The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 08-Mar-2022 | Report No: PIDA32394 Jan 04, 2022 Page 1 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Project Data Country Project ID Project Name Parent Project ID (if any) Lao People's Democratic Republic P176088 Southeast Asia Regional Economic Corridor and Connectivity Project Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EAST ASIA AND PACIFIC 07-Mar-2022 31-May-2022 Transport Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Lao People's Democratic Ministry of Public Works Republic and Transport Proposed Development Objective(s) To improve regional and domestic trade and climate resilient transport connectivity along an East-West corridor in Southeast Asia, and to provide immediate and effective response in case of an Eligible Crisis or Emergency. Components Component 1: Lao PDR and Regional connectivity enhancement Component 2: Logistics services development and border-crossing management Component 3: Strengthening institutional capacity and regulatory framework in agriculture, transport and investments planning Component 4: Project Management Component 5: Contingent Emergency Response PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 202.40 Total Financing 202.40 of which IBRD/IDA 132.40 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing Jan 04, 2022 Page 2 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) International Development Association (IDA) 132.40 IDA Credit 132.40 Non-World Bank Group Financing Counterpart Funding 20.00 Borrower/Recipient 20.00 Commercial Financing 50.00 Unguaranteed Commercial Financing 50.00 Environmental and Social Risk Classification Substantial Decision The review did authorize the team to appraise and negotiate Other Decision (as needed) B. Introduction and Context Country Context 1. Trade among the ASEAN countries1 has strengthened in recent years, and now accounts for 65 percent of ASEAN's total trade. Three major regional development initiatives are supporting economic integration in the South-East Asia region. The Greater Mekong Subregion (GMS) initiative launched with support from the Asian Development Bank (ADB) in 1992 brings together Cambodia, Lao PDR, Myanmar, Thailand, Vietnam, and China (Yunnan Province and Guangxi Zhuang Autonomous Region) to enhance economic cooperation. Second, the Trilateral Highway (TLH) is an initiative under India’s Look East Policy that will connect Moreh in India with Mae Sot Province in Thailand through Myanmar. Third, the Belt-and-Road Initiative (BRI) is a transcontinental infrastructure investment program led by China aimed at accelerating the economic integration of various regions with China. 2. Lao PDR is the key country linking land trade routes across northern Southeast Asia and could become a land-linked country. Lao PDR’s development gains over the last decade are inextricably linked to its integration and connectivity with the region’s countries. Flanked by Vietnam to the east and Thailand, Cambodia and Myanmar to the west and south-west, Lao PDR stretches about 1,700 kilometers from north to south but is only about 100 kilometers wide at its narrowest width. It is bordered by Myanmar and China to the northwest, Vietnam to the east, Cambodia to the southeast, and Thailand to the west and southwest. Lao 1ASEAN countries consist of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Jan 04, 2022 Page 3 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) PDR is a member of the ASEAN Economic Community, and its regional integration and trade with ASEAN and China have been important contributors to its economic growth over the past decade. 3. East-West connections running through Lao PDR would have the potential not only to stimulate intra- regional commerce among Lao PDR and its neighbors, but also to boost the weighting of Lao exporters in the sub-region’s trade. Existing transport connections in Northern Southeast Asia have been primarily oriented North-South, including the National Road 13, the new railway, and the new expressway. With the nodes between the north-south railway and the subregion’s east-west road links located on Lao territory, Lao PDR improved east-west connectivity could also boost export opportunities among the countries in the region and investment in multi-modal logistics. Indeed, Lao PDR’ 9th National Socio-Economic Development Plan (NSEDP) has set economic corridor development as a priority element of the country’s growth strategy, under the slogan ‘From land-locked to land-linked’. 4. The Lao PDR achieved rapid growth and significant poverty reduction between 2005 and 2015, though inequality widened. Gross domestic product (GDP) averaged around 8 percent growth per year between 2000 and 2019. The poverty rate declined from 34 percent in 2003 to 23 percent in 2013, reaching 18 percent in 2019. However, the Gini coefficient increased from 32.5 to 38.8 during the same period, reflecting lower gains for the bottom 40 percent in a growth model heavily dependent upon hydropower and mining rather than job- creation. COVID-19 placed an added economic burden on the country. The incidence of poverty increased by 1.2 percent in 2020 (to 18.5 percent) compared to the scenario without the pandemic (17.3 percent). 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). 5. The Lao PDR’s high debt service obligations are crowding out developmental expenditures and increasing the risk of macroeconomic instability. External public debt from 46 to 59 percent of GDP between 2015 and 2020, while total PPG debt was 74 percent of GDP in 2020. Interest on debt has risen from 1.5 percent of GDP in 2016 to an estimated 6.0 percent in 2022. Debt service in 2020 was over 50 percent of revenue. This accumulation of debt was associated with extensive public borrowing and guarantees in the power sector, which now account for around 40 percent of PPG debt. At the same time, low and declining public revenues, from 22 to 15 percent of GDP between 2014 and 2019, have impaired fiscal performance. Figure 1.1 shows the road fund’s expenditure for road maintenance. 