US embassy cable - 04TEGUCIGALPA1490

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 
--------------------------------------------- ---------- 
 
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 
--------------------------------------------- - 
 
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 
-------------- 
 
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 
------------------------------ 
 
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 
---------------------- 
 
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. 
 
--------------------------------------------- -- 
International Financial Institutions and Donors 
--------------------------------------------- -- 
 
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 
----------------------- 
 
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 
-------------- 
 
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