Documentof The WorldBank FOR OFFICIAL USEONLY ReportNo: 32485-LA PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDGRANT INTHEAMOUNT OF SDR2.7 MILLION (US$4.0 MILLIONEQUIVALENT) TO THE LAO PEOPLE'S DEMOCRATIC REPUBLIC FORA LAO ENVIRONMENTAND SOCIAL PROJECT (LENS) JUNE 8,2005 Environmentand Social DevelopmentUnit EastAsia andPacificRegion This documenthas a restricteddistributionand may be usedby recipientsonly inthe performanceoftheir officialduties. Its contentsmaynot otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective - May 31,2005) CurrencyUnit = LAK 10,500LAK = US$1 1SDR = 1.48516USD FISCAL YEAR October 1 - September 30 ABBREVIATIONS AND ACRONYMS AFD AgenceFranqaisede Developpement MOF MinistryofFinance ADB Asian DevelopmentBank MOFA Ministry of ForeignAffairs BoS Bureauof Secretariat MW Megawatt CAS CountryAssistance Strategy M&E Monitoring andEvaluation CEM CountryEconomicMemorandum MU ManagementUnit of EPF Windows CBI CommunityandBiodiversity Investments NBCA NationalBiodiversity ConservationAreas CPI Committeefor PlanningandInvestment NEAP NationalEnvironmentAction Plan CSO Civil Society Organizations NEC National EnvironmentCommittee CFAA CountryFinancialAccountabilityAssessment NPA NationalProtectedArea CTMA ChiefTechnicalandManagementAdvisor NGPES National GrowthandPovertyEradicationStrategy CPAR CountryProcurementAssessment Report NOL No ObjectionLetter DAFO District Agriculture andForestryOffice NT2 NamTheun2 HydroelectricProject DOE Department of Environment NTSEP NT2 SocialandEnvironmentProject DOF Department of Forestry NTFP Non-timberForestProduct DSTEO District Science, Technologyand Environment NUOL NationalUniversity of Laos Office PAFO ProvincialAgriculture andForestryOffice EIA EnvironmentalImpactAssessment PDR People's DemocraticRepublic EPF EnvironmentProtectionOffice PDO ProjectDevelopmentObjective ERI EnvironmentalResearchInstitute PER Public ExpenditureReview ESSF EnvironmentalandSocialSafeguards Framework PICE Policy ImplementationandCapacityEnhancement ExecutiveOffice of EPF PIP ProjectImplementationPlan EO FinancialManagement PM PrimeMinister FM FinancialMonitoringReport PrMO ProcurementMonitoring Office FMR ForestManagementUnit PPA ProvincialProtectedArea FMU ForestManagementandConservationProject PSC ProjectSteering Committee FOMACOP GrossDomesticProduct PSTEO Provincial Science, Technologyand Environment GDP GlobalEnvironmentFacility Office GEF Government Letter of ImplementationPolicy (for SA SpecialAccount GLIP NT2 Project) SEM StrengtheningEnvironmentalManagement GOL Governmentof Lao (Project) ICR ImplementationCompletionReport SEMFOP SocialandEnvironmentalManagementFramework IDA InternationalDevelopmentAssociation andFirst OperationalPlanfor the NT2 Watershed IDF InstitutionalDevelopmentFund SIDA SwedishInternationalDevelopmentAgency I R R S ImplementingRules andRegulations SoE Statements of Expenditure IUCN The World ConservationUnion STEA Science, TechnologyandEnvironmentAgency LNCE LaoNational Committee on Energy SWORD SustainableForestryfor Rural Development LNFC LaoNational Frontfor Construction Project MAF Ministry of Agriculture andForestry TOR Terms of Reference MIC Ministry of InformationandCulture WRCC Water ResourcesCoordinationCommittee MIH Ministry of IndustryandHandicrafts MIS ManagementInformation System MOE Ministry of Education ~ Vice President: Jemal-ud-din Kassum, EAPVP Country Director: IanC. Porter, EACTF Country Manager: EnriqueCrousillat, EACLF Sector Director: Maria Teresa Serra, EASES Task TeamLeader: PatchamuthuIllangovan, EASES FOROFFICIAL USEONLY LAO PEOPLE'SDEMOCRATICREPUBLIC Lao Environmentand Social Project CONTENTS Page A.STRATEGICCONTEXTAND RATIONALE .................................................................................. 1 1. Country and sector issues ................................................................................................................ 1 2. Rationale for Bank involvement...................................................................................................... 2 3. Higher level objectives to whichthe project contributes................................................................. 3 B PROJECT DESCRIPTION . .................................................................................................................. 3 1. Lendinginstrument.......................................................................................................................... 3 2. Project development objective and key indicators.......................................................................... 3 3 . Project components ......................................................................................................................... 4 4. Lessons learned and reflected inthe project design ........................................................................ 6 5. Alternatives considered andreasonsfor rejection........................................................................... 7 C IMPLEMENTATION . ........................................................................................................................... 8 1. Partnership arrangements................................................................................................................ 8 2. Institutionaland implementation arrangements.............................................................................. 8 3. Monitoringand evaluation o f outcomes/results ............................................................................ 11 4. Sustainability ................................................................................................................................. 12 5. Critical risks and possible controversialaspects........................................................................... 13 6. Grant conditions and covenants..................................................................................................... . . 14 D APPRAISAL SUMMARY . .................................................................................................................. 15 1. Economic and financial analyses................................................................................................... 15 2. Technical....................................................................................................................................... 16 3. Fiduciary........................................................................................................................................ 16 4. Social............................................................................................................................................. 17 5. Environment.................................................................................................................................. 18 6. Safeguardpolicies ......................................................................................................................... 18 7. Policy Exceptions and Readiness.................................................................................................. 19 This documenthas a restricteddistributionand maybeusedby recipientsonly inthe performanceoftheir officialduties WorldBankauthorization . .Its contentsmay not otherwisebe disclosedwithout Annex 1: Country and Sector or ProgramB'ackground ....................................................................... 20 Annex 2: Major RelatedProjects Financed by the Bank and/or other Agencies ............................... 26 Annex 3: ResultsFrameworkand Monitoring ................................................................. 27 Annex 4: Detailed Project Description ................................................................................................... 30 Annex 5: Project Costs............................................................................................................................. 37 Annex 6: Implementation Arrangements ............................................................................................... 38 Annex 7: FinancialManagement and Disbursement Arrangements ................................................... 41 Annex 8: Procurement Arrangements .................................................................................................... 46 Annex 9: Economic and FinancialAnalysis ........................................................................................... 50 Annex 10: Safeguard Policy Issues ......................................................................................................... 53 Annex 11:Project Preparation and Supervision ................................................................................... 58 Annex 12: Documents inthe Project File ............................................................................................... 59 Annex 13: Statement of Loans and Credits ............................................................................................ 60 Annex 14: Country at a Glance ............................................................................................................... 62 Annex 15: National Policyon Environmental and Social Sustainability of the Hydropower Sector in Lao PDR ................................................................................................... 64 MapNo IBRD34091 . Lao People's DemocraticRepublic Lao Environmentand Social Project PROJECTAPPRAISALDOCUMENT EastAsia andPacificRegion EnvironmentandSocialDevelopmentUnit(EASES) Project ID:PO90693 Lending instrument: IDA Grant Project Financing Data [ ] Loan [ 1 Credit [XIGrant [ ] Guarantee [ ] Other For LoansICreditslOthers: Amount (US$m): US$4.00million equivalent (SDR2.7 million) FY 2006 2007 2008 2009 2010 2011 Annual 0.6 0.7 0.8 0.8 0.9 0.2 Cumulative 0.6 1.3 2.0 2.8 3.7 4.0 Does the project depart from the CAS incontent or other significant respects?Ref: PAD A.3 No Does the project require any exceptionsfrom Bank policies?Ref: PAD D.7 No Have these been approved by Bank management? I s approval for any policy exception sought from the Board? Does the project include any critical risks rated "substantial" or "high"? Ref: PAD C.4 No Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D.7 Yes Which safeguard policies are triggered, if any?Re$ PADD.6, TechnicalAnnex I O (i) OP/BP 4.01 Environmental Assessment (January 1999); (ii) 4.04 Natural Habitats; (iii) 4.12 OP OP/BP involuntary Resettlement (December 2001); (iv) OD 4.20 Indigenous Peoples (September 1991); Significant, non-standard conditions, if any, for: Board presentation: Loadcredit effectiveness: The following conditions have to be metby the Recipient prior to declaring the Project effectives: (a) Subsidiary Grant Agreement has beenexecuted onbehalf o f the Recipient and EPF, ina manner and substance satisfactory to the Association; (b) EPF is inoperations in amanner andsubstance satisfactory to the Association, including: (i) Boardof the Directors has beenappointed bythe Recipient's Prime Minister;(ii) the EPF Regulations provided inArticle 8 (4) o f EPF decreehave beenadopted by EPF Boardo f Directors; (iii) following officers have been the appointed by EPFBoard o fDirectors: (a) a director o fthe Executive Office; (b) a manager o fthe ManagementUnit;(c) a chef technical and management advisor; (d) a procurement officer; (e) a financial officer; (0 an environmental specialist; and (h) a social specialist; (iv) the recruitment plan for the Management Unit,satisfactory to the Association, has been approved by EPF Board o fDirectors; (v) the Project ImplementationPlan, satisfactory to the Association, have beenduly approved and adopted by EPF Board o fDirectors; and (vi) established a computerized accounting systemina manner and substance satisfactory to the Association. (c) Recipient has adopted a Decree on Resettlement and Compensation, ina manner and substance satisfactory to the Association; and (d) Environmentaland Social SafeguardsFramework hasbeenduly authorizedbythe Recipient andis legally binding and enforceable inaccordance with the applicable laws o f the Lao People's Democratic Republic. Covenants applicable to project implementation: The following are the dated covenants for the project: (a) By December 31,2005, acceptable scope o f work to design an integrated approach to managing the Nam T h e d a m Kading River Basin. (b) By January 31,2006, core staff ofEPF andall staff o fMUhired. (c) By January 31,2006, annual stakeholder consultation workshop heldand repeated at every anniversary to discuss the Project's annual progress report and EPF annual report. (d) ByJune 30,2006, ProvincialEnvironmentalManagement Planspreparedfor the three target provinces. (e) By October 31, 2006, first annual report o f EPF published, and repeated annually. (f) By December 31,2006, agreed institutional framework for monitoring o fthe implementation o fthe National Policy on Environmental and Social Sustainability o f the Hydropower Sector. (g) By June 30,2006, appropriate institutional arrangement established at STEA to implement the Resettlement Decree. (h) ByJune 30,2007, acceptable institutional framework for river basinmanagement ofNamTheudNam Kading River Basin inplace. (i)ByJune30,2008,ActionPlanstobringeachhydropowerfacilityconstructedsince1990intofull compliance are preparedand disclosed by each owning company. (j)ByJune30, 2008,mid-termreviewoftheProjectiscompleted. A. STRATEGIC CONTEXT AND RATIONALE 1. Countryandsector issues A county with vast natural resources challengedby high levels of poverty. Despite moderate economic growth in recent years, Lao People's Democratic Republic (Lao PDR) i s among the poorest and least developed countries in the East Asia region. The per capita income in 2003 was estimated at around US$340. Improvement in social indicators, which are among the lowest in the region, has not been commensurate with economic performance. More than half of the Gross Domestic Product i s generated by the agricultural and natural resources sectors such as forestry, hydropower, and mining.' Lao has among the highest per capita renewable water availability, with potential to generate over 20,000 MW of hydropower, over 40 per cent forest cover, nearly 20 percent of land area nominally under protection and prominent biodiversity hotspots. Long-term economic growth in Lao PDR will depend on proper utilization and sustainable management o f these natural resources, including prevention and mitigation o f adverse environmental and social impacts. Emerging environmental and social challenges. Natural resource stocks are currently indecline and new social challenges are emerging from existing development processes. The unsustainable exploitation of natural resources, thus far, has resulted in degradation o f land, loss of natural habitats and reductions in water quality, and is disproportionately impacting the poorest and most vulnerable groups inthe country. Generally well-intentioned government efforts to stabilize the resource base by sedentarizing shifting cultivators have led to some negative impacts. These are concentrated on more vulnerable ethnic groups inhabiting upland areas, who suffer from high levels of poverty and illiteracy, and low access to infrastructure and social services. Even voluntary resettlement can have negative impacts. Improving transport infrastructure and increasing regional trade have encouraged voluntary migration of upland villagers to lowland areas closer to the Thai border which can have associated risks from human trafficking and spread of HIV/AIDS. Lao PDR will need to achieve GDPgrowth rates of 7percentper year and sustain this level up to 2020 ifit is to attain itspoverty reduction targets.The Bank's recent Country Economic Memorandum(CEM) concludedthat with its vast natural resources and central position inthe rapidly growing Greater Mekong Sub-region (GMS)? Lao PDR i s well-placed to achieve quality growth and reduce poverty, provided that the Government o f Laos (GOL) manages to increase the contribution of natural resources (especially sustainable hydropower and mining) to development; fosters a more enabling environment for private sector investment; and undertakes reforms to improve governance. The latter include improving the management of environmental and social issues, and addressing the legacy o f past problems arising from development projects, specifically in hydropower and mainstreaming lessons learnt in future projects includingthis Project. Basicfoundations are in place, but implementation challengesare significant. Inresponse to declining environmental conditions, the country has made important strides in instituting changes in partnership with local communities and international organizations. Over the past five years, the country has strengthened its policy, legal and institutional framework for environmental and social safeguards, by buildingcapacity among government agencies, raising awareness more broadly, establishing procedures 'Per capitarenewablewater availability inLaoPDR is the highestinAsia, with potentialto generate over 20,000 M W of hydropower. Over 40 percentofits landareais coveredby forests, ofwhich nearly20 percent is nominally underprotection. It also features some prominentbiodiversityhotspots. The GMS comprises LaoPDR, Thailand, Vietnam, Cambodia, Myanmar, andYunnanProvinceof the People's Republicof China. 1 for environmental assessment and monitoring, designating protected areas, and making some site-specific investments. TheNam Theun 2 Project has acted as a catalyst.The shortcomings of several previous hydropower and mining projects in addressing environmental and social safeguards suggest that existing policies were inadequately implemented. The development o f the Nam Theun 2 Hydroelectric Power Project (NT2); included extensive and consultative work on impact assessment and preparation of mitigation and compensation plans, and has raised the level of awareness to social and environmental issues amongst Lao PDR authorities and agencies. The NT2 project itself has developed comprehensive safeguards structures which lendthemselves to replicationacrossthe country. 