Document of The World Bank FOR OFFICIAL USE ONLY Report No: PP5564 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PAPER ON A PROPOSED GRANT IN THE AMOUNT OF US$1.75 MILLION TO THE LAO PEOPLE’S DEMOCRATIC REPUBLIC FOR A LAO AIRLINES SUSTAINABLE DEVELOPMENT PROJECT DECEMBER 21, 2023 Transport Global Practice East Asia And Pacific Region CURRENCY EQUIVALENTS Exchange Rate Effective November 10, 2023 Currency Unit = Lao Kip US$1 = 20,745 FISCAL YEAR January 1 - December 31 Regional Vice President: Manuela V. Ferro Country Director: Mariam J. Sherman Regional Director: Sudeshna Ghosh Banerjee Practice Manager: Benedict Eijbergen Task Team Leaders: Christopher J. De Serio, Maxwell Bruku Dapaah ABBREVIATIONS AND ACRONYMS AOL Airports of Lao ASEAN Association of Southeast Asian Nations BoL Bank of Laos BCEL Banque pour le Commerce Exterieur Lao Public CO2 carbon dioxide CORSIA Carbon Offsetting and Reduction Scheme for International Aviation DA Designated Account DCA Department of Civil Aviation DPF Department of Planning and Finance E&S Environmental and Social ESCP Environmental and Social Commitment Plan ESF Environment and Social Framework FMUTF Financial Management Umbrella Trust Fund GHG greenhouse gas GMS Greater Mekong Sub-region GRM Grievance Redress Mechanism HSR High-Speed Rail ICAO International Civil Aviation Organization IFR Interim unaudited Financial Reports IFRS International Financial Reporting Standards km kilometers LANS Lao Air Navigation Services LMP Labor Management Procedures M&E Monitoring and Evaluation MOF Ministry of Finance MPWT Ministry of Public Works and Transport MW Megawatt NDC nationally determined contribution PDO Project Development Objective PMU Project Management Unit PSS passenger service system QV Lao Airlines SEA/SH Sexual Exploitation and Abuse and Sexual Harassment SEP Stakeholder Engagement Plan SOE State-owned enterprise USAID United States Agency for International Development The World Bank Lao Airlines Sustainable Development Project (P181359) BASIC INFORMATION Is this a regionally tagged project? Country (ies) No Financing Instrument Classification Investment Project Financing Small Grants Approval Date Closing Date Environmental and Social Risk Classification 02-Jan-2024 30-Sep-2025 Moderate Approval Authority Bank/IFC Collaboration CDA No Please Explain Proposed Development Objective(s) To reduce Lao Airlines business losses, enhance corporate financial reporting, and strengthen operational management. Components Component Name Cost (USD Million) Lao Airline Restructuring Strategy and Reform Pathway 600,000.00 Lao Airlines Business Optimization and Management Assistance 650,000.00 Passenger Service System module upgrade 500,000.00 Organizations Borrower : Ministry of Finance Implementing Agency : Ministry of Public Works and Transport The World Bank Lao Airlines Sustainable Development Project (P181359) PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 1.75 Total Financing 1.75 Financing Gap 0.00 DETAILS -NewFinEnh1 Non-World Bank Group Financing Trust Funds 1.75 Trust Funds 1.75 Expected Disbursements (in USD Million) Fisca l 2024 2025 2026 Year Ann 0.30 1.25 0.20 ual Cumu 0.30 1.55 1.75 lative INSTITUTIONAL DATA Financing & Implementation Modalities Situations of Urgent Need of Assistance or Capacity Constraints [ ] Fragile State(s) [ ] Fragile within a [ ] Small State(s) [ ] Conflict [ ] Responding to non-fragile Country Natural or Man-made Disaster Other Situations [ ] Financial Intermediaries (FI) [ ] Series of Projects (SOP) [ ] Performance-Based Conditions (PBCs) [ ] Contingent Emergency Response Component (CERC) [ ] Alternative Procurement Arrangements (APA) [ ] Hands-on Expanded Implementation Support (HEIS) The World Bank Lao Airlines Sustainable Development Project (P181359) Practice Area (Lead) Transport Contributing Practice Areas Governance OVERALL RISK RATING Risk Category Rating Overall ⚫ Moderate COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✔] No Does the project require any waivers of Bank policies? [ ] Yes [✔] No The World Bank Lao Airlines Sustainable Development Project (P181359) Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance Assessment and Management of Environmental and Social Risks and Impacts Relevant Stakeholder Engagement and Information Disclosure Relevant Labor and Working Conditions Relevant Resource Efficiency and Pollution Prevention and Management Relevant Community Health and Safety Not Currently Relevant Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant Biodiversity Conservation and Sustainable Management of Living Natural Not Currently Relevant Resources Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Not Currently Relevant Local Communities Cultural Heritage Not Currently Relevant Financial Intermediaries Not Currently Relevant Legal Covenants Conditions PROJECT TEAM Bank Staff Name Role Specialization Unit Team Leader(ADM Christopher J. De Serio Air Transport IAWT4 Responsible) Maxwell Bruku Dapaah Team Leader Governance EEAG2 Procurement Specialist(ADM Sirirat Sirijaratwong Procurement EEAR1 Responsible) The World Bank Lao Airlines Sustainable Development Project (P181359) Financial Management Siriphone Vanitsaveth Financial Management EEAG2 Specialist(ADM Responsible) Sybounheuang Social Specialist(ADM Social Development SEAS1 Phandanouvong Responsible) Environmental Specialist(ADM Thuy Cam Duong Environment SEAE2 Responsible) Alina Phonvisay Procurement Team Procurement EACLF Andrei Busuioc Peer Reviewer Governance EECG1 Aymen Ahmed Osman Ali Peer Reviewer Transport IAET1 Elena Georgieva Team Member Governance EEAG1 Georgieva-Andonovska Florou Hernandez Team Member Loan Accounting WFACS Gender Equity and Social Jutta Krahn Team Member HEASP Inclusion Kaysone Vongthavilay Team Member Environment SEAE2 Marie Aria Nezam Counsel Legal LEGAS Mazhar Farid Team Member Legal LEGAS Megersa Abera Abate Peer Reviewer Air Transport ITRGK Ruxandra Luciana Brutaru Team Member Airlines ITRGK Sadig Aliyev Team Member Transport IEADR Sandy Belle Habchi Team Member Air Transport ITRGK Sombath Southivong Team Member Transport IEAT1 Vilayvanh Phonepraseuth Team Member Partnerships IEAE1 Extended Team Name Title Organization Location The World Bank Lao Airlines Sustainable Development Project (P181359) LAO PEOPLE'S DEMOCRATIC REPUBLIC LAO AIRLINES SUSTAINABLE DEVELOPMENT TABLE OF CONTENTS I. STRATEGIC CONTEXT ...................................................................................................... 1 A. Country Context .................................................................................................................. 1 B. Sectoral and Institutional Context ...................................................................................... 3 C. Higher Level Objectives to which the Project Contributes ................................................. 7 II. PROJECT DEVELOPMENT OBJECTIVES .............................................................................. 8 A. PDO...................................................................................................................................... 8 B. Project Beneficiaries ............................................................................................................ 8 C. PDO-Level Results Indicators............................................................................................... 8 III. PROJECT DESCRIPTION.................................................................................................... 9 A. Project Components............................................................................................................ 9 B. Project Cost and Financing ................................................................................................ 10 IV. IMPLEMENTATION........................................................................................................ 11 A. Institutional and Implementation Arrangements ............................................................. 11 B. Results Monitoring and Evaluation ................................................................................... 11 C. Sustainability ..................................................................................................................... 12 V. KEY RISKS ..................................................................................................................... 12 A. Overall Risk Rating and Explanation of Key Risks.............................................................. 12 VI. APPRAISAL SUMMARY .................................................................................................. 13 A. Legal Operational Policies ................................................................................................. 18 B. Environmental and Social .................................................................................................. 19 VII. WORLD BANK GRIEVANCE REDRESS .............................................................................. 20 VII. RESULTS FRAMEWORK AND MONITORING .................................................................... 22 The World Bank Lao Airlines Sustainable Development Project (P181359) I. STRATEGIC CONTEXT A. Country Context 1. The Lao People’s Democratic Republic is a small landlocked economy bordering five countries of mainland Southeast Asia. Stretching about 1,700 kilometers (km) from north to south but only about 100 km wide at its narrowest width, more than three-quarters of its landscape is covered by mountainous terrain with the remaining area part of low-lying plains along the Mekong River. The country’s topography makes it highly vulnerable to climate change-induced natural hazards, particularly floods and landslides. 