6. A large share of the population in Lao PDR is still dependent on agriculture for jobs and livelihoods. Trade in agricultural products is among the top 5 of Lao’s exports in terms of both value and volume across ASEAN. Seventy percent of Lao PDR's population comprising the major share of the rural poor is employed in the agricultural sector, which accounts for 16 percent of GDP. The size of the food and beverage market in Lao PDR is estimated at around 24.6 percent, 1.6 times larger than the share of direct production. 7. Over recent years, a dualistic pattern of agricultural development has begun to emerge, especially in the north of the country where links to Chinese markets are strongest. Agriculture overall has only grown by about 3 percent during the last decade due to the prevailing levels of low agricultural productivity, mainly constrained by inadequate access to farm inputs and low adoption of agricultural technologies, poor compliance with product standards, and high transportation and logistics costs to access markets. Smallholder farmers, many of which are women, are the most disadvantage group who has much poorer access to farm inputs and other services in agricultural production. At the same time, however, export-oriented plantation agriculture and associated agro-processing activities are growing rapidly from a small base, often involving land Jan 04, 2022 Page 4 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) concessions to foreign investors. Laotian agricultural exports reportedly reached close to $1 billion in 2020, corresponding to a 67% increase since 2018, with China accounting for approximately 80% of these exports2. 8. The inclusion of smallholders in export-driven supply chains, particularly women farmers and farmers from ethnic minority groups, has therefore become an urgent policy priority. Promoting agricultural trade through investment in improving sanitary and phytosanitary standard (SPS) management capacity and export business processes will help not only leverage local smallholders and traders to integrate into regional and global value chains but also help reduce documentary transaction time and costs, and improve their capacity to upgrade product quality and standard to meet market requirements of neighboring countries such as China, Thailand and Vietnam. At production level, producer organizations and associations need be strengthened and linked to economic opportunities in export-oriented production. Through provisions of equal access to farm inputs and agricultural services (i.e. through matching grants), small farmers, including women, would be able to adopt faster new agricultural technologies such as organic farming, good agricultural practices (GAP) and climate-resilient production techniques and, therefore, allowing them to increase agricultural productivity and product quality for exports. 9. The Lao PDR’s road network is highly susceptible to climate change induced natural hazards, particularly floods and landslides. Approximately 80 percent of the country’s land area is mountainous, while the remaining 20 percent is low lying plains along the Mekong River. This topography makes Laos very vulnerable to increasing heavy rainfalls, flooding, and landslides. The observed annual rainfall has already been on raise (Figure 1.2). Fifteen major floods have occurred in Lao PDR from 1970 to 2010. Based on the Coupled Model Intercomparison Project 5 (CMIP5) climate projection, mean annual rainfall in Lao PDR is projected to increase by 10-30% in the future, particularly in the eastern and southern part of the country. The overall number of wet days across the southern area of the Mekong River is projected to increase3, indicating higher risks for extreme rainfall volumes and flooding. The greatest economic impact of floods and landslides stems from damage to roads. For example, over half the damage and losses due to the 2018 floods were to transport infrastructure, costing USD 190 million or around 1 percent of GDP.4 Sectoral and Institutional Context Regional Connectivity 10. In 2016, ASEAN countries adopted the Master Plan on ASEAN Connectivity 2025 (MPAC 2025), aiming to achieve a seamlessly and comprehensively connected and integrated ASEAN that will promote competitiveness, inclusiveness, and a greater sense of community. In 2019, ASEAN developed an “Initial Pipeline of ASEAN Infrastructure Projects� across the transport, energy, and ICT sectors to support ASEAN’s objectives of improving access and increasing connectivity in and among the member states5. ASEAN member countries have also signed an ASEAN Trade in Goods Agreement (ATIGA), aiming to achieve free flow of goods in the region 11. Lao PDR’s National Road No. 2 (NR2) is a section of Asian Highway No. 13 (AH13), which is one of the East-West corridors in Southeast Asia. MPAC 2025 identified the NR2 section of the AH13 as an investment 2 https://www.producereport.com/article/laotian-banana-exports-hit-china-border-closure 3 Climate Change Knowledge Portal, Lao PDR Country Profile, 2021. 4 https://laopdr.un.org/sites/default/files/2019-08/2018%20PDNA_English.pdf 5 The "Enhancing ASEAN Connectivity: Initial Pipeline of ASEAN Infrastructure Project" was officially launched by ASEAN in November 2019. (https://asean.org/?static_post=enhancing-asean-connectivity-initial-pipeline-asean-infrastructure-project) Jan 04, 2022 Page 5 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) priority for East-West regional connectivity. With a total length of 295 km, NR2 consists of NR2-West (145 km) connecting with the Thai border at Huai Kone and NR2-East (150 km) connecting with the Vietnamese border at Tay Trang, Dien Bien Phu province. It bisects the new Lao-China North-South rail corridor in Muang Xai, Oudomxay province, creating the potential for multimodal transport connectivity for both north-south and east-west routes connecting Laos, Vietnam, Thailand, and China. As part of the Asian Highway No.13 (1,409 km from Hanoi, Vietnam to Nakhon Sawan, Thailand), NR2 is one of the few remaining sections of the Asian Highway Network (AHN), which still falls below the minimum Asian Highway Standards.6 The development of NR2 provides linkages to Thailand and Vietnam, which can help achieve Lao PDR’s aspiration to become a land- linked country through the development of economic corridors. 