2. Rationale for Bank involvement Complementing the NT2 Project. The proposed project is designed as a complementary activity to the NT2 Project, capitalizing on opportunities to scale-up policy and capacity initiatives to the national level. Specifically, the Project will (i) apply the lessons leamed duringpreparation of the NT2 Project to other development projects, with special emphasis on hydropower development; (ii)address cumulative impacts of river basin development; (iii) strengthen the legal and institutional framework for resettlement4 and enable its implementation; and (iv) help maintain the integrity of other protectedareas inthe country. Inaddition, the Environment ProtectionFund(EPF) which has been established with support from the Asian Development Bank (ADB) and the Bank, could potentially become the primary financing vehicle to fund environmental investments inthe country, including those derivedfrom NT2 revenues which will start flowing in2009.5 Maintaining momentum and deepening reforms. Throughout NT2 preparation, the Government o f Lao PDR (GOL) demonstrated its willingness to carry through reforms to improve environmental and social outcomes. Inthe Government Letter of Implementation Policy for the NT2 Project (GLIP), the GOL has requested World Bank support to mainstream environmental and social safeguards in infrastructure development, support the development o f an approach to integrated river basin management, strengthen biodiversity conservation in Central Lao,6 and increase the public's knowledge o f and support for environmental management. In addition, the establishment of the EPF i s a new initiative for Lao, which can benefit from the Bank's extensive global experience. The Bank has gained valuable lessons assisting many countries to establish environment funds, build capacity for a range o f environmental and social objectives, and ensure linkages to overall reforms for good govemance, sound fiscal performance and sustainable natural resourcesmanagement. The NT2 Projectis located inKhammouaneProvince inCentralLao and consists ofthree components: (i) ahydropowerfacility with an installedcapacity of 1070 megawatts (MW), providing 995 MW of power for export to Thailand and an additional 75 MW for domestic use; (ii)management of the project's environmental and social impacts on the Nakai Plateau, in the NT2 watershed and in the downstreamareas ofNamTheun andXe Bang Fai rivers; and (iii) monitoring and evaluationarrangements designed to meet sound engineering practices, fiduciary responsibilities, and the respective oversight requirements of the participatingfinancialinstitutions A draft ResettlementDecree was preparedby Science, Technology and EnvironmentAgency (STEA)with assistance provided by the ADB, drawinginlargepartonNT2 experience. Its enactment is a conditionof effectiveness for the Project. Environmental protection is among the five priority programs identified for use of NT2 revenues. The eligibility criteria are definedinthe GLIP andNT2 revenuemanagementarrangements(refer ReportNo. 31764-LA). CentralLao as usedinthis Projectis taken to meanthe provincesof Bolikhamxay, Khammouane, andSavanakhet. 2 3. Higher level objectivesto which the projectcontributes Environmental and Social sustainability is vital to economicgrowth andpoverty reduction efforts. Lao PDR's long-term national development goal has to be achieved through sustained equitable economic growth and social development, while safeguarding the country's social, cultural, economic and political identity. The National Growth and Poverty Eradication Strategy (NGPES) emphasizes that the environment and natural resources are foundations for the livelihoods of most rural people, particularly for the poor and ethnic groups. NTFPs account for roughly 44% o f directly consumed production and 55% of cash incomes for rural households according to studies by IUCN.7 Unsustainable resource management threatens this vital source of cash income and direct consumption as well as disruptingthe social fabric of forest-dependent communities. The project aims to arrest declines inrenewable resource stocks by strengthening capacity at national, local and community levels. Consistencywith the CountyAssistanceStrategy (CAS). The proposed project will respond to two of the four CAS8 objectives: (i)strengthen management of key drivers for future growth (i.e. regional integration, private sector development, natural resources, and rural development) by strengthening policies and resources for environment conservation, improving rural livelihoods, and increasing sustainability o f natural resource use; and (ii) support implementation o f NT2 by extending the capacity building of GOL outside the project area to cope with any potential cumulative environment and social impacts. B. PROJECTDESCRIPTION 1. LendingInstrument The project isproposed as an IDADevelopmentGrant. Its primary objective is to contributeto long-term environmental protection and social development objectives o f the country through capacity building efforts both at the national and local levels. 2. Projectdevelopmentobjectiveandkey indicators The Project Development Objective (PDO) is to assist the Recipient to strengthen the management of environmental and social issues associated with the sustainable use o f natural resources in Lao PDR for enhancing quality o f growth andreducing poverty. Specifically, the project aims to: a. Strengthen institutions and instruments for assessment, monitoring and compliance for environmental and social sustainability, and broaden the constituency for environmentalchange; b. Invest in on-the-ground environmental improvement activities identified inthe National Growth and Poverty Eradication Strategy (NGPES), with emphasis on sustainable biodiversity management, community environmentalmanagement and livelihoods enhancements; and c. Operationalize the EPF to become a permanent entity that is eligible to use NT2 revenues for priority environmentalprotection activities by developing two Windows that will serve as models for EPF operations andpotentially become permanent structures within EPF. To ensure that the Project Development Objective i s being met, the following outcomes will be tracked for which specific indicators are provided inAnnex 3: See http://www.iucn,org/places/asia/pdf/Ntfplao.pdf The CAS was approved by the Bank's Board of Executive Directors on March 31,2005. 3 a. Improved policies and instruments are understood by stakeholders, institutionalized within government agencies and system, and implemented by technically competent staff. b. Selected protected areas and local communities benefit from improved environmental management, and enhancedlivelihoodoptions. C. EPF emerges as a capable and competent institution, eligible to receive NT2 revenues. 3. Project components The GOL is introducing policies, legislations and plans to replicate NT2 experiences nationally (see paragraph 5), and their implementation emerges as the main focus of the proposed Project. The Project's geographical focus has a mix of bothnational and provincial coverage, with the three central provinces - Bolikamxay, Khammouane, and Savannakhet - being the main target area of the project. The Project components are summarized below, and elaborated inAnnex 4. a. Component 1 - Policy Implementation and Capacity Enhancement (PICE US$ 1.91 million). This component will strengthen at the national, provincial, and district levels: (i) environmental and social safeguards policy formulation and implementation; (ii)environmental assessment, and monitoring, and compliance of institutions engaged in environmental management; (iii) integrated river basin management; (iv) hydropower sector sustainability; and (v) resettlement management; and (vi) environmental education and awareness. b. Component 2 - Community and BiodiversityInvestments(CBI; US$1.74 million). This will support initiatives to strengthen conservation practices and livelihood improvement activities in and around protected areas (buildingon the conservation planning approachesgdeveloped for the Nakai Nam Theun National Protected Area and its corridors), and to improve localized environmental conditions throughpartnership activities with communities, local governments and civil society organizations, inCentral Lao. c. Component 3 - Management and Monitoring Support (US$ 1.15 Million). This component will support the following activities: the day-to-day operation of the EPF, specifically PICE and CBI Windows; marketing and business development o f the Windows to assist beneficiaries to prepare sub-grants; developing and implementing a monitoring, evaluation and dissemination process to assessperformance of the two windows, and training of WMU staff to perform all the above. The Project will provide sub-grants, through the EPF, to finance activities submitted by national, provincial and district government agencies and other eligible beneficiaries including a community, community groups, mass organizations or civil society organizations. The type of activities include: (i) capacity building grants for Component 1 which will include studies, surveys, workshops, training, preparation of technical guidelines, monitoring and assessment o f environmental conditions, etc; and (ii) grants for protected area management and community environmental management and community livelihood activities. Inaddition, the Project will also support the sourcing of international expertise to assistinthe implementation o f some tasks for Component 1activities. Principal Target Group and Main Outcome. The Project will assist in building capacity o f national government agencies (including research institutions) and their staff, and local-level (provincial and The projectwill not duplicateSocialandEnvironmentalManagementFrameworkandFirst OperationPlan(SEMFOP), which i s premisedon ahigherlevel of financing. Instead,the Projectwill support the applicationofcore approachinselected Provinces. 4 district) officials. The Project will also create opportunities for civil society organizations to further expand their activities in the country by their eligibility to apply for sub-project grants to support activities including workshops, training, and community environmental management activities among others. Communities living in the three target provinces and people affected by ongoing development projects will also benefit fi-om improved management of their environmental and social assets through better application of safeguardpolicies. Sector Issues Addressed by the Project. The Project will support the implementation o f the following policies, decrees and guidelines: Devolution of Environmental Functions to Provinces and Districts. At the field level, implementation of improved environmental practices i s the responsibility o f provincial and district government, but local agencies often lose out to central government in the distribution of international assistance, and Provincial Science, Technology and Environment Offices (PSTEOs) receive no direct budget from STEA. The Project will not only develop management and planning capacity within local agencies, but will also make operational funds available to them. Eachof the participating provinces will be requiredto prepare Provincial Environmental Strategy andAction Plans (PESAPs) to become eligible to participate inthe project. Sustainable Hydropower Initiative. This cooperative effort between the MM and STEA aims to improve the environmental and social performance of the hydropower sector and address the legacy o f past developments by applying approaches developed under the NT2 project. To this end, GOL has issued the National Policy on Environmental and Social Sustainability o f the Hydropower Sector inLao PDR.'' This policy aims to extend the principles developed under the NT2 project to the hydropower sector as a whole, thus enablingprocedures to be streamlined and institutionalized. The Project will support the implementation of this policy, specifically, (i) to build capacity in MM and STEA; (ii) prepare supporting technical guidelines and regulatory to tools; and (iii) to facilitate review and disclosure of the safeguards performance of hydropower plants. 0 Integrated River Basin Management of the Nam Theun-Nam Kading Basin. It i s a specific GLP commitment o f GOL to address cumulative impacts from the NT2 project, the Theun-Hinboun Hydropower project and other developments in the basin. The cumulative impact analysis conducted for the NT2 Project concluded that the full suite of hydropower projects proposed for the basin (four projects totaling 2100 MW by 2012) would have significant cumulative impacts when developed. Mitigatingthese cumulative impacts i s the responsibility o f the GOL. As such, the GOL sees the need for a long-term basin-wide strategic approach to integrated water resources management which would involve the key stakeholders in planning and decision making roles. The Project will support: (i) the establishment of a permanent river basin management entity that will be responsible for formulating and implementing a planning, monitoring and regulatory framework; (ii) the development o f a financing mechanism to mitigate cumulative impacts of multiple hydropower projects; and (iii)the creation o f a participatory mechanism for communities and civil society to be involved indecisionmaking. National Policy on Resettlement and Compensation. After several years o f development and consultation, the enactment of this Decree is a condition of effectiveness for the Project. Its implementation will ensure that social safeguards and consultative approaches developed under the NT2 project are reflected in developments elsewhere in the country. The Project will assist the Department of Environment (DOE) to establish a division that i s responsible for resettlement loDecision561KPIofJune 7,2005 -NationalPolicy on Environmentaland Social Sustainabilityof the HydropowerSector in Lao PDRwas issuedbythe Committeefor Planningand Investment,pursuantto the PrimeMinister's Office Notice 839PM of June 6, 2005. Prior to its finalization, adraft version ofthe document underwent consultationwith stakeholders. 5 and rehabilitation activities, training of staff at the national and provincial level, and developing technical guidelines and manuals. The Project will also support the production of information material and campaigns to enhance awareness of the National Policy on Resettlement and Compensation. e Environmental Impact Assessment. GOL has introduced national regulations on environmental impact assessment, but systems for their practical implementation are still under development. The Project will strengthen the field capacity of national agencies and selected provinces to develop, implement and monitor its environmental impact assessment regulations (e.g. field implementation guides, development and implementationo f practical pilot studies, and provision of technical advice on specific safeguardissues). e Establishment and Operation of the EPF. By the end o f the Project, revenues earmarked for environmental protection will derive from NT2 and from other development projects under the terms of the Sustainable Hydropower Policy and other initiatives. It i s critical that EPF emerges as a competent entity to receive and disburse these funds by that time. The Prime Minister's Decree" establishing the EPF was issuedprior to negotiations of the Project. 4. Lessons learned and reflected inthe project design Lessons learned from the previous and active projects in Lao PDR" and selected capacity building and institutional strengthening projects supported by the Bank inLao and elsewhere are summarized below: Lessonslearned I Incorporationinto Project Design Capacity building Along with the developmentofpoliciesandlaws, The Projectaims to expandon the policy and institutionalgrains of the significant attentionshouldbepaidto the NT2by specificallysupportingthe development ofimplementation developmentof institutions,building ofhuman mechanisms, technicaltools andfield guidelinesto be appliedinselected resources, establishingsystemsandprotocols, sectors (hydropower andwater resources) andtargetedprovinces(Central involvementof communitiesandcapacityat the Lao). The Projectalso allocatesresourcesfor capacitybuilding at the local levels, to achieve their goals. local-levelandthe development of civil societygroups inthe country. Local(provinces/districts/communities) The participatingprovinceswill prepare EnvironmentalManagementand administrationsshouldtake the leadindesigning Action Plans inthe first year, which will form the basis for the Project's programsthat are aimed at developingtheir capacity building interventions.Further,by opting for capacitybuilding capacity. This will ensure that their priorities are grants approach;provinces, districts andcommunitieshavean optionof addressed, andnot thrust fromthe national-level. choosingthe kind of support they require. Riverbasinmanagement is a long term endeavor The Projectwill focus onbuilding partnershipbetweenSTEA andother that requiresextensive buy-in andcoordination governmentagencies (at the nationalandprovincial levels) who share across sectoralagenciesandprovincial govemments. responsibilityinriver basinmanagement.The Projecttargets apilot area (NamTheun/NamKading River Basin)to test anddemonstratean integratedapproachthat will be carriedout by amulti-agencyteam in close consultationandcooperationwith the local communitiesand authorities. Lack of environmentaleducationandlimited The Projecthas a flexible mechanismthat would encourage schools, awarenessabout environmentalbenefitshas universities,research institutions andcivil societyto bebeneficiariesof hamperedthe implementationof environmental the projectby applyingfor sub-grantsthat support: (a) the development policiesand laws, andhinderedprogressinthe anddeliveryof curriculumfor environmentaleducation; and(b) achievementof environmentalgoals. awarenessraisingamong officials and communitiesinthe three selected provinces. Conservationand communitylivelihoods are Communitydevelopment is an integralcomponent ofthe Project.The intimatelylinkedin LaoPDR.Participationfrom links betweendevelopment and conservationare enhancedby allowing '*Forexample, PrimeMinister's Decree 146PMdatedJune 6,2005. ForestConservationandManagementProject(FOMACOP), District Upland DevelopmentandConservation Project(DUDCP), SustainableForestryfor RuralDevelopmentProject(SUFORD), andPovertyReductionFundProject(PRF). 