Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-7012-HO

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN AN AMOUNT EQUIVALENT TO US$34 MILLION

TO

THE REPUBLIC OF HONDURAS

FOR A

RURAL LAND MANAGEMENT PROJECT

FEBRUARY 28, 1997

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS

Currency Unit = LempiraUS$1.00 = Lp.12.94Lp. 1.00 = US$0.0773

GOVERNMENT FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

Metric System

ACRONYMS AND ABBREVIATIONS

AFE-COHDEFOR State Forestry Administration-Honduran ForestryDevelopment Corporation (Administraci6n Forestal del Estado-Corporaci6n Hondurenia de Desarrollo Forestal)

AGSAC Agricultural Sector Adjustment Credit (Cr. 2540-HO)AML Agricultural Modernization Law (Ley de Modernizaci6n Agricola)CONACTA National Advisory Council on Agricultural Technology (Consejo

Nacional de Tecnologia Agricola)DEC Department of Cadastre (Departamento Nacional de Catastro)DICTA Directorate for Agricultural Science and Technology Transfer (Direcci6n

de Investigaci6n, Ciencia y Transferencia Agricola)GEF Global Environmental FacilityGDP Gross Domestic ProductGOH Government of HondurasIDA International Development AssociationIDB Inter-American Development BankIDF Institutional Development FundIMF International Monetary FundINA National Agrarian Institute (Instituto Nacional Agrario)M&E Monitoring and EvaluationNGO Non-government OrganizationPCU Project Coordination UnitPDF Project Development FacilityPIC Public Information CenterPR Property RegistrySAG Agriculture and Livestock Secretariat (Secretaria de Agricultura y Ganado)SAR Staff Appraisal ReportSERNA Natural Resources and the Environment Secretariat (Secretaria de

Recursos Naturales y del Ambiente)SINAPH National System of Honduran Protected Areas (Sistema Nacional

Honduren5o de Areas Protegidas)UNDP United Nations Development ProgrammeUSAID United States Agency for Intemational Development

Vice President: Shahid Javed Burki, LACVPDirector, Country Department: Donna Dowsett-Coirolo, LADCNManager, Sector Leadership Group: Michael Baxter, LASLGSector Leader: Mark Cackler, LADCNTask Manager: Augusta Molnar, LASLG

FOR OFFICIAL USE ONLY

HONDURAS

RURAL LAND MANAGEMENT PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: The Republic of Honduras

Implementing Agencies: Secretariat of Agriculture and Livestock (SAG) andState Forestry Administration-Honduran ForestryDevelopment Corporation (AFE-COHDEFOR)

Poverty: Program of Targeted Interventions

Amount: SDR 23.5 million (US$34 million equivalent)

Terms: Standard IDA terms, with 40-year maturity

Commitment Fee: Standard

Financing Plan: Schedule A

Net Present Value: See paras. 26-28

Staff Appraisal Report: 15917-HO

Map: IBRD No. 28168

Project Identification No.: HO-PA-7398

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

MEMORANDUM AND RECOMMENDATION OF TILE PRESIDENTOF THE IIDA TO THE EXECUTIVE DIRECTORS

ON A PROPOSED CREDIT TO THE GOVERNMENT OF HONDURASFOR A RURAL LAND MANAGEMENT PROJECT

1. I submit for your approval the following memorandum and recommendation on aproposed development credit to Honduras for SDR 23.5 million, the equivalent of US$34 million,on standard IDA terms, with a maturity of 40 years, to help finance a Rural Land ManagementProject.

2. Country Background. After a decade of slow economic growth, averaging 2.5 percentper annum, and mounting fiscal and trade disequilibria, external debt, and market distortions, theGovernment of Honduras (GOH) undertook a structural adjustment program in 1990, supportedby the Second Structural Adjustment Credit (3257-HO). Key elements of this market-orientedprogram were fiscal reform, trade liberalization, removal of price controls, and liberalization ofthe foreign exchange system. While some important progress was made and GDP improvedsubstantially, the 1990-94 administration left office with serious macro-economic imbalancesremaining. The present Government, which took office in January 1994, had initial success inaddressing these imbalances. It completed the second year of an International Monetary Fund(IMF) Enhanced Structural Adjustment Facility program, but was then unable to agree with theIMF on a third year program. It has also found it difficult to maintain progress in strengtheningfiscal policy, as a result of pressures surrounding the presidential primaries in November 1996 andgeneral elections scheduled for November 1997. Although the Government has taken somerevenue measures (raising gasoline taxes and telephone rates), further actions were needed and, inthis connection, a revised tax code is presently in Congress. These macro developments havecaused a delay in declaring effective the Public Sector Modernization Adjustment Credit. On theother hand, the Government has continued to make progress with several of the structural reformssupported by the Public Sector Modernization Adjustment Credit (especially in the areas ofemployment rationalization, changes in the legal framework for telecommunications, legislationpermitting concessions, and modification of the Public Administration Law, setting the basis formeaningful restructuring of public agencies). Growth is estimated to have decreased from 3.6percent in 1995 to 3 percent in 1996. The IMF is continuing discussions with Government withthe aim of finalizing agreement on an economic program for 1997.