12. The lack of climate resilience is a key limiting factor for NR2 to fulfill its potential as a regional logistic corridor. According to the pre-Feasibility study of NR2 conducted by ASEAN in 2019, the topography of the targeted road area is primarily mountainous. As such, the road is prone to damage from climatic hazards such as washouts, landslides, erosion and flooding during rainy reason. NR2 has not undergone any major rehabilitation or upgrading since 2003-2004, and was severely damaged by flooding in July 2018. Since then, dangerous rock falls and collapses has been happening along NR 2 from time to time, imposing significant safety concerns for traffics on the road. A lack of effective maintenance havs accelerated the deterioration of the NR2 over time. In addition, a detailed analysis has been conducted as part of the project identification process focusing on evaluating the potential impact of climate change on the regional connectivity and accessibility in the targeted areas. It was found that without proper climate resilient improvement across NR2, climate change-induced flooding and landslides will result in about 43 percent losses in accessibility to markets for agricultural products. In particular, agriculture products produced in Oudomxay would see the most negative impact on market accessibility without a climate resilient NR2, which could completely offset any benefits generated from improved regional connectivity. 13. Implementation of cross-border transport agreements remains challenging. The GMS Cross-Border Transport Facilitation Agreement (CBTA), established in 1999, aims to create a common subregional cross- border transport system. Ratification of the Agreement was completed in 2015. However, the CBTA has not been effectively implemented – except for the bilateral agreements on the initial implementation. With the disruption caused by the COVID-19 pandemic, most GMS countries moved to close borders, requiring vehicles to transship cargo at the border (plus some driver testing and quarantine or driver swap arrangements) and cross-border passenger traffic was curtailed. The other challenges for the implementation of the cross-border transport agreement include weak freight transport associations (FRETA) as guaranteeing organizations, and inefficient coordination among government agencies including transport, Customs, Immigration, and Quarantine (CIQ), trade, and economic planning. National legal frameworks have not been amended to accommodate what was negotiated in fields such as vehicle standards, mutual recognition of insurance and driving licenses, vehicle licensing and inspection, transit and road user fees, and enforcement regimes for transit consignments. 14. The development of the Thailand and Vietnam segments of the AH13 regional highway is already advanced. In 2014, Vietnam financed the improvement of a 67 km section of NR2 East next to the border to Vietnam. In Vietnam, AH13 travels 116 km along national road 279 (from the Tay Trang border gate to Tuan Yao, Dien Bien Province) and then 478 km along NR 6 (from Tuan Yao to the capital city of Hanoi). A large 6Asian Highway Standards refer to the technical design and standards set out in Annex B of the “Ministerial Understanding on the Development of the Asian Highway Network Project� (1999). https://asean.org/?static_post=annex-b-asean-highway-standards. Jan 04, 2022 Page 6 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) portion of this route has been rehabilitated with two or four-lane paved carriageways meeting the Asian Highway standards, except for a short section of National Highway 279. Likewise, Thailand has also financed the improvement of 40 km of a section of NR2 to the border to Thailand in 2017 . Since then, Thailand’s Department of Highways has been improving road sections of the National Highway 101 in Nan Province, part of AH13, which connects to Lao’s NR2 at Huai Kon border crossing point. The 2021 Provincial Government Action Plan for Nan Province also includes the preparation activities for improving cross-border trade and competitiveness through Huai Kon cross-border facility upgrades, capacity building for cross-border traders and businesses, and facilitation of cross-border dialogues. In Thailand, the total length of AH13 is 560 km, of which 470 km has already been improved into four lanes. The Department of Highway has a plan for further improvement of the remaining 90 km from 2 to 4 lanes gradually. 15. Regulatory and institutional improvements, as well as physical investment, will be required for Lao PDR to play its nodal role. Specifically, efficient transit and cross-border arrangements, a competitive and reliable logistics service sector, improved business environment and trade facilitation, and improved local capacity for planning and managing private investments are among the required complementary reforms and investments for capturing parts of the economic benefits associated with the railway corridor.7 The Governments of Thailand8 and Vietnam9 have offered support for the economic development along this corridor and in the central and southern part of the country, including for transport, logistics, agriculture, and tourism. Cross-Border Trade 16. Current border clearance procedures in Lao PDR are a bottleneck in supply chain links. The use of ICT systems remains limited, especially among border agencies, many of which still rely on paper-based clearance processes. Effective and efficient use of risk management processes to enforce compliance is lacking; instead, there continues to be a high rate of physical inspections by Customs and other border agencies in border clearance.10 Risk-based enforcement, ICT, non-intrusive inspections, and increased transparency will enable faster border clearance for all modes of transport and intermodal transshipment. 