2. With 7.2 million inhabitants, the country is one of the least densely populated in the region. An ethnically diverse country, its population comprises four main ethno-linguistic groups, 67 percent representing the Lao Loum ethnic family. A 2020 poverty assessment estimated the national poverty headcount rate at 18.3 percent, implying that almost one-fifth of the population were living on less than ₭ 9,364 a day (approximately US$1.1 per person per day or in 2011 purchasing power parity [PPP], US$2.4 per person per day). The implications of COVID-19 and recent economic trends since this assessment has likely suppressed living standards among the most vulnerable. Poverty remains concentrated among subsistence farmers and minority ethno-linguistic groups. Although poverty remains predominately rural, rural-urban migration trends have led to rising urbanization rates, which has increased the share of urban poor. 3. Nonfarm employment in Lao PDR rose steadily over the past decade, thought actual job growth appears to have stagnated. According to the International Labor Organization statistics, about 58 percent of the population was employed in the agricultural sector in 2021, followed by services (31 percent) and industry (11 percent). Yet all sectors—except the public and hospitality sectors—experienced a net decline in employment between 2013 and 2019. The services sector is expected to continue benefiting from a recovery in tourism and improved transport connectivity post COVID-19. External demand, coupled with improved logistics services and connectivity, is expected to help sustain manufacturing and agriculture exports. The industry sector will also benefit from investment in the power sector and special economic zones. However, growth is expected to remain below pre-COVID levels, weighed down by structural weaknesses. 4. Economic opportunity and participation rates of Laotian women have made some advancements in recent years. While representation of women in government is improving, with a higher proportion of women in national parliaments in the region, their participation at district and village levels remains low. Lao’s National Socio-Economic Development Plan (2021-2025) mainstreams multiple gender metrics into actionable targets related to women’s representation, improvements in gender index scores, legal empowerment, access to employment, and availability of services for protection and redress against violence and abuse. However, gender gaps, gender-based violence and disadvantageous social norms towards women and girls persist. The gender landscape for a working woman in Lao is better than regional averages, particularly for legal aspects related to mobility, decisions on work, and ownership of property and inheritance.1 Prior to COVID-19, only 20 percent of females participating in the labor force were employed in the nonfarm sector. The labor force participation rate for women over the age of 15 was 1 Women Business and Law (WB, 2023) Page 1 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) 55.4 percent in 2022,2 though monthly wage-earning income was equivalent to about three-fourths of male counterparts. 5. Tourism is an increasingly important segment of the economy. Laos is endowed with significant natural capital, offering beautiful landscapes and rich biodiversity as part of its tourism value proposition. Tourist arrivals have nearly doubled since 2010. In 2019, more than two million travelers from Thailand and one million from China visited Laos, followed by 203,200 from Korea and 41,700 from Japan. According to the World Tourism Organization, international tourism receipts reached a record high US$974 million in 2019 before retracting to US$227 million in 2020 following the COVID-19 global pandemic. A sharp drop in the travel, tourism, and hospitality sectors —which account for 11 percent of total employment and 22 percent of employment in urban areas— caused widespread job losses (between 96,000 and 214,000 jobs). International and domestic tourism rebounded in 2022, but only to about 25 percent of its pre-COVID-19 levels, suggesting the sector will take time to fully recover. 6. Laos’ low carbon development pathway rests on measures that promote energy efficiency, as well as sustainable land use and transportation policies. In September 2021, Laos updated its nationally determined contribution (NDC) targets. National greenhouse gas (GHG) emissions in 2020 were estimated at around 53 MtCO2eq. The country commits to unconditionally reduce its GHG emissions in 2030 by 60 percent or around 62,000 ktCO2e in absolute terms compared to a business-as-usual (BAU) scenario. Progress towards implementation of 2015 NDC measures, which focused on increasing forest cover, scaling renewable energy, and increasing the share of biofuels for transport, where either off track or not achieved. It did, however, achieve an expansion of large hydro capacity to 5,500 Megawatts (MW) by 2020 and is on-track to generate 20,000 MW by 2030. While the Government has set a conditional target of achieving net-zero emissions by 2050, there is currently no National Adaptation Plan or Long-Term Strategy for the country. 7. Macroeconomic weaknesses persist although Lao looks to recover from the effects of the COVID-19 pandemic. Estimated at over 110 percent of GDP in 2022, public and publicly guaranteed debt service obligations are among the highest in the region, creating both solvency and liquidity challenges that are pushing Laos toward sovereign debt distress. Rising debt service obligations, growing interest payments, as well as the debt exposure of state-owned enterprises (SOEs), including the national airline, are squeezing fiscal space and diverting public resources away from development expenditure. a. In one year between April 2022 to 2023, inflation reached 40 percent, while currency depreciation saw the Lao Kip fall by 32 and 43 percent against the Thai baht and US dollar, respectively, straining much of the economy. b. Weaker growth prospects with key trading and investment partners – namely China, due to its structural slowdown and zero-COVID-19 policy – are also weighing on the recovery. Growth is expected to remain below pre-COVID levels in 2023 (estimated at 3.9 percent) but could expand more quickly should measures to address structural imbalances be accelerated. c. Domestic risks include challenges with refinancing external debts, slow progress with structural reforms, and a deterioration of bank balance sheets. In particular, the outcome of the ongoing bilateral debt renegotiation will have strong implications for resolving debt distress and 2 Lao PDR Gender Assessment, (WB, 2023) Page 2 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) macroeconomic instability. d. A fiscal adjustment alone, particularly through protracted expenditure curbs, will not be sufficient to improve debt sustainability without harming long-term growth prospects, as the debt overhang will undermine critical investments in human capital, crowd out private investment, and fuel macroeconomic instability. 8. A member of the Association of Southeast Asian Nations (ASEAN) Economic Community, its regional integration and trade with ASEAN and China have been important development drivers over the past decade. Connectivity and integration with its neighbors - Myanmar and China to the northwest, Vietnam to the east, Cambodia to the southeast, and Thailand to the west and southwest – has contributed to country’s economic progress. Three major regional infrastructure development initiatives – the Greater Mekong Sub-region initiative, the Trilateral Highway initiative connecting India, Myanmar and Thailand, and China’s Belt-and- Road Initiative– aim to enhance economic cooperation and accelerate transcontinental economic integration. B. Sectoral and Institutional Context 9. Air connectivity is vital to economic integration and social cohesion in Laos. In 2019, the International Air Transport Association air connectivity index rated Laos as 93rd among 219 States evaluated around the world. Though the Laotian air market is relatively small, serving 4.07 million total passengers in 2019, it plays a critical role in the country’s access to global and regional economic centers. In addition to facilitating international arrivals, which is important for the country’s tourism sector, air cargo handled an all-time high of 6,300 tons in 2018, according to the Lao Statistics Bureau. 10. The country has 13 airports, of which four operate internationally.3 Though Laotians have a medium propensity to fly,4 low population densities limit the country’s airport catchment areas, affecting the development of air services. During 2019 traffic originated from all points of the country. Vientiane, the main international gateway, provides the largest single airport catchment (1.2 million people). Vientiane processed more than 2.5 million passengers, representing 63 percent of the total national seating capacity. Luang Prabang’s tourism appeal makes it the second most important destination in Laos. Together, the Savannakhet and Pakse areas also combine to make a sizeable airport catchment (1.4 million population). 11. Lao has liberalized its international and domestic air services market access regime, the benefits of which have positively affected sector development. The ASEAN Single Aviation Market stakes out a regional Open Skies policy initiative to liberalize air services between member states to facilitate tourism, investment and trade benefits generated from increased air connectivity. Laos’ adherence to the ASEAN policy significantly increased demand, with seating capacity growing at an average compounded annual growth rate of 16 percent, which is higher than its ASEAN peers though on par with Cambodia and Vietnam. During 2019, 19 airlines from seven countries operated in the Laotian market, all of them regional operations serviced by narrow-body and regional aircraft. Market share in the international sector comprised four Thai airlines (19.7 percent) and four Chinese carriers (10.7 percent). Bangkok is the densest route with 26.4 percent of all seats offered, followed by Kunming with 12.1 percent, and Seoul 3 Four international airports are located in Vientiane, Luang Prabang, Pakse and Savannakhet 4 560 passengers per 1000 population (OAG 2021) Page 3 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) 10.3 percent. The presence of international carriers by seats offered include Vietnam Airlines (8.5 percent), followed by China Eastern Airlines (6.1 percent) and Bangkok Airways (5.9 percent). 12. The effects of the COVID-19 pandemic on the Laotian market were severe. Total seating capacity contracted by 61.1 percent to only 1.14 million seats during 2020. Given the continued level of restrictions, during 2021, only 637,182 seats were scheduled on 17 destinations, only five of which were international, and with modest output. Asia-Pacific countries have since maintained one of the slowest recovery rates, in part due to China COVID lockdowns, while new economic and travel constraints due to the conflict in Ukraine, are likely to extend delays in the re-establishment of international air connectivity. Laos is highly dependent on regional recovery, and pre-COVID traffic levels are estimated to be reached only by 2026. 