3. Natural Resources. Prior legislation governing the use and management of naturalresources encouraged deforestation through adverse incentives, direct intervention by governmentin timber marketing, poor regulation of forest management and insecurity of tenure. Insecurity oftenure over land and forests encouraged forest clearing and discouraged investment, resulting in aloss of about 40 percent of Honduras' forests over the past 30 years, much of it on land suitableonly for forestry use or needed for environmental protection. Soil erosion has been estimated tocause an annual loss of about 10,000 hectares of agricultural land. Forests still cover some 45

2

percent of the country, and better management for timber, non-timber, and biodiversityconservation could lead to greatly increased revenues from the sale of forest products and thegeneration of better and more diversified income sources for the poor in rural areas. While thereis a national protected areas system, the Sistema Nacional die Areas Protegidas Hondureinas(SINAPH), it includes too many small and isolated sites, while omitting areas of key biodiversityvalue to the country and region. The country has neither invested adequately for itsadministration, nor explored self-financing mechanisms and opportunities for expanding tourism inthe protected areas buffer zones.

4. Since 1992, the Government has attempted to reverse this policy framework and haspursued a more balanced natural resource management strategy, reorienting and strengthening thesector institutions concerned. The necessary reforms, incorporated into the AgriculturalModernization Law (AML, April 1992) and supported by an Inter-American Development Bank(IDB) loan and by the IDA Agricultural Sector Adjustment Credit (AGSAC, Cr. 2540-HO,approved August 5, 1993), have substantially improved the legal and institutional framework fornatural resources use and development, and land administration. Activities for the improvementof the cadastre and land titling, and forest and protected areas management, are underway andhave reached targets agreed under the AGSAC. These activities need to be consolidated andextended nationwide, and the reformed government institutions need to be strengthenedsignificantly.

5. Honduras is also noteworthy for the number of innovative and economically promisingwatershed and forestry projects that have been implemented through non-governmentorganizations (NGOs), although the experiences of these projects have not been disseminatedadequately. In most cases, at the end of a given project, there has remained insufficient capacityamong farmers or government to continue the efforts with the resources available to them. Inrecognition of the deficiency of agricultural extension and research services and the need forsustainability, the AML privatized agricultural services in 1992, continued budgetary support forprivate sector research and extension to small farmers, and discontinued such support for largerfarmers. To effect this change, the AML created the Directorate for Agricultural Science andTechnology Transfer (DICTA), a semi-autonomous agency of the Secretariat of Agriculture andLivestock (SAG), to oversee private services for areas of commercial potential as well as thefragile uplands used for subsistence farming. The IDB has prepared a related investment project,the Agricultural Technology Generation and Transfer Project, to support DICTA overall and toprovide support to small and medium farmers in areas of commercial potential.

6. Project Objectives. In 1994, the Government requested IDA assistance in supporting thepolicy reforms and institutional changes described above, through an investment project. Inresponse, a proposed project was developed, focused on the rural poor, with the objectives of: (a)modernizing the system of rural land registration, laying a foundation for more effective landtitling; (b) strengthening the management of the State Forestry Administration (AFE-COHDEFOR) in its new normative role and promoting participation of local populations inmanaging their natural resources; (c) improving agriculture and forestry practices in extremelypoor upland farms to stabilize income and thereby decrease forest encroachment; and (d)

3

rationalizing the national protected areas system, putting representative areas of the nation'secosystems under management for their conservation.

7. Project Description. The proposed Honduras Rural Land Management Project wouldfinance a five-year program with two components. The first, for Land AdministrationModernization, would test and install a land administration modernization system based on folioreal (a parcel-based system in which physical cadastral information is overlaid with a consistentlegal register of that parcel), focusing on the Departments of Comayagua, Cortes, Yoro, Olanchoand Francisco de Morazan. These departments have the greatest potential for agricultural andforest sector development, and also experience a high incidence of land conflict. The secondcomponent, for Natural Resources Management, would be implemented in priority public forestblocks and protected areas with ecosystems important to the Meso-American Biological Corridor(which IDA is also supporting directly and through the Global Environment Facility in otherCentral American countries), and would finance: (i) forest management with local participation;(ii) improved upland agriculture and forestry, building capacity in producer organizations andNGOs; and (iii) management of key protected areas and design of strategies for self-financing inthe protected areas system.

8. Land Administration Modernization Component (US$13 million, total cost,including contingencies). This component and its implementation are described in detail inAnnex B of the Staff Appraisal Report (SAR) No. 15917-HO. It would finance a modem systemof land administration, based on folio real, in which cadastral information would be maintained ata local level, as defined by the jurisdiction of each registry unit. It would aim to increase securityof land and forest tenure and to begin resolving tenure conflicts on forest lands. In doing this, itwould provide a basis for increased productivity and improved management of natural resourcesin rural areas and it would also increase the level of environmental protection. In urban areas andin small rural communities, surveys and legal investigation would be carried out to provide themunicipal authorities with the necessary data to allow proper land adjudication under the Law ofMunicipalities. Implementation would be in two distinct phases, comprising five separateactivities. Phase 1 (pilot) would finance: (a) the creation of a pilot land information base; and(b) background analysis and participatory field adjudication of property rights. Phase 2(expansion) would finance: (c) improved registry services in decentralized registry offices; (d)training of the employees and consultant staff of the national and municipal institutions involved;and (e) a catalogue of national and municipal forest areas entered into the Property Registry (PR).Expansion of activities in the second phase would be conditioned against the satisfactoryimplementation of the critical actions indicated in the joint plan resulting from the evaluation ofthe pilot phase.

