I Revised closing date [if applicable] : Indicate if the restructuring is:

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Date: March 3,2009 Country: Honduras Project Name: Trade Facilitation and Productivity Improvement Project DATA SHEET FOR PROJECT PAPER Task Team Leader: Thomas Haven Sector Manager: Lily Chu Country Director: Laura Frigenti Environmental category: B Project ID: ~ Borrower: Republic of Honduras Responsible agency: Foundation for Investments and Development of Exports (FIDE) Revised estimated disbursements (Bank FYISDRm) FY Annual Cumulative I Current closing - date: December 31,2009 I Revised closing date [if applicable] : Indicate if the restructuring is: Board approved - RVP approved - X Does the restructured project require any exceptions to Bank policies? Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Revised project development objective/outcomes [If applicable] Does the restructured project trigger any new safeguard policies? No Revised Financing Plan (SDRm.) Source Local Foreign Borrower 2.47 IBRD/IDA Others Total I No N/ A N/ A Total

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3 I. Introductory Statement This Project Paper seeks the approval of the Executive Directors to introduce the following changes in the Honduras Trade Facilitation and Productivity Improvement Project, Credit No HO, Project ID No. PO70038 and any accompanying amendments to the project's legal documents. The proposed changes make more explicit and clarify the financing of works that were envisaged in the previous restructuring of July 17, Specifically, the construction of the national metrology laboratory will be added to a sub-component and the construction of a technology center will be made more explicit in another sub-component. This Project Paper also describes all of the works being financed by Project, given that previous amendments have expanded the number of works from what was originally foreseen in the PAD. Finally, some adjustments are made to the output indicators. A reallocation of loan proceeds and partial extension of the project closing date are being processed separately in line with Bank guidelines. 11. Background and Reasons for Restructuring Background. The project was approved by the Board on October 21, The Development Credit Agreement was signed on January 27,2004, and it became effective on July 23, The total credit amount is SDR 20,500,000 and approximately 66 percent of it has been disbursed to date. Project Design and Scope. The development objective of the project is to improve the Borrower's investment climate and local firms' capacity to export in order to prepare the Borrower to benefit from trade opportunities under existing and new trade promotion agreements. The project would achieve its objective by: (a) supporting policy and legal reforms; (b) strengthening existing institutions and creating new institutions to improve competitiveness; (c) providing advisory services and financial support to micro, small and medium enterprises (MSMEs) and to firms operating in the most dynamic local industries to facilitate access to export markets and productivity improvements; (d) financing small scale initiatives to improve productivity of selected areas by upgrading local infrastructure, promoting business innovation and use of technology; and (e) increasing MSMEs' access to training and advisory services. The project contains the following components: A. Investment Climate 1. Reducing firms' anticompetitive behavior and improving consumer protection 2. Reducing administrative procedures 3. Improving quality and reducing costs of infrastructure and logistics B. Promoting Private Sector Innovation 1. Creating and supporting technology centers for the wood and craft sectors 2. Promoting higher value foreign direct investment 3. Developing and implementing a national quality system C. Improving Skills of the Labor Force D. Local Competitiveness: Improving Economic Development in Selected Pilot Areas E. Communication Campaign on Broad Themes Related to Competitiveness F. Project Coordination