17. Inadequate legal frameworks constrain the modernization of cross-border management. In 2020, the Government of Lao PDR approved a new Law on Customs introducing new provisions on border management, the transit regime, and the warehousing system, as well as risk management. These provisions are related to rail freight and multi-modal transport. Secondary regulations remain to be developed. Lao PDR requires an effective customs-bonded warehouse system11 and efficient procedures for the operation of cargo rail stations, terminals, dry ports, and consolidation centers. Lao Customs also needs to increase its throughput capacity by moving from paper-based/manual processes toward a paperless environment. The existing Automated System for Customs Data (ASYCUDA) system has the capability of introducing paperless customs clearance. However, 7 World Bank (2020). From Landlocked to Land-Linked: Unlocking the Potential of Lao-China Rail Connectivity. World Bank, Vientiane. 8 Through the investment support from Neighboring Countries Economic Development Cooperation Agency (NEDA) – i.e. the 5th Friendship Bridge. 9 Based on cooperation agreements between Vietnam and Lao PDR signed in August 2021. 10 In 2020, while the ratio of physical inspection conducted by Lao Customs Department remains at 50 percent of all declarations while international good practice is about 15 percent, other border agencies (including Department of Agriculture, Department of Livestock and Fisheries and Department of Food and Drug) still have 100 percent of physical inspections without any risk management. 11 A Customs-bonded warehouse refers to a specific storage facility of bonded goods and other goods not having gone through customs proving Jan 04, 2022 Page 7 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) the Customs Department lacks the requisite regulations and skills. 18. Lack of capacity and inefficient coordination among border agencies contribute to the long delays of border clearance. Key issues include the weak capacity of border agencies in applying policies and regulations consistently and correctly; and limited inter-border agency cooperation in border clearance, especially joint border inspections between CIQ. These capacity gaps create an operating environment that is not transparent and unpredictable for traders. The weak capacity and coordination of trade-related institutions at the provincial level has constrained traders and producer organizations of agricultural exports from meeting market access requirements and standards of trading partners. 19. Complying with SPS standards is a constraint to Lao PDR’s agricultural trade, especially for smallholders. There is growing consumer demand for high-quality rice, maize, and clean and safe vegetables. From the past experience, improvement of transport infrastructure alone, without investments in SPS infrastructure and capacity building, is insufficient to promote agriculture trade. Domestic producers have limited ability to apply SPS standards, practice Good Agricultural Practices (GAP), access transport to markets, and absorb high logistics and SPS compliance costs. Laboratory testing services for traders is not yet well-function in all five provinces because of lack of mini SPS labs at the borders and that the central SPS lab is not sufficiently equipped and accredited. A simplified business process, in addition to the improved laboratory facilities, will also help agricultural traders get the SPS certification in a timely manner. In addition, the lack of capacity of local authorities to operationalize established procedures for verification of SPS remains challenging. Domestic Connectivity and Logistics 20. Lao PDR’s transport infrastructure is particularly vulnerable to the impacts of extreme weather events and climate change. The transport sector accounted for 65.6 percent of the overall damage and 40 percent of losses from the 2018 flooding and subsequent landslides over July-August. About one-fifth of the Lao PDR road network was damaged. The high vulnerability is due to (i) low design and construction standards, (ii) inadequate maintenance, and (iii) technical designs that have not accounted for increased climate variability. Around 75 percent of local roads are still unpaved and frequently cut off during the rainy season. The increased disasters and extreme weather events have increased the maintenance backlog and the need for emergency repairs. 21. There is a scope for more efficient road asset management. The current maintenance planning practice is year-by-year, yields a sub-optimal lifecycle value due to climate events, and lacks incentives for the contractor to perform quality construction and carry out efficient routine maintenance. The budget for maintenance mainly comes from the Road Fund12, which is generated from the fuel levy. Increases in the fuel levy and involvement of the private sector in road asset management would be cost-effective strategies for improving road asset quality. Moreover, the increased transport, logistics, and trade efficiency supports the 12The Road Fund was established in 2012 with the revenue from fuel levy as a dedicated source of fund for road maintenance, managed by the Ministry of Public Works of Transport. The annual allocation of the Road Fund is subjected to the approval from the National Assembly. Jan 04, 2022 Page 8 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) growing economic activities, which will in-turn contribute to the recurrent revenue for the road sector through the Road Fund. 22. High transport and logistic costs further constrain agricultural growth and access to domestic and regional markets. Although more than 90 percent of Lao PDR’s total trade is with China, Vietnam, and Thailand, agricultural production in Northern Laos still has limited access to trade gateways13. More than half of the agricultural production cannot reach any gateways or markets within 2 hours14. In 2018, Lao PDR’s logistics performance index ranking was 82 out of 160. Furthermore, a recent World Bank study15 in 2018 concluded that, based on actual cargo weight, transport prices are very high compared to other countries in the region, particularly for loads priced by cargo weight rather than based on vehicle capacity. The prices range from US$ 0.36 to US$ 0.11 per ton-km respectively, while the price in Thailand is only US$0.05 per ton-km in 2018. The high prices are attributed to the inefficient use of the trucks: less-than-truck-load, lack of competition, lack of consolidation facilities, and poor road conditions. 