9. Natural Resources Management Component (US$25.2 miNlion, total cost, includingcontingencies). The natural resources management activities component of the project isdescribed in detail in Annexes C, D and E of the SAR. It would: (a) improve natural forestmanagement by: strengthening the institutional capacity of AFE-COHDEFOR at the national,regional and local levels to manage national forests and respond to public concerns andcommunity needs; building the capacity of local groups and municipalities to manage forestresources and address constraints to their participation in forest management; and supportingapplied research in natural forest management; (b) create a fund for upland producers; and (c)

4

improve biodiversity protection. These activities would build on the experiences of a number ofpilot projects carried out in Honduras. The component would include a key institutionaldimension to enable AFE-COHDEFOR to promote sustainability of project activities. It would beexecuted in stages and over the course of the project would cover eleven forest managementblocks and 22 priority micro-watersheds within the forest units. The specific activities are asfollows:

(a) Forest Management (US$12.2 million), would finance staff and operating costs;consultant services; equipment for computer, mapping, and survey activities;vehicles; technical assistance and training for: (i) integrated forest management of7 priority and 4 other forest management blocks, including private and communitylands within these blocks, totaling about 1.5 million hectares; (ii) participatoryprotection and management of 50 priority micro-watersheds within the selectedpublic forest units; and (iii) institutional strengthening of AFE-COHDEFOR,including support to field level offices, upgrading professional skills of staff,improving systems of forest information and monitoring, and technical assistancein developing new standards for forest management and regulations. Incoordination with the land administration component, support would be given todevelop an inventory of public forests, to delimit community forest managementareas, and to resolve forest and land tenure conflicts in the selected watersheds.The sub-component would also support geographic information technology formonitoring and evaluation, and land use planning. Expansion of forestmanagement activities in the 4 non-priority blocks would be conditioned onsatisfactory implementation of the critical actions indicated in the joint planresulting from the mid-term review.

(b) Fund for Upland Producers (US$7.2 million), would support improved naturalresources management in agriculture and livestock; natural forests and micro-watersheds. It would reach approximately 6,500 households over the life of theproject and would respond to proposals from producer organizations and NGOs tofinance: (i) technical assistance and training for upland farmers and municipalities;(ii) applied research in support of agriculture, livestock and natural forestmanagement for upland areas; and (iii) training of natural resources professionalswho provide technical services to upland farmers. It would be treated from theoutset as a pilot, to be reviewed and amended as necessary after 14 months and inthe mid-term review.

(c) Biodiversity Conservation (US$5.8 million), would finance staff and operatingcosts, vehicles, infrastructure, research equipment, consultant services, workshops,and training materials for: (i) the management and protection of protected areaswithin selected forest blocks of national priority; (ii) studies of the traditional landuses within the protected areas and the biodiversity values; (iii) establishing theminimum infrastructure in four parks with high tourism potential to generaterevenues for the overall protected areas system; and (iv) development ofmechanisms for self-financing of the protected areas system, and consultation onthese mechanisms with the National Commnittee on Biodiversity, the Natural

5

Resources and Environment Secretariat (SERNA), SAG, NGOs, and the privatesector. In collaboration with the forest resources management component, animproved biodiversity information base would be included in the geographicinformation system being created by AFE-COHDEFOR.

10. A Project Coordinating Unit (PCU) (US$3.6 million, total cost, includingcontingencies) would be responsible for the overall management, monitoring and evaluation ofthis project. Establishment of the PCU is a condition of effectiveness.

11. Costs and Financing Plan. Total project costs including contingencies and taxes areestimated at US$41.8 million, of which the proposed IDA Credit of US$34 million would financeabout 81 percent. This includes a Project Preparation Facility of US$2 million. A breakdown ofcosts and the financing plan are shown in Schedule A. The amounts and methods of procurementand disbursement are listed in Schedule B. A timetable of key project processing events and thestatus of Bank Group operations in Honduras are given in schedules C and D, respectively. Keysocio-economic indicators are listed in Schedule E. A map is also attached. Staff AppraisalReport 15917-HO is being distributed separately.

12. In addition to the project proposed for IDA financing, the Government has requested thatIDA and UNDP prepare a joint GEF Biodiversity Project to complement activities aimed atconserving key sites in the Meso-American Biological Corridor (the Central and Western montaneand lowland forests extending from Honduras into Nicaragua). The GEF Secretariat approved aproject Preparation and Development Facility (PDF) grant of US$300,000 in January 1996 forthis purpose. A formal funding request was made to the GEF Council for approval as part of theinter-session work program in early 1997. An Institutional Development Fund (IDF) grant forindigenous training has also been approved that would assist indigenous organizations to addressconcerns related to land tenure and forest rights and strengthen the capacity of some of theindigenous communities that would participate in the IDA-financed and GEF-financed projects.

13. Project Implementation. Project implementation would be coordinated and monitoredby a PCU within the Secretariat of Agriculture and Livestock. Spending authority would belimited to two institutions, the PCU and AFE-COHDEFOR. AFE-COHDEFOR would fullyexecute the Natural Resources Management Component. The Land AdministrationModernization Component would be coordinated by the PCU, with the assistance of relevantinstitutions, including the Department of Cadastre (DEC), the Land Administration Agency(INA), and the national Property Registry (PR). Signing of a Participation agreement among theagencies implementing the Land Administration Modernization component and signing of aSubsidiaiy Agreement between SAG and AFE-COHDEFOR are conditions of effectiveness.

14. The Fund for Upland Producers would channel project funds on a grant basis fortechnology extension and research on forestry, soil management, and upland agriculture toextremely poor upland producers to purchase services from NGOs, producer organizations, andmunicipal governments. A selection committee made up of government and private-sectorinstitutions would approve proposals presented to the Fund. Creation of this committee and theFund are conditions of disbursement against this sub-component. A consultant NGO or privatefirm would promote and evaluate proposals in accordance with eligibility criteria set by

6

CONACTA, as the national advisory council for agriculture and forest technology. Initially, it isexpected that most proposals would be from established NGOs that have been providing uplandtechnology support to producers and their organizations and from municipalities seeking tomanage their forests. Over time, it is expected that more proposals would come from first-tierfarmer and indigenous organizations. Should the associated GEF project be approved, GEFextension funds for buffer zones activities could also be channeled through the Fund.