13. There are two incumbent national carriers, Lao Airlines (QV) and Lao Skyway. Both airlines are SOEs that are 100 percent owned by the Government of Laos. While QV serves both international and domestic markets with a fleet of four Airbus A320 and seven ATR-72 aircraft,5 Lao Skyway only operates on domestic routes.6 The two carriers had a combined market share of 52 percent of all seats sold in 20197. Domestic traffic between QV and Lao Skyway was 58 percent and 42 percent, respectively. The two commercial carriers are expected to manage their networks and operations autonomously. There is no explicit policy mandate or licensing scheme with respect to the domestic market, the size of which calls into question the need for two SOE airlines. 14. Competition between two incumbent SOE airlines is further complicated by the opening of the Lao-China high speed rail (HSR) line. In December 2021, HSR infrastructure in the north of the country was operationalized, with new services offering similar travel times between the capital, Vientiane, and Luang Prabang and Luang Namtha, which are also among the top air travel destinations. With rail service ticket prices are nearly half those for air services, passenger demand for air travel could see a 30 to 45 percent drop based on regional experience to date, adding competition to key domestic air routes. To manage this challenge, QV must optimize its fleet and route network, and consider synergies with HSR through combined air-train tickets, to ensure the national carrier can maintain access to domestic and regional networks that are not served by alternative modes. 15. A transport-focused National Appropriate Mitigation Action plan is one of six strategic approaches Lao looks to implement to reduce carbon dioxide (CO2) emissions between 2015–2030. The national mitigation plan does not include air transport.8 Global efforts to address aviation emissions have been led by the International Civil Aviation Organization (ICAO), whereby all ICAO member states conducting international flights have been required to monitor, report, and verify CO2 emissions beginning 2019.9 Landlocked developing countries, such as Laos, can volunteer to participate in its Carbon 5 QV owns all aircraft except for two Airbus that are under operating lease. 6 Due to certification challenges with one of two aircraft in its fleet, the carrier only operates domestic scheduled and charter services. 7 QV market share was 36 percent, followed by Lao Skyway with 16 percent. 8 The NDCs recognize two non-GHG transport related targets: (i) 30 percent Electric Vehicles penetration for 2- wheelers and passengers' cars in the national vehicle fleet mix (conditional); and (ii) implementation of Non- Motorized Transport interventions integrated with the Lao-China Railway project (unconditional). 9 As an ICAO member state, Lao is required to monitor, report, and verify those aircraft operators with Page 4 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) Offsetting and Reduction Scheme for International Aviation (CORSIA), though it is not mandated10. Emissions from domestic air travel are not included in CORSIA, however, domestic aviation, like other domestic sources, are included as part of national GHG inventories under the United Nations Framework Convention on Climate Change. Institutional Context 16. Laos does not currently have a formal National Aviation Policy. Such policy statements provide the strategic framework for the country’s sectoral ambitions, including how air transport can contribute to economic and social development. Outlining the Government’s vision should ultimately guide the intentions over various sector stakeholders with respect to the provision of aviation infrastructure and services can best enable air connectivity for Laos. A national aviation policy would also set the foundation for the potential privatization of aviation sector operations, as well as environmental stewardship within the sector. 17. The Department of Civil Aviation (DCA) within the Ministry of Public Works and Transport (MPWT) is responsible for both policy and planning, as well as regulatory compliance of all operators.11 International best practice calls upon an institutional framework that creates a clear functional separation between policy making, technical regulation, operational entities, and air accidents/incidents investigation. The separation between these roles prevents conflicts of interest that could hamper the effectiveness of each function. Among the policy and planning roles, DCA currently advises the Ministry on tariffs and pricing, and negotiating bilateral air service agreements that determine market access regimes for foreign carriers. Defining essential domestic services in Laos would also be among these functions. DCA's mandate includes regulatory oversight of technical and safety matters. The latest ICAO Universal Safety Oversight Audit Programme12 for Lao PDR was conducted in 2015, where findings reflect that implementation of safety oversight standards is at or above global averages across all eight critical elements. 18. The DCA Safety and Standards Division is responsible for monitoring and reporting the emissions of its registered operators to ICAO. It has recently been tasked with preparing a five-year plan to reduce CO2 emissions for the air transport sector, to be deployed between 2022 and 2024. It is expected to address ICAO recommendations on development of a State Action Plan that identifies mitigation strategies necessary to decarbonize international aviation, including airlines’ participation in CORSIA to achieve carbon-neutral growth from 2030 onwards, as well as time bound commitments for carbon neutrality of airport operations. 19. The operation of infrastructure and infrastructure services—airports, airlines, and air navigation services—are the main points of entry to the system. a. Airports of Lao (AOL) is a government entity under the MTPW, although separate from DCA. It remains a public entity, with plans to be privatized. AOL is responsible for the operation and international flights generating more than 10,000 tons CO2 emissions per annum. 10 Of 193 ICAO contracting States, Lao is one of the 78 countries not yet participating in CORSIA. 11 Operations are divided into three separate responsibilities: Air Navigation Services, Airports and Airlines 12 The ICAO program monitors the fulfillment of the safety oversight obligations by its member states. Page 5 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) maintenance of Wattay International Airport,13 two regional airports (Luang Prabang and Pakse), and two provincial airports (Luang Namtha and Savannakhet). Additional aerodromes fall under the responsibility of the military or are privately operated, primarily by various industrial stakeholders. b. Lao Air Navigation Services (LANS) manages air traffic control within the Lao Flight Information Region. LANS is responsible for communication, navigation, and surveillance in Lao airspace. Though under the control of MPWT, LANS has operated at arms’ length from airport operations and the DCA as the regulatory authority since 2008. c. Lao Airlines and Lao Skyway. Lao Airlines was created as a national carrier in late-1989 and became fully commercial in 2005. The airline is an incorporated SOE, invested under the jurisdiction of MPWT, and operated according to the regulations and guidelines of MOF as the primary custodian (and sole shareholder). Lao Skyway, previously known as Lao Air, was founded in 2002, is wholly owned by the State through MoF, operated under the leadership of high-ranking officials of the Ministry of Defense in the roles a Chief Executive Officer and Chief Operations Officer. 20. Since its launch, Lao Airlines has had mixed results. Despite a buoyant and attractive regional market, the airline’s pre-pandemic performance recorded operating losses. The accumulation of losses forced a restructuring in 2009 that included the MOF writing off its debts. Financial difficulties due to fleet expansion decisions and insufficient agility in leveraging its purchased assets were only compounded when the Covid-19 pandemic severely curtailed the airline’s operations in 2020-2022. QV developed a five-year plan (2021 – 2025) for post-COVID recovery, though it did not adequately account for the risk of potential inflationary impacts, a weakening of the local currency or fuel price fluctuations. Despite rescheduling some of its loans, primarily through either postponement of payments or deferment of interest repayments, its continuing impact only worsened QV’s financial situation. 21. Lao Airlines is highly leveraged. At present, the airline is one of the highest borrowers for the largest public banks in Laos as QVs immediate lenders. All its current borrowing is supported by letters of guarantee issued by the MOF, and the airline is therefore a liability to the Government of Laos as the ultimate guarantor. Resolving aircraft-related debt will require financial and specialized legal support. 22. In June 2022, a World Bank team completed an Integrated State-Owned Enterprise Framework assessment of Lao Airlines. The primary findings advocate for more robust corporate governance practices. These include the necessity for increased involvement of airlines' business experts on the board of directors, tighter internal controls, better procurement processes for leasing capital assets, and a more streamline approach to accounting, records management, and compliance with international financial accounting reporting standards. • Though QV follows the Instructions on State-Owned Enterprise Board of Directors in accordance with its Articles of Association, the structure, composition, and tenure expected of board members is likely to diminish the level of international airline commercial and financial expertise and experience necessary to remain competitive in the region. Additionally, the airline would 13 Lao-Japan Air Terminal Services (LJATS), a joint venture between GoL and Japanese interests, operates Vientiane Airport passenger terminal, and other downstream services. Page 6 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) benefit from experts in several crucial areas such as strategic partnerships, commercial and marketing management, engineering, and human resource development. • Lao Airlines does not have a formal performance management plan for employees, though its most recent business plan acknowledges the need for staff training. The company has 945 staff, of which 692 work in Vientiane headquarters, 234 people in 7 domestic branches14 and 19 people in 12 international branches.15 The SOE is organized in 12 departments, consistent with an optimally functioning airline company. This size of its salesforce is around 10 percent of total employees, slightly above industry averages, though typical of airlines that lack contemporary systems and digitalization of customer experience. Capacity building plans for management, technical and administrative staff have not been prioritized nor has budget been allocated for skills and staff development. A MPWT Strategy for Advancement of Women in the Public Works and Transportation Sector (2014 – 2025) intends to ensure that gender is adequately considered, including among its SOEs, which includes a target that women account for at least 30 percent of participants in technical and non-technical training by 2025. • The airline’s management information systems are not sufficiently robust to qualitatively and quantitively benchmark its operational and financial performance. The current Enterprise Resource Planning software does not provide a complete solution. The stand-alone accounting system that is approved by MOF is not integrated with the current passenger service system (PSS); automation of a revenue accounting solution to eliminate manual entry of passenger revenue figures is needed. 