Millennium Challenge Corporation Visit to Honduras

UNCLAS SECTION 01 OF 07 TEGUCIGALPA 001490

SIPDIS

SENSITIVE

STATE FOR WHA/CEN and WHA/EPSC
TREASURY FOR EIlzetzki
STATE PASS USTR
STATE PASS AID
STATE PASS OPIC, EXIM

E.O. 12958: N/A
TAGS: EAID ECON EINV SOCI PREL PGOV HO
SUBJECT: Millennium Challenge Corporation Visit to Honduras

REF: Tegucigalpa 1385

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SUMMARY
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1. (SBU) Summary: Representatives from the Millennium
Challenge Corporation (MCC),visiting Honduras from June 8-
16, held a productive set of meetings with Honduran
government officials, members of civil society and the
private sector, and representatives of other donor
organizations and nations. The GOH has assigned a four-
person team to work on a proposal for the MCA (Millennium
Challenge Account),under the leadership of the Minister of
the Presidency Luis Cosenza. The government has begun to
reach out to the private sector and civil society to
participate in the development of the proposal, which is
likely to focus on highway infrastructure (the Logistical
Corridor or Dry Canal),integrated rural development, and
development of marginalized urban areas. The MCC team did
not react to the preliminary proposal outline, but did
provide further guidance on the format and expected detail
of the country's proposal.


2. (SBU) The MCA, with its emphasis on economic growth,
comes at a particularly opportune time for Honduras, which
recently adopted a number of critical structural reforms
that have facilitated a new 3-year IMF program, Paris Club
interim debt forgiveness, and international donor agreement
on the poverty reduction strategy. President Maduro made it
clear that he is fully engaged and has made negotiation of a
compact with the MCC a top priority for his Cabinet. End
Summary.


3. (U) MCC Vice President for Country Operations John Hewko,
Vice President/General Counsel John Dyck, Director for Latin
America John Wingle, and Program Officer Katie Uhre visited
Honduras June 8-16. In addition to meetings in Tegucigalpa
on the MCA itself, the group attended the June 10-11
Consultative Group meeting and traveled to Comayagua to
visit USAID rural development projects, to San Pedro Sula to
meet with private sector representatives, and to Puerto
Cortes to see the port facilities.

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Overview of the Millennium Challenge Account Initiative
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4. (U) In each meeting, MCC Vice President for Country
Operations John Hewko started by introducing the team,
congratulating Honduras on being selected as one of the 16
countries eligible to provide proposals for funding from the
FY 2004 appropriation, emphasizing the MCA's goal of
spurring poverty reduction through economic growth, and then
discussing the five key principles behind the MCA
initiative.

-- First, the program will be a partnership between the
compact country and the MCC.

-- Second, country ownership of the program is essential.
The MCC hopes that each eligible country will look hard at
the key obstacles to economic growth, choose the most
important one or two, and propose projects and policy
reforms that will address these impediments. The ball is
firmly in the eligible countries' court to prepare a
proposal that best meets its needs.

-- Third, an inclusive consultative process is required. It
will be vital for the Honduran government to work closely
with members of civil society and the private sector to
develop and discuss the proposal.
-- Fourth, transparency and accountability are key aspects
of the proposal. The proposals should lay out clear
indicators of success and mechanisms for ensuring that the
funds are used as they are intended and have the intended
effect.

-- Finally, there are no guarantees that individual
countries will actually sign a compact and receive MCA
funds. This will depend on the quality of the proposals and
the ensuing negotiations. Once a compact is signed, there
are no guarantees that funding will continue. The countries
will need to meet their commitments under the compact, and
sustain good performance as measured by the 16 eligibility
criteria.