15. Project Sustainability The project is intended to consolidate and sustain theinstitutional reforms that were initiated under the AGSAC and the AML. The activities identifiedare a part of the core work program of the SAG, the PR, and DEC. The land administrationmodernization strategy has the support of an inter-agency commission headed by the SupremeCourt of Justice. The project would seek to create government capacity to implement the type ofparticipatory, site-specific natural resources management interventions that until now have onlysuccessfully been carried out by recruited staff of donor-financed pilot projects. Based on areview of current experience in the country with decentralized mechanisms for channelingdevelopment resources, including the Honduras Social Investment Fund (supported by Cr. 2766-HO), the project would also devolve substantial planning and implementation responsibility tomunicipal, non-government and farmer-based organizations, and foster joint management ofpublic forested and protected areas. Promoting local responsibility in this way should help sustainproject activities.

16. Lessons Learned from Past Operations Experience in Honduras and in the sectorreveals the following lessons: (a) overall government institutional capacity for planning andimplementation is weak, requiring careful tailoring of project scope to the country's absorptivecapacity; (b) decentralized financing mechanisms, such as those developed in the Honduran SocialInvestment Fund, can compensate for weak national capacity as well as increase local interest insustaining investments; (c) there is a wealth of NGO and pilot experience with watershedmanagement and small farmer technologies that provides a strong basis for investment projects;and (d) sectoral responsibility for forestry and natural resources management has been fragmentedin the past, constraining the efficient use of scarce fiscal resources. The project preparationexercise has analyzed experiences acquired in projects in Honduras and in natural resourcesmanagement in neighboring countries, and the lessons of that experience are integrated into thepresent project design.

17. Rationale for IDA Involvement. The proposed project is consistent with the BankGroup Country Assistance Strategy (CAS) for Honduras dated July 14, 1993 and discussed by theBoard on August 5, 1993. The CAS gives priority to poverty alleviation, public sectormodernization and sustainable environmental and natural resources management, the latter withinthe framework of implementing the AML. Specific areas mentioned in the CAS include:(a) improved natural resources management, including forestry; (b) conserving biodiversity;(c) reducing destruction of marine resources; (d) gaining a consensus on priority areas; and (e)strengthening the legal and institutional framework, including for land tenure. Each of these,except the area related to marine resources, is an important part of the proposed project.

18. IDA is in a unique position to support the activities in the proposed project, given its keyrole under the AGSAC in assisting the Government with drafting the AML and with its

7

implementation. Planned land administration modernization activities are intended to build long-term government institutional capacity to establish and maintain information on land and forestrights. Land activities move beyond land titling within the AGSAC context to modernize thecadastral system and the national Property Registry. The modernization draws upon theexperience with other recent World Bank and IDA-assisted projects in the region. The forestmanagement, upland producer technology support, and biodiversity conservation activitiesprovide investment resources to consolidate AGSAC-related reforms. Without the proposedproject, some of these initiatives, which were given momentum under the AGSAC, would be atrisk of being lost. IDA's knowledge of the sector and experience of the environmental, social, andinstitutional issues involved in these initiatives provide justification for continuing IDAparticipation.

19. As mentioned earlier, the macro-economic situation facing Honduras is difficult. Despitethis, there are good reasons for proceeding with the proposed project. Not only is it important tomaintain the momentum of the AGSAC by providing investment resources, but Honduras' long-term development priorities (rural poverty alleviation, land administration, and natural resourcesmanagement), as embodied in the proposed project, will remain a fundamental part of IDA'sCountry Assistance Strategy in the future. The next CAS is scheduled to coincide with the nextpolitical cycle, with Board discussion in early 1998.

20. Environmental Aspects. The proposed project has been assigned to EnvironrentalAssessment Category B. An environmental analysis was carried out during project preparationand is available as Annex H2 of the SAR and in the Public Information Center (PIC). The analysisconcluded that the present legal and policy framework for the sector of the AML is adequate tofoster a balanced natural resources strategy for the country and project areas. It identified thefollowing risks: (a) increased or induced pressures on common and open forests; (b) potentiallynegative impacts from natural resources management interventions; (c) potential that biodiversityconservation and buffer zone activities could attract population to the areas; and (d) under-capacity of AFE-COHDEFOR and SAG to ensure technical soundness of planning andimplementation and/or reduced institutional capacity to address pressures outside the project area.All these risks are addressed in the design of the project.

21. All four project components are designed to improve the environmental management offorests and to rationalize land use according to equity and efficiency criteria. The LandAdministration Modernization component would register existing rights more systematically andreliably and would not change existing ownership or land use. More secure tenure shouldimprove incentives for natural resources management, given that reforms in agricultural andforestry policies under the AGSAC have removed disincentives for forestry management on landsof forest vocation relative to livestock and agriculture. The Natural Resources Managementcomponent would improve management of blocks of public forests and surrounding areas,initiating conservation activities in priority watersheds as well. Timber and non-timber (primarilyresin) harvesting activities in pine forests would be carried out according to governmentguidelines for sustainable forest management, following the system for AFE-COHDEFORsupervision and auditing of activities. The Biodiversity Conservation sub-component andproposed GEF-financed project would include a consultative process to rationalize the SINAPHand encourage appropriate local management of areas of biodiversity or environmental value.