4 Project Performance to Date. Based on the latest supervision mission carried out in November 2008, the rating for the achievement of the project's development objective continues to be "Moderately Satisfactory". Implementation Progress has also been rated "Moderately Satisfactory", as has the Procurement rating. The Financial Management Rating is "Satisfactory". In June 2008, the closing date was extended from September 30, 2008 to December 31, 2009 to enable the Project to better meet its objectives. As of February 2009, SDRs 13.6 million had been disbursed, out of a total of SDRs 20.5 million, or 66 percent of the total. Works Financed by the Project. The original project design envisaged works in the following sub-components for a total of SDRs 530,000 (roughly US$ 830,000 at today's exchange rate): B.1. Creating and supporting technology centers for the wood and craft sectors (specifically in Part B.l (a) (ii) of the Project in Schedule 2 to the Development Credit Agreement); and D. Local Competitiveness: Improving Economic Development in Selected Pilot Areas (specifically in Part D.2 (c) of the Project in Schedule 2 to the Development Credit Agreement). The July nd order restructuring expanded the number of sub-components in the Development Credit Agreement (DCA) that could finance works to include the following: A.1. Reducing firms' anticompetitive behavior and improving consumer protection (specifically in Part A. 1 (c) (vii) of the Project in Schedule 2 to the DCA); A.2. Reducing administrative procedures (specifically in Part A.2 (d) of the Project in Schedule 2 to the DCA); B.3. Developing and implementing a national quality system (specifically in Part B.3 (b) of the Project in Schedule 2 to the DCA); C. Improving Skills of the Labor Force (specifically in Part C.3 of the Project in Schedule 2 to the DCA); D. Local Competitiveness (specifically in Part D.3 (a) and (b) of the Project in Schedule 2 to the DCA). F. Project Coordination (specifically in Part F.2 of the Project in Schedule 2 to the DCA). The July 2007 restructuring also increased the amount of the disbursement category for works to SDR 1.49 million (about US$2.2 million).' The current restructuring would not make works eligible in any new components. With the reallocation of loans proceeds being processed separately, the project would finance SDRs 2.19 million (equivalent to about US$3.28 million) in works. Given that this is a significant expansion from the amount originally envisaged, it is worthwhile to explicitly detail what works the Project has financed or plans to finance (see Table 1). The amounts of the works described in the Table 1 are for the total amount of each construction. The disbursement percentage in the DCA for works is 93%, so out of the US$3.42 million detailed in the table, the Bank is expected to finance about US$3.18 million. This figure ' In a subsequent reallocation of loan proceeds in April 2008, the Works disbursement category was adjusted to SDRs million.

5 1 2 No. A.l 1 does not exactly match the US$3.28 million allocated to the Works disbursement category mentioned above due to changes in the exchange rate between SDRs and dollars over the life of the project (including a small cushion to account for possible future changes in the exchange rate). Table 1: Works Financed or To Be Financed by the Project Estimated Name of Works Brief Description of Work Cost Remodeling of the offices of the Comision de Defensa y Promoci6n de la Competencia Cabling and electrical installations-, SE; COHDEFOR, Portal Em resarial Completion Date (Est.) June A.2 1 Reducing Administrative Procedures I I 1 Reducing Firms' Anti-Competitive Behavior and Improving Consumer Protection $15,000 1 B.l I Creating and Supporting CITES in the Wood and Craft Sectors I Construction of the CITES-Artesania/ Turismo $16,015 $464,771 Remodeling of the first floor of the offices, including removing some walls, painting, installing air conditioning and electrical wiring Provide network cables to connect computers and servers, as well as server room installations in the organizations mentioned. The building will be approximately 752 m2, distributed over 2 levels. On the first will be the principle entrance, reception and information, minibodega, bathrooms, training and exhibition multiple use room, administrative offices, labs, and various workshops. On the second will be the exhibition area and multiple use rooms. Developing and Implementing a National Quality System I The building will be approximately 1200 m2, Construction of distributed over 2 1ev;ls. The firs; floor will include National Metrology special labs for measurement equipment and national Laboratory, including samples. Part of the first level will be for offices for installations for the technical staff and a drop-off and pick-up area for National Quality equipment that needs calibration. The second floor System will be for other National Quality System offices and a multiple use room for training and a cafeteria. Remodeling of the installations for the $5,000 Legal Metrology Laboratory Improving Skills of Labor Force Classroom building for the "Universidad Empresarial" S91 1y81 Installation of sinks and bathrooms Construction of physical installations of the Universidad Empresarial Jose Cecilio del Valle, which consist of 14 classrooms, bathrooms; and an administrative area. April 2009 July 2009 November 2009 June 2009 November 2008 I D I Local Competitiveness: Improving Economic Development in Selected Pilot Areas