23. Improving road connectivity in Northern Lao PDR could help agricultural production reach more both domestic and export markets with shorter time and lower transport costs. Climate resilient road can greatly improve access for agricultural production in Northern Laos16. In addition, more consolidation activities could reduce logistics costs, especially for smallholders. The improved regional connectivity along the economic corridor is already attracting more tourists, which will, in turn, promote the local economy and employment. 24. Dry ports and logistics parks are a key component of the national logistics development strategy and action plan, which was approved in 2015. In August 2021, the government approved the dry port decree, defining principles, regulations, and measures for the management of dry ports. However, there remains a gap in the legal framework and implementing capacity. Out of nine locations for international logistics parks and dry ports, three dry ports have been developed through a PPP approach by the Government: Savannakhet dry port (in operation since 2016), Thanalaeng Dry Port (expected operation in 2022), and Pakse Dry Port (expected operation in 2022). Future dry port locations along the railway are in Luang Prabang, Muangxai, and Natuey. Private sector developers have shown interest in the development of dry ports and logistics parks, but there is a need to ensure competitive and transparent PPP transactions 25. Road accidents are high and increasing, because of infrastructure characteristics, driving practices, alcohol use, weak enforcement, and limited capacity for post-crash response. In 2019, the reported road traffic crash deaths in Lao PDR were 1,020, or approximately 2.4 percent of total deaths. The Global Status Report on Road Safety17 reports 1,120 road crash deaths, which is 16.6 fatalities per 100,000 people in Lao PDR and rising. Road crashes in Lao PDR are the number one cause of death for 5-14-year-olds, the number two cause of death for 15-49-year-olds, and the number one cause of disability for the entire population. The Lao 13 About 1/3 (or about US$1.3 billion) of agricultural production in Northern Laos still has limited low to no access to trade gateways within a 4-hour trip range. 14 World Bank (2021). Lao Transport Corridor Connectivity Assessment Report. 15 World Bank (2018). Transport Costs and Prices in Lao PDR : Unlocking the Potential of an Idle Fleet. World Bank, Washington, DC. 16 World Bank (2021). Lao Transport Corridor Connectivity Assessment Report. 17 WHO 2018. Jan 04, 2022 Page 9 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) PDR government has expressed a commitment to address road safety issues through the Lao PDR National Road Safety Strategy 2030, targeting a 50 percent reduction in fatalities and serious injuries. Multi-Modal Transport 26. Lao PDR enacted a multi-modal transport law in 2013, but it is not yet effectively implemented. Road transport has been the dominant mode of transport, covering 90 percent of all transportation in Lao PDR. However, local capacity constraints are hindering the shift to a multi-modal approach. While public administration and the implementation of national social-economic development plans are decentralized, provincial capacity remains weak, and coordination and collaboration among agencies are ineffective. In order to capitalize on developments in the transport sector, coordination among infrastructure departments, economic departments and private sector actors is required. C. Proposed Development Objective(s) Development Objective(s) (From PAD) To improve regional and domestic trade and climate resilient transport connectivity along an East-West corridor18 in Southeast Asia, and to provide immediate and effective response in case of an Eligible Crisis or Emergency. Key Results 27. The proposed key result indicators are the following: Improved regional and domestic transport connectivity 1) Travel time along the selected sections of the NR2 corridor (hours) 2) Number of people provided with improved, climate resilient road access (number) 3) Beneficiaries expressing satisfaction with transport connectivity (percentage) Improved cross-border trade efficiency 4) Average cross-border processing time at selected Laos-Vietnam and Laos-Thailand border checkpoints (hours) 5) Time taken to obtain SPS certification for agricultural trade (days) D. Project Description 28. The proposed PDO is to be achieved through the following proposed Components: Component 1: Lao PDR and regional connectivity enhancement. Activities include (i) improvement and maintenance climate resilience and road safety of select sections of National Road 2 West (NR2W) to meet the ASEAN Highway Class lll standards, including widening of the road from 6 meters to 8 meters (6 meters of carriageway and 2 meters of shoulders-one meter each side to accommodate pedestrian’s safety); (ii) improvement and maintenance of climate resilience and safety of selected local roads in project provinces; (iii) improvement of the border crossing facilities at (a) Pang Hok in Phongsaly bordering 18 National Road 2 W, which is a section of Asian Highway No. 13. Jan 04, 2022 Page 10 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) to Dien Bien Phu, Vietnam and (b) Muang Ngeun in Xayabouly bordering to Nan province, Thailand through the upgrade of the existing facility and provision of goods and equipment for digitization of cross- border business processes; and (iv) design and supervision of the road