23. The government and the national carrier remain dedicated to maintaining the airline’s financial solvency. In July 2023, the Prime Minister appointed a nine-person Lao Aviation State Owned Enterprise reform committee to manage the airline through its reform process and examine options for restructuring the airline’s financial, operational, and human resource development16. In October 2023, the Prime Minister approved a Lao Aviation State Reform Plan, a conceptual framework for guiding business transformation. However, without a restructuring of the network, fleet, and overheads, the debt write- off solution proposed by QV, which is to issue sovereign bonds totaling more than US$243.5 million, presents several critical risks as it will not be sufficient to balance the airline’s liquidities nor offer a medium or long-term debt solution for the government. Operational improvements must also be accompanied by a sound debt restructuring plan to minimize the fiscal impact on the government. C. Higher Level Objectives to which the Project Contributes 24. The Country Partnership Framework for FY2023-26 (Report No. 177311-LA) places improved public expenditure management and revenue mobilization as the first high level outcome among its objectives. The recent Strategic Country Diagnostic recognizes that restoring macroeconomic stability is 14 Domestic branches are Luang Prabang, Pakse, Xieng Khouang, Savannakhet, Oudomsay and Luang Namtha. 15 Bangkok, Chiangmai, Hanoi, Ho Chi Minh, Phnom Penh, Siem Reap, Incheon, Kunming, Jinghong, Guangzhou, Changzhou, Changsha, Shanghai, Wenzhou, and Chengdu. 16 The Committee is chaired by Vice Minister, Finance, with the Vice Minister, MPWT as deputy chair. Lao Airlines is represented by its Managing Director. The remaining committee members include three persons from MoF and MPWT (Deputy Director of MOF’s department of state enterprise refinement and insurance; and two Deputy Directors at MPWT), and three persons from academia. Page 7 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) necessary if Laos is to return to sustainable debt levels, create fiscal space, strengthen its financial sector, and reduce extreme poverty. It supports the implementation of recommendations of the 2022 Laos Airlines Fiscal Risks and Corporate Governance Assessment and the 2023 Public Financial Review specific to State-owned enterprises on fiduciary management, transparency, and accountability reforms, and builds upon the Second Public Financial Management Reform Program. 25. Resuscitating Lao Airlines requires that the Government defines its strategic value proposition to the overall economy, and that the airline develop a more efficient and sustainable business model. As Lao Airlines accounts for the second largest level of sovereign debt guarantees, the project serves as a catalyst to contribute to (a) addressing the fiscal risks and costs of the airline to government; (b) promoting economic corridor development and regional connectivity, and (c) enhancing the prospects of private capital mobilization for airline operations. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO The proposed technical assistance aims to reduce Lao Airlines business losses, enhance corporate financial reporting, and strengthen operational management. B. Project Beneficiaries 26. The primary beneficiary is the state-owned airline and its majority shareholders. Secondary beneficiaries include the airlines key business partners and the traveling public. The direct beneficiaries of the Project will be executive management and operational staff. These beneficiaries will benefit from on-the-job training and participation in capacity-building activities. Government stakeholders will benefit from greater transparency and accountability of the airline financial and operational performance through publicly available reporting that conforms to international industry standards. The traveling public will benefit from efficiency gains generated through new business processes and system upgrades. Airline industry suppliers and partners are expected to benefit from more clarity and structure on procurement and payment processes. Finally, Lao citizens will also benefit indirectly, as project outcomes are expected to reduce public expenditure on a commercial SOE, thereby creating additional fiscal space for other national development initiatives. C. PDO-Level Results Indicators 27. Achievement of the PDO will be measured through three outcome indicators that correspond to the main elements of the PDO (see Section VII for further details and definitions). (i) PDO 1. Annual Airline business losses (Amount USD) (ii) PDO 2. Asset utilization ratio (Percentage) (iii) PDO 3. Digital systems mainstreamed into operational and financial management processes17 28. The theory of change attempts to frame the intermediate outcomes of the strategic areas as 17 FM Umbrella TF indicator Page 8 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) inherent to the larger reform pathway. A key governance outcome of the proposed project is the adoption of IFRS. Performance measurements related to aircraft load factors, per passenger administrative costs, and operational costs on available seat kilometers are aligned with commercial best practice benchmarks for evaluating efficiency. A Lao Airline’s Annual Report that provides details on the executive management team’s roles and expertise, presents annual audited financial statements using IFRS, and evaluates airline performance using established industry metrics, which are intended to improve governance, transparency, and accountability of the national carrier. Impact Bankable national carrier, less reliant on state aid, with diminished sovereign fiscal risk Project Outcome PDO 1. Rebalance operational PDO 3. Digital systems performance to achieve break-even PDO 2. Asset utilization ratio mainstreamed into operational & operating results financial management processes* Lao Airline State Enterprise Reform Committee adopts restructuring plan Short/Medium Term IRI1. Medium-Term Debt Management Plan Outcomes prepared IRI2. SOE governance and enhanced IRI 3. Transition and cutover of new • IIRI1.1 Business-Administrative costs to US$10/per pax capacity in financial reporting* passenger service system • IRI1.2 Operational expenses and cost per available seat km by 20% • IRI1.3 Aircraft load factors by 10% Component 1 Component 2 Project Pillars Restructuring Strategy & Reform Pathway Business Optimization & Management Advisory Services Component 3 • Fleet-Route Optimization • Sales & Revenue Management • International Airline Management Advisor Passenger Service System Upgrade • Appropriate Governance Model • Executive Level Financial Advisor • Airworthiness Maintenance Technical Advisor • PSS Technical Specialist Critical Assumption * FM Umbrella Program Indicators III. PROJECT DESCRIPTION A. Project Components 29. Three main components are designed to (i) guide government and executive decision making in the debt management of a major SOE, (ii) strengthen strategic, fiduciary and technical management, and (iii) enabling business improvements that strengthen controls on revenue accounting and financial reporting. The technical assistance includes three main components: Component 1: Lao Airline Restructuring Strategy and Reform Pathway (US$600,000) 30. The component will prepare an airline restructuring options analysis that will inform a specific reform pathway and attenuated airline sustainability plan. A Medium-Term Debt Management Plan will be the primary output of this component. Key elements of the plan are to include business cost reduction Page 9 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) options that are underpinned by (a) a Fleet Optimization Strategy based on realistic medium and long term (passenger and cargo) demand forecasts; (b) a Sales and Revenue Optimization Strategy; and (c) a Corporate Governance Strategy to frame the carrier’s governance practices in consideration of internationally observed principles on transparency, leadership culture, management information and performance management would be developed. The analysis will include operational scenarios to better leverage existing assets, increase aircraft utilization, and reduce unitary costs. Component 2: Lao Airlines Business Optimization and Management Assistance (US$650,000) 31. The component will focus on delivering technical assistance in core areas that can immediately add value to Lao Airlines management and operations. Individual consultant services will be engaged to support the options analysis, business planning and reform processes. They will also support the production of an annual airline report to present leadership credentials, management vision, and operational and financial performance metrics. 2.a. International Airline Management Expert. An individual consultant will be recruited to provide expertise regarding aircraft fleet finance and restructuring, airline partnerships, and streamlining of business operations to reduce cost overheads. The expert would support implementation of measures to improve corporate governance, strategic decision-making, and fiduciary management, while facilitating board of directors’ oversight. 