53517 v1 INSTITUTIONAL GOVERNANCE REVIEW "STRENGTHENING PERFORMANCE ACCOUNTABILITY IN HONDURAS" VOLUME I (In Two Volumes) Executive Summary Main Report March 9, 2009 Latin America and the Caribbean Regional Office HONDURAS IGR ­ VOLUME I ABBREVIATIONS AND ACRONYMS ADEL Local Development Association AIN-C Atención Integral a la Niñez en la Comunidad (Comprehensive Community Child Health Services) AMHON Association of Municipalities of Honduras Sida Agencia Sueca para el Desarrollo Internacional (Swedish Agency for Internacional Development) CBOs Community-based organizations CCERP Consejo Consultivo de la Estrategia para la Reducción de la Pobreza CEB Centro de Educación Básica (Centre of Basic Education) CEPREB Centro de Educacion Prebasica (Centre for Prebasic Education) CESAR Centro de Salud Rural (Rural School Centre) CEIMSA Commission for the Modernization of the Customs System CGR Accountant General's Office CMH Honduras Medical Association CNA Consejo Nacional Anticorrupcion (National Anticorruption Council) COHEP Consejo Hondureño de la Empresa Privada (Honduran Council for Private Business) CONADEH Comisionado Nacional de Derechos Humanos (Human Rights Commissioner) CONATEL Comisión Nacional de Telecomunicaciones (National Commission for Telecommunications) CONEANFO National Commission for the Development of Non-Formal Education CPME Comision Presidencial de Modernizacion del Estado (Presidential Commission for State Modernization) DEI Dirección Ejecutiva de Ingreso (Executive Directorate of Revenues) DGSC Dirección General de Servicio Civil (General Directorate of the Civil Service) EFA Programa Educación para Todos (Eduation for All) ENEE Empresa Nacional de Energía Eléctrica (Electricity Company) ERP Estrategia para la Reducción de la Pobreza (Poverty Reduction Strategy) FONAC Foro Nacional de Convergencia (National Convergence Forum) GDP Gross Domestic Product GoH Government o f Honduras HONDUTEL Empresa Hondureña de Telecomunicaciones (Honduran Telecommunication Enterprise) HR Human Resources IDB Inter-American Development Bank INE Instituto Nacional de Estadistica (National Institute for Statistics) INFOP Instituto Nacional de Formacion Profesional (National Institute of Vocational Training) Lps Lempiras MLps Million Lempiras MOE Ministry of Education MOF Ministry of Finance MOH Ministry of Health NAS Nueva Agenda de Salud (New Health Agenda) NGOs Non-governmental organization PIU Project Implementation Unit PNS Plan Nacional de Salud (National Health Plan) PN Plan Nacional (National Plan) PROHECO Programa Hondureño de Educación Comunitaria (Honduras Community Education Program) SE Secretaría de Educación (Ministry of Education) 2 HONDURAS IGR ­ VOLUME I SEFIN Secretaría de Finanzas (Ministry of Finance) SIAFI Sistema Integrado de Administración Financiera (Integrated Financial Management System) SIARH Sistema Integrado de Administración de los Recursos Humanos (Integrated System for the Administration of Human Resources) SIARHD Sistema Integrado de Administración de los Recursos Humanos Docentes (Integrated System for the Administration of Human Resources in Education) SIERP Sistema de Información para la Estrategia para la Reducción a la Pobreza (Poverty Reduction Strategy Information System) SMEs Small & Medium Enterprises SGPR Sistema de Gerencia basado en Gestión por Resultados (Results-based Management System) SS Secretaría de Salud (Ministry of Health) TSC Tribunal Superior de Cuentas (Supreme Audit Institution) UECF Coverage Extension and Financing Unit UMCE External Unit for Measuring Education Quality UNAH Universidad Nacional Autónoma de Honduras (National Autonomous University of Honduras) UNAT Unidad de Apoyo Técnico UPEG Unidad de Planificacion y Evaluación de la Gestión (Planning and Evaluation Unit) WB World Bank 3 HONDURAS IGR ­ VOLUME I INDEX VOLUME I - MAIN REPORT ACKNOWLEDGEMENTS EXECUTIVE SUMMARY MAIN REPORT ­ STRENGTHENING PERFORMANCE ACCOUNTABILITY IN HONDURAS VOLUME II - BACKGROUND CHAPTERS AND ANNEXES CHAPTER 1: OVERVIEW OF THE POLICY-MAKING PROCESS CHAPTER 2: THE CHALLENGE OF PROFESSIONALIZING THE PUBLIC ADMINISTRATION CHAPTER 3: JUSTICE AND PUBLIC SECURITY IN HONDURAS CHAPTER 4: TRANSPARENCY AND ACCOUNTABILITY IN THE EDUCATION SECTOR CHAPTER 5: TRANSPARENCY AND ACCOUNTABILITY IN THE HEALTH SECTOR CHAPTER 6: ACCOUNTABILITY FRAMEWORK FOR MUNICIPAL GOVERNMENTS CHAPTER 7: CORPORATE GOVERNANCE OF HONDURAN PUBLIC ENTERPRISES 4 HONDURAS IGR ­ VOLUME I INDEX - VOLUME I EXECUTIVE SUMMARY ...................................................................................................................................8 MAIN REPORT - HONDURAS AT A CROSSROADS .................................................................................. 12 OVERVIEW OF THE POLICY-MAKING PROCESS ................................................................................................... 15 THE CHALLENGE OF PROFESSIONALIZING THE PUBLIC ADMINISTRATION ......................................................... 20 JUSTICE AND PUBLIC SECURITY IN HONDURAS .................................................................................................. 23 TRANSPARENCY AND ACCOUNTABILITY IN THE EDUCATION SECTOR ............................................................... 26 TRANSPARENCY AND ACCOUNTABILITY IN THE HEALTH SECTOR ..................................................................... 29 ACCOUNTABILITY FRAMEWORK FOR MUNICIPAL GOVERNMENTS..................................................................... 32 CORPORATE GOVERNANCE OF HONDURAN PUBLIC ENTERPRISES ..................................................................... 36 List of Tables, Graphs, Boxes and Figures Table 1. Characteristics of public policies in Latin America................................................................. 15 Table 2. Tax Exemptions ....................................................................................................................... 15 Table 3. Characteristics of the party system. ......................................................................................... 17 Table 4. Quantity and cost of personnel by staff category Honduras Central Government .................. 22 Table 5. Judicial Workload, Selected Countries .................................................................................... 24 Table 6. Evolution of criminal cases, from filing to resolution, 1999-2006 .......................................... 25 Table 7. Performance of sixth grade students in mathematics and Spanish ......................................... 27 Table 8. Health Outcomes and Outputs, 2001 and 2005/06 ................................................................. 29 Table 9. Health Expenditures in Central America, 2005 ....................................................................... 30 Table 10. Municipal Budget vs. Central Government Budget............................................................... 33 Graph 1. Confidence in the Public Administration, Honduras 1996 and 2005 ..................................... 13 Graph 2. Public spending on interest payments and salaries, 1997-2002 .............................................. 16 Graph 3. Human Resource Management in the Public Sector in Latin America .................................. 20 Graph 4. The Impact of the Increase in Administrative Efficiency ....................................................... 21 Graph 5. Budget execution of the Ministry of Education, 2001-2007................................................... 27 Graph 6. Budget distribution in the municipal sector ............................................................................ 34 Graph 7. Submission of Municipal Accounts to the Tribunal Superior de Cuentas .............................. 35 Graph 8. ENEE Financial situation and losses, 2004-2007, millions of Lempiras................................ 36 Box 1. The case of Comayagua ............................................................................................................. 19 Box 2. Transparency, trust in government, and willingness to pay taxes. ............................................. 33 Figure 1. The accountability framework................................................................................................ 14 Figure 2. Diagram of responsibility and accountability relationships in the electricity sector .............. 38 5 HONDURAS IGR ­ VOLUME I ACKNOWLEDGEMENTS From the beginning of this project, the World Bank and the Honduran Government agreed that the method used in creating this study was going to be a key element to its success. In order for it to be of benefit to those who fight against poverty in the country, and contribute to the national debate, it would have to be carried out in a participatory manner, by involving national and international specialists working together with government representatives in each of the relevant institutions, in addition to considering input from Honduran citizens. Following these guidelines a Steering Committee was created to lead the process of elaboration and discussion of the study. This Steering Committee was led by Rodolfo Pastor Fasquelle, Secretary of Culture, Art and Sports and Coordinator of the Social Cabinet; Ricardo Arias, Subsecretary of the Presidency; and Hugo Castillo, Subsecretary of Finance; with representatives from the following government agencies ­ the Poverty Reduction Strategy Commission, the Minsitries of Health, Education and Interior and Justice. The study has been carried out in collaboration with the following actors from the international community, who contributed with financial support and/or technical specialists: DFID, ASDI, AECI, IDB, and GTZ. Other actors from the international community that participated in the process as a part of the Steering Committee were the UNDP and USAID. On the part of the World Bank, this report has been prepared by a team led by Ana Bellver (LCSPS) and comprising, in alphabetical order: Cristian Aedo (LCSHE), Antonio Blasco (LCSFM), Henri Fortin (LCSFM), Lidia Fromm (LCSHE), Linn Hammergren (LCSPS), Martin Hessel (LCCHN), Christine Lao Pena (LCSHH), Alberto Leyton (LCSPS), Fabienne Mroczka (LCSFM), and José Rezk (LCSFM). The group of national and international consultants that worked in the different chapters included: Pedro Antman, Eva Caballero, Ana Cristina Barrios, Miguel Cálix, Marco López, Israel Mandler, Roberto Martínez, Víctor Meléndez, José Luís Méndez, Napoleón Morazán, Joaquín Oviedo, Mark Payne, Sandra Pineda, Hernán Pflucker, Hector Silva, and Miguel Braun and Gabriel Filc from CIPPEC, and Helmis Cárdenas, Rafael del Cid, Marco Moncada and Ramon Romero from ESA Consultants. The principal authors of the separate background chapters are as follows: Chapter 1: Ana Bellver, Martin Hessel and, Mark Payne. Chapter 2: Alberto Leyton and Martin Hessel. Chapter 3: Linn Hammergren and Miguel Cálix. Chapter 4: Cristian Aedo and Lidia Fromm. Chapter 5: Christine Lao Pena and Lidia Fromm. Chapter 6; Antonio Blasco, Fabienne Mroczka and, José Rezk. Chapter 7: Henri Fortin, Ana Bellver and Ana Cristina Hirata Barros. The team also benefited from the collaboration of Dante Ariel Mossi (LCCHN); Phil Keefer and Cesi Cruz from DEC; Alexander Berg and Sunita Kikeri from the IFC; Edgard Restrepo from IFC Honduras, and Jonathan Halpern (ETWWA). The team would like to thank Laura Frigenti, LCC2C country director; Geoffrey Bergen, Honduras country manager; Nick P. Manning, public sector manager, Humberto López, lead 6 HONDURAS IGR ­ VOLUME I economist, and the three peer reviewers ­ Ian Walker, Steve Webb and Yasuhiko Matsuda ­ for their support during the elaboration of this study and their valuable comments. It is not possible to name all of the Hondurans who have contributed in some way to this study, but we would particularly like to thank government counterparts from the Office of the Presidency, the Ministry of Education, the Ministry of Finance, the Ministry of Interior and Justice, the Ministry of Health, the Public Ministry, the Judicial Branch, the Ministry of Public Security, the General Directorate of the Civil Service, the Technical Support Unit of Presidency, the Honduran Social Security Institute, the Poverty Reduction Strategy Commissioner, and the Association of Municipalities of Honduras, for their involvement, both through the participation of their senior officials in the Steering Committee and the knowledge and valuable contributions of their technical teams. We also want to express our gratitude to the representatives of civil society organizations, universities and the private sector for their time and dedication. Their willingness to participate in the numerous meetings, and the contributions they made, greatly enriched the study. The guiding principles that were established with the Government at the beginning of this project were that the document should: Have a practical focus: the selection of priority areas and the identification of the questions that should be considered in each area were performed pragmatically with the aim of implementing gradual advances and solutions which would achieve intermediate results. Be policy oriented: each chapter should conclude with concrete and viable proposals. Be informed by a participatory process: decision-makers, heads of institutions and technical teams should be involved in the design and elaboration of each one of the chapters. Build on existing practices and accumulated knowledge in the sector: the analysis begins with existing studies and advances already made, and reflects the current beneficial practices and ongoing initiatives in the country. We hope that we have fulfilled these objectives and that this study becomes a useful instrument both for the departing administration to consolidate its achievements, as well as for the new administration that will assume power in 2010 and for all of the different actors involved in the fight against poverty in the country 7 HONDURAS IGR ­ VOLUME I EXECUTIVE SUMMARY i. Having achieved fundamental milestones in terms of representative democracy and institutional modernization, Honduras continues to face important