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The Honduran Government's Preliminary Approach
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5. (U) The Honduran government's effort to develop and
negotiate a compact with the MCC is led by Minister of the
Presidency Luis Cosenza. Cosenza has designated a working
level team, led by former Central Bank President Victoria
Diaz, and including economic advisors Manuel Ramirez, Ian
Walker, and Dante Mossi, as well as Honduran Embassy
Counselor Sergio Membreno. Other key members of the GOH
team include Minister of Transportation Jorge Carranza,
Minister of Finance Arturo Alvarado, Minister of Agriculture
Mariano Jimenez, Minister of Industry and Trade Norman
Garcia, and Presidential Advisor for Projects and
Modernization of the State, Mauro Membreno. President
Ricardo Maduro met with the MCC delegation for over an hour
to emphasize the importance that he attaches to the MCA
effort.


6. (U) The GOH is using as its starting point the
implementation plan for the Poverty Reduction Strategy (PRS)
for 2004-2006, just recently developed for the June 10-11
Consultative Group meeting with key donors. The key pillars
of the Poverty Reduction Strategy are growth with equity,
reduction in rural poverty, reduction in urban poverty,
development of human capital (particularly education and
health),emphasis on vulnerable groups, and sustainability
of the strategy, including strengthening of the government
institutions and ability to govern justly. The principal
goals for 2004-2006 are to accelerate economic growth,
strengthen the link between the growth and poverty
reduction, widen programs for the poorest families in
society, undertake policy reforms in the areas of education,
health and nutrition, water and sanitation, and
agriculture/forestry, and finally, improve governance and
transparency, improve protection of the environment, and
implement a system of tracking and evaluating poverty
reduction programs.


7. (U) In its introductory meeting with the MCC staff, the
GOH provided an overview of its work in recent years in
improving the macroeconomic framework, making structural
reforms that will improve competitiveness, working toward
improved infrastructure, and the targeting of three key
sectors - agriculture, tourism, and light manufacturing.
They identified several obstacles to economic growth: poor
road infrastructure (particularly in rural areas),lack of
irrigation, poor titling and registry of property,
inadequate support to rural farmers and businesses, and the
need for improvements in urban areas which will help foster
continued economic growth in the municipalities as well.


8. (SBU) The Honduran government is considering a proposal
to use MCA funds for three key types of activities. On road
infrastructure, the current thinking is to request funds for
three segments of the Logistical Corridor highway project:
(a) partial financing for a new road from the Salvadoran
border to Comayagua which connects to the highway to Puerto
Cortes, (b) partial financing for improvements on the
Villanueva-La Barca section of the highway to Puerto Cortes,
and (c) full financing for improvement of the road from
Choluteca to Guasaule on the Nicaraguan border.


9. (SBU) Together with the improvements already underway on
the road between Puerto Cortes and Guatemala, these road
projects would tie Central America's principal Atlantic port
more closely to the neighboring countries, improving the
region's ability to increase integration as envisioned under
Plan Puebla Panama, and take full advantage of the recently
signed Central American Free Trade Agreement (CAFTA). The
projects will allow the four countries to cut transport
costs for exports to the U.S. and Europe and among
themselves, and build upon the efforts to obtain rapid
certification of Puerto Cortes and modernization of the
port. The improvement of this road corridor will also allow
Honduras to make additional areas of the country attractive
for investment in light manufacturing, which traditionally
has been located close to the port of Puerto Cortes and the
city of San Pedro Sula.


10. (SBU) A second prong of the proposal would target
obstacles to growth in rural areas, and would involve:
development of rural roads to feed into the Logistical
Corridor, irrigation, rural credit, land titling and
registration, and support to small businesses in rural areas
in the western and southern parts of the country (which are
traditional areas of the worst poverty).


11. (SBU) The final prong would involve investments in urban
areas that will help build a productive labor market in the
cities. These would include land titling and registry in
marginal urban areas to promote more construction of low-
income housing, expansion of the USAID-supported pilot
program to develop community-based kindergarten programs,
and micro-lending.


12. (U) The GOH emphasized that all these elements are in
the Poverty Reduction Strategy, and thus a result of lengthy
and exhaustive consultation with all members of civil
society. The GOH also emphasized its commitment to clear
indicators and targets, and effective accountability
mechanisms for project expenditures.