2.b. Executive-level Airline Financial Expert. An individual consultant will be recruited to develop a bespoke financing model for the airline and advise the reform committee on measures to improve financial forecasting and reporting, fiscal controls, near-term cost savings, and adoption of IFRS to ensure accuracy and ease in international transactions. 2.c. Airworthiness Maintenance Expert. A licensed maintenance professional will be engaged to provide technical advisory services that support aircraft maintenance planning, including supply chain and inventory management, which will improve fleet utilization. 2.d. Passenger Service System (PSS) Specialist. A PSS specialist will be engaged to support the development of technical specifications for the PSS integration for the airline’s control systems and modernization initiatives under the project. 2.e. Project Financial Audit. Funding is allocated to complete required project financial audit(s) of grant resources. 2.f. Project Operating Costs. A small envelope is available to cover project operating costs during implementation. Component 3: Passenger Service System module upgrade (US$500,000) 32. The component will implement industry software module upgrades that improve integrated enterprise resource planning. Goods (software) acquisition and installation of appropriate PSS modules for an airline of its size and market reach, as well as relevant staff training, is included as part of this activity. B. Project Cost and Financing Page 10 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) 33. The project is financed by a grant from the United States Agency for International Development (USAID) through the Financial Management Umbrella Trust Fund (FMUTF) in the amount of US$1.75 million. Counterpart Project Components Project cost (US$) Trust Funds (US$) Funding (US$) Lao Airline Restructuring Strategy and Reform Pathway 600,000 600,000 0 Lao Airlines Business Optimization and Management 650,000 650,000 0 Assistance Passenger Service System module upgrade 500,000 500,000 0 Total Project Costs 1,750,000 1,750,000 0 Total Financing Required 1,750,000 1,750,000 0 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 34. The implementing agency is the Ministry of Public Works and Transport (MPWT) on behalf of Lao Airlines. The MOF has appointed a nine-person Lao Aviation State Enterprise reform committee, chaired by the Deputy Minister of Finance, to examine options for restructuring the airlines financial, operational and staffing challenges18. At the national level, both the MPWT and MOF have experience working with World Bank-financed Projects. An existing Project Management Unit within the MPWT managing an on-going World Bank-financed investment project will be responsible for day-to-day project management, safeguards, and procurement and financial management. Given the size and scope of the recipient-executed trust fund, a Project Operations Manual is not required. B. Results Monitoring and Evaluation 35. Monitoring and Evaluation (M&E) of the project development outcomes is guided by the Results Framework. QV will be responsible for overall M&E data and reporting against agreed indicators and timelines. Achievement of the PDO will be measured through two outcome indicators that correspond to the main project elements. Data for measurement of key performance indicators, several of which are consistent with widely accepted airline industry financial and operational metrics, will be sourced from Lao Airlines quarterly reporting to the SOE Reform Committee, as the acting management board. The PIT will have the primary responsibility for collating and reporting relevant data to the World Bank through semi-annual project reports. Actionable reforms would then be implemented by the Airline Board of Directors. 18 Committee members include three persons from MoF and MPWT (Deputy Director, MOF’s department of state-owned enterprise reform and insurance; and two Deputy Directors at MPWT), and three persons from academia (two deputies from department of economics and administration at national university of Laos, and deputy department of research policy development enterprise and international connection, institute of economy research-national sociology). Page 11 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) 36. A Bank-executed grant from USAID through the FMUTF provides funding to the project’s Implementation Support Plan. It facilitates the World Bank team’s client engagement during regular intervals, as well as just-in-time support in reviewing and providing guidance during development of the airline's business planning and reform strategy, and with the technical specifications for the acquisition of the PSS module. Implementation review missions will be conducted every three to six months, either in- country or virtually, over the project period. The implementation support plan covers both technical advice and non-technical project management reviews. These will be documented through Aide Memoires agreed between the World Bank and government stakeholders and discussed at wrap-up meetings to be chaired by Lao Airlines Restructuring Committee. C. Sustainability 37. Key outcomes related to governance and accountability are embedded in the expected airline annual reporting and public disclosure of financial and operational performance. The corporate governance strategy will support a transition from airline management under the auspices of the government reform committee to an industry good practice model. It will further strengthen airline fiduciary controls, elaborate corporate social responsibility related to environment, social and governance principles, including workforce diversity and inclusion in corporate culture. 38. The adoption and transition to IFRS will ensure accuracy in reporting through accredited audit agencies, support performance benchmarking, facilitate international transactions, and enhance the potential to attract foreign investors and access to global capital markets. Additionally, new IFRS sustainability disclosure requirements were published in June 2023 on the adoption of airline industry- based climate-related reporting, which includes: (a) gross GHG Scope 1 emissions; (b) discussion of long- term and short-term strategy or plan to manage emissions, set reduction targets, and assess performance towards its targets; and (c) account for the airline’s total fuel consumption, as well as percentage of alternative and sustainable fuels used. The transition to IFRS under the project improves transparency and accountability about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term. 39. A modernized PSS will enhance the airlines’ asset utilization and streamline business operations beyond the project period. The PSS provides a platform to enhance customer experience with flight schedules, fares, and seat availability, as well as facilitate travel agencies booking processes to expand QV’s market penetration, while simultaneously automating and digitizing its revenue accounting ledgers. V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks 40. The overall risk rating for the proposed Project is Moderate. This is based on Moderate risk ratings for political and governance aspects, fiduciary, technical design, and institutional capacity of the line Ministry. The macroeconomic risk is deemed to be Substantial. Recent depreciation of the Lao Kip further elevates the risk of exchange rates losses to the determinant of QV business units requiring foreign Page 12 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) currency. Adoption of specific options for restructuring the airline is contingent upon the endorsement of the Lao Airline State Enterprise Reform Committee, which also represent the political imperatives of the MoF and MPTW, the airline owner and responsible entity, respectively, with final approval of the Prime Minister. Transitioning airline management to an independent Board of Directors with sufficient autonomy to make strategic commercial decisions on fleet management and resource allocation is crucial to reducing debt exposure and implementation of other reform recommendations. The main mitigation measures will rely on close and continuous dialogue with the GOL, capacity building, engagement of key stakeholders through technical workshops and World Bank implementation support. VI. APPRAISAL SUMMARY 41. Technical. The primary consultancy (firm) is expected to prepare a Medium-Term Debt Management Plan, which is to be informed by a Fleet Optimization Strategy, a Sales and Revenue Optimization Strategy, and a Corporate Governance Strategy. Lao Airlines requires a professional business plan developed in collaboration with a reputable firm, to ensure an appropriate assessment of fleet size, debt restructuring options, build-up of its network, and streamlining of its administrative structure to articulate an actionable roadmap to monitor implementation. A proper financial model capable of evaluating scenarios that balance additional capital injections, debt write-offs, renegotiation of borrowing terms, and operational restructuring to ensure its sustained viability in the medium to long term. • A Fleet Optimization Strategy based on realistic medium- and long-term demand forecasts (passenger and cargo) to enable (a) evaluation of network and fleet scenarios; (b) development of business client engagement options, including optimizing ground and flight operations, streamlined maintenance processes, and cost efficiency procedures; and (c) analysis of industry 'good practice' financial mechanisms, including fuel and currency hedging options. • A Sales and Revenue Optimization Strategy that (a) defines essential airline partners strategy and plan to renegotiate partnerships; (b) recommendations on pricing incentives and (c) sales and distribution plans. The strategy also covers cargo business development to maximize the airline’s revenue potential. • A Corporate Governance Strategy to frame the carrier’s governance practices in consideration of internationally observed principles. Detailed corporate governance guidelines focusing on transparency, leadership culture, management information and performance management would be developed. A procurement manual, as well as use of government or company digital procurement platforms, will be assessed to improve competition in purchasing and acquisitions. The design of an associated capacity development and corporate training for senior leadership and management roles would be embedded to strengthen overall corporate governance. 