challenges in its bid to provide public services with coverage and quality commensurate with the resources available to the country. Honduras has come a long way in its democratic development, with seven free elections held since 1981 and the military subordinated to civilian control. Since the 1980s, the country has undertaken key public sector management reforms and has all of the formal components of a modern democracy. However, its average rate of economic growth and its degree of progress in reducing poverty over the past two decades have been low relative to most other Latin American countries ­­ at this growth rate, Honduras will reach the current income per capita of El Salvador ($2,530) in 2050. Efficiency of public spending continues to be very low compared to regional standards, and the capacity of the public administration insufficient for ensuring the minimum goal of universal coverage of basic services. ii. These difficulties in improving citizens quality of life have a negative impact on their confidence in public institutions and undermine the process of democratic consolidation. Hondurans do not question democracy as the preferred political system, but they are dissatisfied with its capacity to respond to the problems that confront the country and provide services that benefit the majority of the population. The high level of absenteeism in the most recent presidential elections (45 percent in 2005 compared with 16 percent in 1985) was a wake up call in this sense. The upcoming elections provide a unique opportunity to regenerate citizens' trust in public institutions and, in the capacity of the democratic system, to respond to their main concerns, which include poverty, unemployment, and public security. iii. The quality of public policies in Honduras is an important factor behind these poor development outcomes. A few broad characteristics of public policies can be observed across a variety of sectors. Public resources in Honduras are often inefficiently allocated; policies tend to benefit the groups with strongest bargaining power rather than the general interest, and in general, policy implementation is poor. To understand why the policy process is so prone to the influence of interest groups it is necessary to consider the incentive structure that stem out of three salient features of the party system: the high level of institutionalization of the two main parties, their internal fragmentation and weak programmatic orientation. In a context such as this, political actors have little incentive to prioritize policy reforms that impose immediate costs on specific well-organized groups, while the benefits for the wider population may be more evenly spread and uncertain. iv. The analysis of reform trajectories in the sectors included in this study support the argument that poor sector performance is related to weak implementation and to the incentive structure that policymakers face. Some of the initiatives that have been proposed to enhance sector performance are already contemplated within the current legal and institutional framework (as in the cases of civil service, education, and public enterprises) and yet, the policy discussion in the country has focused on designing further reforms rather than on enforcing already approved initiatives. Even in the cases where major reforms have been passed (such as the justice sector), performance has not improved accordingly. With few exceptions, the lack of reform champions that have emerged from the Honduran political landscape it is striking which is related to the incentive structure mentioned earlier. The 8 HONDURAS IGR ­ VOLUME I successful reform of the Executive Directorate of Revenues (DEI) shows however that it is possible to make significant advances in politically sensitive areas, such as human resource management, if there is a champion behind them that is able to mobilize sufficient political support. In such context there is a need to be opportunistic to take advantage of entry points and champions when they emerge. v. Honduras is making advances towards a stronger institutional framework, but less rapidly than would be expected in a country with its trajectory of institutional and democratic reforms. International comparisons reveal that Honduran institutions perform relatively worse than their counterparts in other democratic countries with similar levels of development. Three factors are highlighted in this report that, if addressed, could help the country to improve its institutional framework and the quality of the policy-making process: the lack of transparency around decision-making and lack of available information to assess performance that makes it difficult for citizens to hold policymakers for their decisions and their impact on institutional performance; the shortage of mechanisms to punish or reward good performance so it can be translated into political capital; and the weak organizational capacity of groups representing public interest What follows are specific recommendations to improve the quality of the policymaking process in sectors which are key for the functioning of the state machinery (such as the public administration and the justice sector), or for the growth of the country (such as education, health and public enterprises) and for deepening the decentralization process (subnational governments). vi. A general conclusion, highlighted throughout the study, is the need to strengthen the countrys accountability framework and in particular, the accountability of policymakers towards citizens and tax payers, and to focus the policy discussion on performance. In order to make some improvements to the quality of policy-making in the short term, the following recommendations should be considered. First, to focus public and political attention on a few key stages in the policy-making process, such as the legislative passing of the budget, the process for agreeing public service salaries and the electricity tariff regime. Second, to focus policy discussion on performance, increase the visibility of good policy outcomes and strengthen the accountability of political actors. Honduras has made progress in this regard with the implementation of the Results-Based Management System (Sistema de Gerencia por Resultados, SGPR), developed by the Presidency and managed by UNAT, and the Transparency Law. Although these instruments still need further improvements, they represent country-led efforts to enhance transparency and performance accountability of public institutions. Third, provide support to the groups representing the broader public interest so they can participate in policy discussions. vii. To address weaknesses in the implementation of public policies a new approach towards the professionalization of the public administration needs to be adopted in order to ensure that reforms take into consideration the country context and become an integral part of public sector management reforms. Despite its importance for service delivery and the effectiveness of public policy, management of human resources continues to be one of the weakest areas within Honduran public administration. Previous reform attempts failed, partly due to an excessive emphasis on the control of salary expenditures and the wide- ranging legal reforms which aimed to radically alter the structure of public employment. In order to increase its chances of success, any reform needs to take into account the co- existence of different employment regimes in the public administration (i.e. the civil service 9 HONDURAS IGR ­ VOLUME I regime, special statutes and contractual employment) and should be implemented as part of broader institutional reforms. viii. Honduras has undertaken important reforms since the early 1980s to strengthen the justice sector as a key element in good governance, and its role in improving public security, but the large increase in funding for the sector has not yielded the expected performance improvements. Compared to regional and international standards, the productivity of all sector institutions is very low. In a country with one of the highest crime rates in the region, the performance of all actors in the criminal justice chain is disappointingly poor. Less than ten percent of reported crimes reach some kind of resolution and it is estimated that roughly 90 percent of these are minor infractions in which the defendant is apprehended on the spot (in flagrante). Although the number of judges has doubled since 1986, output per judge has not increased and is among the lowest in the region. It is doubtful that offering more resources to the sector will improve the situation. The first step should be to use performance information and set productivity goals to hold each institution accountable for the resources it receives and the services it provides. In addition, a high priority for policy dialogue should be to avoid a qualitative deterioration in the Supreme Court at the upcoming renewal. The new selection process implemented in 2000-2001 to restrict political interference was an important achievement for the country that needs continuous support so there are not major setbacks. The next step on the Supreme Court is to move a rolling renewal process so a couple of judges are replaced every year, instead of having a big bang replacement. ix. The comparison between the reform trajectories of the two key sectors for achieving the Millennium Development Goals ­ education and health ­ is striking and reflects differences in the bargaining power of the actors involved. During the 1990 to 2007 period, Honduras substantially increased its expenditure on education, but this increase in resources has not been translated into better educational outcomes. The country now invests more per unit of learning achieved, due mainly to the share of spending on teacher salaries, which, though already high, has increased sharply in the last eight years. The main factor responsible for such poor educational outcomes is the opposition of the teachers' to any attempt to reform the sector and introduce performance measures. Meanwhile, the health sector is an interesting case in the Honduran context because in general its performance with regard to advancing reforms has been superior to other sectors. This relative success is mainly due to the different power structure of the sector and the "bottom-up" reform approach adopted that generated a constituency for reform at the local level. An important exception is the procurement of pharmaceuticals where strong vested interests oppose any reform. x. In education, the main recommendations include the need to empower other actors to participate in policy discussion, acting as counterweight for the teachers unions, and to focus the discussion on learning outcomes. The establishment of a National Education Council that leads the reform process is a critical step to unblock the discussion around the General Education Law with the unions. Such Council should include representatives from parent associations, universities, municipal governments, the private sector and the PRS Council as actors that can represent the broad interest in the sector. In addition, the development of performance indicators at the departmental, district and school level would be a critical input for enhancing accountability of the actors involved in the service delivery chain. Same as the full implementation of the recommendations arising from 10 HONDURAS IGR ­ VOLUME I the Teacher Census and Auditing of Post conducted by the TSC. If no action is taken, it would have devastating consequences on government's credibility. In the case of health, the main recommendations are to develop performance information for decision-making and accountability, to set up service standards and to improve continuity of key health staff appointments to minimize disruptions in the implementation of sector reforms. xi. An effective accountability framework for municipal governments is critical not only to enhance the effectiveness of poverty reduction programs at the local level, but also to raise public support for the decentralization process. However, the accountability framework currently in place is not exercising an effective control on the financial management of municipal governments. The main recommendations in this regard are: to ensure the framework is applied to all funds that are executed at the municipal level and not only to the funds executed by municipal governments, to incorporate incentives for municipalities to comply with the reporting requirements and to better leverage on social monitoring initiatives at the local level. Given that the level of international assistance executed at the municipal level is significant ­ both in terms of the number of initiatives and the amount of funding ­ donors should be more proactive in strengthening the control framework and promoting social accountability, by insisting that municipal budget execution reports be appropriately registered, requesting that annual financial reports be submitted to the TSC, and that budgetary information be provided to the Transparency Councils. xii. Strengthening the corporate governance framework of public enterprises is key to improving the performance of these companies. Honduran public enterprises predominate in sectors that are integral to the socioeconomic development of the country. Yet the three largest public enterprises, ENEE, SANAA, and HONDUTEL, have experienced serious operational and financial difficulties over the recent period. Many of the weaknesses observed in the institutional framework arise from: (a) the lack of separation of policy-making functions from those related to regulation and provision of services, which undermines the effectiveness of the counterbalance system; and (b) the lack of transparency and available information regarding the management and performance of these companies, thereby undermining accountability. The lack of empowerment from consumer and citizens as key stakeholders in improved management of these enterprises is also a contributing factor to weak accountability. In the short term, a priority should be to (a) establish a specialized oversight entity to fulfill the Government's "ownership" function ­ either strengthening existing units at SEFIN or Presidency, or establishing an independent commission that would report first to the Government and then to Congress ­ and (b) enforce the provisions in the organic laws of ENEE and HONDUTEL that require the General Manager to be appointed by the Board of Directors. To improve performance accountability, the priorities are to set up performance targets to be monitored periodically through the SGPR, ensuring compliance with the requirements of the Transparency law, and develop service standards. Lastly, to ensure appropriate financial accountability, public enterprises should be required to publish their audited financial statements each year. 11 HONDURAS IGR ­ VOLUME I STRENGTHENING PERFORMANCE ACCOUNTABILITY IN HONDURAS - THE KEY CHALLENGE AHEAD 1. Honduras has come a long way in its democratic development, with seven free elections held since 1981 and the military subordinated to civilian control. Since the 1980s, the country has undertaken key reforms and has all of the formal components of a modern democracy, including: one of the most institutionalized and stable party systems in the region; an electoral system which is becoming more representative over time; a congress that acts as a counterbalance to the executive branch; a framework that provides the basis for judicial branch modernization; a budget operating under a single account that is executed through an integrated financial management system (SIAFI); an independent central bank; and a tax agency that has proven to be an efficient instrument for collecting revenues for the state. 