6 I Lessons learned Incorporation into Project Design local communitiesenhances sustainabilityofboth PA managementunitsto serve as facilitatorsfor communitydevelopment conservationand livelihoods aspects. grants. CommunityparticipationinConservationandinplanningof livelihoodsactivitiesis mescribedinthe conservationmodelto be followed. Projectdesign andmanagementplanningshouldnot As sub-grantswill beprovidedto the implementingagencies and be overly ambitiousvis-a-vis the capacity ofthe communitiesaccordingto their ownproposals, local ownership and implementingagency. relevancewill be ensured. Technicalassistancewill beprovidedto potentialproject proponents.Sub-grantproposalswill be evaluatedbased onpracticalityandcapacityofthe implementingagencies. A flexible approachinvolving learningby doingis The provision for an open-menuof activity-focusedsub-grants oftenmore effectivethan trylng to prescribe overcomesacomplexor rigidpre-determinedproject structure. A limited activitieson the basis of apriori studiesor implementationperiodof upto two years allows for initialpilot activities assumptions. to be adaptedaccordingto the lessons learnedthroughfollow-up Overly complexinstitutional, administrativeand Institutional complexityis avoidedby channeling funds throughthe EPF financial arrangementshavethe potentialto hinder andrespective Windows, which will providesub-grants directly to the disbursementof funds for project activities, beneficiaries. seriouslyimpactingtheir timing andcoordination. Long-termcommitmentsare neededto achieve The availability ofrevenuefrom hydropowerprojectsto EPFby the close change inthe field of sustainableenvironmental ofthe Projectwill provide sustainedfunding. The Projectwill develop management. fundmanagementsystems for the EPF. Developingcapacitywithin village communities and Adequate projectresourcesare committedto fundmanagementand local implementingagenciesto design, submit and facilitation of sub-grantproposals. An explicit objectiveof the Project is implementproposals is amajor undertakinginitself to providefor alearningprocesswhich will clarify how these andrequirestime. arrangementsshouldbe managedwithin the EPF. Capacitybuilding of local communitieswill be funded. 5. Alternatives considered and reasons for rejection Scope. The activities to be supported under this Project were previously part of the NT2 Social and Environment Project (NTSEP IDA Grant H1550). Since NTSEP's objective i s to mainly fund environmental and social mitigation measures o f the NT2 Hydroelectric Project, it was considered more appropriate to package the assistance for broader national-level capacity buildingneeds into a separate operation. However, the implementation of the proposed project will be aligned with that of NTSEP, and buildsynergies to replicatethe environmental and socialpractices ofthe NT2project. The Project scope is informed by past lessons, and by an assessment of priority issues, potential reform drivers and champions, ongoing or proposed initiatives, and delivery mechanisms. It took into account especially the following: (a) previous Bank capacity building projects suggest that interventions are sustained only if they are internally demand-driven as opposed to externally supplied; (b) other international partners already provide extensive capacity building inthe form o f trainings and workshops to most parts of the Government, with a mixedrecord o f success, which indicates the need for a improved delivery mechanism to provide the required capacity; (c) ensuring the availability o f adequate GOL recurrent budgetto sustain project interventions, and thus it i s proposeduse the EPF as the vehicle which includes provisions to finance recurrent expenditures that support specific outcomes; and (d) the need to broaden the constituency for environmental change by expanding capacity building efforts at the provincial, district and community-levels. Implementation Arrangements. Environmental protection and conservation responsibilities are shared between STEA and MAF, with the former recognized as the country's apex environment policymaking and oversight agency, while the latter i s responsible for forestry and forest conservation functions. Given 7 the project's objectives, STEA emerges as a natural choice to lead the project, although in partnership with Ministryo f Agriculture and Forestry(MAF) andMinistry of IndustryandHandicrafts (MIH).These Ministries along with Ministry of Finance and other agencies collaborated in the establishment of the EPF. Project preparation has focused on arriving at implementation arrangements for the project that recognizes: (i) the primacy of STEA in environmental policy making and regulation; (ii) technical the responsibilities o f MAF and MM; (iii) the mandate of provinces inmanaging environmental quality; (iv) the potential role o f EPF; and (v) appropriate structure to support demand-driven capacity building and investment activities. At the same time, a key premise has been that any structure instituted should be a permanent part o fthe institutional architecture. Geographical Coverage. The Project will have both national and provincial coverage. Nationally, the Project will assist GOL to develop capacity to implement policies, decrees and guidelines. STEA, MAF and MIH have prepared plans to decentralize their functions to provinces, some o f which are being supported by donors. Specifically, through the two SIDA-funded Strengthening Environmental Management (SEM) projects, STEA i s supporting some provinces to build their capacity. Although all provinces in Lao PDR face acute conservation and environmental problems and a chronic lack o f funds with which to address them, the Project will focus on the three Central Lao provinces of Khammouane, Bolikamxay and Savannakhet for the following reasons: (i) to prevent regional staff and expertise being drawn exclusively into working with the NT2 project due to the fundingand opportunities associatedwith it; (ii) central Lao region is of key national and internationalbiodiversity importance, as exemplified the by the discovery of an entirely new mammalian family fkom karst areas near to PhouHinPounNPA;and (iii) investmentofsubstantialconservationresourcesintheNT2Watershedwouldbesignificantly the undermined if support were not also made available to adjoining conservation areas. Inthe longer run, it i s hoped that the model developed under the CBI Window will be extended to all provinces, and further target provinces may be included within the life of the Project if agrees by IDA in consideration of implementationprogress. C. IMPLEMENTATION 1. Partnershiparrangements Partnerships with several international agencies have already been established through the ongoing operations in Lao PDR. The Bank has worked closely with the ADB in the preparation o f the Project, especially on the design of the EPF and the formulation of the National Policy on Resettlement and Compensation. Moreover, the Agence Franqaise de Developpement (AFD) and the United Nations Environment Program (UNEP), have also expressedinterest inthe Project. Upon the successful operation of the sub-funds, additional financial support may be channeled during project implementation through the PICEandCBIWindows. Ongoing activities of STEA and Swedish International Development Association (IDA) as part o f the Strengthening Environment Management I(SEM 1) project and its continuation, SEM2 have been taken into account in the design of the Project. Frameworks and guidelines developed by SEMl and SEM2 may receive implementationsupport from the proposed Project inthe three-targeted provinces. 2. Institutionalandimplementationarrangements STEA will lead and coordinate the implementation ofthe Projectthrough the EPF.The EPFwill be governed by a Boardof Directors (chaired by a Deputy Prime Minister with the Vice Minister of Finance and Vice President of STEA serving as the deputy chairs, and composed ofrelevant sectoral ministries including MMand MAF) as an independent and autonomous entity. Its day-to-day management will be 8 the responsibility o f the Executive Office (EO) which will be headedby a Director and supported by technical, administrative and financial staff (see Figure 1). The EPF business and operating practices will be guidedby aRegulations, Operational Guidelines andAnnual Plans, all provided for inthe draft Decree. The draft Decree also makesprovisions for the establishment of specialized Windows to support targeted activities inselectedgeographical areas or specific sectors. Two such Windows will be set-up for Components 1and 2 of the proposed Project. The two Windows will be used to channel assistance to beneficiary ministries, agencies,provinces, districts, communities, and other eligible recipients under the EPF guidelines. Figure 1: Institutionaland implementationarrangements Figure A6.1. Institutional and Implementation Arrangement Component 1: Window Manager PICEWindow for Pollcy Technical Ofker/Community Procurement Implementation and TechnicalOfficer/M&ECoordinator Capacity Enhancement Accountant Biodiversity Environmentaland Social Disbursement Investments I Monitoring,Educationand I ExecutiveAssistant Awareness, IntegratedRiver Procurement PA Small Grants, Basin Management, 3 ProvincialFacilitators Communitysmall HydropowerSector SustainabilityInitiative, ResettlementManagement LEnS Implementation I I I__..___________ Sub-Grant Applications $ ~ ~ ~ ~ , a $ ~ ~ $ Small rSub-Grant Application ~ ~ t Implementationby cir 1 1I Implementationby PA and GovernmentAgencies , Provindal fromPAFOsand Communities,and Civil Society ~ ~ and Civil Society Project Oversight. The EPF Board will appoint a Project Steering Committee (PSC) to which it will delegate authority to (i) propose general guidelines and strategc directions for the EPF, (ii) coordinate with sectoral ministries responsible for technical tasks that have been assigned to them by law, and (iii) oversee the performance of the two Windows. The inter-ministerial PSC will be chaired by STEA and vice-chaired by MAF and MM. Because planned activities run across different ministries and require capacity building in other ministries and provinces, the PSC will also include representatives of key govemment agencies, target provinces and non-government groups. The structure i s schematically presented above. EPF WindowManagement. The Boardwill also establish aManagement Unit(MU)to managethe two Windows, which will have responsibility for preparation o f annual plans, procurement, financial management, progress reports and quality assurance. The MU will be headed by a Windows Manager supported by technical, administrative and financial staff located in the Executive Office o f EPF. Collectively, this team will be responsible for day-to-day management. The Windows Manager and hisher team will be responsible for marketingthe activities o f the two Windows, assisting indrafting sub- grants, reviewing and approving sub-grants, signing sub-grant agreements, undertakmg procurement for sub-grants on behalf o f the beneficiaries, and ensuring financial management o f transactions. He/she will 9 also be responsible for liaising with implementing partners, beneficiaries and other stakeholders to prepare annual work plans, monitor progress, and prepare regular progress reports for review by the PSC/EPF Board. The project includes a component to strengthen the EPF, with special emphasis on the MU responsible for the two Windows. The Project will support the hiring of a Chief Technical and Management Advisor (CTMA) for a period of two years to assist the GOL to manage the two Windows, and more broadly to build the capacity o f EPF. The selection of the CTMA i s a condition of effectiveness for the Project. Both Windows will provide two tiers of grants with somewhat different selection procedures. Small proposals of up to US$lO,OOO can be submitted in Lao according to a concise, standard form. Grant decisions would be made directly by the Windows Manager with guidance and advice from the CTMA in the first two years o f the project. The Windows Manager will be obliged to complete a standard, concise evaluation form for each small proposal. This evaluation will include a matrix scoring compliance with the aims and selection criteria of the appropriate component, and a briefjustification o f the decision to accept or reject the proposal or components thereof. The PSC will review the small proposal funding decisions made by the Windows Manager every four months, and may suggest changes to the selection policy at that time. Proposals larger than US$lO,OOO would require a more extensive proposal to be submitted in English, which would be sent for peer-review by the Window Manager to facilitate a more extensive proposal evaluation. The Windows Manager would decide to accept, reject or suggest amendments to each proposal after receiving peer reviewers' recommendations, andprovide a briefjustification along with the proposal evaluation to the PSC for approval. If the Manager's decision were overturned, the PSC will mention the reasons for doing so. For both small and large grants, proposal evaluations and grant decisions would be disclosed on a regular basis. Project Implementation Plan (PIP). A draft PIP has been prepared, and has undergone reviewby STEA, MAF, ME,MOF, MOFA and other government stakeholders including the three provinces. The PIP will guide project implementation and monitoring. At negotiations, the revised draft PIP was agreed betweenGOL andthe Bank, and the final version will needto be endorsedby the Board of Directors prior to effectiveness o f the Project. The PIP is a two-volume document: (i) Volume 1 explains the project objectives, structure and implementation arrangements; contains copies o f background documents including relevant legal and policy instruments; and lays out the monitoring and evaluation framework; and (ii) Volume 2 catalogues the detailed implementation procedures which make up the operations, procurement and financial manuals; and the institutional arrangements within EPF for the Project. The institutional arrangements include a MUstaffing and recruitment plan, with TORSfor key staff members. The Operational Manual includes consultation, planning, monitoring and reporting, and disclosure. Draft forms and formats are included for grant applications, screening of proposals for safeguards issues including extensive checklists of prohibited or controlled activities, proposal evaluation, and grant agreements. The Procurement Manual includes general procedures, procurement tables and sample contracts. The Financial Management Manual includes procedures and policies, budget and disbursement tables and sample payment request forms. Much o f the material has been adapted from similar projects, in particular the Poverty Reduction Fund. Key provisions o f the Environmental and Social Safeguards Framework are incorporated in the sub-grants screening and approval process in the operations manual. Duringthe start-up phase of the Windows, training and additional technical assistance will be provided for the EPF and local governments of the target provinces to facilitate the development and marketing of project applicationand implementation. Establishment of the EPF i s also being supported by ADB, who will provide US$5 million as initial capital. The constitutionof the Board, appointment o f the Director, and approval of the PIP are conditions o f effectiveness. 10 Procurement. EPF will oversee procurement for the proposed project, with proponents being responsible for each sub-project. Procurement will be done by the beneficiaries as per standard IDA guidelines as specified inthe PIP which includes a detailed section on the procurement arrangements. All subproject procurement processes such as review, evaluation and selection o f quotations and bids (where applicable) will be opened, presented, and deliberated in a public meeting. All related procurement documents such as the terms o f reference, design and technical specifications, quotations and bids will be accessible or available to anyone who may be interested. To manage the procurement process, the EPF will recruit relevant staffthat willbe intensivelytrained at the start of implementation. Financial Management. The Executive Office ofthe EPF will include a Finance Unitwhich will have overall responsibility for the Fund's financial management. The MU(under the guidance o f the Finance Unit)would: (i) flow of funds to'each component; (ii) ensure supervise the financial management, of the national, provincial and local activities; and (iii) be responsible for consolidating financial reports and audits and for accounting to GOL and IDA. The EPF will employ an automated system, and an Accountant and a DisbursementOfficer will be recruited to the MU. IDA funds will be channeled through a Special Account (SA). The SA will be established at the Bank of Lao PDR and operated by the EPF. At the sub-project level, an agreement will be signed between the beneficiary and the EPF (through the MU) which will specify the sub-project implementation arrangements including the opening and maintaining o f Bank accounts. An Independent Auditor acceptable to IDA will be appointed to audit the annual financial statements according to a terms of reference acceptableto the IDA. 3. Monitoring and evaluation of outcomes/results The outcomes to be achieved by the Project are detailed in Annex 3. Project monitoring will be the responsibility o f the WMU which will collaborate with the Environment Research Institute (ERI) and Department of Environment (DOE) and sub-project beneficiaries to obtain data for measuring outcomes and results. These will be determined at the aggregate level to assess trends inenvironmental conditions, and at the sub-project level to measure the impacts and benefits of grant activities. e At the aggregate-level the project will assist ERI and DOE to strengthen their environmental database and to establish a system for measuring social outcomes. Through the recent preparation of the Lao Environment M~nitor,'~assistance was provided to ERIto improve the analytics and reporting o f environmental trends. It i s expected that this will facilitate the preparation of future environment reports by EM. The Project will assist the three target provinces to develop and adopt a provincial environmental and social safeguards performance index. The performance index will provide a composite measure o f staff capacity, budget levels, engagement of civil society, project compliance with environmental and social safeguards regulations, and indicators of general environmental health. The Project will also assist in mainstreaming the monitoring methods to be developed by a proposed Institutional Development Fund Grant for Ethnic M i n ~ r i t i e sto~measure social outcomes; and ' e At the sub-project level, monitoring arrangementswill be agreedbetweenthe WMUandthe grant recipient prior to grant approval on the basis o f the scope, complexity and length o f the proposal l3The Lao EnvironmentMonitor 2005 will bepublishedinJune 2005, was preparedby STEA with assistance provided by the Bank, ADB andthe UnitedNations EnvironmentProgram. l4An applicationhasbeenmade for an IDFGrant that will assist indevelopingthe capacityof the Lao Frontfor National Constructionbothat the nationaland at the local level to monitor andevaluatethe impactson ethnic groups causedby priority NGPES policies,and to promotenationalpolicy dialogue concemingethnic groups anddevelopment. 