8

This would prevent harvesting activities from being carried out in areas that should be protected.Assurances were given at negotiations that no resettlement is envisioned, but, if it should arise,any resettlement would be carried out fully complying with IDA guidelines on resettlement.Subprojects financed through the Upland Fund may include use of pesticides and fertilizers. Theactivities would be small-scale, however, and the technological packages eligible for financingwould include soil and water management, integrated and biological pest management and otherenvironmentally positive technologies. The increased sustainability of rural livelihoods shouldlead to improved land and forest management and reduce incentives for forest conversion.

22. Participation and Indigenous Peoples Involvement. A participation plan has beenprepared for this project, drawing upon a full social assessment which paid significant attention togender and indigenous peoples development. A summary of the plan and the social assessment isincluded as Annex H3 of the SAR and in the PIC. The social assessment included an analysis ofpolicies and past programs related to land administration and forestry and evaluated the impact ofthese on poor and vulnerable groups, including women and indigenous peoples. Specific actionsare included with investment resources to promote positive impacts on indigenous groups andwomen and to enhance their active participation in the project at various levels. The participationplan includes five types of initiatives: (a) definition of a process for involving local population inthe design and implementation of master plans for forests and protected areas; (b) M&E to shapethe process of participation in land adjudication to be carried out in the pilot areas of the project;(c) training and orientation of project staff, local organization staff, and beneficiaries onindigenous concerns and gender aspects; (d) an IDF for indigenous capacity building; and (e)design of the Upland Fund to provide access to poor producers, NGOs, and municipalorganizations to technical assistance resources through a selection process with transparentcriteria and consultative procedures.

23. A participation specialist would be assigned full-time to the PCU, and specializedconsultants would be employed by individual implementing agencies for training and consultationactivities. The land titling agency, INA, has gained considerable experience through the AGSACand USAID-funded titling programs in participatory approaches to mapping and landadjudication, and in promoting community-based, non-formal arbitration of land conflicts. Inaddition, a number of special studies are included to track the access of women and indigenousgroups to land and forests and to land titles, to promote positive models for reaching women aswell as men in upland farm families, and to enhance indigenous group management of forests andbiodiversity.

24. Poverty and Program Objective Categories The proportion of the poor among projectbeneficiaries is expected to be significantly larger than their proportion in the overall population,and therefore this project fits the criteria for inclusion in the Program of Targeted Interventions.The project belongs primarily to the Environmentally Sustainable Development and PovertyReduction and Human Resources Development Program Objective Categories.

25. Project Benefits. The project would have a number of important benefits. First, the landcomponent would enhance land security for over one million people, contributing to increasedagricultural investment and productivity, greater environmental management and improved landvalue. The component would also improve the cartographic base and judicial system, which

9

would permit the Government to manage important watershed, forested and wildlife areas thathave environmental values for the nation and the international community. Second, through thepilot Upland Fund, the project would improve nutrition, food security and the income base of6,500 rural poor families by improving crop production, supporting vegetable production, andpromoting new income streams through forestry. Third, the Natural Resources Managementcomponent would lead to improved forest conservation and management, benefiting 100,000people in the project area, by strengthening the institutional capacity of AFE-COHDEFOR.Fourth, the Biodiversity Conservation subcomponent would support self-financing systems for800,000 ha. of protected areas, which would allow these areas to attain greater financialindependence and long-term sustainability.

26. The quantitative economic analysis focused on a subset of these benefits derived directlyfrom investments in natural resources management. Because sub-projects under the Upland Fundare demand-driven and it is not known ex-ante what community and municipality choices wouldbe, a set of representative household-level models of the types of activities proposed wereprepared based on NGO experiences in implementing such projects in the country. These allshowed attractive benefit:cost ratios using a discount rate of 10 percent, and some ranged up to1.9:1. For public forest management activities, estimates were of the expected stumpage feesunder improved management based on various forest management models in the pine forests,resulting in a net present value of US$17 million and a benefit-cost ratio of 2.4.

27. The land administration component was not subjected to cost:benefit analysis. However,a recent econometric study on land titling in Honduras carried by the University of Maryland andthe World Bank shows a conservative internal rate of return of 17% for titling carried out in thelate 1970s. Design of the land information base methodology mandated a least-cost solution.The selected methodology resulted in a cost of approximately US$2.85 per ha for institutionaldevelopment and for completing the legal land information base for 37 percent of Honduras' landarea. This is low by comparison with costs in neighboring countries, mainly because Hondurasalready has significant experience and is well endowed with existing information andinfrastructure.

28. While no quantitative analysis was carried out for biodiversity conservation, preliminaryestimates of tourism fees from the proposed National Park infrastructure is between US$2 millionand US$2.5 million annually, more than sufficient to justify the proposed investment andoperating costs. Details are found in the Annex HI in the SAR.

29. Project Risks. The main risks of the project relate to: (a) its complexity; (b) Governmentcommitment; and (c) institutional capacity. With regard to complexity, the design of the projectrecognizes the interrelation between poverty, forest destruction, soil erosion and lack of landtenure and attempts to set in motion processes which would make an impact on all of theseelements of the problem, but in each case taking a very cautious approach. The LandAdministration Modernization component would attempt to tackle the most fundamentalproblem, a lack of a modem property registry, before any further attempt is made to title land. Itproposes a small pilot in one municipality, expanding to fifteen more municipalities and then toseveral departments, ifjustified, and at each stage the process would be subjected to close review,open debate and possible redesign. Disbursements under the project would be subject at each

10

stage to full implementation of agreed actions. The same pilot approach has been applied to theForest Management and Biodiversity subcomponents. In the former, progress would only bemade through careful participatory approaches involving local planning, and priority areas forintervention by the project have been set in accordance with already established AFE-COHDEFOR criteria. In the latter, a gradual approach to modifying the existing SINAPH hasbeen chosen, intensive training has been included, and a minimum investment proposed for a firstphase development of a financially sustainable park system. The Upland Fund would also takesa very cautious approach. A relatively small amount of money would be committed to it; itsregulations and management would be subject to regular review and potential redesign in the lightof experience; and close consultation would be retained with IDB, in order to maintainconsistency with a complementary fund financed by IDB for more conventional extension andresearch. A review of the land administration pilot phase will be carried out after the first 14months and a full mid-term review will also be undertaken.