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Policy Reforms
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13. (SBU) The MCC noted that the program proposal should
focus on removing impediments to economic growth, and this
would likely require significant policy changes as well as
projects. GOH Economic Advisor Ian Walker noted that some
of the policy changes included in the Poverty Reduction
Sector Credit (PRSC) that is being proposed to the World
Bank board at the end of June may be included as part of an
MCA proposal.


14. (SBU) The first set of 14 policy reforms/actions (prior
conditions) in the PRSC include several that directly
address key obstacles to economic growth in Honduras, for
example: a sound macroeconomic framework, the reduction of
time needed to register a business to 62 days, amendment of
the airport concession with stakeholder involvement,
improvement in telecommunications through the award of
private interconnection contracts and a new cellular phone
operator, adoption of a property law which establishes a
unified property registry and facilitates land titling,
decentralization of education oversight, and introduction to
Congress of a law creating a professional civil service.


15. (SBU) To continue the program in the second year, the
GOH would need to fulfill 11 more policy reforms, including:
maintain an adequate economic framework, pass a competition
law which reduces collusive practices and constraints to
firm entry and exit, improve the legislative framework for
ports, plan and begin restructuring of the national electric
power company ENEE, pass legislation creating a professional
civil service, create an electronic government procurement
system, and create and implement the protected areas trust
fund.

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Meeting with Political Leaders
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16. (SBU) The MCC team also met with congressional and
political party leaders, including the Vice President of
Congress, the Secretary (Majority Whip) of Congress, the
Nationalist Party Majority Leader, and members of four of
the five national parties, as well as foreign policy and
assistance advisors for the leading presidential candidates
for the Nationalist and Liberal parties. As in other
meetings, the MCC team outlined the MCA initiative and
stressed the importance of a fully consultative process in
identifying projects for MCA funding. They also began to
engage opposition political leaders to ensure continuity of
support for the MCA effort in Honduras after the 2005
national elections. The briefing was well-received, and
participants raised several interesting ideas, including the
need for greater municipality involvement in the process and
the need for greater access to micro-credit lending to
support small business development.

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NGOs and Civil Society
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17. (U) The MCC delegation met with a group of 29
nongovernmental organizations (NGOs) doing development work
throughout Honduras, and with FONAC (Fora Nacional de
Convergencia),the official umbrella organization for
Honduran civil society groups. After an overview of the MCA
initiative, John Hewko asked the participants their opinion
about the level of participation in the Poverty Reduction
Strategy. Several participants noted reservations about the
consultative process used during the development of the PRS:
that the government tended to provide a finished product for
reaction without including civil society from the beginning,
that some communities and organizations were more adept and
prepared at participating than others, leaving some voices
heard and others not, and that many comments and suggestions
were not adopted.


18. (U) Several project ideas were also forwarded during
these meetings, including: financing micro- and small
enterprises to generate greater employment and income
growth, education, and municipal infrastructure. They also
expressed their concern about the importance of including
civil society representatives in the design and
implementation of the MCC compact with the GOH.


19. (SBU) The MCC delegation emphasized the importance of
forwarding any proposals to the GOH team, working together
across sectors to develop a focused approach in dealing with
the GOH, focusing on economic growth, and having
participation in the design and implementation of the
proposal.

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International Financial Institutions and Donors
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20. (SBU) IMF resident advisor Ana Lucia Coronel and
visiting IMF Mission Director Adrienne Cheasty provided an
overview of the two years leading up to the IMF's third
program in Honduras, and the importance of the policy
measures the government finally took in December 2003. They
expressed support for the MCC and willingness to cooperate
in any way possible. The IMF representatives confirmed that
even the HIPC completion point will provide little in the
way of new funds for vitally needed government investment.
Cheasty also indicated that the GOH is on track with its
financial sector and anticorruption/transparency reforms.