and cross border facilities improvement and local road maintenance. Component 2: Logistics services development and border-crossing management. Activities include (i) development of pilot logistics facilities (which could be dry ports, consolidation locations, truck terminals, and community-based consolidation points) which include technical assistance for preparation of market assessments, technical studies, environmental and social studies, and transaction support to leverage private sector financing, in which public sector financing may include the provision of the basic public utilities; (ii) technical assistance to support the implementation of the existing cross-border transport agreements, including improving collaboration among countries in the region including Vietnam and Thailand; and (iii) strengthening institutional and operation capacity of CIQ in managing and operating border facilities, harmonizing customs processes and trade facilitation, developing customs-bonded warehouse management guidelines through streamlining the procedure. Component 3: Strengthening institutional capacity and regulatory framework in agriculture, transport, and investment planning. Activities include: a) Support on agricultural trade and Sanitary and Phyto-Sanitary (SPS) Management, which focus on improving the enabling environment for agricultural trade activities. The key activities include (i) technical assistance to review and improve business process for cross border trade for agriculture products through streamlining of export and import permits, raising awareness of traders’ compliance with SPS requirements, and simplifying the registration of farm inputs; (ii) providing training to strengthen operational capacity for the MAF, Provincial Agriculture and Forestry Offices (PAFOs), District Agriculture and Forestry Offices (DAFOs) and smallholder producer organizations including ethnic groups in agricultural trade promotion; and (iii) capacity development to address key gender gaps in agricultural trade including unequal access to information for women, barriers registering businesses, accessing financial credit, technology and market. For the capacity building for SPS management, the activities cover (iv) financing technical assistance to review and improve existing legislation relevant to SPS and develop a generic automated system in SPS certification ; (v) providing training to strengthen institutional and operational capacity in SPS management including border controls and its coordination between the mini labs at the border and the central and regional SPS labs; and (vi) financing technical assistance to carry out a laboratory assessment of the existing SPS labs for laboratory equipment upgrade, accreditation and testing services. b) Support on multi-modal transport. The key activities include: (i) multi-modal transport technical assistance, which includes updating of the Transport Sector Strategy, development of a multi-modal transport framework, development of a public transportation plan, development of regulations and guidelines to support strategy implementation; (ii) supporting the implementation of road safety action plan, which will focus on road safety engineering, road safety data management, road safety campaigning and enforcement, post-crash response capacity improvement; and, (iii) Strategic Capacity Building Program (SCBP) which will focus on strengthening the institutional and organisational capacity necessary to deliver the above plans and actions, enhancing the skills and capabilities required to implement the above multi-modal transport framework and strategy, and strengthening capacity to address the gender gaps in the transport sector, including integrating Jan 04, 2022 Page 11 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) gender and social inclusion (GESI) considerations in developing regulations and guidelines to support the implementation of the sector strategy. Component 4: Project Management. This Component will provide technical and operational assistance for strengthening safeguard capacity, the day-to-day management, monitoring and evaluation of the Project, and the carrying out of technical and financial audits. In addition, this component will provide support for compliance monitoring for environmental and social aspects. Component 5: Contingent Emergency Response Component (CERC). This component will provide an immediate response to an eligible crisis or emergency, as needed. In the event of an Eligible Crisis or Emergency, the World Bank will re-allocate project funds to support emergency response and recovery. 29. The Ministry of Public Work and Transport (MPWT) conduct a feasibility study (FS) and an environmental and social assessment (ESA) for the entire NR2 corridor (both NR2 East and NR2 West) and the related local/feeder roads. The studies commence in February 2022 with conceptual design expected to be completed by December 2022. The ESA will contribute to site-specific assessments once the sites are selected. This project will finance NR2 West improvement, and the Government of Lao PDR is seeking funding from other development partners for NR2 East. . . Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No Summary of Assessment of Environmental and Social Risks and Impacts . 30. The overall environmental and social risk classification is Substantial. Whilst the project aims to deliver a range of benefits, project activities have the potential to generate significant social and environmental risks and impacts. Nine of the Environmental and Social Standards (ESSs), including ESS1: Assessment and Management of Environmental and Social Risks and Impacts, ESS2: Labour and Working Conditions, ESS3: Resource Efficiency and Pollution Prevention and Management, ESS4: Community Health and Safety, ESS5 Land Acquisition, Restrictions on Land Use and Involuntary Resettlement, ESS6: Biodiversity Conservation and Sustainable Management of Living Natural Resources,ESS7: Indigenous Peoples, ESAS8: Cultural Heritage, and ESS10: Stakeholder Engagement and Information Disclosure, have been screened as relevant. ESS 9 on Financial Intermediaries is not considered relevant. 