42. Individual consultants will provide expertise on (i) aircraft fleet finance and restructuring, airline partnerships, and streamlining of business operations to reduce cost overheads; (ii) adoption of International Financial Reporting Standards and related financial management capacity building; (c) maintenance and repair planning and management for fleet airworthiness; and (d) developing appropriate technical specifications for competitively tendering the PSS modules. 43. Acquisition of appropriate PSS modules will address the current absence of an industry standard revenue accounting platform that eliminates manual keying-in of passenger revenue figures, which will Page 13 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) effectively enable a transition to IFRS. The main modules being considered in the upgrade include: (i) reservation, inventory, and ticketing; (ii) revenue integrity; (iii) revenue management; (iii) departure control system; and (vi) revenue accounting. 44. Financial and Economic Analysis. The project is expected to have direct positive economic impacts and quantifiable benefits of reduced fiscal risks to the government and enhanced financial and operational sustainability of the airline. These benefits are expected from all three project components. 45. The support will help develop and implement a business plan with clear pathways for reducing current and future debt, reducing reliance on cross-subsidies from the government and fostering a financially sustainable business model. Experience from similar efforts by state-owned airlines in the region and around the world show positive results in reducing sovereign exposure and of off-budget fiscal transfers, creating additional fiscal space for public expenditure towards social and human development. 46. Lao Airlines total liabilities, equivalent to about 2.5 percent of (estimated) 2023 GDP, continue to put pressure on the Government’s national domestic and external debt stock. Aircraft ownership and leasing accounts for 80 percent of the company’s borrowing, which is backed by sovereign guarantees. In June 2023, MOF issued a promissory note on behalf of QV to cover the accrued interest on an overdue loan to one of its domestic creditors. QV’s liquidity ratio and its debt-to-equity ratio are well below industry averages, which indicate both an inability to service short and long-term debt, placing it at a high risk of bankruptcy and insolvency. Debt cancellation to State creditors and service providers amounting to approximately 12 percent of liabilities has been tentatively agreed by MOF. Financial forecasts indicate that the airline will continue to accrue operating losses between 2024-2028. As its current debt obligations cannot be repaid from projected revenues, stabilizing the company’s cash flow is crucial. Without restructuring of the network, fleet, and overheads, the current proposed debt write-off solution to issue sovereign bonds will not address the fiscal risks to the government as well as achieve the needed change in the operational model. 47. Based on the level of investment for the proposed set of interventions to support a corporate workout of Lao Airlines, a qualitative assessment of costs and benefits has been undertaken19. Should QV present a viable business plan, reduce overheads, and implement contemporary revenue management practices that enable a return to a positive cash flow and operating profits, financial restructuring of state bank borrowing could potentially rebalance the Government’s contingent liabilities. A proper financial model capable of evaluating scenarios that balance additional capital injections, debt write-offs, renegotiation of borrowing terms, and operational restructuring to ensure its sustained viability in the medium to long term is needed. 48. The support to be provided on IFRS implementation will improve the reliability of reporting to accurately reflect QV’s true financial status and contingent liabilities. The debt restructuring will have implications on access to capital and potential joint-venture partnerships. Equally important is having internationally recognized accounting practices and standards in place to continually report operational results, measure key performance indicators and report transparently to all stakeholders. The quantitative benefits of such improvements to be supported could not be measured but are well recognized as having 19A GHG Accounting is not applicable to the economic analysis, as the level of project investment does not exceed the predefined threshold of US$15 million that would require estimating GHG emissions. Page 14 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) positive contributions to firm performance and overall corporate reporting of the SOEs sector. 49. Financial Management (FM). The FM risk is considered ‘Low’. FM systems and staffing at PIU- DPF is deemed adequate for the project’s FM arrangements. Existing FM procedures used at PIU for other Bank-financed projects will be followed. To ensure smooth and timely payment processing, Lao Airlines will appoint a coordinator to coordinate with PIU-DPF. PIU-DPF will provide FM training to the coordinator when the project is effective. The project will produce semester Interim unaudited Financial Reports (IFR) on funds received, spent and fund balances by the end of the period, based on a format agreed with the Bank. The IFR will be submitted to the Bank no later than 45 days after the end of each semester. The project will also be subject to a one-time audit at project closure. The audit will be carried out by an independent and qualified auditor, with audit TOR acceptable to the Bank. The auditor shall be appointed within one year of the project becoming effective. The audit report and management letter will be submitted to the Bank no later than six months after the closing date of the project. The audited financial statement will also be disclosed by MPWT and the Bank in accordance with the Bank’s Policy on Access to Information. 50. Disbursement methods shall include advance, direct payment, and reimbursement. A segregated Designated Account (DA) denominated in US Dollars will be opened at the Bank of Lao. The DA ceiling will be fixed at US$250,000. Minimum value for direct payment will be US$100,000. An operating account with a ceiling of US$25,000 will be opened at commercial bank to facilitate day to day small payments. The grant (US$1.75 million) will be disbursed against eligible expenditure under Goods, Consulting Services, Non-Consulting Services, Training and Workshops, and Operating Cost. Audit cost will also be covered under the project financing. 51. Procurement. The procurement risk rating is considered ‘Moderate’. Procurement under the project will be carried out in accordance with the World Bank’s ‘Procurement Regulations for IPF Borrowers: Procurement in Investment Project Financing’, dated September 2023. Proc urement under national procurement procedures, as agreed with the World Bank, will be carried out in accordance with national regulations, including the Law on Public Procurement Law No 30/NA, dated 2 Nov 2017 and the Instruction of Implementation of Law on Public Procurement, No. 0477/MOF, dated 13 Feb 2019. Conditions for use of such procedures will be stipulated in the Procurement Plan. The current procurement team of PMU within DPF of MPWT will be responsible for the project’s procurement activities, with QV team members as a technical procurement supporting secretariate. Table 1. Procurement (Goods) Packages with Methods and Time Schedule 1 2 3 4 5 6 7 Date of Expected Ref. Contract Estimated Procurement Review Bidding Comments No. (Description) Cost (US$) Method by Bank (*) Document issued G-1 Passenger 500,000 RFB Post Jan 1, 2024 International supplier; Service System international Limited invitation to be (software) open considered based on PPSD market scan Page 15 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) Table 2. Consultancy Assignments with Selection Methods and Time Schedule 1 2 3 4 5 6 7 Ref. Description of Estimated Selection Review Expected Comments No. Assignment Cost (US$) Method by Bank (*) TOR ready CS-01 PSS Specialist 25,000 Individual Post Nov 1, 2023 1st priority. CS-02 International 225,000 Individual Post Jan 1, 2024 2nd priority Airline Finance REOI Jan. 15 Expert CS-03 Restructuring 600,000 Firm/QCBS Post Jan 1, 2024 3rd priority. Targeting Strategy and July 1, 2024 (on Business Plan board); 4-6 months CS-04 Airworthiness 125,000 Individual Post Feb 1, 2024 4th priority Advisor CS-05 International 225,000 Individual Post Mar 1, 2024 5th priority Airline Management Expert CS-06 External 6,000 Firm/CQS Post July 1, 2024 6th priority Auditor (*) Technical Review – via email • IC: Terms of Reference (TOR) / Evaluation Report • Firm QCBS: TOR / EOI Evaluation Report / RFP / TER • Software: Draft Bidding Document + Technical Spec. / Bid Evaluation Report 52. The environmental risk is classified as Moderate. The project provides technical assistance that involves detailed options analyses for airline financial and operational restructuring options, a business plan, detailed cooperate governance guidelines (Component 1); advisory experts for business optimizations and management improvement (Component 2); and procurement of software module upgrades that are necessary to improve enterprise resource planning (Component 3). The project will not finance civil works. The Project comprises soft activities that will take place within the existing footprint of the company’s facilities, both within the country and in regional offices (for the PSS rollout only). It is not expected to cause any direct adverse impacts or risks on the biophysical environment, human health and safety, or other valued environmental components. However, there are potential downstream environmental risks associated with the airline restructuring strategy options and future business plan to be developed under the project. These may include increases in noise and vibration pollution, local GHG emissions and air pollution from possible increased airline traffic and aircraft utilization. The fleet-route optimization strategy aims to improve utilization of existing aircraft assets, which may or may not increase overall flight time should QV restructure its network to improve aircraft load factors. The governance strategy aspects of the project would look to strengthen corporate social responsibility through improved environment social governance practices, such as the airline’s use of alternative fuels and participation in CORSIA to achieve carbon-neutral growth from 2030 onwards, which implies consideration of GHG reporting and abatement initiatives. 