21. (SBU) World Bank resident advisor Joe Owen discussed the
Bank's ongoing work in providing budget support requiring
policy changes (the Poverty Reduction Sector Credit is
scheduled to go to the Board in June) and in strengthening
institutional capacity in areas as far ranging as the
financial sector, transparency and anticorruption, the
judicial sector, land administration, and integrated rural
development (health, education, nutrition, microfinance and
technical assistance). Owen said that a recent Development
Policy Review showed that the key factors impacting growth
in Honduras are infrastructure, education coverage and
quality, and financial sector deepening. In the rural
areas, key issues are access to capital and access to
markets.


22. (SBU) The Interamerican Development Bank representatives
explained the IDB's process for assuring adequate
consultation on its projects, and an overview of potential
mechanisms for accountability over grants and loans.


23. (SBU) In a meeting at the Central American Bank for
Economic Integration (CABEI),bank President Harry Brautigam
explained that CABEI has provided the GOH with a USD 125,000
grant to help fund the cost of the government's MCA proposal
team, and expressed interest in partnering with the MCC to
co-finance parts of the MCA proposal, particularly the
highway infrastructure. The MCC delegation indicated that
there were possible obstacles to this kind of co-financing,
as CABEI's funding is provided as market-rate loans. There
will be further discussions in Washington about whether this
would be feasible and desirable, in the context of Honduras'
IMF agreement and HIPC status, and given the MCC's own
legislative mandate to provide funds only in the form of
grants.

24. (U) The meeting with bilateral donors included
representatives from the World Bank, CABEI, UNDP, SIDA
(Sweden),CIDA (Canada),JICA (Japan),DFID (U.K.),AECI
(Spain),and the EU (European Union). After hearing John
Hewko's presentation on the five principles of the MCA,
bilateral donors expressed concerns over how to assure civil
society participation in the design of the compact,
transparency in the implementation of the compact, and the
coordination of the MCC in the PRSP and with the G-17 group
of donors. They were also interested in learning more about
the government's proposal to achieve faster economic growth
to alleviate poverty. Victoria Diaz explained her team's
preliminary thinking with respect to the preliminary
proposal outline that the government presented to the MCC
Team (discussed above).

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Private Sector Meetings
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25. (SBU) Private sector leaders in San Pedro Sula and
Tegucigalpa provided additional ideas for projects that
would spur economic growth, including: flood control
projects in the Sula Valley, low-cost housing, education
projects, microfinance, and improved highway infrastructure
serving Tegucigalpa. The MCC delegation encouraged the
businesspeople to provide their input to the GOH team,
understanding that the GOH's eventual proposal to the MCC
will have the best chance if it is well targeted and
focused, and the result of a consultative process.

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Press Coverage
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26. (U) PAS press strategy included the following media
events using all national media. The delegation held a
press conference with President Maduro on June 14 and a
second one at the embassy on June 16 at the end of the visit
in the PAS conference room. PAS arranged for Hewko to
participate in a 45 minute interview on the most widely
viewed morning television talk show "Frente a Frente."
Press coverage was extensive, and served the intended
purpose of highlighting the MCC and the five key MCA
principles (see reftel). Some initial news stories, which
included a statement by President Maduro saying that MCA had
been approved, were misleading, suggesting that an MCA
proposal had already been submitted and accepted. However,
later coverage corrected Maduro's statement and gave
prominent coverage to the message that there were no
guarantees that Honduras would receive funding.

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Comment
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27. (SBU) The MCA comes at a particularly welcome time for
Honduras. The GOH has given the initiative a great deal of
thought and will probably be working on its MCA proposal
throughout the summer. The preliminary proposal outline the
GOH currently has in mind is likely to be complementary to
(and not duplicative of) other foreign assistance, and
should help lay a solid foundation for Honduras'
participation in the Central America customs union and the
Central American Free Trade Agreement. Key challenges will
include (1) ensuring sufficient consultation throughout
society on a well-focused proposal that emphasizes economic
growth, (2) developing efficient implementation mechanisms
that ensure accountability and transparency, and (3)
proposing good indicators and targets for the measurement of
success, including relevant policy changes. End Comment.

Palmer