11 and the competence and experience of the recipient. All sub-projects will be required to provide a completion report according to a standard format. Projects of a year in duration would receive at least one supervision visit during project implementation, but projects of only a few months duration, especially in the case where they are implemented by an experienced agency may be assessedonly after completion. The MU will provide to the PSC and IDA quarterly progress reports as per the format contained in the PIP. The report will describe the status of sub-projects (approved, ongoing and closed), status of technical assistance activities, draw down from the Special Account and other aspects. These reports will also be disclosed. The STEA and EPF will also conduct semi-annual stakeholder consultations to review the progress o f the proposed project, and also disseminate the lessons learned. The indicators for monitoring outcomes are given inAnnex 3. Component 3 includes technical assistance to STEA, EPF and Provinces to assemble baseline information for the outcome indicators, and to develop methodology and systems for tracking these outcomes. Bank Supervision. The Bank will supervise the Project in tandem with the extensive supervision arrangements for the NT2 project. Environmental, social and fiduciary specialists from the Bank's offices inVientiane andBangkokwillbeinvolvedinProject supervision, andwill extendsupport to the capacity- buildingactivities of Component 1including the development of terms of references for major sub-grants to address hydropower sustainability, integrated river basin management and resettlement policy implementation. Supervision will be especially intense during the first 18 months after project effectiveness, and i s likely to include quarterly missions. The first three small grants and first 6 large sub- grants up to US$ 100,000 incost will be subject to ex ante Bankreview. Sub-grants over $100,000 incost will be subject to ex ante Bank review. Ex post review of all grant award decisions will be carried out at least on a six-monthly basis. 4. Sustainability Given the low capacity and funding in the environment sector in Lao PDR, project sustainability is a significant issue. The Project has been specifically designed to minimize the risk o f unsustainable outcomes by: (i) buildingon existingefforts and achievements of the GOL duringthe preparationof the NT2 Project; (ii) taking a demand-driven approach, involving small-scale, locally implemented activities; (iii) avoiding the creation o f a temporary project implementation unit and instead developing the capacity of existing government agencies to plan and implement activities; (iv) developing effective systems for monitoring sub-projects; and (v) directly tackling the issue o f sustainable fundingby establishing the EPF as an effective instrumentfor the management of long-term environmental funding. Government Commitment. The NT2 Project has been an important testing ground for government commitment to sound management o f environmental and social issues in the context of large infrastructure development. Indicative o f this heightened awareness and commitment are: (i)the enactment of Prime Ministers' Decree 39 to establish and operationalize a specialized authority for watershed management, curbing illegal logging and tackling wildlife poaching in the Nakai-Nam Theun National Protected Area; (ii) employment o f consultative and participatory methods in resettlement the planning, and caring for the welfare o f the vulnerable groups; and (iii) the adoption of a proactive approach to dealing with likely downstream fisheries losses as a result of the hydropower project's implementation. The Project provides resources to extend conservation, environmental management and social development models developed under the NT2 project to address similar issues beyond the scope o f the NT2 project. The capacity building component centers around supporting the GOL to fulfill its commitments to strengthen and institutionalize environmental safeguards and management measures nationally as laidout inthe GLIP for the NT2 Project . 12 Devolved planning and administration. Project activities driven by the demands of implementing agencies, rather than extemally imposed on them, are inherentlymore sustainable due to the desire for them and the sense of ownership created. In addition, it i s expected that devolved activity design and planning will reduce the risk of disconnect between the scale, complexity or approach o f the grant- financed projects, and the capacity and culture o f implementing agencies. Avoidance of artificial project structures. Local and agency-specific capacity to plan and administer projects i s fostered through competition between grant recipients and directly supported by outreach, training and supervision activities of the MU.The MUitself will provide a core of expertise available for the future administration ofthe EPF. Sub-project monitoring. Onthe level of individual sub-projects, detailed selection criteria will ensure that activities are appropriate to local capacity, and implementation and outcome monitoring will ensure cost- effectiveness. Both systems will ensure that field projects do not lead to unsustainable outcomes by breaching social and environmental safeguards themselves. Disclosure and transparency in proposal selection, and grant amounts and outcomes will help to engage local communities and civil society, and provide a leaming process for all stakeholders. Foundation for long-term environmentalfinancing. The Project directly tackles the constraints of low capacity and resources by building operational capacity not only within governmental environment agencies, but also in the administration of the EPF. The EPF i s being established to address sectoral fundingconstraints by providing a long-term instrument to channel revenues from hydropower and other resource extraction projects into environmental protection. The proposed project will operationalize two Windows o f the EPF (which i s the only financing mechanism created for environment and conservation purposes inLao PDR). A proportion of NT2 revenues, and those from future hydropower projects, could potentially be earmarked for the EPF ifitperforms satisfactorily, and will begin to come on stream before the proposed project closes. Facilitating financial sustainability within the environmental and social development sectors i s as much o f an objective for the proposedproject as the more traditional capacity- enhancement and field-based components. are not realized due to delays in NT2 commits GOL to implement specific actions implementing the agreedpolicy and aimed at improving environmental andresettlement regulatory reforms, inadequate management inthe country. The NT2 legal availability of human and financial agreementsprovide recourse mechanismto the resources, and lack o fpublic Bank for non-fulfillment o f such commitments involvement. - Specific policy commitments needed for the project will be sought before approval or included as -datedcovenants as specified inPart C6 below. Incentives are built into the project to attract community involvement I- Availability o fNT2 revenues for EPF will sustain project inputs To Components Results: External factors and administrative I EPFhas been established as an independent and IModest interference limits the effectiveness autonomous organization. Further, the following o fEPF. measures are designed to specifically addressthe 13 riskinthe Project: -- application of strict selection criteria; disclosure o f project activities, including sub- project approval and performance; and - external monitoring and semi-annual stakeholder workshop. EPF is a new organization, and - Acceptable staffing plan i s a condition o f Modest delays inrecruitment and developing effectiveness capability couldhinderproject - Adoption o f procurement and financial implementation management arrangements contained inthe PIP is a condition o f effectiveness -- EPFhas flexibility to recruit staff from the market Specialized staff will be trained inproject procedures, safeguards, procurement arrangements, and financial management systems Selectiono f weak or inappropriate Detailed procedures for grant selection are detailed Low projects inthe PIPto ensurehighquality applications in accordance withthe ESSF. Lack o f capacity at central, The project design features demand-driven capacity Modest provincialand district levels to building activities that require upfront commitment implement the project. includingpreparationo fplans, assignment o f staff, and allocation o f recurrent expenditures. National agencies receive undue - Project design is explicit about involvement o f Low preference over provincial or target provinces incapacity building activities. community interests andpriorities - Site-specific investments at the local-level will be through a demand-drivenprocess inwhich both provinces and communities will have a significant stake. Lack o f local community - Incentives (benefits, capacity, ownership, Low participation consultation) have beenbuilt into the project design to encourage community involvement inproject activities - Project design encourages the involvement o f civil society groups (internationaL'loca1) to partner with local communities Lack o f recurrent budget will riskthe - Provincesparticipating in the project will needto Modest sustainability o f sub-projects commit to financing recurrent expenditures either through their budget or cost recovery from communities .isk Rating- H (High Risk); S (Substantial Overall Riskrating sk); M(ModestRisk),N(Low or Negligible LowRisk) 6. Grant conditions and covenants Effectiveness Condition. The followingconditions have to be met by the Recipientprior to declaringthe Projecteffective: (a) Subsidiary Grant Agreement has been executed on behalf of the Recipient and EPF, ina manner and substancesatisfactory to the Association; 14 (b) EPF is inoperations in a manner and substance satisfactory to the Association, including: (i) the Board o f Directors has been appointed by the Recipient's Prime Minister; (ii) the EPF Regulations provided in Article 8 (4) of EPF decree have been adopted by EPF Board of Directors; (iii)the following officers have been appointed by EPF Board o f Directors: (a) a director o f the Executive Office; (b) a manager of the Management Unit; (c) a chief technical and management advisor; (d) a procurement officer; (e) a financial officer; (0 an environmental specialist; and (h) a social specialist; (iv)the recruitment plan for the Management Unit, satisfactory to the Association, hasbeen approved by EPF Board of Directors; (v)the Project Implementation Plan, satisfactory to the Association, have been duly approved and adopted by EPF Board of Directors; and (vi) established a computerized accounting system in a manner and substance satisfactory to the Association. (c) Recipient has adopted a Decree on Resettlement and Compensation, in a manner and substance satisfactory to the Association; and (d) Environmental and Social SafeguardsFrameworkhasbeenduly authorized bythe Recipient and i s legally bindingand enforceable in accordance with the applicable laws of the Lao People's Democratic Republic. Implementation (Dated Covenants). The following are the dated covenants for the project: (a) By December 31,2005, acceptable scope of work to design an integrated approach to managing the NamTheudNam Kading River Basin. (b) ByJanuary 31,2006, core staff ofEPF and all staff ofMUhired. (c) By January 31,2006, annual stakeholder consultationworkshop held andrepeated at every anniversary to discuss the Project's annual progress report and EPF annual report. (d) ByJune 30,2006, Provincial EnvironmentalManagement Plansprepared for the three target provinces. (e) By October 31,2006, first annual report of EPF published,andrepeated annually. (0 ByDecember 31,2006, agreedinstitutionalframework for monitoringofthe implementationof the NationalPolicy on Environmental and Social Sustainability o fthe Hydropower Sector. (g) ByJune 30,2006, appropriate institutionalarrangement established at STEA to implementthe Resettlement Decree. (h) ByJune 30,2007, acceptableinstitutionalframework for riverbasinmanagementofNam Theun/Nam KadingRiver Basininplace. (i)ByJune30,2008, ActionPlanstobringeachhydropowerfacilityconstructedsince1990intofull compliance are prepared and disclosed by each owning company. (j)ByJune30,2008, mid-tennreviewoftheProjectiscompleted. D. APPRAISAL SUMMARY 1. Economic and financial analyses The Project takes a "framework" approach where most o f the major investments are not fully identified in detail upfront. Economic and financial sustainability criteria are integrated into the eligibility and review process to ensure that the sub-grants would be selected based not only on the technical and practical soundness but also on economic considerations. Detailed sub-grant eligibility and selection criteria and implementation arrangements are further described in Annex 4 and 6, respectively. Detailed procedures will be elaborated inthe PIP.The capacity buildingpart o f the project i s expected to yield highreturns in the conservation operations as well as human capital development. 15 Financial and Fiscal Evaluation. Due to current stagnation of government revenue, it i s not surprising that only 0.6 percent of the government budget is spent on environment related agencies. STEA annual budget i s estimated to be around USD 100,000, of which only USD 37,000 i s available for the environment related agencies within STEA. Only USD 15,000 i s available for the entire National Protected Areas (NPA) system. The Project would provide much needed resources to both national and provincial levels to enhance environment and conservation activities. Fiscal sustainability of the Project i s being assured by the fact that: (i) the Project is proposed as an IDA grant and not credit; and (ii) EPF will receive annual revenue from the NT2 as well as future the hydropower and other development projects. The establishment of operational mechanisms o f the EPF will ensure that future revenues from NT2 can be channeled for new environmental and social investments. 2. Technical The provision of sub-grants provides for a flexible technical structure in which proposals will be developed by the individual implementingagencies in a manner which i s consistent with their specific needs and requirements. Technical design of each proposal will be evaluated in light of the selection criteria o f the EPF, and expert input will be provided in the form of peer review of larger proposals according to the guidelines laid out in Annex 4. At its core, the Project concerns the scaling-up o f technical models whose effectiveness has already been demonstrated in Lao PDR or elsewhere. Conservation activities for example will follow the community conservation model15 that has already been developed inLao PDR as detailed inAnnex 4. 3. Fiduciary Procurement. Procurement for the Project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits'' dated May 2004 and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004. These provisions " will be stipulated inthe DevelopmentGrant Agreement (DGA). EPF will be responsible for procurement and financial management activities of the Project. Since EPF i s a new organization, efforts will be made to harmonize its procurement practices at the start o f project implementationwith those o f IDA and ADB. The EPF will recruit procurement and financial management specialists, who will receive intensive training on IDA methods and practices. The PIP includes manuals for procurement and financial management, and its ratification by the EPF Board i s a condition of effectiveness. Financial Management. The Country Financial Accountability Assessment (CFAA) o f 2002 concluded that the overall fiduciary risk in Lao PDR i s considered to be high due to weak internal control environment for the management o f public funds and resources, and lack o f transparency in the use of public finances. Public access to government financial information i s limited and there is inadequate awareness of modem practices of internal control in the public sector. The oversight functions and the State Audit Organization needs substantial improvements, the accounting and auditing profession and institutions remain under-developed, and technical capacity o f financial staffs are limitedand weak. With respect to externally funded projects, the overall financial management system remains weak. Key issues are: (i) inconsistent and inadequate financial management standards, procedures and software in ~~ The communityconservationmodelrests onthree pillars of developingvillage resourceuse agreements, village conservation teams, andsustainablealternativelivelihoods,and is implementedinaccordancewith principlesof community empowerment, inclusiveness andequitableoutcomes, and adaptive management.The Social andEnvironmentalManagement Frameworkand 1st OperationalPlan for the NT2Watershedprovidesthe most detailedexposition of the model. 