2. However, having achieved fundamental milestones in terms of representative democracy and institutional modernization, it continues to face important challenges with regard to providing a level of services commensurate with the resources available to the country. The efficiency of public spending continues to be very low compared to other democracies with similar levels of development, and the capacity of the public administration is insufficient for ensuring the minimum goal of universal coverage of basic services. Honduras' average rate of economic growth and degree of progress in reducing poverty over the past two decades has been low relative to most other Latin American countries. Although its performance has improved recently, this is more likely a reflection of the favorable international context than a reduction in long-term obstacles to growth. Even if Honduras maintains the average annual per capita growth rate of the last four years (1.7 percent), income per capita will barely double over the next 40 years, reaching $2,500 in 2050 ­ approximately the current per capita income of El Salvador ($2,530) ­ and it is unlikely that the country will reach the Millennium Development Goals established for 2015 (PER, 2007). 3. The lack of progress witnessed by citizens with regard to improvements in their quality of life, has led to a downturn in confidence in public institutions and is undermining the process of democratic consolidation. In spite of all of the reforms carried out in the previous decade, the confidence in the public administration has not improved (see Graph below). Hondurans do not seem to question democracy as the preferred political system, but they are dissatisfied with its capacity to respond to the problems that the country faces and to provide services that benefit the majority of the population1. The high level of absenteeism in the most recent election (45 percent in 2005 compared with 16 percent in 1985) was a wake up call in this sense, with one third of citizens who did not vote citing 1 According to Latinobarómetro, while levels of satisfaction with democracy hovered around 45 percent from 1997 to 2000, they fell to 31 percent in 2007 and the two surveys carried out by LAPOP in the last five years show a decrease in satisfaction with democracy from 64 percent in 2004 to 54 percent in 2006. Similarly, the levels of dissatisfaction with democracy have increased. According to surveys carried out by the Latin American Public Opinion Project (LAPOP), dissatisfaction with democracy increased from 36 percent in 2004, to 46 percent in 2006 (Cruz, Argueta and Seligson, 2006). 12 HONDURAS IGR ­ VOLUME I reasons related to their attitude toward the political system 2. The upcoming elections provide a unique opportunity to regenerate the trust of citizens in public institutions and in the capacity of the democratic system to respond to their main concerns, which include poverty, unemployment, and citizen security. Graph 1. Confidence in the Public Administration, Honduras 1996 and 2005 65.0% 66.0% 70 70 60 60 50 50 40 28.0% 40 27.5% 30 30 20 20 10 10 0 0 High/Some Seldom/None High/Some Seldom/None Source: Latinobarómetro, 1996 and 2005. The sample for each survey comprised approximately 1000 persons with 66 and 68 persons either not responding or saying that they did not know. 4. Previous analytical studies (Development Policy Report 2004; Poverty Assessment 2006; Public Expenditure Report 2007), looked into the developmental challenges that Honduras faces and provided technical recommendations. Many of the reforms that are needed for improving the provision of basic services and placing the economy on a path of sustained growth that can have a lasting impact on poverty reduction are well-known, and yet no government has been able to successfully implement them. The Development Policy Report (2004) emphasizes four policy areas that are especially important for accelerating growth in Honduras: human capital, public infrastructure, financial market development, and governance. Lack of progress in most of these areas does not rest in the technical content of the proposed reforms but around constraints for decision-making. Using the conclusions of those reports as a foundation, this study aims to contribute to this discussion by analyzing the incentives behind decision-making provided by the institutional framework, thereby contributing to a better understanding of the structural limitations that each government confronts when assuming office. 5. This study does not try to evaluate any particular administration but rather to offer recommendations that can facilitate the adoption of some of the reforms that are needed for accelerating growth and reducing poverty. The first part of the report provides an overview of the policy-making process; that is, the process of formulation, approval and implementation of public policies, in order to identify the incentives they provide that affect the behavior of the actors involved. The second part of this study analyzes the institutional framework in sectors which are key for the functioning of the state machinery (such as the bureaucracy and the justice sector), or for the growth of the country (education, health, public enterprises) and for the decentralization process (the subnational governments). Each chapters aims to contribute to the debate in that specific area and foster a discussion about 2 That is to say, "lack of interest," "I do not like any of the candidates," "I do not believe in the system." Another third do not vote because of problems with registration, and the remaining third do not vote for a variety of personal reasons. 13 HONDURAS IGR ­ VOLUME I possible reform options. An effort has been made to identify with the relevant national counterparts and development partners, the areas where value could be added to the efforts already being made in the country. 6. A general conclusion, highlighted throughout the study, is the need to strengthen the countrys accountability framework and in particular, the accountability of policymakers towards citizens and tax payers. The reports applies the analytical framework developed by the World Development Report (2004) that emphasizes the relationship between citizens, politicians, service-providers or public institutions and the legal-institutional framework that governs them (see Figure 1), and Spiller, Stein and Tommasi (2003) framework to analyze the quality of the policymaking process. In general, recommendations are geared towards strengthening the electoral connection between voters and decision makers by altering the incentive structure and increasing the reward for good performance. On the one hand, there is a need to enhance transparency around decision making and clarify institutional mandates, so citizens can evaluate their representatives in terms of the decisions they take on their behalf. On the other hand, the provision of information about institutional performance can assist citizens in assessing the consequences of those decisions, translate good performance into political capital and improve the quality of the policy debate. Figure 1. The accountability framework The State Co mp a ct e V oic Politicians Policymakers Providers Citizens Administrators Client Power Front-line Providers Users Services Source: World Development Report, 2004 7. The analysis of reform trajectories in the sectors included in this study support the argument that poor sector performance is related to weak implementation and to the incentive structure that policymakers face. Some of the initiatives that have been proposed to enhance sector performance are already contemplated within the current legal and institutional framework (as in the cases of civil service, education, and public enterprises) and yet, the policy discussion in the country has focused on designing further reforms rather than on enforcing already approved initiatives. Even in the cases where major reforms have been passed (such as the justice sector), performance has not improved accordingly. With few 14 HONDURAS IGR ­ VOLUME I exceptions, the lack of reform champions that have emerged from the Honduran political landscape it is striking which is related to the incentive structure mentioned earlier. The successful reform of the Executive Directorate of Revenues (DEI) shows however that it is possible to make significant advances in politically sensitive areas, such as human resource management, if there is a champion behind them that is able to mobilize sufficient political support. Therefore, in such context there is a need to be opportunistic to take advantage of entry points and champions when they emerge OVERVIEW OF THE POLICY-MAKING PROCESS 8. A few broad characteristics of public policies in Honduras are important factors in accounting for the poor development outcomes and poor use of resources. A comparative perspective is provided using the index developed by Stein et al., that is then backed up with country evidence. Compared to the Latin American and Central American averages, Honduras performs comparatively well with regard to the stability of the system, but scores lower in three characteristics that are critical for the allocation of resources and effectiveness of public policies: public regardedness or orientation to the public good, efficiency, and the quality of implementation and enforcement. That is, public resources in Honduras are not allocated to activities that could give the greatest return, policies tend to benefit the groups with strongest bargaining power rather than the general interest, and in general, policy implementation is poor. Table 1. Characteristics of public policies in Latin America. Public Adaptability Stability Enforcement Coordination Regardedness Efficiency LAC 2.36 2.50 2.08 2.05 2.10 1.85 Centroam 2.30 2.46 2.04 1.91 2.05 1.81 HON 2.43 2.60 2.01 2.14 1.99 1.67 Source: Stein et al. (2005) 9. How public resources are collected and spent is at the core of the policy-making process and illustrates well these three characteristics, as it is the result of the interaction between policy-makers and different groups in society and reflects the overall priorities of public policies, translated into tax measures and spending programs by the bureaucratic machinery. Based on existing analytical work, the most salient features of resource collection and allocation are analyzed in order to provide some evidence of these characteristics of public policies. Table 2. Tax Exemptions Exemptions Exemptions/ Exemptions/ (MLps) Collected Revenues GDP 2002 2047.4 11.7% 1.9% 2003 6387.2 32.3% 5.3% 2004 7844.5 33.4% 5.7% 2005 9419.6 35.4% 6.0% 2006 11909.5 37.7% 6.9% Source: DEI, 2007 15 HONDURAS IGR ­ VOLUME I 10. The few studies available suggest that the preponderance of taxation on goods and services makes the Honduran tax system regressive. As in many other countries in Latin America, Honduras relies to a large extent on tax revenue from indirect taxes, although important efforts have been made to increase the share of direct taxes during recent years. In addition, Honduras relies on a large number of tax exemptions, which are not necessarily a problem in themselves, but their opaque nature ­ their costs are not reflected in the budget and they are not consistently subject to any public discussion that allows for weighing their costs against their benefits ­ facilitates the extension of tangible favors to specific groups. 11. With regard to the composition of public expenditure in Honduras, the most notable characteristic is the large quantity of resources devoted to salaries compared, for example, to capital expenditures. The health sector and, to an even greater extent, the education sector have absorbed the bulk of the increases into the public wage bill. However, this has not necessarily manifested into improvements in their respective public services, but it is a consequence of the bargaining power of these groups. Only a very small share of the spending increases can be attributed to an increase in the number of teachers, doctors and nurses. Moreover, these salary increases have not been linked to performance criteria and have not brought about improvements in the quality of education. Honduras spends more on education than other countries in the region, while the educational quality is lower than in neighboring countries. 