30. There are significant factors leading to confidence in the Government's commitment tothe objectives of the project. Not least among these is the passage of six key laws on which theprinciples of the proposed project are based. These are: the Municipal Law (1991); theAgriculture Modernization Law (1992); the Property Registry Law (1987); the Environment Law(1993); the Forest Incentives Law (1993); and revisions to the Law of Public Administration(1996). Confidence in government commitment is also derived from the project preparationprocess itself, which was long and arduous. During that time, there were major developments ingovernment thinking, especially with regard to the decentralization of AFE-COHDEFOR, and theintegration of the Supreme Court, PR, DEC and INA to make a common effort to modernize theregistry system. These principles are now firmly embedded in the design of the project, and inundertaking the project the Government is demonstrating its acceptance of a much alteredinstitutional environment than has existed hitherto. At the same time, each major component ofthe project carries with it a real prospect of financial sustainability. The built-in review processesalso provide several major check points for modification or even suspension in the event ofweakening commitment. Further evidence of commitment is the implementation of a ProjectPreparation Facility to begin decentralized activities of AFE-COHDEFOR and to initiate the landpilot.

31. Addressing weaknesses in existing institutional capacity is the principal elementunderlying the design of the proposed project. A significant proportion of its resources would bedevoted to institutional strengthening at national and local levels, to introducing concepts ofparticipatory planning and decision-making, to training and to modernization of technicalprocesses. Key factors leading to confidence in the institutional arrangements are: (a) reliance onexisting institutions, combined with introduction of new processes, as for example in thedecentralization of AFE-COHDEFOR and the strengthening of its field offices; (b) increasedreliance on NGOs and the private sector, as would be the case in the management, promotion andexecution of the Upland Fund; (c) creation of a simple PCU with authority derived directly fromthe Minister of Agriculture and Livestock and located inside the existing structure of the SAG; (d)mechanisms which specifically aim to unite disparate agencies currently involved in landadministration; and (e) limitation of overall management and spending authority to twoinstitutions, the PCU and AFE-COHDEFOR.

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32. Recommendation. I am satisfied that the proposed credit would comply with the Articlesof Agreement of the Association, and I recommend that the Executive Directors approve it.

James D. WolfensohnPresident

by Caio K. Koch-Weser

AttachmentsWashington, DCFebruary 28, 1997

Schedule A

HONDURASRURAL LAND MANAGEMENT PROJECT

Estimated Costs and Financing Plan(US$ million)

L Estimated Project Costs Local Foreign Total

A. Land Administration Modernization

1. Pilot Phase 1.2 0.9 2.12. Post Pilot Phase 9.0 0.7 9.7

Subtotal Land Administration Modernization 10.3 1.5 11.8

B. Natural Resource Management1. Inproved Natural Resource Management 5.0 6.0 11.02. Fund for Upland Producers 6.8 0.0 6.83. Biodiversity Conservation 4.1 1.2 5.4

Subtotal Natural Resource Management 15.9 7.2 23.1

C. Project Coordination Unit 3.1 0.1 3.2

Total BASELINE COSTS 29.3 8.8 38.1

1. Physical Contingencies 0.9 0.5 1.42. Price Contingencies 1.9 0.5 2.3

Total PROJECT COSTS 32.2 9.6 41.8

IL Financing Plan:

1. Govemment 5.9 0.5 6.42. Beneficiaries 1.4 0 1.43. IDA 24.9 9.1 34.0

Total Financing 32.2 9.6 41.8

Note: Due to rounding, totals may not add precisely.

Schedule BPage 1 of 2

HONDURASRURAL LAND MANAGEMENT PROJECT

Procurement Method and Disbursement(US$ millions)

Procurement MethodInternational NationalCompetitive Competitive

Bidding Bidding Other b/ N.B.F. Total

L Procurement

A. Works a/ - 3.2 0.3 - 3.5(2.5) (0.2) (2.7)

B. Goods 1.2 0.8 1.8 - 3.8(1.0) (0.7) (1.5) (3.3)

C. Consultants - 16.6 - 20.1(16.2) (16.8)

D. Training 2.4(2.4)

E. Fund for Upland Producers - - 7.2 - 7.2

(5.3) (5.3)F. PPF - 2.0 - 2.0

(2.0) (2.0)G. Incremental Recurrent Costs - - 6.2 - 6.2

(2.2) (2.4)Total 1.2 4.0 36.6 - 41.8

(1.0) (3.2) (29.8) (34.0)

a/ Includes mapping works.b/ "Other" includes LIB, national shopping and consulting services.c/ Services to be procured in accordance with World Bank and IDA Guildelines: Use of Consultants by the

World Bank Borrowers and by the World Bank as Executing Agency (August 1981)

Note: Figures in parentheses are the respective amounts financed by IDA

Schedule BPage 2 of 2

HONDURASRURAL LAND MANAGEMENT PROJECT

Allocation of Proceeds(USS millions)

% ofExpenditures

Category Amounts To be Financed

It Disbursements

(1) Works(a) Works - Real Estate Registry 50,000 85(b) Works - Natural Resource 250,000 70(c) Works for Forest Management Plans 75,000 70