16 project implementation units; (ii) to project implementationresultingfrom management o f Special delays Accounts byMOF; (iii) delayed audits and lack of consistent external audit standards andprocedures; (iv) accounting departments have been poorly staffed and equipped at start-up; (v) poor internal control procedures and absence o f internal audit inline agencies; and (vi) lack o f financial management capacity at provincial and district levels. The review of financial management arrangements for the Project was carried out inMarch 2005. As EPF i s a new organization, risk i s high and financial management capacity will need to be built. This also provides an opportunity to harmonize practices with Bank and ADB requirements. Appropriate financial management arrangements and systems will be put into place before the Project starts, and the required capacity buildingwill be assessedand further supported as needed duringimplementation. The following actions will be taken: (i) establishment of a financial management unit within EPF; (ii) adequate staffing o f the Unit, with two project accountants having qualifications acceptable to IDA; (iii) finalization o f a Financial Management Manual, acceptable to IDA, as an integral part of the PIP; (iv) instituting an acceptable accounting system; and (v) training o f project staff in project financial management procedures 4. Social The unsustainable exploitation of natural resources disproportionately impacts some of the poorest and most vulnerable groups in the country, includingethnic groups. Thus ensuring that these resources are sustainably managed i s vital to the well-being of these groups in the short and long term. It i s expected that the Project will contribute to improved social outcomes by: (i) providing funding for small scale sub- projects for participatory natural resource management and community development activities; and (ii) assisting GOL inthe implementation of social safeguard policies, decrees and guidelines inthe context of investment projects and biodiversity conservation activities. The Project will provide capacity building, including training assistance, to government agencies and other stakeholders, including communities, community groups, mass organizations, or civil society organizations in the areas of environmental management and community development in and near protected areas and implementation and monitoring of social safeguards. This project makes an important contribution in seekmg to address the social legacy o f past hydropower development including adverse impacts resulting from resettlement and impacts on ethnic groups by mainstreaming lessons learnt through new Government policies such as the National Policy on Resettlement and Rehabilitation of People Affected by the Implementation of Development Projects and the Hydropower Sustainability Policy statement. Among other features, these emphasize the importance of (i)conducting comprehensive assessments of potential environment and social impacts as part of feasibility studies and; (ii)gaining public acceptance and involving communities; (iii) recognizing entitlements for those affected by projects. The Project will include awareness raising and dissemination activities on the Resettlement Decree and other social policies such as the law on "Protection of Women and Children." Moreover, design of biodiversity conservation and other local environmental improvementactivities will include opportunities for participating communities to better their livelihoods. Activities around protected areas o f Central Lao will draw on the experience o f the District Upland Development and Conservation Project and the planning process (the Social and Environmental Management Framework and First Operational Plan) that was developed for the NT2 Watershed, which was designed to ensure equitable benefit sharing at the village level for all villages involved in that component of the hydropower project. While the Project i s expected to benefit local communities through the above mentioned activities, social risks and constraints exist. Many development interventions (including hydropower projects and protected area management projects) coincide with areas populated by ethnic groups who are often most 17 vulnerable to development activities and excluded from their benefits. Ethnic groups inthe Project areas mainly practice shifting cultivation, have customary rightsto the land, and adhereto culturalpractices and beliefs different from the mainstream Lao society. They often live in fragile relationships with the environment, their poverty levels are high, and they have little access to basic services and are often excluded from decision making processes. Government policies to support upland communities have been found to have adverse impacts on these communities, e.g. policies concerning focal area development, stabilization of shifting cultivation and land allocation. A major challenge for the Project will be to ensure that project activities take into account the particular circumstances of vulnerable communities and that projects exploiting natural resources and protecting biodiversity do not cause negative impacts on these people. It i s also important that vulnerable groups are included in, and benefit from, project activities inways that are culturally and socially appropriate. Mechanismand procedures to address these issues have been developed and are described inAnnex 10 and the Environment and Social SafeguardsFramework (ESSF). As this Project is designed as a complementary activity to the NT2 project, the extensive consultations undertaken for NT2 have directly informed this project design. Consultations were also undertaken inthe context o f the Lao Environment Monitor 2005, and the drafting of the decree for the EPF. Discussions were held with government stakeholders and development partners (ADB, SIDA and UNEP). NT2 preparations included consultations with local communities in the NT2 Watershed and involved all 31 villages inside the Nakai Nam-Theun National Protect Area and a large number o f villages in the peripheral impact zones. These consultations informed the approach in SEMFOP, which i s also the basis for this Project, including its social safeguards measures in relation to activities in and near protected areas. Consultations with local groups have been especially important since civil society engagement i s a relatively new and important advancement for Lao PDR. The Project aims at further advancing and deepening such opportunities. 5. Environment The Project will result inenvironmental gains by strengthening institutions, reformingpolicies, amending decrees, modemizing instruments and procedures, and supporting their implementation. The project design i s rooted inan effort to stem the degradation o f the natural environment inLao PDR by increasing the capacity of GOL to enforce existing rules and regulations, and test this capacity in pilot project interventionsthat are targeted at improvingbiodiversity conservation at the provincial level. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes N o Remarks Environmental Assessment (OP/BP/GP 4.01) [XI Natural Habitats (OP/BP 4.04) [[1 ] Assessedaspart ofthe EAprocess Pest Management (OP 4.09) [XI[XI [ ] Assessed as part of the EA process Cultural Property (OPN 11.03, beingrevisedas OP 4.11) [ ] [XI Assessed as part of the EAprocess Involuntary Resettlement (OP/BP 4.12) [XI 1 Indigenous Peoples (OD 4.20, being revisedas OP 4.10) [] Forests (OP/BP 4.36) [XI[XI [ ] Assessed as part of the EAprocess Safety of Dams (OP/BP 4.37) [ 1 [XI Projects inDisputedAreas (OP/BP/GP 7.60)' [ 1 [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [ 1 [XI * By supportingthe proposedproject, the Bank doesnot intendto prejudicethe final determinationof the parties' claims on the disputed areas. 18 The proposed project would trigger four of the ten policies, namely EnvironmentalAssessment (OP 4.0l), Natural Habitats (OP/BP 4.04), Involuntary Resettlement (OP/BP 4.12) and Indigenous Peoples (OD 4.20). The Project i s consistent with but does not trigger safeguardpolicies addressing Pest Management OP (4.09), Cultural Property (OPN 11.03) and Forests (OP/BP 4.36) in as much as sub-grant proposals which would trigger specific measures under these policies may conceivably be received, but would not be accepted. The identification and rejection of such proposals would occur at the screening stage of the application process, as will be detailed inthe Project ImplementationPlan. The environmental category of the project i s B. No physical impacts are anticipated due to the activities o f Component 1 and 3. However, Component 2 i s likely to cause the following impacts: (a) localized impacts in the immediate areas adjacent to sub-project location due to construction activities; (b) access to resources inside protected areas may be restricted because of conservation plans supported by the project; (c) selected community-led livelihood activities may cause minor, short-term or reversible impacts. To address these impacts, an Environmental and Social Safeguards Framework (ESSF) has been prepared, which provides background on safeguards issues of potential concern, and detailed principles for ensuring that these are avoided, minimized and mitigated in the implementation of sub-grants in accordance with World Bank policies and with the level of impacts acceptable to the Project. The details o f ESSF can be inAnnex 10. The Project will not finance any sub-projects involving land acquisition, loss of physical assets or physical displacement of population. Sub-projects will not include areas with govemment activities involving village consolidation or focal site areas that have involved, or plan to involve, involuntary relocation. Implementation of project safeguards procedures and adherence to the ESSF will be directly overseen by the CTMA, until such time as the WMU staff have sufficient capacity to take full responsibility. An objective of the proposed project i s to strengthen GOL capacity to implement its environmental and social safeguards policies, decrees and guidelines. Such capacity will also be developed in the EPF by taking a mainstreaming approach to include safeguard features in design parameters of sub-projects. 7. Policy ExceptionsandReadiness (a) Policy Exceptions: None (b)Readiness: Project Implementation Plan (June 2005) Procurement Plan for the Firstfiscal Year (June 2005) Terms o f References for three major Sub-Grants (June 2005) 19 Annex 1:Country and Sector or ProgramBackground16 Lao Environmentand Social Project Vast naturalresourcesbut highlevels ofpoverty Lao PDR i s a landlocked and mountainous country, which i s surrounded by Cambodia, China, Myanmar, Thailand and Vietnam. About 70 percent of the country's 5.68 millionpeople live on less than US$2 per day. With a per capita GDP of around US$ 340, it i s one of the poorest countries in the East Asia and Pacific Region. The country's human development ranlng was 145" among 175 countries. Lao PDR i s rich in forest resources and has four eco-regions o f global significance. It has a large volume of internal renewable water resources and considerable mineral resources, such as gold and lignite. These natural resources have catalyzed past economic growth, but their unplanned exploitation has also resulted in significant environmental damage to the country. With little economic diversification, Lao PDR continues to rely heavily on its naturalresourcesto support national development and secure livelihoods for its people. Current wood products account for more than 35 percent of Lao PDR's total export revenues, and forestry contributes more than 15 percent o f GDP. Non-Timber Forest Products (NTFPs) are critical for meeting subsistence needs and for achieving food security to the majority o f rural Lao households. An average rural family consumes the equivalent o f US$ 280 per year inNTFPs. Inaddition, collectionand sale o fNTFPs provide on average 55 percent o f family cash income. The role of NTFPs is especially important duringoccurrences o f droughts, which regularly reduce rice yields. In remote rural regions in and around protected areas, it i s typically the case that villagers do not produce enough rice to meet subsistence needs for a substantial part or majority o f the year. Depletionof naturalresources In 1940forests were estimated to cover 17million ha, approximately 70percent ofthe landarea. In1989, the forest cover accounted for 47 percent of the land area. The forest cover ranges from about 65-70 percent in the southernmost provinces to only 25 percent in some northern provinces. The largest and least disturbed blocks o f forest are inthe central and southern part o f the country. Recent surveys suggest that this i s being further reduced by an annual 53,000 hectares per year, resulting in approximately 10.2 millionshectaresor 43 percent cover in2004. Very little ofthis i s pristine primary forest. Poorer upland districts in Lao PDR are especially susceptible to land and forest resources degradation. Over the last decade, the poorer districts in Lao PDR have experienced greater declines in agricultural land. Deforestation and forest degradation remain a significant environmental problem in Lao PDR. Deforestationrates in certain districts have been more then 20 percent over the period 1993-1997.Other blocks of forest are becoming increasingly fragmented and disturbed, resulting in a rapid contraction of mature forest, and a decreasing amount of tree cover and crown density nationally. Ina number o f upland forest areas, deforestation i s mainly a result of logging and unregulated commercial exploitation. In addition, local pressures include unsustainable exploitation practices, shiftingagriculture and poverty, all of which are putting pressure on the remaining forests. All causes of deforestation result in increased pressureon the remaining forests and forest products. l6The Lao Environment Monitor 2005 (forthcoming) reviews the major environmental trends and identifies the key challenges faced by the country. 20 As pressure on land increases, rural villagers are increasingly turning to NTFPs as a ready source of income. This leads to acceleratedexploitation and diminishingavailability. Increasedmarket demand for NTFPs scarce elsewhere in South-East Asia i s also accelerating unsustainable exploitation. For example, approximately 80 percent of domestic energy consumption for cooking i s based on fuel wood, and the estimated 4-5 millionm3/year (about 1m3/persodyr) of fuel wood used annually by local communities i s leadingto excessive fuel wood gathering and tree felling. Sustainable management of the country's natural resources and responsible govemance o f the benefits accrued from their use has been identified as an integral part of the government's recently approved National Growth and Poverty Eradication Strategy (NGPES). Having an average 52 ha o f high-density forest area per household, the well-being of the poor could be improved while conserving the forest by providing access and knowledge (including traditional or indigenous knowledge) regarding the efficient use o f resources. 17 Development and social challenges One o f the main characteristics of the Lao PDR i s its complex cultural diversity, including numerous ethnic groups from four ethno-linguistic groupings: the Lao-Tai including the dominant ethnic Lao group (about 30 percent of the total population of Lao PDR according to the 1995 census) and lowland and upland Tai speaking groups (about 35 percent); Austro-Asiatic, including the Mon-Khmer ethnic minorities (about 23 percent); Hmong-Mien, including the Miao-Yao (about 7.4 percent); and Sino- Tibetan (about 2.7 percent). The three target provinces include a large number o f ethnic groups, mainly Hmong, Mon-Khmer groups such as Vietic and Brou, and upland Tai groups. There i s much variation across ethnic groups in terms of their social organization, culture, land use practices, level of food security, Lao language abilities, access to resources, gender roles, level o f participation in local development planningprocesses, and level o f interaction with and integration into the mainstreamsociety and market economy. Ingeneral, ethnic groups are most often vulnerable to, and marginalized from, the development process. They typically live inhighlevels o f poverty, have less access to infrastructure and social services, and have lower literacy levels than the Lao and lowland Tai groups. This i s particularly true inthe more isolated and forest rich areas in and around protected areas, which are usually inhabited by ethnic groups. Ethnic diversity increases the likelihood of adverse social impacts from development initiatives and complicates their successful mitigation. A number o f generally well-intentioned GOL policies enacted to provide access to services, address a decreasing resource base in upland areas and reduce opium production, have beenfound to adversely affect vulnerable ethnic groups. These include: 0 Relocation. GOL has moved ethnic groups from the uplands to the lowlands since 1975, mostly under the focal area development program. Plannedrelocation is still occurring inmany places, including in Central Lao, particularly in Bolikhamxay. Several studies, including the ADB- funded Participatory Poverty Assessment, have documented how this kind of relocation has negative impacts on the communities involved through loss o f livelihoods, increased food insecurity, restrictions to natural resources (e.g. NTFPs that they rely on for their livelihoods), and even increasedmortality rates. 0 Stabilization of shifting cultivation and land-forest allocation. GOL views shifting cultivation as an un-sustainable land use practice and has placed a high priority on reducing it, and in some policy statements seelung to phase it out by 2010. Although GOL has stated that the policy l7 The Lao Environment Monitor 2005. 