12. Honduras also stands out for devoting an important share of public expenditure to subsidies. If all of the subsidies ­ direct, indirect and hidden ­ are considered, their estimated value in 2006 was $320 million (3.5 percent of GDP). In many cases, the argument used to justify subsidies is that they make public services affordable to poor consumers (such as the cross-subsidies in the water sector) or that they are a second-best solution to compensate low-income groups for other disadvantages (as in the case with Bono 80, given to the urban population to compensate for high transportation costs, but paid through the electricity bill). However, subsidies tend to be rather blunt instruments for reaching this policy objective, as they are of disproportionate benefit to well-off groups. Graph 2. Public spending on interest payments and salaries, 1997-2002 12 10 Percentage of GDP 8 Salaries 6 Interest 4 2 0 1997 1998 1999 2000 2001 2002 Source: SEFIN. 16 HONDURAS IGR ­ VOLUME I 13. To understand why the policy process is so prone to the influence of interest groups, it is necessary to consider the salient features of the party system: the high level of institutionalization of the two main parties, their internal fragmentation and weak programmatic orientation. Honduras has one of the most institutionalized party systems of the region with two principal parties, the Liberal Party (PL) and the National Party (PN) that have alternated in power for much of the period since 1930. However, political parties exhibit a high degree of internal fragmentation. Each party is comprised of different internal factions that control the selection of the candidates and provide votes that are necessary for the party to win. The dynamic between these factions and the party is critical to understanding Honduran politics, and it has important consequences for the electoral connection and executive-legislative relations. In addition, the high level of internal fragmentation and the weak programmatic orientation of the parties create incentives for the parties to attract support on the basis of tangible benefits for specific groups, instead of basing their appeal on improvements in public policies over the long term. Even though one observes a tendency towards programmatic competition in Honduras, clientelistic practices continue to be strongly rooted, especially at the local level. The recent electoral reforms provide an opportunity to strengthen democracy from the bottom-up and increase the ties between the deputies and their constituencies, but they may also reinforce clientelistic practices and lead to further fragmentation of the parties. Table 3. Characteristics of the party system. Party system Degree of Effective number Programmatic institutionalization of parties competition Uruguay 2.72 3.02 7 Honduras 2.67 2.15 2 Mexico 2.32 2.37 2 Chile 2.30 5.27 8 El Salvador 2.27 3.17 7 Source: Payne et al.(2007) and Stein et al. (2005) 14. In this context, political actors have little incentive to prioritize policy reforms which impose immediate and clear costs on well-organized groups and provide benefits which are uncertain and diffuse. Given the comparative weakness of large groups (consumers, parents, the private sector as a whole, etc.) it is very challenging to implement reforms with such payoff structures. In the context of clientelist representation, the incentive for politicians to avoid taking on such risks is even greater, since such reforms are less likely to be successfully implemented and even if they do, it is less probable that policymakers will get political recognition for the passing of the reform from voters. This helps to explain why key decisions are passed from government to government without any of them being able to absorb the political cost associated with them, such as the salary negotiations related to the employment statute for teachers; the rationalization of the finances of the electric company ENEE or of SANAA, whose debts continue to accumulate; the professionalization of public servants; or a fiscal reform that reduces exemptions. 15. Independent institutions play a fundamental role in the democratic system, placing some restraints on the executive and the legislative branch and leveling the playing field for actors to participate in policy discussion. An independent and effective 17 HONDURAS IGR ­ VOLUME I judicial system, as well as other independent check and balance institutions, are fundamental since they provide guarantees that agreements reached will be respected and their associated policy changes implemented fully and fairly. The democratic system is based on the division of powers principle, whereby checks and balances are established, so that one set of institutions controls the others and prevents one branch of government from dominating the others. Thus, the legislature has the power to formulate public policies and to supervise the work of the executive in implementing them. Aside from guaranteeing the individual rights of citizens, the judicial branch performs a fundamental role in the political system; that of impartial arbiter responsible for ensuring the effective and fair application of policy decisions and the rules of the game. The considerable gap between the formal powers of the Honduran legislature and its effective capacity to carry out the assigned policy-making and oversight functions, creates uncertainty in respect to the interpretation and enforcement of the basic rules of the game, as well as with regard to whether potential public policy reforms will be implemented fairly and completely. 16. Honduras is making advances towards a stronger institutional framework, but less rapidly than would be expected in a country with its trajectory of institutional and democratic consolidation. International comparisons reveal that Honduran institutions perform relatively worse than their counterparts in other democratic countries with similar levels of development. Three factors are highlighted that, if addressed, could help the country to improve its institutional framework and the quality of the policy-making process: i) the lack of transparency with regard to policy-making; ii) the shortage of mechanisms to punish or reward good performance; and iii) the weak organizational capacity of groups representing public interest. What follows is a brief description of each factor with some recommendations for the short-term. 17. Greater transparency in the policy-making process would increase accountability and level the playing field for participation in policy discussion. Access to information about the process to formulate, discuss and approve public policies, together with information about the performance of the three branches of government ­ congress, executive and the judiciary ­ with an emphasis on the division of powers, would increase accountability, and reduce the undue influence of interest groups, thereby providing the opportunity for different social actors to participate in policy discussions under more equal conditions, whether directly or through their political representatives in congress. The implementation of the Transparency Law in public institutions, and especially in the congress, entails an advance in this direction and its implementation should continue to be supported. The recent initiative to approve a Public Hearings Law for the congress' appointment of high level officials ­ like the Supreme Court judges ­ is another effort of this type. 18. Focusing the policy discussion on performance would also provide positive incentives for policy-makers. An important feature of the Honduran context is the absence of mechanisms to allow good performance to be translated into political capital, whether for candidates or for the party, which means that no actors have sufficient incentive to confront powerful groups and make decisions that generate uncertain outcomes in the medium term. For this reason, any initiative that increases the visibility and benefits associated with these types of decisions could alter this political calculation. Three recent initiatives ­ the Results- Based Management System, the Transparency Law, and the social monitoring mechanisms ­ are helping to change these incentives and will facilitate public awareness of who is 18 HONDURAS IGR ­ VOLUME I responsible for decisions and what the outcomes achieved from them are. In this way political representatives can be rewarded with political support for their efforts to enhance performance. Examples like the municipality of Comayagua illustrate well how the electoral dynamic can be a good instrument for rewarding good management. Box 1. The case of Comayagua Carlos Miranda has been Mayor of the municipality of Comayagua for three consecutive terms. During his administration he has managed to increase municipal revenues by 20 percent and improve the services offered to citizens and businesses. Among other reforms, the municipality has implemented the Integrated System of Municipal Information (SIIM); has established a Multimedia Kiosk and One-stop Shop for Administrative Procedures whereby the maximum length of administrative procedures has been reduced to three days; and has increased the number of permits for business operation issued by the municipality by 45.7 percent and the revenues collected for construction permits by 74.7 percent. Comayagua is in the top three municipalities in the municipal scorecard ranking of the IFC in respect to operating licenses for businesses and construction permits (IFC, 2007). The web page of the municipality (www.municomayagua.com) is one of the most complete and, among other services, offers online facility for the payment of taxes and the resolution of procedures, bidding opportunities, information about projects and public works in progress in the municipality, and a service window for citizens. In addition, according to the Human Rights Commission, Comayagua is one of the municipalities that obtain the best social audit reports of its Transparency Commissions. 19. A third element that would assist in altering the incentive structure is addressing the collective action problem. Political actors have little incentive to prioritize policy reforms which impose immediate and clear costs on well-organized groups and provide benefits which are diffuse and uncertain (since under clientelistic incentives the reform is unlikely to be implemented or it may not produce the expected benefits). Given the comparative weakness of large groups, reforms with such payoff structures are very challenging to implement. Compared with the organizational capacity demonstrated by certain interest groups in the country, other groups representing more general interests ­ such as consumers, parents of school children, and small and medium-sized enterprises ­ have great difficulty in organizing themselves effectively. This imbalance of power, in favor of narrow interests, reduces the political rewards to those who support the implementation of reforms that pursue the common good. The report issues recommendations in each chapter in order to supporting the organizational capacity of groups representing the public good in that particular sector and strengthening their capacity to participate in policy discussion. 20. In a context of scarce resources and urgent demands, prioritization is essential. It is not possible to change the whole system at the same time, but it is possible to build up some key institutions or functions and achieve some results with a significant impact in the short term. The following are some recommendations in this regard: With the basic machinery of transparency and access to information now in place, focus public and political attention on a few key stages in the policy process such as the legislative passing of the budget, the process for agreeing public service salaries and the electricity tariff regime. 19 HONDURAS IGR ­ VOLUME I Make use of two existing country instruments (Results-Based Management System and Transparency Law) to center the policy discussion on performance, increase visibility (and therefore political capital) of good policy outcomes and strengthen accountability of political actors. Support the organizational capacity of groups representing the larger interest ­ such as consumers of public services, parents, beneficiaries of social programs, small and medium-sized enterprises, and farmers ­ and enhance their ability to participate in policy discussions. THE CHALLENGE OF PROFESSIONALIZING THE PUBLIC ADMINISTRATION 21. Despite its importance for service delivery and the effectiveness of public policies, the management of human resources continues to be one of the weakest areas within the Honduran public administration. Cross-country comparisons show that Honduras is one of the countries in Latin America that spends most on public employment, but also one of the countries where human resource management is the weakest. While having the second highest salary expenditure in terms of GDP in Latin America (10.3%), Honduras scores below average on all the qualitative indicators developed by the IDB 2006, indicating serious deficiencies in most areas of human resource management (e.g. planning, job organization, employment management, performance management, compensation, career development, and human and social relations). Graph 3. Human Resource Management in the Public Sector in Latin America 40% % of Maximum Value 35% 30% 25% 20% 15% 10% 5% 0% cy rit cy it y ts ien Me en ac es f ic ist ap ter Ef on s al C eI n al C t io n oniz tur nc rm uc Fu Ha Str to Honduras ity p ac Average LAC Ca Source: IDB (2006) 22. There have been various failed attempts to address some of these challenges through broad legal reforms aimed at containing the wage bill. Under pressure posed by an increasing wage bill, Honduran governments have tried to implement wide-ranging reforms of the public employment regime to reduce the threat to public finances. However, these reforms did not pass the approval stage. The failed reform attempts of 2003 and 2004 20 HONDURAS IGR ­ VOLUME I show that an excessive emphasis on the control of salary expenditures and wide-ranging legal reforms that radically alter the structure of public employment lower the chances for success. 