6 9 10 l Construction and equipment for tourist information kiosk in Copan Ruinas Construction of workshop for microentrepreneurs that work in dyeing in Copan Ruinas (GRUTECA) Rehabilitating the multiple use room in Copan Ruinas Minor works in productive decentralized units (SMEs) to start a maquiladora industry in the southern region of the country Construction of two pilot centers for the processing and storage of cashews for small producers in the southern region (one in Choluteca and one in Valle) Redesign of the municipal market and rehabilitation of food market in Ojojona Construction of three wood-drying ovens in theureservadel Hombre y Biosfera del Rio Platano" Repairing of hydrothermal plant for mango processing Total $18,98 1 $68'000 $120,000 $106,382 $148,038 $80,000 $60,000 $63,820 $3,420,293 An information center to serve tourists that visit Copan Ruinas and the archeological park, to promote local tourist fms, and to make available information that could facilitate linkages with other national tourism services. Construction of a dyeing locale for women working with the microenterprise, GRUTECA. Construction will improve the physical space for this activity and therefore increase the quality of production and elevate their competitiveness in the local artisanal market of Copan Ruinas. Rehabilitating the convention center so that it has sufficient capacity to house numerous audiences, thereby assisting tourist firms in the region that currently do not have adequate spaces for large events. Complete the improvement and expansion of physical installations of workshops of 5 clothing producing SMEs. Construction of a processing plant for the false fi-uit of cashews, of which they are currently only harvesting 10% of the total production. Taking greater advantage of this product will allow farmers to offer products with greater value-added, generating increased income and opportunities for work. Development of civil works necessary for the facade of the municipal market to harmonize its architecture with the historical center of the city of Ojojona and to include it as another tourist destination, increasing the length of stay of visitors to Ojojona. Generate greater value-added in forestry activities and increase the volume of exports of wood pieces fi-om agro-forestry cooperatives in the Reserva del Hombre y Biosfera del Rio Platano through the construction of 3 wood-drying ovens that will improve the quality of final products by producing wood with the degrees of humidity requested by clients. The work included the automating of the hydrothermal treatment system, rehabilitation of the cooling tower, relocation of the packaging line, etc. March 2009 March 2009 May 2009 June 2009 June 2009 April 2009 June 2009 April 2007 Additional details about the largest works in the table are described below: Construction of the CITES-ArtesanidTurisrno for US$464,771. The PAD envisaged providing facilities for the technology centers (CITES) financed by the Project. Specifically, the PAD says that "the project will support the creation of the main CITEartesania Center in Tegucigalpa and of.three small technical units in Copan (stone and Mayan souvenirs), Santa Barbara (natural fibers) and La

7 Ceiba (or Trujillo)" (p. 67). Early in the project's execution, it was decided that only the main CITEartesania would be constructed in Copan. This amendment to the DCA will make clear that the "provision of facilities" described in the DCA includes the construction of a building. Construction of National Metrology Laboratory (including installations for the National Quality System) for $1,342,475. The main reason for this restructuring is to make this construction eligible, as described below. Classroom building for the "Universidad Empresarial" for $9 1 1, This building was added to the project as part of the July 2007 restructuring. The 2007 restructuring Project Paper states "Add also the provision of works... to upgrade the quality of the those entities [public and private training providers], and explicitly include financing for the establishment of a new Enterprise Management University (Universidad Empresarial)...". Since the Project Paper did not explicitly mention the construction of a new building, it is worth highlighting here that a new classroom building was constructed as part of this component. Reason for the Restructuring. The reason for the restructuring is to expand and clarify the definition of eligible works in the Project. Specifically, the construction of the national metrology laboratory will be added to a sub-component and the construction of a technology center will be made more explicit in another sub-component. The construction of the laboratory has been in the planning stages for the past 2.5 years, with the support of the Project. The Development Credit Agreement currently only permits the financing of "complementary minor works" in this sub-component. Given that the laboratory is a two-story, stand-alone structure, a modification to the DCA is necessary to finance the construction. The restructuring will also modify the list of output indicators described on page 3 of the PAD and in Schedule 2 of the Project Agreement. The reason for the modification is to increase the level of specificity of the indicators to better capture the project results and to correspond to what is currently monitored in the Implementation Status and Results Reports. There are sufficient hnds in the credit to cover the proposed changes and no additional funding is being requested Proposed Changes The proposed changes would expand the scope of sub-component 3 "Developing and implementing a national quality system" of Part B "Promoting Private Sector Innovation" of the Project. Specifically, the changes would modify the following clause in Schedule 2, Part B.3 of the Credit Agreement: "3. Developing and implementing a national quality system in the Borrower's territory through:...( b) provision of goods, complementary minor works, training and advisory services to improve the quality of private and public laboratories in the Borrower's territory". In addition to complementary minor works, the construction of the national metrology lab would be made eligible. Office space on the second floor of the laboratory would be used to house the national quality organizations (accreditation, metrology, and standards) created with support from the Project.