21 targets "pioneering shifting cultivation" rather than the rotational shifting cultivation, actual practice indicates that all types of shiftingcultivation i s reduced or phased out even if sustainable under current circumstances. Prime Ministerial Decree No. 169 on Management and Use of the Forest Land issuedin 1996 stipulates that land cannot be left fallow for more than three years- far shorter than the normal cycle of rotational agriculture. The implementation of the land and forest allocation program has been found to have significant adverse impacts as it provides for inadequate land to meet subsistence needs of ethnic groups practicing shifting cultivation, including sustainable rotational agriculture. The program aims to give villagers ownership of forest resources through participatory land use planning, but it has also led to a reduction in the land available for cultivation. Voluntary movement o f people can also have negative impacts. A characteristic of the three target provinces i s that they have all developed direct communication links between Vietnam and Thailand, including river crossings, bridges and upgraded roads. Trade i s increasing, somejust passing through Lao PDR. The progress has been rapid as the roads have been improved, and with it has come rapid development along the roads. Many villagers are moving voluntarily down from the upland areas to live along the roads and there have obviously been economic benefits for many people. However, there are also negative impacts, and the Lao Women's Union has identified these three provinces as beingthe ones of major concern for human trafficking and transmission of HIV/AIDS. Economic Growth and Poverty Reduction Lao PDR will need to achieve GDP growth rates o f 7 percent per year and sustain this level up to 2020 if it is to attain its poverty reduction targets. The Bank's recent Country Economic Memorandum (CEM) concludedthat with its vast naturalresources and central position inthe rapidly growing Greater Mekong Sub-region (GMS), Lao PDR i s well-placed to achieve quality growth and reduce poverty, provided that Government manages to increase the contribution of natural resources (especially sustainable hydropower and mining) to development; fosters a more enabling environment for private sector investment; and undertakes reforms to improve governance, including improved management o f environmental and social issues, and addressingthe legacy o fpast development interventions. With the largest per capita water availability in Asia, Lao PDR is poised to tap this potential to spur economic growth by developing hydropower, expanding irrigation facilities and increasingwater supply. Hydropower generation has increased fivefold inthe last 25 years and i s expected to triple inthe next five years. Over the next quarter of this century, Lao PDR has the potential to produce 18 percent of the 23,000 MW o f electricity that can be generated in the Mekong River Basin, but the exploitation o f this hydropower potential needs to be carefully balanced with environmental and social pressures so as to guaranteenet benefits. The legal and institutional framework for natural resource and environmental management The Government has formulated a wide array o f legislation and regulations for environmental conservation and protection. The Environmental Protection Law o f 1999, supported by its Implementing Decree (2002) i s the principal environmental legislation in the country. It includes measures for the protection, mitigation and restoration o f the environment as well as guidelines for environmental management and monitoring. The Decree on Environmental Impact Assessment (EM) was approved in 2000. This regulation describes the process for consideration, approving and certification of development projects. Sector specific environmental assessment (EA) guidelines have been developed for hydropower and electricity (MM)and RoadDevelopment (MCTPC). The Forest Law o f 1996 and its various enabling 22 implementation decrees and regulations describe measures to improve the protection of forests and protected areas. Under this law, specialized decrees have also been issued for specific forestry programs or protected areas. Environmental legislation has evolved quickly in Lao PDR. Inconsistencies have surfaced in different legislation as a result o f different Ministries leading the development o f sectoral legislation. Principal inconsistencies include conflicting provisions, overlapping mandates given to different Ministries, and lack of implementingregulations and supportingenvironmental standards. The institutional structure for environmental management in Lao PDR consists of: (a) national-level ministries and agencies including Science, Technology and Environment Agency (STEA) and Ministry of Agriculture and Forests (MAF) which have a core role inenvironmental protection and conservation; the others having a significant role include the Ministry o f Industry and Handicrafts, Ministry of Communications, Transport, Post and Construction, and the Ministry o f Education; (b) national committees which guide inter-sectoral coordination among agencies; (c) provincial and district entities which have devolved responsibility for environmental protection; and (d) mass organizations which support the government in promoting participation and awareness. Recognizing the cross-sectoral character of environmental conservation and protection, the Lao Government has created multiple coordination bodies to facilitate inter-agency and provincial coordination. These include the National Environment Committee (NEC), the Water Resources Coordination Committee (WRCC), and the Lao NationalMekong Committee (LNMC) and the Lao National Committee on Energy. Central to addressing existingenvironmental and social concerns is the need to rapidly develop slulls and capacity in the country so as to make the institutions work effectively. Inadequate human resources (two percent of public sector staff) and very low government budgets (less that one percent of government budget) significantly constrain the implementation and enforcement o f ambitious legislation and policies that have been enacted to protect the country's vast naturalresources from environmental degradation. Increasingrecognitionof andcommitmentto environmentalissues Working in partnership with local communities and international organizations, the Government o f Lao PDR has made important strides in instituting changes that could slow the pace of natural resource degradation. Recent achievements include: enacting an environmental impact assessment decree; strengthening the regulations for wildlife trade in endangered species; decentralizing environmental functions to provinces; improving water and air quality monitoring; and establishing a third-party monitoringprotocols to report on environmentalimpacts of development projects. Nam Theun 2 (NT2) Project in particular has acted as a catalyst to strengthen environmental and social policy. The GOL has stated that the NT2 Project has constituted an enormous learning exercise in the management of a complex, multi-sectoral project, and has explicitly recognized it as a model for testing environmental guidelines and approaches that could be applied elsewhere in the country. NT2 has especially influencedthe GOL's awarenessandcommitment inthree areas: 0 Biodiversity conservation. The GOL considers the protection o f the Nam Theun 2 Watershed (4000 sq. kms.) as important for the long-term sustainability of the NT2 Project. To this end, GOL has enacted a Prime Ministers Decree creating a specialized agency to protect and manage the Nakai Nam-TheunWatershed, developed a 5-year management plan that underwent extensive local consultation, and secured long-term financing o f US$ 31.5 for 30 years from the project sponsors. A comprehensive program has been prepared which includes patrolling and enforcement, community planning and participation, community-based resource management, outreach and education activities and provisions for controlling cross-border wildlife trade and prohibiting commercial activities within the watershed. 23 0 Integrated river basin management.The GOL has recognized the need to assess and address the cumulative impact of several developments and activities alongthe same river basin. Through the Government Letter of ImplementationPolicy (GLIP) for the NT2 Hydroelectric Project, GOL has confirmed the following: (i) an institutional framework for management o f the Nam Theun-Nam Kading system to address and mitigate cumulative impacts caused by different development projects including hydropower and miningprojects will be designedby June 30,2007; and (ii) an agreement with the Theun Hinboun Power Company on the management o f cumulative impacts downstream of the Theun Hinboun dam will be reached by December 31, 2007. In addition, an integrated river basin management approach i s already being developed for the Nam Ngumriver basin with assistance from the Asian Development Bank and Agence Frangaise de DCveloppement. The Government's Water Resources Coordination Committee has decided to establish a national approach to the integrated management of the country's river basins. 0 Consultation and disclosure. The NT2 Project undertook a consultation process unprecedented within the Lao PDR in terms of scale, outreach, coverage, methodology and feedback. That process will be continued as the Project i s implemented. The GOL has indicated that it intends expand the process usedby the NT2 project for other development projects as well, and will use this Project to develop skills in consultation, while at the same time to put in place meaningful mechanisms for local communities to be involved in designing and implementingsub-projects. Further, the GOL will make public the Project progress reports and EPF Annual Reports, and conduct an annual stakeholder consultation by sharing the lessons learned more widely. The Project includes assistance to develop a website as part of EPF's management information system, through which it will disclose the criteria for evaluating sub-projects and also disclose their progress. Addressingthe environmentalandsocial legacy of past hydropowerdevelopment Duringthe preparationof the NT2 Project, a Strategic EnvironmentalAssessment (SEA) was carriedout. Experience in EMS,resettlement and consultation and public involvement in several past hydropower projects was reviewed, revealing several common shortcomings, including: (i) the analysis occurred too late in the planning process to influence project design, resulting in limited preventative planning; (ii) impacts tended to be underestimated resultinginunder budgeted mitigation and compensation programs; and (iii) resettlement tended to be under planned resulting in mixed outcomes. These limitations have created a need for ex-post compensation programs which have been implemented for several of the projects. An approach to making post-construction adjustments to address outstanding issues in these projects to help enhance the outcome for affected people and the environment will be an important element inthe future agenda o fthe hydropower sector. Commitment to mainstreaming new practices i s evidenced by the development o f new Government policies such as the Resettlement Decree and the Hydropower Sustainability Policy Statement. The latter builds on the lessons learned and key features of the NT2 Project, including: (i)conducting a comprehensive assessment of potential environmental and social impacts as a part o f the feasibility study of a proposed project; (ii)gaining public acceptance and involving communities; (iii)recognizing entitlements for those affected by projects; (iv) offsetting unavoidable environmental impacts; and (v) addressing downstream impacts. Maintainingmomentumand deepeningreforms Despite significant progress, major challenges remainto be addressedover the next five years. Inadequate human resources (two percent of public sector staff) and very low government budgets (less that one percent of government budget) inthe environmental sector significantly constrain the implementation and 24 enforcement of ambitious legislation and policies that have been enacted to protect the country's vast natural resources from environmental degradation. Budgets allocated for biodiversity conservation and protected area management are very low, and consequently the levels of protection in all protected areas are insufficient, with reports o f widespread loggingandpoaching. Over the past few years, the country has benefited from considerable donor support to strengthen its institutional capacity. Foreign assistance remains the main source of financing. As a result, progress i s visible incertain areas of environmental management such as the implementation of Environment Impact Assessment (EM) procedures, provincial level planning and public awareness activities. However, continuity in these activities i s disrupted when donor financing ceases. For example, management staff numbers for the 20 National Protected Areas have declined from 224 in 2000 to approximately 150 in 2004, followingthe endof a number of donor projects. The budget allocation for environmental functions need to be increased several fold from its current low level if the country is to realize its ambitious goals. Recognizing that the allocations from central funds are likely to be low in the immediate term, the GOL i s putting in place some specific measures for sustained financing. These include: (i)requiring hydropower concessionaires to fund conservation "offsets" for natural habitat loss over the life of a concession; (ii)allocating a portion o f the revenues earned from hydropower to finance capital and recurrent expenditure for environmental protection inthe context of specific projects; (iii)setting-up the Environment Protection Fund(EPF), with fundingsupport from ADB, to receive and allocate these funds. Suitable govemance mechanisms and procedures for ensuringtransparency and accountabilityof financial managementneedto be developed accordingly. The new initiatives need to be followed through and institutionalized, and policies developed for the hydropower sector should be extended to other sectors such as mining. There i s need to improve the efficiency of water utilization in agriculture and water supply sectors. Building on the creation of the Water Resources Coordination Committee (WRCC), the GOL needs to further expand its policy and implementation arrangements towards achieving an integrated approach to water resources management inthe country. There also remain significant opportunities for increasinglocal participation through the development of procedures for consultationand awarenessraising. 25 Annex 2: Major Projects Financed by the Bank and/or other Agencies Lao Environment and Social Project Latest Supervision(ISR) Ratings OngoingBank-financedProjects Sector issue (IDA-financed projectsonly) Implementation Development Progress(IP) Objective(DO) NamTheun 2 Social and Environment Project Waterlsanitatiodflood NR NR (JPN27044) protection Lao NamTheunPower Project (IDAH1550, IDA BOOSO) Energy & Mining NR NR Lao PDR FirstPovertyReduction Support Credit Law & Public Admin NR NR (IDA40490, IDAH1560) Sustainable Forestry for Rural Development Project Agriculture U U (IDA 38020, JPN 26765) Poverty Reduction Fund (IDA 36750, IDA Q3350) Poverty Reduction S S Agricultural Development Project (IDA 35090) Agriculture S S OED Evaluation CompletedIDA-financedProjects Outcome Sustainability ID Impact District Upland Development and I Conservation Project Agriculture MS UL M (IDA 31860, JPN 51332) Forest Management and Conservation Project Forestry, Agriculture U UL N (IDA25860) 26 Annex 3: ResultsFrameworkandMonitoring Lao Environmentand SocialPr To strengthen the - % of development projects complying with management o f relevant national policies infrastructure development projects environmental and - prevalence o f selectedprohibited expected within the life o f the project, social issues environmental activities intarget provinces and suitable indices on prohibited associated with the activities for which data are or may be sustainable use o f collected inthe provinces. natural resources in YR2-YR5: Ensure compliance status Lao PDR for o f development projects and collect enhancing quality o f provincial data. growth and reducing YR5: Incorporate lessons learned for poverty future replication, particularly for the use o fNT2 revenues Outcome 1: YR1: Lists o frelevant projects Improvedpolicies and NationalPolicy on Environmental and Social YR2-YR5: Low levels should trigger instruments are Sustainability o fthe Hydropower Sector by adjustment o f the project understoodby preparing actionplans and implementing agreed implementation and capacity building stakeholders, mitigationmeasurescontainedtherein program institutionalized within - New hydropower projects responsive to the YR5: Synthesize the lessons learned government agencies National Policy on Environmental and Social for future policy support and capacity and systems, and Sustainability o f the Hydropower Sector building initiatives implemented by - Framework for addressing cumulative impacts technically competent inNamTheun/Nam Kadingriver basininplace staff - # ofprovinces effectively implementing Provincial Environmental Strategy and Action Plans - # of qualified staffat the national and provincial-levels to implementthe Decree on Resettlement and Comaensation Outcome 2: - # ofprotectedareas with management plans YR1: Devise environmental andPA Selected protected prepared inconsultation with concerned ethnic management plans areas and local groups, and thereafter actively managed YR2-YR5: Low levels should trigger communities benefit according to these plans an adjustment o fthe implementation, from improved - # of communities benefiting from sustainable coordination, and community environmental environmental management activities participation strategies management, and YR5: Synthesize lessons learned for enhanced livelihood possible replication inother provinces options. Outcome3: - Reductioninannual operating costs per YR1: Establishbaselines EPF i s a competent volume o f transactions YR2-YR5: Highoperating costs and institution, eligible to - % o fprojects completed satisfactorily low percentage o f satisfactory projects receive NT2 revenues should lead to an adjustment inthe fundmanagement YR5: Synthesize lessons learned for further improvement o f the EPF management 27 4 >f 00 N >-4 8 U 5e % u ew" & I- v) L .