23. While these attempts to implement changes across the board failed because of strong opposition from organized interest groups, there are examples of successful reforms of individual institutions that may provide important lessons for the development of a more gradual approach. The Executive Revenue Authority (DEI) has implemented a merit-based recruitment process as a first step towards a new human resources management model within the institution. Three factors contributed decisively to the success of the reforms possible: strong political backing, the implementation of a transparent and clearly-defined recruitment process under external oversight, and the fact that these HR reforms were conducted as part of an overall institutional reform process. The experience of the DEI shows that it is possible to carry out human resource management reforms in the Honduran public sector and that such improvements have an impact on the efficiency of the institution. Graph 4. The Impact of the Increase in Administrative Efficiency 25% Increase in Revenue 20% collection 15% 10% 5% 0% 2003 2004 2005 2006 2007 Inflation GDP Growth Efficiency DEI Source: DEI. 24. This study calls for a change in approach in order to ensure professionalization becomes an integral part of state modernization reforms. Over the years, Honduras has implemented numerous reforms to modernize the public administration by introducing modern legislation and new public expenditure management systems. However, one of the weaknesses of these reforms is that they have not been conceived, programmed and implemented together with improvements in human resource management. The sustainability of these institutional modernization reforms, and the new public management systems, depends crucially on the existence of a critical mass of skilled and professional staff within the public administration. Therefore, professionalization needs to be an integral part of ongoing public sector management reforms. In addition to guaranteeing the sustainability of public sector institutional and management reforms, this new approach would help to focus the efforts in areas where other reforms are being implemented, instead of spreading them thinly across the entire public administration, and it would ensure that the professionalization process is tailored to the needs of each institutions. Linking improvements of human resource to other public sector reforms within specific institutions could also facilitate the emergence of reform champions within these institutions 21 HONDURAS IGR ­ VOLUME I 25. An important conclusion from the analysis of the structure of public employment in Honduras is that any reform attempt must take into account the fragmentation of the Honduran public service and the co-existence of different employment regimes (i.e. the civil service regime, special statutes and contractual employment). Although the civil service regime still includes an important group of professionals responsible for the key functions and the direction and management of public policies, around 70 percent of public sector employees belong to special statutes that have surged as a result of pressure exercised by sector specific unions. On the other hand, there is a significant number of persons employed under fixed-term contractual arrangements, in many cases paid for by external funding, that have become the backbone of important functions of the public administration, but that cannot be absorbed by the regular structures of the State because of the high salaries they are often paid. Given that this fragmentation cuts across institutions, professionalizing key functions requires adopting an approach that starts with identifying the key functions of public administration that need strengthening, rather than starting by identifying positions under a certain regime or salary scale to be professionalized.. Table 4. Quantity and cost of personnel by staff category, Central Government, 2008 Number Total Salary Average of Expenses Salary Category employees (MLps.) (Lps) Civil Service 26,077 2,924 9,343 Special Statutes 63,036 13,635 18,025 By contract (1) 6,642 n/a. n/a. Other (Defense and Security) 24,160 2,874 9,914 Total 119,942 n/a n/a Source: General Directorate of the Civil Service and SIARH.. 26. Despite the many challenges facing Honduras, the Government has already put in place key building blocks to continue advancing towards a professional public administration: a generally acceptable legal framework; a concrete plan to gradually professionalize a limited number of key positions, already approved by the executive; a modern system to support most human resource management processes under consolidation (Integrated System of Human Resources Administration ­ SIARH); and a well- institutionalized Results-Based Management System. Hence the recommendations provided by this chapter do not require any major legal reforms or institutional engineering, but rather that the laws, systems and instruments already in place are fully articulated and applied. 27. Among the most important recommendations to advance gradually with the professionalization process outlined in the Professionalization Program for the Public Servant are: To centre the reform on the key functions of the public administration by: (i) starting with the identification of the key technical functions that need strengthening within each institution, rather than by identifying positions under a certain regime or salary scale to be professionalized; (ii) applying a universal set of basic principles to all public sector 22 HONDURAS IGR ­ VOLUME I employees, irrespective of their employment regime; and (iii) allowing for a significant amount of flexibility to adapt the process to the needs of the line functions. To strengthen transparency in human resource management it will be important to: (i) consolidate the SIARH; (ii) make sure that all obligated institutions publish information on human resources in accordance with the Transparency and Access to Information Law; and (iii) allow for external scrutiny of the implementation of the professionalization program by a Validation Committee. To introduce a performance focus in the three human resources regimes (i.e. the civil service regime, special statutes and contractual employment) by enforcing the performance-related provisions in each legal framework and strengthening the links between the Results-Based Management System and human resource management by: (i) introducing regular reviews of each employee's performance against previously identified performance targets; (ii) linking individual performance targets to the institutional targets established in the Results-Based Management System; and (iii) developing indicators for the Results-Based Management System that measure the progress of the professionalization process. 28. In the very short term, the recommendations are to: (i) in its first phase, apply the Professionalization Program in the DGSC, the Human Resource Departments within Central Government, the UPEGs and to functions and positions that are necessary to provide sustainability beyond the next change in government, to the state modernization reforms currently under implementation; (ii) establish the external Validation Commission, to ensure rigorous oversight of the professionalization process from the outset; and (iii) consolidate the SIARH in order to establish a modern system that provides the information necessary to monitor the professionalization program and structure the human resource management processes in a transparent way. JUSTICE AND PUBLIC SECURITY IN HONDURAS 29. Since the early 1980s, Honduras has undertaken important reforms to strengthen the justice sector as a key element in good governance and its role in improving public security. The problems addressed, while doubtless worsened by the prior two decades of military control, were not dissimilar from those found in much of the region ­ inaccessibility of services, outdated procedures, insufficient judicial independence, corruption, and general inefficiency and inefficacy. Starting even before the 1982 Constitution, but emphasized in that document, changes were introduced to modernize the legal framework and the criminal justice proceedings in particular: to create a judicial career, depoliticize judicial appointments and mandate merit-based recruitment; restructure existing institutions and create new ones (the Public Ministry and Public Defense in particular, as part of the transformation of the criminal justice system); and remove the police from military control. Financing for the sector also increased and the Constitution guaranteed the judiciary an earmark of three percent of the national budget. 30. However, implementation of the reforms has been slow, partly due to the opposition of traditional elites who feared their impact on their privileged status. During the 1990s civil society organizations (including business, labor, minority parties, and 23 HONDURAS IGR ­ VOLUME I independent jurists) continued their demands for full implementation and further changes. With backing from the donor community, their campaigns produced: the creation of the Public Ministry and a Public Defenders' Office (1993); the formation of a civilian police force (1998) and the transfer of the Public Ministry's police investigators to its ranks (a measure that remains controversial); the passing of a second Criminal Procedures Code (2002, replacing a code enacted in 1984, but considered insufficiently different from the prior "inquisitorial system"); and in 2001-2002, a constitutional amendment altering the system for selecting Supreme Court justices, lengthening their terms, and increasing their number, as a means of combating the continued politicization of the Court. By 2008, the reforms had thus provided the sector with a more modern structure, and a clearer definition of the processes and of responsibilities of the key institutional actors, larger budgets, and perhaps a higher degree of transparency in its activities. 31. Despite this progress and the increase in the funding channeled to the sector, improvements in performance have not materialized accordingly. Compared to regional and international standards, the productivity of all sector institutions is very low; for example, although the number of judges has doubled since 1986, output per judge has not increased and is among the region's lowest. In a country with one of the highest crime rates in the region, the performance of all actors in the criminal justice chain is disappointingly poor. Less than 10 percent of reported crimes reach some kind of resolution and it is estimated that roughly 90 percent of these are minor infractions in which the defendant is apprehended on the spot (in flagrante). All institutions demonstrate a variety of management weaknesses that contribute to the low productivity­ an inefficient allocation of resources, inadequate monitoring systems and the lack of attention paid to existing systems (e.g. management statistics), absence of institutional planning, and structures and processes that tend to duplicate efforts and create intra- and inter-institutional conflicts. Table 5. Judicial Workload, Selected Countries Country Incoming cases Judges per Incoming per 100,000 100,000 cases per Inhabitants inhabitants judge Honduras (2006) 1,089 10.1 108 Ecuador (2006) 1,802 6.7 269 El Salvador (2006) 2,375 9.2 258 Colombia (2006) 2,893 10.2 283 Peru (2006) 3,919 7.7 509 Argentina (2004) 10,225 11 930 Chile (2004) 12,305 5.0 2461 3 Costa Rica (2004) 22,911 17.4 1316 France (2004) 4,411 10.1 436 Italy (2004) 8,611 10.4 828 Spain (2004) 14,000 9.8 1428 3 After 2004, the litigation rate and number of cases per judge decreased by half as transit cases were transferred to administrative forums. 24 HONDURAS IGR ­ VOLUME I USA (2004) 33,848 10.2 3351 Sources: Unidos por la Justicia, 2006; CEPEJ, 2006; and official country data. See Background Chapter 3 for the complete table 32. Critical milestones have been achieved to reduce political interference but it is still a challenge, especially with regard to the selection of personnel, and compliance with the new legal framework needs to be a priority for policy dialogue. The reform carried out in 2000-2001 aimed to restrict political interference through a new process of selecting the judges and the separation of judges' terms from the electoral cycle, by lengthening their terms from four to seven years. The establishment of this new selection process in which actors can veto any candidate who is considered incompetent or corrupt is an important achievement that needs continuous support so there are not major setbacks. The selection of the members of the nominating board, like the members of the Court, was politicized and the new judges are all identified with one party or the other. However, there are now certain professional standards that candidates need to fulfill and there is an open process where other actors can participate. However, it is critical that due process is followed according to the new legal process. In 2002, in apparent contradiction to the Law, the Supreme Court majority voted to delegate all its personnel functions to the Chief Justice, thereby ending further progress in instating competitive merit appointments. The intervention of the Prosecutor General in the processing of cases involving members of government is notorious, and in both the courts and the Public Ministry it is claimed that appointments and assignments of professional and administrative staff are usually based on political criteria. The public defenders are spared that charge, but their appointment and placement seem determined more by political criteria than need ­ and their extraordinarily low productivity suggests a perverse incentive system. Table 6. Evolution of criminal cases, from filing to resolution, 1999-2006 Criminal cases 1999 2001 2003 2005 2006 Complaints received 56,845 51,700 52,965 62,463 63,537 Complaints referred for 31,977 35,336 26,104 48,507 49,198 investigation Complaints investigated DGIC 15,633 12,749 8,005 7,825 9,213 (48.89%) (36.08%) (30.67%) (16.13%) (18.73%) Prosecutor appearances (during 9,931 10,525 9,407 5,157 3,367 summary stage) 1984 Code Formal accusations filed (2002 --- --- 6,390 6,732 7,181 Code) Formal order of Commitment 3,306 4,634 3,700 4,745 4,621 Preventive detention --- --- 2,463 2,678 2,643 Sentences 4,582 4,969 982 1,317 1,347 Convictions 1,844 2,208 759 996 1,015 (40.25%) (44.44%) (77.29%) (75.63%) (75.35%) Total formal and alternative 4,582 4,969 5,952 4,748 5,091 resolutions 25 HONDURAS IGR ­ VOLUME I Source: M. Cálix (2008) based on data from the Public Ministry (Anuarios Estadísticos). See Background Chapter 3 for the complete table. 