(d) Other Works 2,100,000 85

(2) Goods and Vehicles(a) Goods - Real Estate Registry 600,000 100% FE, 80% LE(b) Other Goods 2,300,000 100% FE, 80% LE

(3) Consultant Services and Studies

(a) Consultants - Real Estate Registry 450,000 100(b) Consultants -Management Plans 1,200,000 100(c) Other Consultants 14,000,000 100

(4) Training

(a) Training - Real Estate Registry 90,000 100(b) Other Training 2,200,000 100

(5) Subprojects for Upland Producers Fund 5,200,000 100

(6) PPF 2,000,000 100

(7) Incremental Recurrent Costs

(a) IRC - Real Estate Registry 800,000 90% for 2 years, 50% next 2, then 20%(b) Other IRC 1,300,000 90% for 2 years, 50% next 2, then 20%

(8) Unallocated 1.385.000

TOTAL 34,000,000

Estimated IDA Disbursement:

IDA FY FY98 FY99 FY00 FY01 FY02

Annual 8.0 7.8 7.9 6.0 4.3Cumulative 8.0 15.8 23.7 29.7 34.0

al Includes an Initial deposit to the Special Account

Schedule C

HONDURAS

RURAL LAND MANAGEMENT PROJECT

Timetable of Key Project Processing Events

(a) Time taken to prepare the project: 27 months

(b) Prepared by: Augusta Molnar, William Beattie, JamesSmyle, Nelson Espinoza, Ana LuciaMoreno, John Joyce, Juan Martinez,Robin le Breton, Tom Korczowski,Richard Owen, Daan Vreughdenhil, LuisZelaya and Maria Luisa Pardo

(c) First IDA Mission: February 1994

(d) Appraisal Mission departure: May 1996

(e) Negotiations: December 1996

(f) Planned Date of Effectiveness: June 1997

(g) List of relevant PCRs/PPARs: None

Status of Bank Group Operations in HondurasIBRD Loans and IDA Credits in the Operations Portfolio

Difference

Original amount in US$ millions between expectedProject Loan or Fiscal and asctila!

ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursernents'

Number of Closed Loans/Credits: 58

Active Loans

HN-PE-7387 C28162 1997 REPUBLIC OF HONDURAS PUB SEC MOD SAC 20.10 19.45HN-PE-7387 C28161 1996 REPUBLIC OF HONDURAS PUB SEC MOD SAC 26.40 24.46HN-PE-7387 C28160 1996 REPUBLIC OF HONDURAS PUB SEC MOD SAC 55.00 50.86 31.37HN-PE-34607 C28140 1996 REPUBLIC OF HONDURAS PUB SEC MOD TAC 9.60 7.82 0.84HN-PE-37709 C27660 1996 GOVERNMENT-HONDURAS SOC INV FUND III 30.00 5.79 -10.93HN-PE-7399 C26940 1995 GOVT OF HONDURAS BASIC EDUCATION 30.00 25.84 6.05HN-PE-7396 C26930 1995 GOVERNMENT OF HONDURA ENVIRON. DEVELOPMENT 10.80 9.63 5.54HN-PE-7388 C24580 1993 GOVERNMENT OF HONDURA TRNSPRT SCTR RHB 65.00 35.60 23.42HN-PE-7392 C24520 1993 GOVERNMENT NUTRITION/HLTH 25.00 4.96 4.03

TOTAL 0.00 271.90 0.00 184.41 60.31

Active Loans Closed Loans Total

Total disbursed (IBRD and IDA) 78.26 1058.64 1136.90

Of which repaid 0.00 422.98 422.98

Total now held by IBRD and IDA 271.90 644.43 916.33

Amount sold 0.00 4.46 4.46 e (a

Of which repaid 0.00 4.46 4.46

Total undisbursed 184.41 20.09 204.50

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.

Honduras - Statement of IFC Investments t M

Committed and Disbursed PortfolioAs of 8131196 C

(In US Dollar Millions)

Committed Disburscd

I I I~~~FCIFIIFC IFC

FYApproval Company Loan Equity Quasi Partic Loan Equily Qltasi /'arlic

1978 Rio Undo 0.00 1.00 0.46 0.00 0.00 1l00 0.46 0.00

1995 Elcosa 9.94 2.64 3.50 32.18 9.94 2.63 3.50 32.18

Total Portfolio: 9.94 3.64 3.96 32.18 9.94 3.63 3.96 32.18

Approvals Pending Commitment

Loan Equity Quasi Parlic

Tlere are no approvals pending conunitment for this country.

Schedule EPage I of 2

Honduras at a glanceLatin

POVERTY and SOCIAL America Low-Honduras & Carlb. income Development diamond

Population mid-1995 (millIons) 5.9 480 3,188GNP per capita 1995 (USs) 600 3.300 460 Life expectancyGNP 1995 (billions USs) 3.6 1.584 1.466

Average annual growth, 1990-95

Population () 3.0 1.8 1.8 GNP / GrossLabor force (%) 3.7 2.4 1.9 per primary

Most recent estimate (latest year available since 1989) capita enrollment

Poverty: headcount index (% of population) 53Urban population (% of total population) 48 74 29Life expectancy at birth (years) 67 68 63Infant morlality (per 1,000 live births) 46 41 58 Access to safe waterChild malnutrition (% orchtildren under 5) 19 38Access to safe water (% ofpopulation) 69 81 75Illiteracy (% of population age 15+) 27 13 34 -HondurasGross primary enrollment (% of school-age population) 112 110 t 12 - Low-income group