-m 0 U a 0 -B 3 e U v) a g m Annex 4: Detailed Project Description Lao Environment and Social Project Component 1- Policy Implementation And Capacity Enhancement (US$l.91 Million) This Component (or EPF Window) will fund proposals submitted by national, provincial or district government agencies and civil-society to undertake activities within at least one o f the components detailedbelow: a. Environmental and social monitoring andpolicy implementationsupport. This component will strengthen the capacity of national agencies and selected provinces to develop, implement and monitor environmental and social safeguard policies. Any national or provincial government agency involved in monitoring social and environmental safeguards, including the hydro and miningsectors, wouldbe eligible for funds underthis component to carry out activities consistent with their mandate. Activities forming the basis of applications might include the preparation of technical guidelines, development and implementation of pilot studies, and technical advice on specific aspects of safeguard monitoring. Support will also be provided for the three target provinces in Central Lao to develop Provincial Environmental Management and Action Plans, and adopt a provincial environmental performance index. The performance index will provide a composite measure of staff capacity, budget levels, engagement o f civil society, project compliance with environmental regulations, and indicators of general environmental health, potentially combining indicators already identified inthe NEAP, Lao Environment Monitor, and by UNEP/OECD. The provincial plans will outline priority natural resource management issues within the province and a five-year action plan to address these. The emphasis will be on encouraging the provinces to produce straightforward, operational plans and budgets within the limits of their capacity to facilitate further grant applications where appropriate, rather than extensive, consultant-led reviews of environmental issues. The three target provinces are already at an advanced stage of developing environmental plans, and the Project will complement, rather than duplicate existing efforts. Where provincial environmentalprofiles and priorities are already well established, the Project will focus on translating these into budgeted action plans. Where adequate knowledge of provincial environmental challenges does not already exist, funds would also be provided to conduct a review workshop as developed under the SEM Project. Production o f plans will be led by PSTEOs through extensive consultation with other arms of provincial government. The plans would be subsequently be used as a basis for drawing up provincial proposals for further support under the Project, and/or other applicable windows within the EPF. Tracking of the provincial environmental performance index may be used to support these applications. The production o f simple Provincial Environment Monitors to disclose index trends and assess progress against environmental plans may also be supported. Environmental planning support may be extended to other provinces once an effective pilot has been established. b. Integrated River Basin Management. The Project will provide support to Water Resources Coordination Committee o f the STEA and MMto develop and implementan integratedapproach to the management of cumulative impacts in Nam Theun/Nam Kading Rwer Basin. The cumulative impact analysis that was conducted for the NT2 Project, concluded that the full suite o f hydropower projects (four projects totaling 2100 megawatts by 2012) when developed would have significant cumulative impacts in the basin encompassing these two rivers and their major tributaries. The mitigation of cumulative impacts falls outside the obligations o f the four private sponsors and the GOL has agreed to assume responsibility for addressing them. The GOL sees the benefits of a long-term, basin-wide strategic approach to integrated water resources management, which would involve the key stakeholders in planning and decision making roles. 30 Currently, national-level agencies such as MM, MAF, STEA and Provincial and District Administrations pursue their respective programs independently of the others, and in an ad hoc fashion. The GOL i s committed to (i) establishing a permanent river basin management entity, which will be responsible for formulating and implementing a planning, monitoring and regulatory framework; (ii)devising a financing mechanism for funding mitigation actions resulting from cumulative impacts of the four hydropower projects; and (iii) developing and implementing the mitigation measures through relevant agencies. The Project will provide support in the form of capacity building grants, consultant services, training and consultation workshops to implement the above three activities. The Project will encourage and facilitate the involvement of local govemments and civil society in these activities and ensure that plans and frameworks for river basin management will be disclosed and feedback from a diverse group of stakeholders will be sought and considered. c. Hydropower Sector Policy Support. This Component will support the Secretariat of the Lao National Committee on Energy (LNCE) and STEA to implement the National Policy on Environmental and Social Sustainability of the Hydropower sector in Lao PDR (Decision 561/CPI o f June 7, 2005) Proposals should develop planning and capacity for implementation. Proposals from the MIH Secretariat of the LNCE or STEA are most likely, and it i s anticipated that proposals would typically be developed by both in cooperation. Third parties may also be invited to participate in the development and implementation of proposals, where able to contribute appropriate expertise. Several of the provisions o f the National Policy relate to the adoption of general policy principles, and do not require specific financial support. There are commitments made within the Statement, however, that would benefit from the provision of additional support. Specifically, these relate to the development of plans and schedules for the application of policies to existing hydropower developments, and for the institutionalization of the process, i.e. the definition o f responsibilities and procedures. Capacity building and the development of practical local models would also be supported in technical aspects of implementation, including the development of watershed management (similar to the NT2 watershed) and design andimplementation of local consultationstrategies and guidelines. d. Social Safeguards Management. Strengthening GOL's capacity to implement the National Policy on Resettlement and Compensation'* (to be issued as a condition of effectiveness), including the establishment of a Division with responsibility for resettlement within the Department of Environment, capacity in three central provinces, and developing guidelines and other technical instruments. The Project will further assist in the refinement of policies that improve livelihood opportunities for ethnic and other vulnerable groups, and support activities that will enhance their implementation. Awareness raising and dissemination o f laws and rights conceming resettlement, and associated social issue, such as protection o f the rights of women and ethnic groups will be supported." Activities may also support capacity buildinginthe area of social impact assessment and monitoring, public consultations and participatory planning approaches. Applications will be accepted from government agencies at all levels, including research institutions. Civil society and mass organizations may also apply for support, and will be encouraged to participate in government led proposals. Possible activities include: development of guidelines and training material for social impact assessments and the preparation o f social development plans (or Resettlement Action Plans and Ethnic Minority Development Plans); development of courses in social and cultural analysis in relation to development at NUOL; development o f guidelines and training for public consultations and participatory planningapproaches; awarenessraising and educational campaigns among others. '*PreparedbySTEA with assistanceprovidedby the AsianDevelopmentBank 31 e. Environmental Education and Awareness. This would foster the development of a generation of dedicated environmental specialists, managers and leaders to ensure that current momentum towards improved environmental management and institutional development in Lao PDR i s maintained in the long-term. STEA and Ministry of Education have developed a National Environmental Educationand Awareness Strategy and Action Plan focused on developing formal school curricula and disseminating environmentalmessages through mass organizations. STEA i s receiving support from the SEM project for the implementation of this plan. Support from the Project will focus on concentrating on the vital first step of sparking interest in the environment through experiential leaming activities that directly expose young people to the natural world and focus on buildingenthusiasm and empathy as much as formal knowledge. Applications would be accepted from government agencies and institutions involved in education and environmental work, and mass organizations. Involvement of media and civil organizations experienced in environmental education would be encouraged in the development of proposals, especially for larger grants. Examples of potential activities to be funded include: development of conservation and ecology classroom and field courses at the NUOL, development of field guides, development and piloting of an informal experiential leaming curriculum for secondary schools, leaming-by- doing activities involving mass organizations and communities, and strengthening of environmental awareness and attitudes surveys. Size of Sub-grants: The size ofeach sub-grant under the PICE Window is expectedto be typically in the range o f US$25,000, but there i s provision for a wider range o f grants given the diverse activities and type of support likely to be required. Proposals larger than US$lO,OOO would be sent by the Window Manager to at least one peer reviewer within each o f the following groups -national academics, regional academics, and donors. Terms of References for intemational consultant assistance to assist in some of the tasks related to integrated river basin management, hydropower sector policy support and social safeguards management will be preparedprior to project effectiveness, and these are expected to be inthe range o f US$ 150-250,000. The EPF WMU staff will work with the respective Ministries and agencies to facilitate the procurement of such consultant services. Selection criteria for large and small grants would be as follows: contribution of the proposal to the aims of the Window and its activities. complementarities with environmental capacity building measures being implemented in other projects. Duplicationof efforts already underway will not be supported. activities which should be funded by individual project developers under the terms of the EIA Regulations or the National Policy on Sustainability o f the Hydropower Sector will not be eligible for funding. proposals for activities will be considered according to their appropriateness to the current stage of implementation of new policies. The National Policy on Sustainability o f the Hydropower Sector, for instance, i s considered apriority. confidence that implementing partner manpower and resources required under the proposal will be made available. clear and assessable outputs and results. Trainings or workshops, for instance, should deliver tangible end-products, which assist inmoving the implementationprocess forward. feasibility of delivering outputs with the resources proposed. Component2 -Community andBiodiversityInvestments(US$1.74 million) This Component (or EPF Window) will support proposals to strengthen the management of protected areas (PA), ensure the sustainable livelihoods o f communities dependent on them, and support 32 community-level environmental management projects in Central Lao PDR." A consistent approach to participatory management of protected areas has emerged within Lao PDR over more than a decade o f practice, achieving its most detailed exposition inthe Social and Environmental ManagementFramework and First Operational Plan (SEMFOP) developed for the NT2 Watershed. The approach builds upon the connections between biodiversity and local rural livelihoods inLao PDR, and depends on three elements: e village agreements detailing resource use rules and regulations for all village areas which lie within the PA. These are reached inconcert with the zonation of the PA into controlled use and totally protected zones such that the final P A zonation emerges from the consolidation of agreements, which are informedby the priorities for PA zonation. development of village conservation teams which provide a platform both for management of village resources, including monitoring compliance with village land and resource use agreements, and for broader biodiversity monitoring and enforcement activities in cooperation with the PAmanagementunit. 0 development of sustainable alternative livelihoods to ensure that village land and resource use agreements can be met over the long-term, and to mitigate negative impacts from restrictions on activities or options included within these agreements. Support for these activities is conditional on village land and resource use agreementsbeing adopted. The approach i s implementedaccording to anumber of core principles including: community empowerment through secure resource use rights, enhanced decision-malung and resource management capacity, and recognitionof indigenous knowledge; e inclusiveness and equitable outcomes: ensuring that the most vulnerable (and often most forest- dependent) groups are includedinthe process; and adaptive management, honing village agreements, resource management and livelihoodactivities through an iterative, learning process. This Component will not replicate SEMFOP, which is premisedon a higher level of financing, but will provide support for the core SEMFOP approach to be applied across Central Lao. Community environmental grants will complement this activity, building on the parallels between community conservation and community environmentalmanagement. Two types of grants are available under the Window. a. Small Grantswill support proposals of no more than $10,000. The grants would cover two sets o f activities: e Protected Area Management Activities. These grants would support protected area management authorities to do operational work in eligble protected areas. This work could range from specific activities consistent with the overall participatory approach. For instance, land and forest allocation or boundary demarcation could be carried out as part o f the process of clarifying land use frameworks with villagers. Support for field implementation o f activities may involve provision o f TA, staff training and/or field implementation costs including certain items of equipment (such as binoculars, phones, computers, basic trail bikes, etc). As a first step, PA management units would be expected to develop a concise All PA management units withinBolikhamxay, Khammouane and SavannakhetProvinces are eligible to provideproposals for activities relating to their specific areas, with the exception of the NT2 Watershed Area and Nam Kading NPA, which already receive considerable support from the NTSEP and GEF Bolikhamxay projects respectively. PASinclude both national and provincialprotected areas, and inaddition to forests may include wetlands or any other habitat type given conservation protection status. 33 priority action plan and budget for managementactivities withintheir areas. This process will be facilitated through workshops at the start ofthe project. 0 Community Environmental Development Activities. These grants would be available to all communities inthe target provinces. They would support the development of reduced-impact livelihood options in and around national and provincial protected areas, and other small environmental and natural resource managementprojects inthese and other communities. An indicative list of eligible activities will be given in the PIP, and a Conservation Impact Assessment as described inthe SEMFOP will berequired. The breadthof activities supported under the community component will also depend on the degree of involvement of that community in PA management. Communities that have developed village agreements with P A management units, or are actively engaged on in a cooperative process leading to one, would be eligible for general livelihood support activities to reward cooperative efforts and facilitate the transition to new resource management regimes. Activities in communities that are not yet actively engaged in PA management should more directly contribute to positive conservation and environmental impacts or incentives; e.g. family planning, natural resource management, community environmental management projects, and non-extractive uses o f biodiversity such as eco-tourism. Provision for a community-led process will support community development more broadly. Grants would be provided directly to communities, but since Provincial Facilitators will only be able to provide limitedassistance it is expected that most, if not all, proposals may be facilitated by other agencies working with eligible communities, including P A management units, PAFOs, DAFOs, PSTEOs, DSTEOs, mass organizations and CSOs. The PIP will provide guidance on the planning and implementation process, including procedures to ensure that activities are prepared with the full and meaningful participationo f the respective community(ies). b. Larger Grunts will support larger proposals over $10,000. Eligibleactivities are: 0 protected area management, and community livelihood or environmental development activities as described above, but at a larger scale; 0 research into species, habitats and/or approaches to facilitate improved biodiversity conservation inLao PDR; 0 outreach activities to raise the profile of biodiversity and its conservationaround Central Lao protectedareas; and 0 ecotourism activities to support appropriate management planning, appropriate community capacity building, learning visits to sites of interest, and regulation o f ongoing ecotourism development inand around protectedareas Component 2 grants would be provided to competent agencies, eligible to receive fundingunder EPF guidelines and with specific expertise in the activity areas described above. Local government agencies such as P M O Sand PA management units would be eligible to apply, but would typically be expected to develop joint proposals with more experienced partners. Larger proposals would be sent to at least one peer reviewer within each of the following groups - national or regional academics, donors, and environmental CSOs registered inLao. The selection criteriawill entail an assessment ofthe following: 0 consistency with the NationalBiodiversity Action Plan and Strategy. 0 appropriateness to the overall aims of strengthening conservation and environmental management, and community development inand around Central Lao PAS. 0 identificationand incorporation o f local or regional conservationpriorities. 