33. There are numerous explanations for these problems and for the resulting lack of progress in implementing the reforms such as: the number of initial deficiencies to overcome; technical errors in the design of laws and new structures; budgetary constraints (although the organizations could clearly do better with existing resources); the poor quality of personnel recruited by the sector; the low level of inter-institutional coordination; and the power of interested parties both within and outside the sector whose agendas are particularly conflicted with the proposed changes. The reforms have complicated the political situation by creating another set of interested parties. Changing established practices, even when those practices are not very effective, has become more difficult, as this is viewed as a threat not only by the elite, but also by those in receipt of lesser privileges by virtue of working in the "reformed" structures. 34. It is doubtful that simply adding more resources would improve the situation. What is required is first an initial, broad-based consensus on the need for change and on the objectives to be pursued (preferably expressed as quantitative goals ­ e.g. a 100 percent increase in the number of completed investigations or a 50 percent decrease in the time taken to resolve a civil case), and subsequently, a high-level agreement to reduce political interference in the operations of the various institutions. It would be unreasonable to expect that all political control will be relinquished, but a strong and well-defined demand for specific improvements in performance could mitigate its effects by ensuring that those chosen for high positions have the qualifications and the incentives to respond to that demand. On the basis of this consensus, several concrete steps should be taken, including: the enactment and effective implementation of laws to establish a Judiciary Council and judicial career; the adoption of meritocratic principles in the selection and promotion of all sector personnel, based on job profiles for all positions, and especially, but not exclusively for professional staff; and the development of transparent processes for the appointment of Supreme Court justices and senior positions in the remaining institutions. 35. In the meantime, the first step would be to acknowledge the poor level of performance within the sector, and setting productivity goals to hold each institution accountable for the resources it receives and the services it provides. All those committed to change will have to reexamine some of the policy choices they have made, especially as regards the organization and internal processes of the sector institutions. Many of these choices seem destined ­ even without political intervention ­ to produce suboptimal results. Donors can assist by providing information on, and technical assistance from, better- performing judiciaries (and other institutions) within and outside the region. Finally, Honduras needs to pay more attention to the performance statistics it already generates for the sector, and to interpret them in light of international trends. In Honduras, indicators are very poor. Even taking into account the poverty of the country, the lack of resources and the shortage of qualified human resources, the sector could perform much better. Comparative analysis might clarify the gap between resource inputs and product outcomes, and thus demonstrate that the citizens do not have to settle for so little. TRANSPARENCY AND ACCOUNTABILITY IN THE EDUCATION SECTOR 26 HONDURAS IGR ­ VOLUME I 36. During the 1990 to 2007 period, Honduras substantially increased its expenditure on education but this increase in resources has not been translated into better educational outcomes. During that period, education spending rose from 5.0 percent to 8.6 percent of GDP. Although the country made important advances in terms of literacy rates, enrolment rates at each level of education, and the rate of completion of sixth grade, it has not been able to improve student learning achievements, as scores on standardized tests in Spanish and mathematics in third and sixth grades have not improved since 1997. Table 7. Performance of sixth grade students in mathematics and Spanish (Percentage of correct responses) Subject 1997 2002 2004 2007 Spanish 42.0 42.5 42.6 45.0 Mathematics 35.0 38.5 38.5 38.8 Source: UMCE. 37. The country now invests more per unit of learning achieved, due mainly to the high and growing share of spending on teacher salaries, which have increased sharply in the last eight years. The available information on salaries and public sector employment, even though limited, suggests that the growth in the real salaries of health care workers and other public sector workers (who are not teachers) stabilized between 2002 and 2006. However, it is estimated that the real salary rate of teachers increased by 18 percent during the same period, reflecting their comparative power in terms of union organization and influence. In constant 1990 Lempiras, the average teacher salary has increased from 912.1 to 1073.8 Lempiras in 2007. These salary increases were negotiated without any requirement to improve performance, and as a result the gap between the payments to teachers and their performance is considerable, and teachers and schools, in general, are not accountable for the meager achievement of their students. Graph 5. Budget execution of the Ministry of Education, 2001-2007 18000 12000 16000 14000 10000 Lempiras Millions Lempiras Millions 12000 8000 10000 Capital 6000 Other current 8000 6000 4000 Salaries 4000 2000 2000 0 0 2001 2002 2003 2004 2005 2006 2007 2001 2002 2003 2004 2005 Source: SEFIN. 38. The main contributing factor to the poor education outcomes is the strong bargaining power of the teachers unions that oppose any attempt to reform in the sector. The teachers' unions in Honduras have an unprecedented organizational and financial capacity and have learned to negotiate with political actors exchanging political support for salary gains. In this government as well as in previous ones, the Secretary of Education has made important efforts in introducing reforms aimed at improving the quality of education 27 HONDURAS IGR ­ VOLUME I and linking public spending with outcomes (salaries with teacher performance), but these reforms have failed because of the opposition of the teachers' unions. 39. Other factors contribute to these poor results, but the insufficient accountability of all of the actors and problems related to collective action are at their core. Besides the importance of the teachers' unions, the education sector is characterized by: (i) the lack of information about inputs and outcomes, which makes it difficult to hold actors accountable and to know who is responsible for poor performance; and (ii) disperse and poorly organized beneficiaries who have little voice in the discussions about education policy. 40. Recommendations are provided to improve the quality of education focus on strengthening the accountability of the different actors involved in the provision of services. In line with the accountability framework (Figure 1) the recommendations have been structured according to the areas of Voice, Compact, and Client Power ­ Accountability. The State needs to be accountable to clients-citizens; organizations that provide the services through the management pact need to be accountable to the State; the teachers need to be accountable to the providers and education institutions and those responsible for the sector need to be accountable to clients-citizens. 41. But the main recommendation in the short term is the need to empower other actors who represent the general interest to participate in policy discussion, and to focus such discussion on performance and quality of education. i. To facilitate the participation of other actors in policy discussion, the most important action in the short term is the establishment of a National Education Council that leads and supervises the process of sector reform. While the creation of this council is considered in the General Education Law proposal, it is not necessary to wait until the Law is approved to create it. Moreover, the Government has the power to provide the council with broad representation and its first mandate would be to obtain a national consensus for the approval of the General Education Law4 .The participation of the municipal governments, the private sector and the Poverty Reduction Strategy Council is specially relevant as those are two strong actors that have also an interest in the sector ii. Similarly, other immediate priorities are to continue with the support for community participation throughout the school networks, AECOs (Community Education Associations), ADELs (Associations of Local Education Development) to enhance the accountability of the education service providers; to strengthen the process of institutionalization of PROHECO within the formal national, departmental, and district structures; to continue supporting the social audit initiatives carried out by civil society organizations; and to empower parents with simple tools and standards to measure quality of education. iii. To enhance performance accountability of service providers, the priority in the short- term is the implementation of performance indicators at the departmental/district and school level. These indicators could be monitored systematically through the SGPR 4 Other actors that are not considered and could be key in the generation of a consensus of this nature, are the Honduran Council of Private Enterprise (COHEP), the Advisory Council of the Poverty Reduction Strategy (CCERP) and representatives of the principal political parties. 28 HONDURAS IGR ­ VOLUME I and displayed at the school as a social monitoring tool. Table 4.9 presents recommended indicators. Parents, through the Parent Associations, should be involved in producing and monitoring these key indicators. iv. The other priority in this regard is the full implementation of the recommendations arising from the Teacher Census and Post Audit conducted by the Tribunal Superior de Cuentas. If no action is taken against those teachers that are receiving collaterals unduly, this would have devastating consequences on government's credibility. The Ministry of Finance and Education need to jointly lead this process. v. Full disclosure by the Secretary of Education of revenues collected by Teachers' Unions is also needed. vi. In addition would be critical as well to revise the economic clauses of the Teachers' Statute that are most harmful to public spending. The full application of the Teachers' Statute was agreed with the teachers starting in 2010. The fiscal implications of the application of the Teachers' Statute should be analyzed, with the purpose of advising the future government if it should be applied fully or if a compromise proposal should be offered. In this analysis the Teachers' unions should be invited to participate. If by 2010 there remain differences in the vision of the problem and its possible solutions with the Teachers' unions, the convenience of convoking a national plebiscite should be considered. The implementation of the evaluation of teacher performance established in the Teachers' Statute should also be considered. TRANSPARENCY AND ACCOUNTABILITY IN THE HEALTH SECTOR 42. In the last two decades, Honduras has experienced notable progress in most national health, nutrition and population indicators. Since the 1990s, the country has succeeded in reducing neonatal, infant and child mortality, and to some degree, chronic malnutrition. Nevertheless, in spite of the progress achieved, serious challenges remain in the sector. Approximately 17 percent of the population still does not have access to any type of health service. Significant gaps in access persist between rural and urban areas, as well as between low- and high-income households. The quality of service in terms of the availability of adequate staff, equipment and medicines remains an issue, with only a very small percentage of health centres and hospitals being accredited. Inequality in the distribution of financing is another problem, with a large share of health expenditures funded through out-of- pocket payments. Table 8. Health Outcomes and Outputs, 2001 and 2005/06 Indicator* 2001 2005/06 Life Expectancy at birth (years)** 70.7 72.1 Infant Mortality Rate (per 1000 live births) 34 (1996-2001) 23 (2001-2005) Under 5 Mortality rate (per 1000 live births) 44 (1996-2001) 30 (2001-2005) Total fertility rate 4.4 3.3 Prenatal care coverage 83 92 Percent of women who received their 1st prenatal visit before 4th 56 69 month of pregnancy Percent of institutional births 52 67 Percent of women who received post natal care 34 73 Underweight (low weight-for-age) 17 11 29 HONDURAS IGR ­ VOLUME I Sources: ENDESA 2006*, MOH Statistical Bulletin 2005**. Based on PER (2007: Table 14). 