31. Project activities have the potential to generate social risks and impacts including (a) pre-construction phase impacts from land acquisition including the disruption of livelihoods and the relocation of households, and venders located near the road along with the potential loss of culturally significant or spiritual spaces (b) construction phase risks such as restricted access to roadside properties, risks related to labor and working conditions for construction workers, along with the risk of increased substance abuse and Sexual Exploitation Jan 04, 2022 Page 12 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) and Abuse (SEA) /Sexual Harassment (SH) and transmission of communicable diseases, including COVID-19, associated with labor influx (c) operational phase risks to community health and safety due to the increases in heavy traffic, and associated increases in road safety, human trafficking and SEA/SH risks. While some of these risks and impacts may be significant, they are for the most part predicable and possible to mitigate during the lifetime of the project. Those risks related to longer term risks of SEA/SH and human trafficking during the operational phase will be mitigated during activities included in the project design (sub-component 2.3 and component d). Also, while there are a number of sensitive social receptors that have the potential to be affected by the project, if the screening and assessment procedures laid out in the ESMF are applied it should be possible to avoid or minimize such disruption, or to apply reliable mitigatory or compensatory measures. 32. The potential environmental risks and impacts will include (i) direct impacts related to construction works on border crossing facilities and road improvement including widening and rehabilitation of the existing road network, (ii) indirect impacts related to the operation phase, (iii) downstream impacts from TA type of activities, and (iv) the limited experience of the implementing agency with the Environmental and Social Framework (ESF).Potential direct impacts associated with the construction works may include sourcing of material for earthworks, noise, dust, sedimentation, erosion, wastes generated from road and building constructions and management of storm water. Road widening may have impacts on natural habitats along the corridor’s Right of Way (ROW). Asbestos Containing Material (ACM) risks may stem from demolition of existing building. The nature and magnitude of these direct environmental impacts and risks during construction phase are temporary, site specific, predictable and reversible if relevant mitigation measures, including OHS guidelines, are properly implemented. During operation phase, potential risks and impacts on community health and safety, forests and biodiversity are likely to be significant due to the increased connectivity from improved road network and railway, but the residual risks are not likely to be significant. Mitigatory measures are readily available and reliable. Potential indirect environmental (transboundary) impacts may arise as a result of the road upgrade and the increased connectivity among Lao PDR, Thailand and Vietnam. For instance, improved road condition may allow the flow of illegal trades of timber and wildlife products from nearby forests and national protected areas/biodiversity conservation areas. 33. Potential downstream environmental impacts may arise from the Technical Assistance (TA) type of activities such as the institutional strengthening, related policy and regulatory reforms, market assessments and technical studies for agricultural value chain development. These TA activities may not result in any direct environmental risks and impacts but could have downstream environmental implications. For example, improved facilitation of agricultural trade could increase agricultural production and that could prompt intensive agricultural farming and/or increased use of agrochemicals, and consequently result in water and soil resources deterioration and/or accelerate the change to agricultural landscape from remaining protection forests. MPWT has prepared draft environmental and social (E&S) risk management instruments: (1) Environmental and Social Management Framework (ESMF) which includes a Preliminary Environmental and Social Impact Assessment (Pre-ESIA) for the NR2 West Corridor (145 km) that the Bank will be financing (Chapter 3 of the ESMF), Resettlement Planning Framework (RPF), Ethnic Groups Engagement Framework (EGEF) and Labour Management Procedures (LMP), (2) Stakeholder Engagement Plan (SEP), and (3) Environmental and Social Commitment Plan (ESCP). These documents were publicly disclosed on the MPWT website, including Lao versions of the Executive Summaries, on November 15, 2021 and consulted on with local level and national stakeholders during end November-early December and updated to reflect the finding of Jan 04, 2022 Page 13 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) these consultations. A Stakeholder Engagement Plan (SEP) including a Grievance Redress Mechanism (GRM) was prepared to identify stakeholders, build and maintain a constructive relationship with them, and to meet communication and disclosure requirements with a particular focus on project-affected parties. During implementation, site-specific assessments will be conducted following the screening procedure to inform site specific management plans. This provision is clearly mentioned in the ESCP. The TORs for project’s activities (technical studies, institutional strengthening and update of legal framework) will be reviewed by the Bank to ensure that ESF requirements are effectively integrated. Potential risks and impacts associated with any downstream activities identified through the TA TORs. This will allow due consideration of the potential E&S implications of activities under studies/analysis. This provision is included in the ESCP. 34. At the national level, MPWT, Ministry of Agriculture