8 This change is justified to meet the objective of developing a national quality system as described in the PAD. Specifically, the sub-component objective in the PAD is to "Build awareness of, and a demand for, a national quality culture; facilitate the establishment of quality measurement, standards, testing, and certification services; and promote the application and certification of quality and environmental management systems to increase the productivity and competitiveness of the private sector." (p. 72). As one of the means to achieve this objective, the PAD describes financing "capacity building for the national metrology laboratory" (p. 74) and includes as a performance indicator "National Metrology Laboratory fully operational" (p. 75). Yet, no financing for the actual construction of the lab was described in the PAD. Given that the Government does not have adequate resources to undertake the construction without Project support, there is no way that this indicator can be achieved without the proposed change. The construction of the lab would also allow the Project to finance the necessary equipment to make the lab operational. Given that the construction and equipping of the lab would be finished shortly before the project closing date, it is unlikely that the lab would be fully operational before the project closes. However, without this restructuring, no national metrology laboratory would exist. The office space on the second floor of the lab would further the project's goals of developing a national quality system by providing a more adequate space for the national quality system entities created with Project support. The restructuring would also add a small clause to the sub-component of the Project for "Creating and supporting technology centers for the wood and craft sectors" (Part B.l). The clause would affect Schedule 2, Part B.l(a)(ii) of the DCA and make it explicit that the "provision of facilities" includes the construction of a building. Providing facilities for the technology centers was part of the original project design, and this amendment is only meant to make that explicit. Adjustments to output indicators. The list of output/monitoring indicators on page 3 of the PAD and Schedule 2 of the Project Agreement is shown in Table 2 below:

9 Table 2: Original output/monitoring indicators Part A: Investment Climate Reduction of business registration time by 40% Reduction of business registration cost Reduction of unit cost and increase in volume of cargo handled by Puerto CortCs Part B: Promoting Private Sector Innovation Number of Micro, Small and Medium Businesses (MSMBs) using Innovation Technology Centers (CITEs) financed by the project Increase in FDI diversification following implementation of the Investment Promotion Strategy financed by the project Increase in the number of laboratories accredited by international institutions Increase in the number of firms obtaining quality certifications (large firms and MSMEs will be monitored separately) Part C: Improving Skills of Labor Force Increase in the number of firms requesting training by INFOP Improved quality of INFOP courses (as assessed by the firms attending the courses) Part D: Local Competitiveness: Improving Economic Development in Selected Pilot Areas Increased investment (local and foreign) in the areas selected as pilots for the local competitiveness initiative The proposed restructuring would modify the list of indicators in Schedule 2 of the Project Agreement to include the following: Table 2: Proposed modified output/monitoring indicators Part A: Investment Climate Reduction of time to start a business by 40% Reduction of time spent dealing with construction licenses Increase in volume of cargo handled by Puerto CortCs Part B: Promoting Private Sector Innovation Number of Micro, Small and Medium Businesses (MSMBs) using Innovation Technology Centers (CITEs) financed by the project Number of new jobs created through FDI promotion activities Increase in the number of laboratory tests accredited according to international standards Increase in the number of f ms obtaining quality certifications (large f ms and MSMEs will be monitored separately) Part C: Improving, Skills of Labor Force Number of SMEs receiving training through project-financed courses Number of public and private training centers strengthened with project support Part D: Local Competitiveness: Improving Economic Development in Selected Pilot Areas Increased investment (local and foreign) in the areas selected as pilots for the local competitiveness I- initiative The reasons for the changes are as follows: Part A. In the first indicator, "business registration time" was replaced by "time to start a business". This adjustment is to align the wording with the Doing Business indicator that

10 is used to monitor the results. "Reduction of business registration cost" was replaced by "Reduction of time spent dealing with construction licenses" since project activities have concentrated much more on the latter. This change also broadens the scope of the investment climate monitoring since business registration is already covered in the first indicator. The reduction of unit costs was removed fiom the Puerto CortCs indicator since unit costs for the port have not changed since 1999 by agreement between the National Port Company (Empresa Nacional Portuaria) and the Shipping Association (Asociacidn de Navieros), so there is nothing to monitor. Part B. The "increase in FDI diversification..." indicator was replaced by a much more concrete measure: "Number of new jobs created through FDI promotion activities". This provides a clearer measure of impacts since how to measure FDI diversification was never defined in the PAD. The international laboratory accreditation indicator was refined to make it better reflect what is important in laboratory accreditation. What matters for the accreditation of testing and calibration laboratories is that they have specific tests (that are relevant to the country context) accredited by an internationally recognized accreditation authority according to ISOIIEC Hence, this indicator was changed to measure the number of "laboratory tests accredited according to international standards" rather than simply the "number of laboratories accredited by international institutions." Part C. The Project's involvement with INFOP (the National Institute of Professional Training, Instituto de Formacidn Profesional) has been much lower than originally anticipated and, as a result, the July 2007 restructuring broadened the component description to finance other training providers besides INFOP. The proposed change aligns the indicator with the previous restructuring by broadening it to cover firms and workers receiving training from project-financed activities outside of INFOP. Outcome indicator. According to page 3 of the PAD, the outcome indicator is the following (the outcome indicator is not mentioned in the Development Credit Agreement or the Project Agreement): "Improvement in Honduras' ranking in the World Economic Forum's Competitiveness list, fiom 75" (in 2003) to 65th (in 2008). This improvement should be driven mainly by an improvement in Microeconomic Competitiveness ranking (Business Environment and Companies Performance), for which the goal is that Honduras should move fiom 78th (in 2003) to 65th (in 2008). (The Macroeconomic Index, which is the second determinant of the overall Competitiveness Ranking and is outside the scope of this project, is also expected to improve based on the Government's planned macroeconomic reforms.) As agreed at the Project Concept Document Review Meeting, after the ICA study is completed, this indicator will be replaced by a figure (fiom the ICA study) that is easier to monitor and more directly related to the interventions financed under the project." The World Economic Forum has changed its methodology and no longer measures the indices mentioned in the outcome indicator. For that reason, and since the PAD explicitly mentions replacing the indicator with one "that is easier to monitor and more directly related to the interventions financed under the project", the indicator was replaced via an indicator refinement exercise in the May 2008 ISR. The purpose in mentioning the change here is to ensure transparency. The indicator was replaced by Honduras' ranking in the Ease of Doing Business index published by the World Bank Group. The new

