It would include the development of modules for tendering and purchasing, and would interface with SIAFI as well as other relevant public sector management systems. 26. The main activities of this sub-component would consist of: (a) Design of a new e-procurement platform. This activity would finance the conceptual design of the new transactional e-procurement platform. 25

34 (b) Development and implementation. This activity would finance the development and implementation of the new e-procurement platform and include training and workshops to train government officials as well as private sector in the use of the new platform. (c) Hardware for the new platform. 27. The estimated amount for this component is US$4.7 million. Activities would be implemented by the National Procurement Office (ONCAE) within the Ministry of Finance and would finance goods, consultants services and training/workshops. Component 3: Improving Public Sector Human Resources Management (US$3.7 million) 28. Human resources management (HRM) continues to be one of the weakest areas of Honduras public administration. Due to its low autonomy and low capacity, regional studies 15 have defined the civil service as a clientelism-based bureaucracy. It is highly politicized and based on patronage with appointments based on clientelism than on technical competence. In addition, its cost relative to GDP is higher than in comparable countries of the region. Honduras wage bill as a percentage of GDP has increased substantially between 2008 and 2010, mainly driven by pay increases to teachers, lack of effective controls for payroll management, and creation of new positions, (See Figure A2.1). 15 Figure A2.1 Central Administration s Wage Bill as a percentage of GDP Selected Countries ( ) Honduras Paraguay El Salvador Costa Rica Nicaragua Panama Guatemala Dominican Republic Source: IMF 29. Since 2010, the Government has taken important measures to contain the public sector wage bill through the improvement of pay negotiations. In particular these efforts have focused on the education sector which represents the large majority of the public sector workforce 16. Since 2010, the Government has frozen the teachers pay per class hour by temporarily delinking base pay from the private sector s minimum wage and not adjusting for inflation 17. Negotiations with the teachers unions were concluded in July 2011, and opened the 15 Longo, Francisco and C. Remió (2008), La Profesionalización del Empleo Público en América Latina, Fundación CIDOB, Barcelona, World Bank IGR 2009, PETS 2011, and Honduras CGAC Report The government reported having close to 68,000 teachers holding over 88,000 positions, out of a total estimated central government public workforce of 130,000 public servants. 17 The Teachers Statute indexes pay adjustments to increases in the average private sector minimum wage. See Legislative Decree No , articles 46, 48 and 49. The agreement with the unions, to be approved 26

35 way to extend this practise for the period by law. While it is not permanent, the effort does provide predictability for wage bill growth for the next four years, placing increases below the estimated inflation level of 8.1 percent for 2012 (see Figure A2.2) Figure A2.2 Evolution of Honduras Central Government s Wage Bill and Projection for (As percent of GDP) Source: SEFIN 30. The Government has also contained the wage bill through a stronger control over personnel expenditures. The Government has implemented a payroll audit and, based on its findings, is currently working to correct inaccurate payments. 18 In addition, after cleaning-up the database the Government has strengthened controls over the payroll by processing salaries for teachers exclusively through SIAFI. Further legislation was approved establishing the procedures for the inclusion of new teachers, the processing of the payroll through shared controls between the Ministries of Education and Finance, and explicitly preventing teachers from receiving duplicated allowances, among other control measures Several and substantial challenges remain for gradually moving towards a longterm fiscally sustainable wage bill. While the Bank-financed Education Quality, Governance, and Institutional Strengthening Project (P101218) would continue strengthening control efforts over the education sector personnel expenditures to avoid further anomalies; the accuracy of the payroll for the rest of the administration remains unknown. Meanwhile, payroll management is fragmented across the entire public sector with no reliable internal audit units providing controls. SEFIN s recently created Payroll Monitoring and Control Unit (Unidad de Control y Seguimiento de Nóminas), currently focusing on teachers, lacks the capacity to monitor the entire administration. 20 External controls by the Tribunal Superior de Cuentas tend to be insufficient by law, establishes nominal increases close to L$1 billion per year, or the equivalent of 6,25% compared to the 2011 education wage bill. 18 According to information provided by SEFIN, thanks to the migration of the teachers payroll to SIAFI over 19,711 cases were found to have irregularities (incorrect allowances, teachers with over 36 hours per week, teachers with jobs in schools in different regions of the country and dead teachers, among others). These anomalies added up to L$ 84 million, or approximately 5% of the education sector wage bill. Some of these payments have been discontinued in August Legal procedures are being prepared to address the rest of them. 19 Special Agreement expected to be approved in October Created by Executive Decree PCM in March