and Forestry (MAF), Ministry of Industry and Commerce (MOIC), and Ministry of Planning and Investment (MPI) have experience working with World Bank financed projects, but only limited experience of implementing environmental and social (E&S) risk management under ESF. The MPWT has a dedicated unit working on E&S risk management, including on E&S compliance. Participating local government departments are known to have institutional capacity constraints, and current systems for E&S risk management are weak, and that is considered in the environmental and social risk ratings. A Capacity Needs Assessment has been carried out as part of the preparation of the ESMF. This informed Component 3 and 4 which will have activities to support building capacity and knowledge on the ESF and also inform potential ESF capacity building initiatives in the road sector. The ESMF contains a targeted capacity building approach. Specific institutional capacity strengthening/ building measures such as the provision of additional resources and training needs have been identified and presented in the E&S instruments, including the ESMF and ESCP to ensure ownership and sustainability of the resources. For the project’s CERC component, a CERC Manual and CERC Addendum to the ESMF will be prepared prior to appraisal and the ESCP will include provisions for them. E. Implementation Institutional and Implementation Arrangements 35. MPWT will be the lead implementing agency for the project. The development of transport connectivity, including roads, logistics services, dry port, and consolidation locations, is under the overall jurisdiction of the MPWT. Sectoral implementing agencies will include: (a) MAF, which will be responsible for institutional and operational capacity development in agricultural trade facilitation; (b) Customs Department under the Ministry of Finance (MOF) and the Department of Import and Export under the MOIC, which will be responsible for implementing Customs and trade facilitation activities through the National Trade Facilitation Committee (NTFC) and Provincial Trade Facilitation Committee (PTFC); (c) Ministry of Public Security (MoPS), which will be responsible for overall border facility management and security, immigration and border crossings, and road safety; (d) Ministry of Health (MoH), which will be responsible for food- and health-safety related to cross- border management; and (e) relevant provincial authorities, which will involve in roads improvement and maintenance, dry-ports development, the cross-border facility management, management of private sector investment, and ensure consistency between national regulations and local practices of border facility Jan 04, 2022 Page 14 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) operation. Furthermore, the private sector will involve in implementing certain aspects of dry ports and logistics development, and road improvement works, under a PPP using an OPBRC. 36. The project will be implemented through the government administration systems, with support from implementation support consultants. However, to enhance coordination among agencies involved in the project implementation, the following mechanisms are to be established. a) A Project Steering Committee (PSC), chaired by Minister of MPWT, with Vice Minister of MAF and Vice Minister of MOIC as vice-chairpersons. Members consist of MoH, MOF, MPI, MoPS, and Vice Governors of Oudomxay, Luang Namtha, Luang Prabang, Phongsaly, and Xayabouly provinces. PSC will be responsible for overseeing the overall project implementation and meet twice a year to solve any policy issues and implementation issues that could not be solved by implementing agencies or the PCC. b) A Project Coordination Committee (PCC), chaired by the Assistant Minister of MPWT, with six DGs of Department of Road (DOR), Department of Planning and Finance (DPF), Department of Public Work Transport Institute (PTI) and Department of Transport (DOT) of MPWT, and Department of Agriculture (DOA) of MAF, and Trade Facilitation Secretariat (TFS) of MOIC as vice-chairpersons. Members consists of Director General/Deputy Director-General of the sectoral and provincial implementing agency, who will be responsible for overall project management including, managing, facilitate and coordinate the project implementation and monitoring at the working level and serve as a secretary to the steering committee. The PCC, with support from Secretariat (DPF/MPWT), will meet on a monthly basis to follow up and resolve issues related to project implementation and multi-agencies coordination. The PCC will be supported by a team of project implementation and coordination support consultants, including Project management/coordination, M&E, Financial Management specialist, and procurement specialist. c) Component Management Units (CMU), led by a qualified staff appointed by the leading agencies for respective sub-components and consists of environmental and social staff and authorities concerned. The CMU, with support from implementation support consultants, will be responsible for day-to-day implementation of the sub-components, including the preparation of the TOR, bidding documents, contract management, and M&E. . CONTACT POINT World Bank Sombath Southivong Senior Infrastructure Specialist Chanin Manopiniwes Senior Infrastructure Economist Konesawang Nghardsaysone Economist Jan 04, 2022 Page 15 of 16 The World Bank Southeast Asia Regional Economic Corridor and Connectivity Project (P176088) Borrower/Client/Recipient Lao People's Democratic Republic Phanomphone Keovongvichith Deputy Director General, External Finance Department phanomphonek@hotmail.com Implementing Agencies Ministry of Public Works and Transport Sengdarith Kattignasack Assistant Minister, Minister of Public Works and Transport ksengdarith@yahoo.com FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Sombath Southivong Task Team Leader(s): Chanin Manopiniwes Konesawang Nghardsaysone Approved By Practice Manager/Manager: Country Director: Alexander Kremer 08-Mar-2022 Jan 04, 2022 Page 16 of 16