Honduras

Decision Point Document (HIPC: June 2000)

Progress has continued in the structural area. In the financial sector, the government has been strengthening banking supervision and improving the regulatory framework by limiting banks' external indebtedness, connected lending, and certain off-balance sheet transactions. The Board of the Social Security Institute (IHSS) approved in May 2000 a reform plan aimed at improving health and pension benefits and restructuring the institution. In privatization, the bidding for the management of airports was concluded in March 2000, and the winning bid for the telecommunications company (HONDUTEL) is expected to be announced in mid-July.2 However, approval of the new Electricity Sector Framework Law, that would permit the privatization of electricity distribution, has been delayed beyond the June congressional recess; the law is expected to be approved once congress reconvenes in July.

Despite progress, many challenges remain to achieve faster, poverty-reducing growth. The financial sector and its regulatory framework needs further strengthening. Average lending rates, at nearly 27 percent (interest rate spreads average 12 percent), are high 3 and long-term credit scarce. The privatization of electricity distribution and other utilities remains to be achieved, and the pension and social security reform action plan has to be implemented. The reform of public sector management and employment policies need to be deepened. The investment framework, although improved, still contains bureaucratic barriers and excessive regulations that increase the cost of doing business. Transparency and governance need to be strengthened further to enhance investor confidence and efficiency of resource use. Export capacity and earnings are affected by an overregulated transport sector, and inadequate ports infrastructure. The quality of education and health services, despite progress, remains low.

Prudent fiscal and monetary policies and accelerated structural reforms are expected to facilitate growth and reinforce social policies (Box 2). Fiscal policy will aim at containing nonpriority current expenditures and maintaining good revenue performance (especially by increasing the efficiency of the tax system) to increase public savings. A reform of public sector wage policy will be key to fiscal sustainability. The efficiency of monetary policy will be enhanced by an increased reliance on open market operations, which together with stronger prudential regulation and supervision of the financial sector is expected to reduce distortions affecting real interest rates. In the structural area, privatization will be finalized in telecommunications and electricity distribution, and started in water and ports management. Trade liberalization will continue in the context of regional commitments. The reforms of the social security and pension systems supported by the program have potentially large social benefits. The program will also deal with constraints to foreign direct investment, labor-intensive exports, governance, and transparency.

Summary of Planned Macroeconomic and Structural Reforms Under the PRGF, 2000-2002

Improve expenditure efficiency-limit the increase in the public sector wage bill (to 9 percent of GDP in 2000, to 9.3 percent in 2001 and to 8.8 percent in 2002) and reforming the civil service law (including rationalization of employment policies and wage-setting criteria) in October 2000; improve targeting of electricity subsidies of the poor (June 2000) and review targeting of transport subsidies (December 2000); reform the social security system (2000-02); and establish a group to analyze options for pension reform (June 2000).

Privatize telecommunications (June 2000) and airport concessions (April 2000); initiate privatization of electricity distribution (September 2000) and water and sewer management (end 2000); and prepare a plan to privatize port management (October 2000).

Reform of the social security system, which is crucial to increase both the coverage and the quality of health services and ensure a sound pension system. The specific measure to reach the completion point is the implementation of the social security reform plan approved by the IHSS Board on May 24, 2000. This plan provides a good framework for action and will be refined as implementation proceeds. The plan includes, among other components, the separation of the health and pension plans of the IHSS, the strengthening of the regulatory capacity of the ministry of health, and the improvement of coverage, efficiency and quality of health service provision. In pensions, the IHSS system will be made actuarially sound, its coverage expanded, and pension benefits rationalized to improve the incomes of the neediest.

Privatization. The role of the private sector has been substantially increased with only a few utilities remaining in the public sector.
· In the early 1990s over 50 public enterprises were privatized.
· In utilities, private sector participation has been increased in electricity generation, road maintenance, airport management, and is expected soon in telecommunications.
· Main challenges are the privatization of electricity distribution, management of water distribution and sea ports, and the development of competent regulatory bodies.

Public sector management. The government has taken steps to ensure better fiscal manage-ment and to reform the civil service with a view to improve the efficiency of public adminis-tration, including procurement and personnel management.
· Public Sector Modernization Law approved in the early 1990s, improving the organization of the public sector, developing a consistent legal framework, and rationalizing public employment.
· Comprehensive reclassification of positions and decompression of salary scales in about half of civil service, improved procurement procedures, and external auditing of use of aid funds.

Letter of Intent, March 10, 1999

An important aspect of the government's fiscal policy is to ensure the soundness of the finances of the Social Security Scheme (IHSS) and the public sector pension funds over the medium term. In recent years, the deficit in the health and insurance fund of the IHSS has been financed by drawing down on the resources of the pension fund. The government intends therefore to separate (operationally and on an accounting basis) the pension fund from the health fund by the end of the first half of 1999. This will be followed in December by the approval of legislation that would permit a profound reform of the IHSS that would include an increase in the salary ceiling for contributions. Also, the government will take steps to increase the transparency and efficiency of the operations of the other public sector pension funds (INJUPEMP and IMPREMA). The objective is to ensure a real rate of return on physical assets equivalent to the real rate of return on government bonds, which will require a halt to the real estate development activities of the funds. Beginning in September 1999, the banking commission will review on a regular basis the loan portfolios of the funds.

The structural reforms to be undertaken under the program focus mainly on privatization, modernization and increased efficiency in the public sector, and strengthening the financial system. These reforms are described in greater detail in the PFP. In the area of privatization, the main objectives will be to complete the process of transferring control of the telephone company to the strategic partner; conclude the privatization of the electricity distribution network; and permit concessions to the private sector for the management and operation of public works projects and airports. Also, the government will ensure that the framework for tariff adjustments is clearly established prior to the conclusion of the privatization process for these sectors.