43. Health expenditures have increased in real terms since the late ,,90s, but remain relatively low compared to the rest of the Latin American region. However, since there is limited potential to increase funding, there needs to be greater focus on more efficient allocation and use of existing resources, enhancing the performance accountability of policy- makers and service-providers. Table 9. Health Expenditures in Central America, 2005 Total health Per capita Government Private External expenditures total health expenditure as expenditure as resources as as a % of expenditures % of total health % of total % of total GDP US$ expenditure health health expenditure expenditure Costa Rica 7 684 76 24 0.2 El Salvador 7 364 54 46 2.2 Guatemala 5 244 38 62 1.1 Honduras 7.5 226 51 49 6.8 Nicaragua 7.9 240 54 45 9.7 Panama 7.3 660 69 31 0.2 Average 7.0 403.0 57 43 3.4 Source: WHO Core Indicators 2008 44. The health sector is an interesting case in the Honduran context because in general its performance with regard to advancing reforms has been relatively better compared to other sectors analyzed in this report. This is partly due to: (i) a certain continuity in some policies and strategies, particularly those related to involving local levels in improving access to services; (ii) the process followed in undertaking some reforms in the sector (for example, gradually establishing a consensus among stakeholders with regard to regional reorganization, as well as emphasizing a bottom-up approach in the case of the decentralized models of service delivery, and also holding a discussion with unions to gain sufficient support to continue and to avoid large scale opposition); (iii) the relative power structure in a sector where there are 30 unions, syndicates, and groups representing various types of health workers, making it more difficult for them to unite in opposition to reforms compared to teachers; and (iv) the sector has also benefited from having some committed Ministers of Health who have championed reform initiatives despite strong pressures from unions and other interest groups. 45. On the other hand, the challenges faced by the sector underscore the fact that it still has significant institutional weaknesses that impede reforms and that, in turn, impact its performance. These institutional weaknesses include: (i) a lack of clearly-defined policies and strategies and well-articulated, budgeted operational plans to guide the implementation of reforms; (ii) an institutional framework that does not have adequate accountability mechanisms to motivate policy-makers and traditional service-providers to meet sector objectives, (iii) poor human resource management, that is characterized by the lack of incentives and sanctions to encourage good performance, and high rotation of key personnel, including the Minister and the technical staff at the Planning and Management Evaluation Unit (UPEG). The provisions of the Estatuto Médico also make it difficult to fire underperforming health staff; (iv) duplication of interventions, lack of coordination, and some 30 HONDURAS IGR ­ VOLUME I confusion of roles and responsibilities among different sector institutions, agencies, and administrative levels; (v) lack of access to timely information to guide management decision- making, as well as to inform citizens about sector performance so they can hold service providers and policymakers accountable; and (vi) little awareness of users rights and service standards, and relatively few well-organized citizen associations, especially at the local level, who promote users' welfare. 46. Priority recommendations for the short-term emphasize the importance of (1) strengthening the existing decision-making/consultative bodies and empowering other stakeholders, especially civil society to effectively participate in these processes; (2) enhancing and expanding the current Results-Based Management System; and (3) improving continuity of key health staff appointments to minimize disruptions in the implementation of sector reforms. These include: Reviewing the experiences of key decision-making and consultative bodies especially the Advisory Council for the Health Secretariat (CONCOSE), the IHSS Board of Directors, and National Health Council (CONSALUD), improving their decision-making process by providing incentives to increase the likelihood of their members reaching consensus for the common good, while minimizing party/interest group politics. As part of this review process, undertake a stakeholder survey to obtain recommendations on how to better engage civil society representatives in the different forums for dialogue (for example, at the sector table (mesa sectorial), CONSALUD, Consultative Council for the PRSP, etc.) Developing and disseminating performance information along the service delivery chain, improving and leveraging on the existing Results-Based Management System by (i) expanding it to include the regional and local levels; (ii) standardizing indicators used (e.g. age groups, number of visits, dosage of immunizations, etc.) across different administration levels (central to local); (iii) establishing a mechanism for independent verification of reported results; and (iv) making the results available through various channels of information in addition to the internet. Enhancing consumer awareness by developing service standards and simple indicators to assess service quality and expanding the social audit initiative that was initiated in two main hospitals in collaboration with the Tribunal Superior de Cuentas (TSC) to include other health facilities and agencies. Establish a formal process in which audited facilities have to formally respond to the social audit findings in public forums. Improving the duration/stability of appointments of key personnel, including the Minister and the technical staff at the Planning and Management Evaluation Unit (UPEG). Include the health UPEG in the first phase of the Professionalization Program for the Public Servant. Improving accountability and transparency in the procurement of pharmaceuticals. The MOH should (i) resolve concerns raised in June 2008 regarding the Inter-institutional Commission on Medicine's (CIM) role in awarding direct contracts to 13 ineligible firms. The findings of the investigation should be made public and appropriate actions taken; (ii) review CIM's role in technical evaluations ­ if allowed to continue ­ based on the profile of its members, and (iii) systematically disclose the complete results of bidding processes for the procurement of medicines and ensure that the results are audited. 31 HONDURAS IGR ­ VOLUME I 47. In the medium term, other recommendations to address the above issues are as follows: Reaching a consensus on a strategic vision for health reform based on a budgeted operational plan. The MOH needs to confirm based on the work being done by the review committee assigned by the new Minister of Health to what extent the draft health sector reform framework, presented by the National Health Council (CONSALUD) in a public forum in September 2008, will continue to be the basis for health sector reform. Clarifying and possibly redefining roles and responsibilities of sector institutions and administrative levels. This also needs to be based on a review of the regulatory issues that affect the sector financing, service provision, and insurance functions performed by each sector entity, as they relate to the proposed health reform framework. In this review process, for example, (i) the MOH and IHSS should agree on which activities they should undertake jointly (e.g. the procurement of medicines) and which ones they should undertake separately; and (ii) the MOH should also clarify how the stewardship function will be implemented across the different administrative levels. The central and regional levels should perform their official roles and functions. Efforts must be made to ensure that each level is provided sufficient resources and training to do so, particularly in the case of the new regional health administrations. Reviewing and updating the sector's human resource strategy (e.g. hiring and retaining qualified administrative and technical staff, staff deployment, and managing health staff, including performance evaluations, incentives, and application of sanctions). This also includes identifying provisions of the Estatuto Médico that should be changed. Consultations should be held with unions and syndicates to achieve a consensus on proposed changes and to minimize strikes. Improving the management and distribution of pharmaceuticals in the sector. Develop and implement specific guidelines on storage, distribution, transportation, formulation of therapeutics guides, inventory control, and quality control. ACCOUNTABILITY FRAMEWORK FOR MUNICIPAL GOVERNMENTS 48. Since the passing of the Municipal Law in 1990, the Government of Honduras has taken a series of steps to promote and strengthen the decentralization process. Municipal management has been bolstered recently with the adoption of a state procurement law, the reorganization of budget management, the regulation of the reporting and accountability of municipal funds, the creation of the Superior Tribunal of Accounts (TSC) and the establishment of a model for the supervision and control of public management, including municipal management. 32 HONDURAS IGR ­ VOLUME I Table 10. Municipal Budget vs. Central Government Budget Overall Budget of Municipal Municipal Budgets Central Government Budget Year Governments* vs. Government (Approved, MLp.) (Approved, MLp.) (%) 2004 4,738 34,520 13.7% 2005 5,517 39,288 14.0% 2006 6,291 42,996 14.6% 2007 N/A 49,383 N/A Sources: National Budget SEFIN, Municipal Budget SGJ-SINIMUN * Includes municipal taxes and transfers from the Central Government 49. However, the further advancement of the decentralization process depends on strengthening the institutional capacity of municipal governments to ensure they can fulfill their new responsibilities and manage the resources transferred in an efficient and transparent manner. In this respect, important deficiencies in the laws and/or their application remain. For example, the 1990 Law of Municipalities has lagged behind with respect to various aspects of current management, including the definition of "municipal autonomy," the conditions for the creation and operation of municipal associations, and the incorporation of different modalities of citizen participation. 50. Building institutional capacity within the municipal governments to manage funds and increase their accountability is not only key to the effectiveness of poverty reduction programs at the local level, but also to raising citizens support for the decentralization process. The survey conducted by the Latin American Public Opinion Project (LAPOP)5 shows that support for decentralization is limited in Honduras, which may be interpreted as an indication of the low level of confidence that the population has, that the additional transfer of resources will truly translate into better services. As Box 2 shows, enhanced transparency and accountability in municipal management has a direct impact on citizens' trust in the sound use of public funds, and their willingness to channel additional resources to the local government. Box 2. Transparency, trust in government, and willingness to pay taxes. According to the survey carried out by LAPOP, Honduran public perception of municipal management is characterized by low confidence in the management of funds (60 percent of respondents say that they have no or little confidence in the good management of funds on the part of the municipal government) and little disposition to pay local taxes (79 percent believe that it is not worth paying taxes to the municipality). The survey also shows that few citizens receive information about how municipal resources are invested. Seventy-six percent say that the municipal government does not provide this type of information and that citizens that receive information about the allocation of public resources tend to have more confidence in the management of funds by the municipality. To investigate how these two variables ­ trust and transparency ­ affect the disposition to pay taxes to the municipality, a Logit regression analysis was done. Variables for controlling the level of satisfaction with municipal services, as well as for various socioeconomic characteristics (not shown) were also included. As can be seen in the table below, information about the use of 5 The 2006 LAPOP Survey on Honduras was performed by Vanderbilt University. The survey is statistically representative at the national level; the sample consists of 1,585 households. 33 HONDURAS IGR ­ VOLUME I resources increases the probability of being disposed to paying more taxes by nine percent. Citizens that responded that they have a lot of confidence in the management of funds are 57 percent more likely to be disposed to paying taxes compared with those that have no confidence. Little or some confidence increases the probability by 14 percent. Results of the Logit Regression ­ Disposition to pay more taxes The municipality informs about how it invests its 0.09 resources (2.90) Little or some confidence in the management of funds 0.15 (5.28) A lot of confidence in the management of funds 0.57 (8.13) Observations 1223 Pseudo R2 0.17 Note: t-statistics in parenthesis. Coefficients of control variables and the constant not shown. These results show that good management of municipal funds, that inspires the confidence of citizens, is key for convincing tax payers of the value of paying more taxes for investment in the municipality. It also shows that greater transparency in the management of resources contributes to generating this confidence. Source: Hessel and Moller (2008) with data from Honduras 2006, Latin American Public Opinion Project (LAPOP), Univeristy of Vanderbilt. 