Institution Building and Policy Reform

A key characteristic of MCA programs globally is that they are not just about products (like roads); they are also about process (like institutional strengthening). Honduras offers some good examples of this side of the MCC’s approach. Even before spending significant program funds, the MCAH has created an unprecedented inter-agency planning process for rural roads, increased government commitment to better fund and manage national road maintenance, built a coalition for policy change in the financial sector, and helped strengthen the financial management capacity of the Ministry of Finance.

• Rural roads planning: The MCAH has created a committee to select the rural roads that will be funded by the MCAH. This brings together the Association of Municipalities, Soptravi, the Honduran Social Investment Fund (FHIS) in the office of the president, the Ministry of Natural Resources, and the MCAH in a joint planning exercise. The committee is using a model designed by the Honduran Center for Social and Economic Research (CIES) to calculate rates of return of roads. The model takes into account, among other things, farmer productivity increases from the MCAH’s rural development program, the poverty index of municipalities and the wish lists of municipalities around the country. This formal, transparent, collaborative process for road selection and program planning is new in Honduras, and is setting an excellent example for improved government effectiveness in planning and budgeting.
• Road maintenance fund: As a condition for disbursement of MCAH transportation project funds, the GoH must allocate an increasing amount for the next three years to the national road maintenance fund (Fondo Vial) to cover maintenance of all roads, not just those funded by the MCAH. The GoH had agreed that $45 million would be the adequate amount for road maintenance in 2007. However, when the national budget went to the congress, it included only $40 million for the Fondo Vial. As a result, the MCC withheld funding for the transportation project until the GoH provided a written commitment to increase road maintenance funding for the next three years at acceptable levels, starting with $45 million for 2007.
  
  The MCA program is also helping improve planning and transparency in road maintenance operations in Honduras. In addition to providing adequate funding for road maintenance, the GoH must have a maintenance plan. This requires the Fondo Vial to develop a long term plan that inventories roads and prepare quarterly reports that track maintenance activities. According to one MCC official in Tegucigalpa, the Fondo Vial administration has not shared reporting or planning documents with its supervisory committee in the National Assembly. By requiring that Fondo Vial to develop and abide by a maintenance plan, MCAH will help government officials and public citizens better track the use of Fondo Vial’s funds (a desperate need, judging from the corruption allegations against Fondo Vial in local papers recently).
• Access to credit law: According to a number of respondents, the creation of a moveable property law and registry is the MCAH activity likely to have the longest and largest transformative impact. Together, the law and the registry will increase access to credit by allowing borrowers to use assets other than land (such as cattle inventories or accounts payable) as collateral. The MCAH has been savvy in working toward this objective, engaging both other donors (such as the World Bank that is working on a bankruptcy law and the IADB that is working to design new financial instruments) and the private sector (such as the Chamber of Commerce) to design and advocate for this new legal framework.
• Institutional strengthening of Sefin: The Honduran Ministry of Finance (Sefin) serves as the fiscal agent for the MCAH. The MCAH is one of only three MCA programs worldwide that places the country government in this role. The MCAH’s commitment to working through a government entity is an important contribution to building national capacity and should be commended. But it has its challenges. It has taken a lot of work for the MCAH and MCC to get Sefin to meet MCC fiscal accountability requirements in terms of accountability, reporting and speed. It would undeniably be easier and faster just to go around the government and hire a private firm to serve as a fiscal entity, as the MCA programs do in a number of other countries, but this would mean losing the opportunity to invest in the long-term financial management capacity of the government. To strike the right balance between bolstering national systems and meeting the MCC standards, the MCAH has decided to contract an independent fiscal oversight advisor that will help implement the fiscal accountability plan and act as a "third eye" of oversight and quality insurance over Sefin.