53. The social risk is classified as Moderate. The proposed activities are not expected to have any significant direct social risks or impacts. The project will not finance physical works and activities that would require land acquisition, displacement or generate risks or adverse impacts on local communities, Page 16 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) particularly ethnic and vulnerable groups. The project is expected to have beneficial impacts for Lao Airlines as well as the domestic aviation sector, including its business partners and suppliers, clients (passengers), and employees by improving its operational and financial performance. Consultant services with required areas of expertise will be hired to provide technical assistance to develop an airline restructuring strategy and business plan intended to inform a specific reform pathway, Advisory services on day-to-day strategic, financial and operational management are also envisaged. However, the adoption of business plan and modernized PSS developed under the project may lead to changes in the organizational and financial management structures. This includes potential staff retrenchment in some positions impacted by introducing automated PSS processes that reduce cost overheads, as well as improve efficiency and financial reporting. This risk is expected to be insignificant and will be assessed in more detail during project implementation to identify appropriate mitigation measures. In the longer term, an increase in air traffic demand for the air carrier will likely increase noise and pollution, including vibration and carbon emission that are harmful to physical and mental health among the local people and surrounding communities residing near the 13 international and domestic airports, located in Vientiane and provincial towns. 54. Alignment with Paris Agreement. The project is aligned with the objectives of the Paris Agreement. World Bank guidance notes on evaluating air transport sector projects acknowledge that no investment activities are considered universally aligned. The project supports Lao PDR’s state-owned enterprise reform agenda, specifically targeting the national carrier’s debt management, governance, accountability, and financial management practices. The activities do not involve an expansion of airline capacity and are not expected to lead to a significant increase in GHG emissions. The aviation sector is not included in Lao PDRs updated (2021) NDCs.20 While there is currently no National Adaptation Plan or Long Term Strategy for Lao PDR, the project is consistent with the National Strategy on Climate Change, as the fleet analysis, fleet-route optimization strategy, and business cost reduction options are expected to present scenarios that inform medium and long term investment decisions (in aircraft assets) and fleet management, including the outlook for achieving low- to zero emission air mobility in line with industry transition trends.21 Therefore, the project does not hinder the achievement of Lao’s climate goals on both mitigation and adaptation. 55. Climate co-benefits. Climate co-benefits from the project are likely to be generated through contemporary corporate policy and management practices, implementation of business cost reduction options, and operational efficiency improvements. Lao Airlines does not currently have an environmental unit or department in charge of optimizing the company’s environmental footprint, which is often the case for an airline of its size. The airline has yet to identify or implement any strategic initiatives to ensure proper management and minimization of emissions and reduction of fuel associated expenses. Despite crew knowledge and availability of continuous descent approach procedures, such operations have yet to introduced at Vientiane and other domestic airports, providing potential fuel and CO2 emission reductions. The most effective operational means to reduce aviation emissions in the near term is to 20 The updated NDCs identify the following transport related mitigation targets by 2030: (i) New Bus Rapid Transit system in Vientiane Capital and associated Non-Motorized Transport (unconditional); (ii) Lao-China railway, (unconditional); (iii) 30 percent Electric Vehicles penetration for 2-wheelers and passengers' cars in the national vehicle fleet mix (conditional); and (iv) biofuels to meet 10 percent of transport fuels (unconditional). 21 The airline sector decarbonization pathways include the aircraft manufacturing industry’s medium and long -term commercial market development of electric or hydrogen powered propulsion systems and/or accelerated at-scale production and distribution of Sustainable Aviation Fuels (SAF). Page 17 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) minimize the amount of fuel used in servicing and maneuvering of each flight. Business planning improvements related to fleet-route optimization and improved aircraft utilization could improve per- passenger emission factors rates (i.e., passenger load factors); planning efforts to optimize fuel consumption and minimize fuel expenses, increase overall efficiency, and improve emission abatement, such as procedural requirements on the use of auxiliary power units, one-engine taxiing, and reduced taxi times, as also anticipated. 56. Climate Mitigation. The proposed operation is aligned on mitigation, as the measures have been included in the project to avoid negatively impacting the country’s low carbon development pathways reduce the risk to low. The NDCs emphasize electric mobility penetration in the national vehicle fleet mix, non-motorized transport connectivity, operationalizing the High-Speed Rail (HSR) line to displace the use of internal combustion engine private vehicles, and an increase in the use of biofuels. Though Lao Airlines competes with the HSR for passengers to two domestic destinations (Luang Namtha and Luang Prabang), with HSR operations providing equivalent travel time at significantly less cost to users as a lower carbon mode, the project does not impede the stated modal shift goals between rail and private vehicles. Passenger demand for air travel for these routes could drop 30-45 percent; the proposed interventions on fleet-route optimization and potential reduction of airline fleets on routes competing with HSR would be essential to ensure the national carrier can maintain access to domestic and regional networks not served by alternative modes. The fleet-route optimization strategy will aim to ensure that network planning prioritizes access and services to domestic and regional destinations not currently served by alternative modes. Furthermore, the project activities do not impede a transition to the use of biofuels (i.e., sustainable aviation fuels), the availability of which will be driven by regional market dynamics.22 The mitigation measures for this project include: (a) embedding environmental, social and governance principles as part of the airline’s corporate social responsibility, in line with the 5-year GHG emission reduction plan; and (b) transparent GHG emission data monitoring as part of annual reporting on airline governance, operational and financial performance, in accordance with anticipated IFRS requirements. Building on an existing Bank collaboration with the US Federal Aviation Administration’s ASCENT Aviation Sustainability Center, the team will also look to leverage their expertise and build local capacity in Laos. 57. Climate Adaptation. Climate vulnerability and hazard impacts related to river and urban flooding, landslide, cyclone and wildfire are high in Lao PDR. Cyclone, flood, and wildfire risk can impact airline operations either by reducing capacity or increasing delays and cancellations, which would have financial implications due to lost revenues, increased operating costs and passenger inconvenience. Extreme temperatures, considered to be moderate risk for Laos, can impact engines and electronics to reduce aircraft lift, requiring longer runway requirements or reductions in aircraft load factors. However, these risks are not likely to have a material impact on this operation and its development objective. Business continuity planning is one aspect of the broader airline business planning model. The passenger services (software) systems are contracted and supported through known international vendors with global IT system connectivity that would have a low risk of climate hazard exposure. The adaptation risk is therefore considered low. A.. Legal Operational Policies . 22Association of Asia Pacific Airlines estimates suggest that 40 percent of global SAF production will be needed to supply the Asia-Pacific region. Page 18 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No . B. Environmental and Social 58. Based on project characteristics and the key findings of the Environmental and Social (E&S) due diligence, the following ESSs are deemed relevant to the project: ESS1 (Assessment and Management of Environmental and Social Risks and Impacts), ESS2 (Labor and Working Conditions), ESS3 (Resource Efficiency and Pollution Prevention and Management), and ESS10 (Stakeholder Engagement and Information Disclosure). The E&S risk is rated Moderate. 59. There are potential negative E&S impacts that are associated with the project’s activities under components 1, 2, and 3. The project will finance consultancy services to develop a restructuring strategy and reform pathway; however, it does not finance the implementation of the strategy and reform process. The project will not finance civil works, nor is it expected to cause any direct adverse impacts or risks on the biophysical environment, human health and safety, or other valued environmental components. The supply of any electronic equipment related to upgraded IT systems is not expected to have adverse impact on energy consumption. However, there are potential downstream environmental risks associated with the airline restructuring strategy options analysis and business plan to be developed under the project. These may include increases in noise and vibration pollution, local GHG emissions and air pollution from possible increased airline traffic and aircraft utilization. To ensure that the potential induced impacts are properly addressed, and the requirements of the WB ESF policy are effectively integrated, project activities will consider relevant aspects of the WB's ESF. The TORs and deliverables for the development of restructuring options analysis and business plan will be reviewed to ensure that downstream E&S implications be identified and assessed, to provide appropriate guidance that is consistent with the ESF when addressing such implications. 