Other key aspects of the reform program in the public sector include (i) a restructuring of the civil service (supported by a sectoral loan from the World Bank) aimed at reducing duplication and overlapping among institutions, reducing excess employment, and reclassifying positions and salaries to ensure that skilled staff can be attracted and retained; (ii) increasing public sector saving over the medium term (through appropriate public sector tariffs, better targeting of subsidies, improved tax administration, and expenditure management) in order to meet the significant social needs, which have become more acute in the wake of the crisis caused by the hurricane; and (iii) strengthening the social security system along the lines described above.

Regarding privatization, the key steps already taken by the government, and others expected to take place over the program period include (i) the commencement of the bidding process for shares in COHDETEL, with the sale scheduled to be concluded by December 1999; (ii) the contracting of legal and financial advisors in June to prepare for the privatization of electricity distribution followed by the invitation in December to bid for the purchase of shares in the new distribution companies being created; (iii) the conclusion (by September) of the bidding process for the award of concessions to manage the country's four international airports; and (iv) the design (with the support of the World Bank and the IDB) of a plan to develop the country's sea ports, including through the granting of concessions to the private sector.

Contract investment bank to advise on privatization of electricity distribution. June 99
Invite bids for shares in electricity distribution companies.2 end-Dec. 99
Approve legislation to permit private sector participation in construction and operation of roads.1 Nov. 98 (done)
Invite bids for the concession of the airport system to the private sector. June 99

Interim Poverty Reduction Strategy Paper, April 13, 2000

In Honduras, progressive laws have been adopted for the protection of workers. However, these laws have not had the anticipated results: most employees are not able to retire through the IHSS (Honduran Social Security Institute), since the institution has financial problems arising from a long history of inefficiency and failure to meet its obligations. At the same time, the benefits given to an employee if he or she is laid off represent a problem for enterprises: some employees may see them as an incentive to get themselves fired, and, at times, an enterprise may find itself unable to fire an employee because of the consequent obligation to pay the benefits.

The flexibility of work days should be something negotiated between the enterprise and the worker, according to the needs of the enterprise and the preferences of the worker. Partial contracts and half-time work days can help take more efficient advantage of the labor force. Collective contracts at large enterprises often act as straightjackets that prevent enterprises from reallocating their human resources in the best way. These contracts should be negotiated between the employer and workers' representatives, provided that the majority of the workers agree to have union representation. In practice, many of the unions come to acquire a power parallel to that of the employer, in terms of decision making; some enterprises have to be certain of the approval of the union before they make a decision that, strictly speaking, is not labor related.

Increase private participation in the delivery of public services.
- Conclude Hondutel tender
- Award cellular band "B' concession
- Concession of previously defined port services.
- Privatization of electric power transmission and distribution.
- Conclude tender for the concession of the main airports.

Restrict the central government wage bill

Letter of Intent and Memorandum of Economic Policies, April 13, 2000

The central government wage bill will not exceed 9 percent of GDP in 2000 and 9.3 percent of GDP in 2001. Based on redundancies identified in the study commis-sioned as part of the modernization of state, several existing vacant posts will be cancelled in 2000 and 2001, voluntary early retirement with adjustment aid will be conducted before end-June 2000, and the retrenchment of civil servants at the administrative level will take place during 2001 yielding savings of about 0.2 percentage points of GDP. To maintain the central government wage bill at a sustainable level in the future, we will undertake the following actions. We will approve legislation in October 2000 to reform the civil service and establish a comprehensive and uniform civil service wage policy in time to be effective for the 2001 budget. The law will include clear and objective criteria for annual wage increases based on comparable average increases in private sector wages, productivity and/or merit. We will provide a draft of the wage-setting criteria before the IMF Board discussion on the second review of the arrangement under the PRGF, and a draft legal text of the uniform principles of wage policy and wage-setting criteria by end-June 2000. We will accelerate the civil service reform program in 2000 with World Bank and IDB collaboration by (i) completing the reclassification of jobs, and the profiling and auditing of each position by end September 2000; (ii) preparing an action plan for retrenching redundant personnel, mostly at the administrative levels by end-October 2000; and (iii) completing the wage scale reclassification by end-June 2001 to decompress the salary structure and incorporation of factors such as responsi-bility and seniority by June 2002. We will also undertake a comprehensive assess-ment of public expenditures, and review plans for the hiring of new teachers in 2000 in collaboration with the World Bank. The results of the civil service retrenchment, public expenditure and education policy reviews, and their potential implications for the 2001 wage bill will be discussed during the next review of the program.

We are determined to speed up privatization in 2000. We will conclude the sale of the telecommunications company Hondutel by end-June 2000. The concessioning of the country's four international airports was done in March 2000. These should provide an important boost to investment and to the program's growth targets. To speed up privatization of electricity distribution, the Framework Law on the Electricity Sector will be approved in October 2000. A contract with the IFC is expected to be approved by congress by end-December 2000, designating the latter as investment banker for the planned privatization of electricity distribution. To advance the privatization of ports, we will work with the IDB to design a proposal to incorporate the private sector in the management, operation, and financing of ports. The study is expected to be completed in end-October 2000. To facilitate private concessions in the provision of water and sewage services we shall approve the Framework Law for the Water and Sewage Sector by end-December 2000.

Approve by IHSS Board an action plan to separate (operationally and on an accounting basis) the IHSS pension fund from the health fund and to restructure the IHSS based on recommendations of World Bank experts.
Conclude bidding of airport concessions.
Conclude bidding of Hondutel. June 2000
Approve by congress contract with IFC for the privatization of el.distribution. June 2000