51. An important conclusion of this study is that the distribution of funds in the municipal sector is not evenly dispersed, and a large proportion of municipal expenditure is concentrated in only a small number of municipalities. More than 50 percent of the funds that are executed at the municipal level is concentrated in five municipalities, and 18 percent of municipalities receive 80 percent of the executed funds. Even though this study does not specifically focus on this aspect of municipalities, any municipal financial management modernization or improvement program must take this factor into account, in order to benefit overall public financial management at the municipal level by considering larger municipalities as the primary objective. Graph 6. Budget distribution in the municipal sector Budget Distribution in the Sector 100% 90% Percentage of Total Budget 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 31 61 91 121 151 181 211 241 271 Number of Municipalities Source SGJ - Municipal Budget2006 52. The level of international assistance that is executed at the municipal level is significant, both in terms of the number of initiatives and the amount of funding, which are not always adequately reflected in the municipalities' budget execution reports. This is 34 HONDURAS IGR ­ VOLUME I particularly true in the case of aid channeled through mancomunidades. International cooperation agencies may establish and agree on simple and effective rules in order to create incentives to promote compliance with control framework and strengthen social accountability at the municipal level. Graph 7. Submission of Municipal Accounts to the Tribunal Superior de Cuentas Submission of Municipal Account to TSC Subm itted to TSC Not subm itted to TSC 2006 2005 2004 2003 2002 2001 2000 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Municipalities (Source: TSC) 53. The current control framework does not effectively exercise control on financial management in the municipalities. A large percentage of municipal governments do not submit their financial statements to the TSC nor do they present complete budget information to the SGJ. Since budget execution reports are not reviewed or verified in detail against other sources of information, they are not necessarily complete or accurate. The current control system does not include incentives for those municipalities that comply with the norms, differentiating them from those that do not, nor does it reward municipalities that consistently apply accountability mechanisms. In general, the most important factor in the quality of municipal financial management appears to be the attitude of authorities, especially the attitude and management capacity of the Mayor. This also appears to be the key factor in accounting for the efficacy of citizen participation instruments for the supervision of municipal operations. 54. The three key recommendations for the short-term are to provide incentives for the municipalities to comply with the legal framework and to strengthen nascent social accountability initiatives at the local level: i. To reward municipalities that comply with reporting requirements, develop indicators on compliance with institutional and social control mechanisms at the municipal level together with other indicators about the quality of financial management, and publish them. ii. To promote effective enforcement of the control framework at the local level, international cooperation agencies may agree on simple and effective rules to create incentives to ensure that the current accountability framework is enforced. For instance, requiring that their assistance they provide to the municipalities is appropriately incorporated in the municipal budget execution reports and the annual report presented to the TSC and Transparency Councils, and is conditioned to the timely submission of those reports. iii. To strengthen control systems at the local level, promote the participation of community organizations in the audit process of the Tribunal Superior de Cuentas at the local level. As seen from the audit pilots, the collaboration between the TSC and the social 35 HONDURAS IGR ­ VOLUME I monitoring mechanisms at the social level can strengthen the control framework for municipal financial management in the short term. 55. In addition, it is recommended that the Municipal Law be updated so that it coordinates with the Law on Citizen Participation, thereby providing further clarification of the concepts concerned, and facilitating the enforcement of both laws. Donors should be more proactive in strengthening the control framework and promoting social accountability at the municipal level by securing the adequate registry of municipal budget execution reports, and requesting that annual financial reports be submitted to the TSC, and that budgetary information be provided to the Transparency Councils. It would be beneficial to train the Citizen Transparency Councils in social auditing procedures, to enhance their capacity to oversee public finances. Internal control functions should be strengthened either by linking these to the Transparency Councils or by separating out the internal auditors from core-line activities. There is also a need to identify and quantify the funds that are not administered by the municipalities, but that generate contributions in financial resources, goods and services for the community. CORPORATE GOVERNANCE OF HONDURAN PUBLIC ENTERPRISES 56. Honduras has a relatively large state-owned enterprise sector. This includes some of the most important entities in the countrys economy that are facing serious operational and financial difficulties, which in turn has negative consequences for the economy and the tax payer. Public enterprises predominate in sectors such as water, electricity, ports and telecommunications, that have strategic importance for the socioeconomic development of the country. Yet the three largest public enterprises ENEE, SANAA, and HONDUTEL have recently experienced serious operational and financial difficulties. ENEE's financial losses currently amount to two percent of GDP, while HONDUTEL's income went from covering 15.3 percent of public spending in 2005 to 7.4 percent in 2007. This situation is posing a financial burden on Honduran taxpayers, undermining the provision of efficient services for citizens and local enterprises, and having a potential impact on macroeconomic stability and the country's capacity to attract foreign investment. Graph 8. ENEE Financial situation and losses, 2004-2007, MLps. 35,000 (3,500) 30,000 (3,000) 25,000 (2,500) 20,000 (2,000) 15,000 (1,500) 10,000 (1,000) 5,000 (500) 0 0 2004 2005 2006 2007 Debt Net equity Annual loss Sources: Audited financial statements (2004-06) and ENEE Website (2007). 36 HONDURAS IGR ­ VOLUME I 57. In order for public enterprises to continue playing a key role in these strategic sectors and improve their performance, it is crucial to improve corporate governance and quality of management. Managing public enterprises faces a series of challenges that are inherent to the very nature of this type of enterprise. Public enterprises frequently have multiple objectives that are sometimes contradictory. The State is the owner, provider of goods and services, and regulator all at once, which creates conflicts of interest and opportunities to discriminate against private sector enterprises. Accountability is hampered as the principals (citizens, or the Government on their behalf) are dispersed and poorly organized, while agents are large in number (for example, managers, Boards of Directors, politicians, and regulatory bodies) with objectives that are frequently different. In addition, when State-owned enterprises enjoy a monopoly in the market, potential monopoly rents create incentives for using enterprises to generate visible rents for the State, jobs, and subsidies, rather than to provide efficient services to citizens and companies. These characteristics do not imply that public enterprises inherently function poorly, but rather that they pose particular challenges that need to be tackled with practical solutions, many of which lie in designing a set of appropriate corporate governance arrangements. 58. Corporate governance involves the array of relationships between company management, its board of directors, its owners (mainly the State, on behalf of its citizens, in the case of public enterprises) and other stakeholders such as customers, employees, business partners, etc. A good corporate governance framework results in a system of checks and balances in the rights and responsibilities of these groups, and provides the structure though which a company's objectives are set. A sound corporate governance framework for state-owned enterprises is based on four pillars: (i) an adequate legal framework; (ii) efficient government bodies; (iii) a robust, high quality financial management system, based on sound accounting principles and reliable internal controls; and (iv) a rigorous accountability framework. 59. The institutional framework of public enterprises suffers from serious weaknesses that are affecting their performance. Most of these weaknesses arise from: i) failure to observe the fundamental principle of separating policy-making functions, from those related to regulation and provision of services, which undermines the effectiveness of the counterbalance system; and ii) the lack of transparency and available information about the management and performance of these companies, thereby undermining accountability. In addition, the legal framework applicable to state-owned enterprises is highly fragmented, which has a negative impact on its enforcement. 60. The absence of influence from consumer and citizen stakeholders ­ i.e. those with a direct interest in improving the management of the enterprises ­ is also a contributing factor which weakens the accountability framework further. Even though this study has not addressed the relationship between enterprises and these two stakeholders (consumers and citizens), both are key to the accountability framework as illustrated by Figure 1 in relation to the electricity sector, and therefore attention should be paid to this issue in the medium term. 61. Two areas are highlighted as key for improving the corporate governance framework of public enterprises in the short-term: i) the need to strengthen the division of policy, regulatory and service provision functions as envisioned in the legal framework; and 37 HONDURAS IGR ­ VOLUME I ii) the need to enhance accountability and transparency of these enterprises and focus the policy discussion on performance. Below are some recommendations for the short term in these two areas. Figure 2. Diagram of responsibility and accountability relationships in the electricity sector Honduran State CNE SEFIN, SERNA, SOPTRAVI Voice Responsibility Long Route of Responsibilities Users ENEE Coalitions/Communities Short Route of Administration Responsibilities Representatives More advantaged Less advantaged Organizations sectors sectors Client Power Services 62. The roles of policy-making, regulation and service-provision overlap in many Honduran public owned enterprises, with detrimental effects on their performance. Most public enterprises operate in key socioeconomic sectors where the State plays a natural role as policy-maker and regulator ­ ensuring public goods and services are properly delivered and accessible to all, protecting citizens and consumers, while providing a level playing field for competition whenever possible, and providing incentives for the company to be as efficient as possible. To perform these two functions properly and to exert the necessary checks and balances, it is important that they are conducted independently from the provision of services. In that regard, a priority for the short term in this regard should be to strengthen the policy and planning function, designating the institution within the executive branch responsible for the formulation of policies and sectoral plans in each sector, and ensuring it has the necessary technical capacity to undertake its obligations. 63. The States role and responsibilities as owner of these public enterprises, which needs to be clearly separated from policymaking and regulatory functions, should be both clarified and reinforced. The "ownership" function naturally lies with the Executive (i.e., Government), which is responsible for ensuring that public sector entities ­ including public enterprises ­ are properly and efficiently managed. This in turn requires that appropriate objectives, organizational structures, operational policies are put in place for each of these enterprises, in compliance with relevant laws. Recommended actions to strengthen the ownership function with respect to public enterprises include: (a) Establishing a specialized oversight entity to fulfill the ownership function. An option would be to strengthen the existing units either within SEFIN (Dirección General de Instituciones Descentralizadas, DGID), or within the Presidency (Comisión 38 HONDURAS IGR ­ VOLUME I Presidencial de Modernización del Estado, CPME), or to establish an independent commission that would report to the Executive and to Congress. (b) Strengthening the role of the Board and improving the quality of Board deliberations. The above-mentioned commission would be in charge of appointing Board Members according to pre-established technical requirements, to ensure that they have the necessary technical capabilities, independence and time to perform their board duties; and (c) Enforcing the provisions in the organic laws of ENEE and HONDUTEL that require the General Manager to be appointed by the Board of Directors, in order to improving the accountability of the General Manager to the Board and reducing political interference in the management of the companies. 64. In addition, Government has the responsibility of setting up performance targets for these companies, monitoring progress over time and holding the Board and the General Manager accountable for their performance. Honduras has made progress in this regard with the implementation of the SGPR and the Transparency Law. These instruments could be used to enhance the transparency and accountability of public enterprises to the Government and the public at large, by setting up performance targets to be monitored periodically through the SGPR, and ensuring these companies publish their audited financial statements, external audit reports and performance information as required by the Transparency Law. The introduction of modern financial management and accounting systems is critical to ensure that timely and reliable information for decision-making and accountability is available. wb264730 C:\Documents and Settings\WB264730\Desktop\IGR Dec New\Version revisada ingles despues DM\HN IGR Volume I - Feb 15.doc 02/16/2009 2:53:00 PM 39