60. Social risks and impacts anticipated for this project include: (a) risks of exclusion of some beneficiary groups/institutions and therefore related to limited stakeholder engagement; (b) risks related to the labor and working conditions of project workers and (c) risk of Sexual Exploitation and Abuse and Sexual Harassment (SEA/SH) in relation to training and working conditions. These risks and impacts are low, and they are for the most part predicable and possible to mitigate during project implementation. As the scope of the project is largely between government officials (at MOF, MPWT, and QV) and contracted services, the risk of child labor and/or forced labor is negligible. This risk rating takes into consideration a lack of or minimal familiarity with environmental and social management capacity. The anticipated risks can be mitigated through appropriate actions/risk management plans to be handled by the PIU. Particular attention will be paid to monitoring and verification of compliance in the application of labor and working condition requirements (ESS2), including codes of conduct that will form a part of all project-financed contracts. 61. E&S Instruments. An Environmental and Social Commitment Plan (ESCP), which specifies all material measures and actions required for the project to meet Environmental and Social safeguards over specific timeframes. An adaptive management process for addressing changes or unforeseen circumstances is set out in the ESCP, has been prepared by MPWT. The process specifies how such changes or circumstances are to be Page 19 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) managed and reported, and how any necessary changes will be made to the ESCP, and the management tools used by the MPWT. The ESCP forms part of the Financing Agreement, which includes the obligation to ensure implementation of the ESCP. 62. Labor Management Procedures (LMP) have been developed to ensure fair and transparent process of staff and consultant selection for the jobs and assignments, equal treatment of workers as well as proper labor and working conditions. The LMP includes special policy provisions for workers or staff who may lose their job should the reform committee adopt the Restructuring Strategy and Business Plan, with special attention paid to ethnic and vulnerable groups of employees. The LMP also includes information on a Grievance Redress Mechanism (GRM) for workers. 63. A Stakeholder Engagement Plan (SEP) has been developed to ensure that the project incorporates elements that strengthen citizen engagement and enhance public participation (ESS10). The SEP has identified key stakeholders and describes the process for sharing information on Project activities as well as incorporating stakeholder feedback into project design, reporting and disclosure of project documents. The SEP includes provisions that are unique to the project for consultation with concerned stakeholders, including DCA and QV staff during project implementation. The SEP also outlines a GRM for the project that is consistent with the Bank ESS10’s requirements, providing legitimate access and a platform for stakeholders and project affected people to voice their complaints, opinions, and suggestions. Grievances can be received through different communication approaches such as by phone, email, postal service, SMS, and social media. The GRM will be managed by PTI of MPWT and will include staff adequately trained on GRM handling processes, monitoring, and reporting on grievances received and addressed. The engagement strategy includes consultation workshops, communication through different channels such as social media, QV’s website, newspapers, etc. Citizen engagement and transparency will be measured through the public availability of information. Participants in workshops will provide feedback that will be collected and analyzed by the PIU and documented in project reports. 64. Public consultation and disclosure of information. The relevant stakeholders were initially consulted on the draft ESCP, LMP and SEP in October and November 2023. The feedback from the consultations was incorporated into the project design and the final draft documents. The draft versions of these documents were disclosed locally on the Lao Airlines’ official website prior to project appraisal on December 1, 2023 (ESCP and SEP) and December 5, 2023 (LMP), respectively. The final ESCP, SEP, and LMP and were disclosed locally in a location accessible to project affected parties and other interested parties, as set out in ESS10, and on the World Bank’s external website on December 5, 2023. VII. World Bank Grievance Redress 65. Grievance Redress. Communities and individuals who believe that they are adversely affected by a project supported by the World Bank may submit complaints to existing project-level grievance mechanisms or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted to the Page 20 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) AM at any time after concerns have been brought directly to the attention of Bank Management and after Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, please visit https://accountability.worldbank.org. . Page 21 of 26 The World Bank Lao Airlines Sustainable Development (P181359) VII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY : Lao People's Democratic Republic Lao Airlines Sustainable Development Project Project Development Objectives To reduce Lao Airlines business losses, enhance corporate financial reporting, and strengthen operational management. Project Development Objective Indicators Unit of Data Source / Responsibility for Indicator Name Corporate Baseline End Target Frequency Measure Methodology Data Collection Name: Annual Airline Amount( - 0.00 Quarterly Lao Airlines quarter Lao Airlines business losses USD) 1,000,000.0 financial statements. 0 Airline quarterly operating revenues from passenger & cargo services cover quarterly operating expenses. Description: The indicator measures revenue enhancement targets to attain break-even operating results. Name: Asset utilization Percentag 0.00 20.00 Quarterly Lao Airlines operational Lao Airlines ratio e reports. Page 22 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) Unit of Data Source / Responsibility for Indicator Name Corporate Baseline End Target Frequency Measure Methodology Data Collection Description: Aircraft utilization rates are determined by the average number of hours per day an aircraft is used. QVs current aircraft utilization rate average for its fleet is 6.5 hours per day. A 20 percent increase represents an additional 1.2 hours per day. Name: Digital systems Text Legacy PSS Upgraded Once Lao Airlines. The indicator Lao Airlines mainstreamed into in use PSS reflects upgraded PSS that operational and financial operational digitizes: (i) reservation, management processes inventory, and ticketing; (ii) revenue integrity; (iii) revenue management; (iii) departure control system; and (vi) revenue accounting. Description: A FM Umbrella Trust Fund indicator. The stand-alone accounting system in use is not integrated with the current passenger service system (PSS); automation of a revenue accounting solution to eliminate manual entry of passenger revenue figures, Intermediate Results Indicators Unit of Data Source / Responsibility for Indicator Name Corporate Measur Baseline End Target Frequency Methodology Data Collection e Name: Medium-Term Yes/No N Y Once Lao Airlines business cost Lao Airlines Debt Management Plan reduction options prepared underpinned by (a) a Fleet Optimization Strategy based on realistic medium and long term (passenger Page 23 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) Unit of Data Source / Responsibility for Indicator Name Corporate Measur Baseline End Target Frequency Methodology Data Collection e and cargo) demand forecasts; (b) a Sales and Revenue Optimization Strategy; and (c) a Corporate Governance Strategy. Business Cost - Amount(U 14.30 10.00 quarterly Lao Airlines quarterly Lao Airlines Administrative costs SD) report per passenger Sales and Revenue Amount(U 0.09 0.08 Management - cost SD) peer available seat kilometer Aircraft load factors Percentag 63.00 70.00 Quarterly Lao Airlines Lao Airlines e Description: Assessment of fleet size, debt restructuring options, route network, and streamlining of administrative structure to articulate an actionable roadmap to monitor implementation. A proper financial model capable of evaluating scenarios that balance additional capital injections, debt write-offs, renegotiation of borrowing terms, and operational restructuring to ensure its sustained viability in the medium to long term. Name: SOE governance Yes/No N Y Annual Lao Airlines Lao Airlines and enhanced capacity in financial reporting Description: A FM Umbrella Trust Fund indicator. Production of a Lao Airline’s Annual Report that includes, composition, roles, and creden tials of Board of Directors, IFRS Page 24 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) Unit of Data Source / Responsibility for Indicator Name Corporate Measur Baseline End Target Frequency Methodology Data Collection e audited financial statements, airline business climate related risk disclosures, and industry standard operational metrics. Name: Staff training on Number 0.00 100.00 Annual Lao Airlines training Lao Airlines Sales Strategy and new records passenger service system Women trained on Number 0.00 30.00 Lao Airlines training Lao Airlines sales strategy and PSS records Description: Sales Strategy and PSS trainings to operationalize new system. Page 25 of 26 The World Bank Lao Airlines Sustainable Development Project (P181359) Target Values Project Development Objective Indicators FY RESULT_FRAME_TBL_ PD O Indicator Name Baseline End Target Annual Airline business losses -1000000.00 0.00 Asset utilization ratio 0.00 20.00 Digital systems mainstreamed into operational and financial management processes Legacy PSS in use Upgraded PSS operational Intermediate Results Indicators FY RESULT_FRAME_TBL_ IO Indicator Name Baseline End Target Medium-Term Debt Management Plan prepared N Yes Business Cost - Administrative costs per passenger 14.30 10.00 Sales and Revenue Management - cost peer available seat kilometer 0.09 0.08 Aircraft load factors 63.00 70.00 SOE governance and enhanced capacity in financial reporting N Yes Staff training on Sales Strategy and new passenger service system 0.00 100.00 Women trained on sales strategy and PSS 0.00 30.00 Page 26 of 26