11 baseline is Honduras ranked 112 in Doing Business 2006 (Ease of Doing Business rankings are not available before DB 2006)~. The new target is Honduras ranked 104 in Doing Business 2010 (based on the same country sample used in 2006) The Ease of Doing Business indicator is directly impacted by project activities that target 3 of the 10 sub-indices that make up the ranking. A new indicator from investment climate assessments was not used (as suggested in the PAD) since there is no ICA survey that would fall close to the end of the project and capture project impacts. Moreover, the scope of the Doing Business indicator is similar to the World Economic Forum's Microeconomic Competitiveness ranking. Hence, this change is considered a refinement of the original outcome indicator, rather than a material change to it. IV. Analysis The proposed changes do not have a major effect on the original economic, financial, technical, institutional, or social aspects of the project and no exceptions to Bank policies are involved. The changes do not raise the environmental category of the project or trigger new safeguard policies. The previous project restructuring in July 2007 included a number of small works, and at that time the Project was upgraded to an environmental category B. An Environmental Impact Assessment and Environmental Management Plan and Indigenous Peoples Development Plan were then prepared and approved by the Regional Safeguards Coordinator in July The Environmental Impact Assessment and Environmental Management Plan included the construction of the national metrology laboratory and the technology center (CITES-Artesania/Turismo) as part of the works foreseen by the project. In addition, the potential environmental impacts of the two works were reviewed by the Bank in February 2009 (and found to be low), and the project implementing unit has followed through on measures to ensure that the works are in compliance with the Environmental Management Plan. A mission was undertaken in February 2009 by a Bank resettlement specialist to review the status of the proposed technology center and the national metrology lab. The mission confirmed.that the proposed activities do not trigger the Involuntary Resettlement safeguard. Moreover, the Development Credit Agreement contains a covenant (inserted during the July 2007 restructuring) that provides that the Borrower shall ensure that no physical or economic involuntary resettlement (as interpreted in accordance with the Bank's Operational Policy 4.12) shall take place as a consequence of Project implementation. Compliance for all of the works will be reviewed as part of regular supervision. Given these measures, the Regional Safeguards Coordinator confirmed that the Involuntary Resettlement safeguard is not triggered. The lab construction will be partially financed by gains from exchange rate changes between the dollar and Special Drawing Ri hts (the project budget is in dollars while the loan amount is denominated in SDRs)! The remainder will be financed by the The Doing Business Report usually comes out in the fall of the preceding year, meaning that data in Doing Business 2006 is from mid All Borrowers in Honduras have been notified that these exchange rate gains, as well as the losses, are for the Borrower's account, as indicated in the Disbursement Guidelines, and thus the Project Coordination Unit will assume the risk of any financing shortfall in case the exchange rates change in the future.

12 elimination of smaller consultancies and goods purchases that have been determined to be either less feasible given the amount of time remaining in the project or of less importance to achieving the objectives of the project. V. Expected Outcomes The proposed change will not affect the project's development objective, outcome targets, or outcome indicator. The outcome indicator was previously refined in an ISR and the output indicators are being adjusted, as detailed above. VI. Benefits and Risks The restructuring does not introduce any new risks to the achievement of the development objective.