Mate 111 -. 112gruFemale 112 .. 98

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1975 1985 1994 1995

GDP (billions US) 1.1 3.6 3.4 3.9 Economic ratiosGross domestic investment/GDP 19.0 17.3 33.9 31.5 OpennessofeconomyExports of goods and non-factor services/GDP 30.7 24.3 38.9 40.1Gross domestic savings/GDP 10.0 11.7 24.9 25.7Gross national savings/GDP 7.8 7.6 18.3 22.1

Current account balance/GOP -11.5 -9.7 -12.4 -7.3 Sn IInterest payments/GDP 1.4 2.8 4.9 4.3 Savings : InvestmentTotal debt/GDP 33.9 75.0 131.8 113.6Total debt servicelexports 13.2 24.7 29.7 .. 1

Present value of debUGDP .. .. 100.8Present value of debt/exports .. .. 231.3 .. Indebtedness

19764t4 1985-95. 1994 1995 1996-04(average annual growth) - HondurasGDP 3.9 3.4 -1.5 3.6 4.6 Low-income groupGNP per capita 0.1 0.6 -4.0 3.5 2.2Exports of goods and nfs 2.9 2.0 -10.1 11.0 4.9 _

STRUCTURE of the ECONOMY1975 1986 1994 1995

(X of GDP) Growth rates of output and Investtnent (%)Agriculture 27.3 21.9 22.4 22.2 20

Industry 24.9 24.0 22.7 23.1 /0Manufacturing 15.7 14.5 15.1 15.2 1.

Services 47.8 54.2 54.9 54.7 o

Private consumption 77.7 75.2 65.2 65.5 -tO s

General government consumption 12.4 13.1 9.9 8.8 - GOl - GOPimports of goods and non-factor services 39.7 29.9 47.9 45.8

1975-84 1985-95 1994 1995_(average annual growth) Growth rates of exports and Imports C%)Agriculture 3.3 3.7 -1.5 1.1 20Industry 4.2 4.4 -7.1 1.6

Manufacturing 3.1 3.5 -2.0 1.5 10-

Services 4.5 2.2 0.1 4.9 o

Private consumption 4.2 2.4 1.0 5.3 .o 1 2 95General govemment consumption 3.6 1.5 -2.7 -10.8Gross domestic investment -1.2 9.7 5.4 7.4 .20

Imports of goods and non-factor services 0.2 3.7 1.1 12.0 -Epos -O.-posGross national product 3.7 3.7 -1.3 3.6 _

Note: 1995 data are preliminary estimates.The diamonds show four key indicators in the country (in bold) compared vith its income-group average. If data are missing, the diamond willbe incomplete.

Schedule EPage 2 of 2

PRICES and GOVERNMENT FINANCE1975 1985 1994 1995 In 1 (%)

Domestc prices I(% change) 40

Consumer prices 8.4 3.4 21.7 29.5 30'Implicit GDP deflator 6.0 4.9 28.1 26.5 I 20

Govemment rinance(% of GDP) 39 go g1 92 93 94 95

Current revenue 22.0 28.0 29.9 ;Current budget balance 1.3 4.9 6.1 -GOP der -0-CPIOverall surplus/deficit -6.9 -6.9 -2.8

TRADE

(millions US$) 1975 1985 1994 1995 Export and import levels (mill. USS)

Total exports (fob) 796 959 1,193 2, DTBananas 274 155 202Coffee 185 200 349 s500o Manufactures

Total impors (cil) 97t '992 215 1000

Food .. 141 197 214 i n0

Fuel and energy .. 15 192 215Capital goods 182 343 374 !Export price index (1987=100) 93 110 114 ! 89 90 91 92 90 94 9

Import price index (19875100) .. 114 117 124 | oExports mimportsTerms of trade (1987= 100) .. 81 94 92

BALANCE of PAYMENTS1975 1985 1994 1995

(millions USS) Current account balance to GOP ratio (%)Exports of goods and non-factor services 344 909 1,303 1,582 oImports of goods and non-factor services 446 1.085 1.605 1,808 rg 91 _ 92 93 94i 95Resource balance -101 -175 .302 -226

Net factor income -29 -190 -207 -196 -sNet current transfers 0 12 93 133

Current account balance. . ULbefore official transfers -130 -353 -416 -289 _

Financing items (net) 184 336 443 405Changesinnetreserves -54 17 -27 -116 -'S5

Memo:

Reserves including gold (mill. USS) 97 111 259 302Conversion rate (locaWlUSS) 2.0 2.0 8.6 9.5

EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1994 1995

(millions US$) Composition of total debt. 1995 (mill. USS)Total debt outstanding and disbursed 381 2.729 4,418 4,4801BRO 57 369 469 443 A AIDA 29 81 307 386 F 342 443

Total debt service 46 228 433 438 8412 3I1RO 6 34 90 96 cIDA 0 1 3 4 90

Composition of net resource flowsOfficial grants 16 126 83 85Official creditors 87 230 105 26 \Private creditors 12 36 -4 -16 E 0Foreign direct Investmenl 7 28 70 77 1568 1239Portfofio equity 0 0 0 0

World Bank programCommitments 38 7 28 97 A . IBRO E. BilateralDisbursements 15 45 69 84 8 -IDA 0- Other mwtilateral F - Privat |Principal repayments 2 13 53 60 C -IMF G -Short-termNet tkws 13 32 16 24

Interest payrnents 4 23 40 41Net transfers 9 10 -24 -17

Intemational Economics Department U20196

MAP SECTION

IBRD 2816R

! B E L I Z E / X HONDURAS

11 LAND USE AND

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Report No.: P 7012 HOType: MOP