34 village development activities potentially detrimental to the environment or conservation goals would not be supported. for small grants, the competence of the grantee to manage funds and follow the necessary procurement procedures. sufficient commitment o f staff time and resources by implementing partners to ensure successful implementation. clear and assessable outputs and results. For instance, training or workshops should deliver tangible end products, which assist inmovingthe implementation process forward. feasibility o f delivering outputs with the resources proposed. All grants under the CBI Window must support the implementation of field activities, although grants can be used entirely for planning where this provides the basis for development o f a further grant proposal. appropriateness of the activity to the capacity o f the implementing agency. Activities themselves do not necessarily have to be sustainable in the absence o f further external funding, but they should provide a basis for simple management procedures that can be continued with a minimum o f external support. where time permits, small-scale trial activities will be favored initially in support o f developing larger subsequent proposals. the extent to which the proposal recognizes and incorporates lessons learned in previous initiatives. A substantial amount o f PA management training and community livelihood development material i s already available in Lao PDR and should not be overlooked. Similarly, proposals that build on the efforts and outputs of other conservation projects inthe region will be favored. the extent to which the proposal i s able to provide added value by leveraging funds from additional sources that would otherwise not be available. enthusiasm and commitment of implementingteam. compliance with all Bank safeguards policies, including involuntary resettlement (restrictions o f access to resources) and indigenous peoples/ethnic groups. Component3 -ManagementandMonitoringSupport (US$1.15 Million) This component will support the following activities: (i) buildingof EPF Windows Management capacity Unit;(ii) marketing and business development o f the sub-funds amongst relevant agencies and within the targeted provinces; and (iii) development and implementation o f monitoring and dissemination systems. Monitoring will include both the monitoring o f sub-project effectiveness and the outcome indicators for the Project overall. The latter will include the development of a capacity index as a composite measure of staffing levels and competence within relevant government agencies, tools and information systems readily available, engagement of civil society, and enrolment and graduation o f students inenvironmental studies. This will be developed in consultation with central government partners during the first year of the project. The Management Unit (MU) will consist o f one Manager responsible for both Windows, a technical officer for each Window to provide guidance and support for the development o f suitable proposals, administrative support staff, and three provincial facilitators. For the initial two years o f the project, the MUwill be supportedby a ChiefTechnical andManagementAdvisor (CTMA), who will act as a direct personal counterpart and advisor to the Window Manager. Early on inthe project, the MUwill draw-up lists of suitable peer reviewers for larger proposals under the two Windows. In conjunction with the Window Manager, the CTMA will be responsible for designing and implementing a training program to ensure that all WMU staff have the appropriate understanding and capacity to implement the procedures laid out in the PIP, including financial management, facilitation o f grant design and application, and safeguards screening and supervision, as appropriate for different staff members. Until such time as the 35 CTMA and the WorldBank are satisfied that MUtechnical staff and provincial facilitators have sufficient capacity to implement project safeguards procedures independently, the CTMA will review all grant applications to ensure that the ESSFi s correctly implementedand accompany any safeguards verification field visits that may betriggered.Evidence of staffcapacity to implement safeguardsprocedures would be expected to be inthe form of completion of training programs, and the record o f safeguards screening and monitoring decisions made by technical staff and facilitators inrelationto the decisions o fthe CTMA. During the early stages of the Project, the MU will hold workshops for potential grant recipients to explain the purpose and procedures for the grants. These will especially target eligible local government agencies where existingknowledge o f the Project and capacity will be lowest. To support the CBI Window, workshops will be held to facilitate the development o f simple priority activity plans and budgets for Central Lao "As and PPAs. As part of this process, PA management units will complete the WWF/World Bank Management Effectiveness Tracking Tool, which will be provided with a template operational and financing plan, and will be required to develop their own plan according to specific needs. The plans will recognize that fundingi s limited, and will therefore prioritize the actions with the greatest chance of sustained success. Work with villages, for instance, will target those villages which have the greatest influence on the PA through their own use or the potential to control the access of others. The WMU will follow a defined andtransparent process for evaluating and selecting proposals. Procedures are outlined inAnnex 6 and will be elaborated inthe Project ImplementationPlan (PIP). 36 Annex 5: Project Costs Lao Environment andSocial Project Project Cost By Componentandor Activity' Local Foreign Total U S $million U S $million U S $million Implementation Support A2 IntegratedRiver BasinManagement 77,600 389,000 466,600 A3 Hydropower Sector Sustainability Initiative 90,800 389,000 479,800 A4 Social Safeguard Management 77,600 313,000 390,600 A5 Environmental EducationandAwareness 179,900 114,000 293,900 592,600 1,319,000 1,911,600 B1PA ManagementActivities 770,850 395,000 1,165,850 B2 Community Environmental DevelopmentActivities 575,000 575,000 1,345,850 395,000 1,740,850 C1 CapacityBuilding of EPFWindows 751,350 15,000 766,350 C2 Marketing and Business Developmentamongst 25,000I1 277,200 II 302,200 C3 Guidance. Evaluation. andMonitoring 79.000 I 79.000 I I 855.350 I 292.200 I 1.147.550 I Total Baseline Cost 2,793,800 2,006,200 4,800,000 PhysicalContingencies 0 0 0 Price Contingencies 0 0 0 Total Project Costs' 2,793,800 2,006,200 4,800,O00 Total Financing Required 2,7939800 2,006,200 4,800,000 Grant totals under each activity category are indicativetotals based on feedback from stakeholder consultation.Final budget allocations between the various types of sub grants will be flexible and demand responsive, in that budget may be moved from low-demandto high-demandactivitytypes ifrequestedbythe PSCandsubject to NOLby the WorldBank. 'Identifiable taxes and duties are 0 (US$m), and the total project cost, net of taxes, is 4.80 (US$m). Therefore, the share of project cost net oftaxes is 83%. 37 Annex 6: ImplementationArrangements Lao Environmentand Social Project ProjectOrganization The Science, Technology, and Environment Agency (STEA) will lead and coordinate the implementation o f the project through the EPF, with sectoral ministries responsible for technical tasks that have been assigned to them by law. The EPF has been established through Decree 146PM of June 7, 2005, and governed by a 12-member Board of Directors (chaired by the Deputy Prime Minister, Vice Minister of Finance and Vice President of STEA as deputy chairs, and consisting of representatives from national ministries, provinces, mass organizations, academe and international financing institutions) as an independent and autonomous entity. The EPF Board will: (a) appoint a Project Steering Committee (PSC) chaired by STEA; and (b) establish a Management Unit to manage the two Windows, which will have responsibility for procurement, financial management, progress reports and quality assurance. The project includes a component to strengthenthe EPF, especially the two Windows. The EPF Board will delegate its authority to a Project Steering Committee (PSC), which will establish guidelines and monitor the performance o f the two Windows. The inter-ministerial PSC will be chaired by STEA and vice-chaired by MAF and MM. Because planned activities run across different ministries and require capacity buildingin other ministries and provinces, the PSC will also include Committee for Planning and Investment (CPI), the Ministry o f Finance (MOF), the Ministry o f Education (MOE), MinistryofInformationandCulture (MIC), andrepresentatives ofthetarget provinces. ProjectManagementby EPFWindows For the proposed project two such windows will be set-up for components 1 and 2. The structure i s schematically presented infigure 1. The two Windows will be managed by a Management Unit located within the Executive Office of EPF. The two Windows will be used to channel assistance to beneficiary ministries, agencies, provinces, districts, communities, and other eligible recipients under the EPF guidelines. The two Windows will be headed by a Manager supported by technical, administrative and financial staff located inthe Executive Office o f EPF. Collectively, this team will be responsible for day- to-day management. The Window Manager and hisker team will be responsible for: marketing the activities of the two Windows, assisting in drafting sub-grants, reviewing and approving sub-grants, signing sub-grant agreements, undertaking procurement for sub-grants on behalf o f the beneficiaries, ensuring financial management of transactions, liaising with implementing partners, beneficiaries and other stakeholders to monitor progress, and preparing regular progress reports for review by the EPF Board or PSC. A draft ProjectImplementationPlan (PIP) has beenprepared for the proposedproject. The PIP will guide project implementation and monitoring, and GOL provided to the mission a revised draft o f the PIP, incorporating the previous comments. The PIP i s a two-volume document: (i) Volume 1 explains the project objectives, structure and implementation arrangements; contains copies of background documents including relevant legal and policy instruments; and lays out the monitoring and evaluation framework; and (ii) Volume 2 catalogues the detailed implementation procedures which make up the operations, procurement and financial manuals; and the institutional arrangements within EPF for the Project. The institutional arrangements include a WMU staffing and recruitment plan, with TORSfor key staff members. The Project operations procedures include consultation, planning, monitoring and reporting, and disclosure. Draft forms and formats are included for grant applications, screening o f proposals for safeguardsissues including extensive checklists o fprohibited or controlled activities, proposal evaluation, and grant agreements. Procurement documents include general procedures, procurement tables and 38 sample contracts. Financial documents include procedures and policies, budget and disbursement tables and sample payment request forms. Much of the material has been adapted from similar projects, in particular the Poverty Reduction Fund. Key provisions of the Environmental and Social Safeguards Framework are incorporated in the sub-grants screening and approval process in the operations manual. Duringthe start-up phase of the Windows, training and additional technical assistance will be provided for the EPF and local governments of the target provinces to facilitate the development and marketing o f project application andimplementation. Procurementand FinancialManagement EPF will oversee procurement for the proposedproject, with proponents being responsible for each sub- project. Procurement will be done by the recipients as per standard IDA guidelines as specified in the Project Implementation Plan (PIP), which includes a detailed section on the procurement arrangements. All subproject procurement processes such as review, evaluation and selection o f quotations and bids (where applicable) will be opened, presented, and deliberated in a public meeting. All related procurement documents such as the terms o f reference, design and technical specifications, quotations and bids will be accessible or available to anyone who may be interested. No bids will be opened unless ina public meeting. To managethe procurement process, the EPF will recruit relevant staff who will be intensively trained. IDA will assist the GOL by providing support and approval of the necessary procurement and by providing advice on technical and financial matters through regular supervision missions and participation inthe Annual LearningForums. Sub-GrantapplicationandImplementation Both Windows will provide two tiers of grants with somewhat different selection procedures. Small proposals o f up to US$lO,OOO can be submitted in Lao according to a concise, standard form. Grant decisions would be made directly by the Manager of the Windows with guidance and advice from the CTMA inthe first two years of the project. The Manager will be obliged to complete a standard, concise evaluation form for each small proposal including a matrix scoring compliance with the aims and selection criteria of the appropriate window and activity type, and a briefjustification o f the decision to accept or reject it. PSC will review the small proposal fundingdecisions made by the manager at the end o f eachyear, and may suggest changes to the selection policy at that time. Grants larger than US$lO,OOO would require a more extensive proposal to be submittedinEnglish,which would be sent for peer-review by the Manager to facilitate a more extensive proposal evaluation. The Manager would decide to accept, reject or suggest amendments to each proposal after receiving peer reviewers' recommendations, and provide a briefjustification along with the proposal evaluation to the PSC for approval. If the Manager's decision were overturned by the PSC, a short justification of this reversal would be required.Maximum grant amounts will be determined by the EPF Board, and may be adjusted from time to time with approval from IDA. Application forms and evaluation procedures will differ somewhat for the two Windows due to the different safeguards and procurement management issues involved for the different activity types. Safeguards screening will be directly overseen by the CTMA until such time as the Mutechnical staff and provincial facilitators have sufficient capacity to carry it out independently. For both small and large grants, proposal evaluations and grant decisions would be disclosed on aregular basis. 39 A more detailed overview of the general procedures for grant application, review and approval is illustratedinthe figure below. More detailed procedures are given inthe PIP.Inconsultationwith the MU staff, the procedures will be updated and includedinthe PIP. Implementation o f sub-grants can start after agreements are signed between the MU and the sub-grant applicant, fimds are available, and (for community grants) a sub-grant account i s opened by the community representatives. Timing o f implementation also depends on the type of activity and the season. In the implementation of approved sub-grants for communities, the following principles need to be observed: 0 the community i s the owner o f the sub-grant and therefore any decision is the responsibility o f the villagers; 0 where labor i s to be paid, the village poor should get priority as laborers; 0 when there are parts of the work that are beyondthe ability of the community, the community can utilize outside skilled labor or experts as longas it has been previously agreed and includedinthe approved subproject proposal. Operations and Maintenance o f the subproject built as part o f the Project i s the responsibility o f the community and villages, which built the works. This will be monitored periodically on a sample basis, and usedas an indicator of community ownership and sustainability of project outcomes. Monitoringand evaluation of outcomes/results Project monitoring will be the responsibility of the Management Unit.Regular monitoring reports will be prepared and submitted to the World Bank as specified in the PIP. Coordination o f the implementation progress and findings for each sub-activity will be presented in Annual Learning Forums. The set of indicators for monitoring outcomes andresults i s shown inAnnex 3. For individual sub-projects, supervision arrangements will be agreed between the MU and the grant recipient prior to grant disbursement on the basis o f the complexity and length of the proposal and the competence and experience of the recipient. All sub-projects will be required to provide a completion report according to a standard format. Projects of a year inlength would receive at least one supervision visit duringproject implementation, but projects o f only a few months duration that are implementedby an experienced agency may be assessedonly after completion. A complaints resolution system is central to the project. As elaborated in the PIP, a complaints and reasons database will be maintainedas part of the project, bothat the province andnational level. 40 FigureA6.1. Institutional and Imdementation Arrangement EPF Board of Directors ............................................................ j LEnS ProjectSteering Committee (PSC) /....................................... ...................... I .............................................................................................................. EPF Executive Office LEnSWindows Management Unit Window Manager Technical OfficeriCommunity Procurement Component 2: ~ CBIWlndow for I Implementation and Technical Officer/M&E Coordinator Community and Capacity Enhancement Accountant Biodiversity Environmental and Social Disbursement Investments jjj Monitoring. Education and Executive Assistant Awareness, integrated River Procurement Basin Manaoement. 3 Provincial Faciiitators Hydropower Sector , Grants Sustainability Initiative, Resenlement Management LEnS lmplementabon ....................................... ............... Sub-Grant Appllcatlons Implementation by implementation by PA and Government Agencies ~~ Figure A6.2: General Overview of the Appllcatlon Process InitialDiscussionswith possible ApplicantJ I Doesthe potentialApplicant havean appropriaterepresentativestrudure? ProvideSupportfor Establishingan appropriateStructureof Representatives Ifrequested,providesupportlotheGrant Applicant inDraftingof a Proposal I I Submissionof Proposals lnltlal Screeningand Reviewof Proposals DoestheEligibilityCriteria? Initial Prowsalmeetthe Approvalof Window Manager Doesthe Proposaliswithin the general PreparationandSigningof Sub-Grant agreementwith Applicant 41 Annex 7: FinancialManagementandDisbursementArrangements Lao Environmentand SocialProject Summaryof FinancialManagementAssessment The review o f financial management arrangements for the project was carried out inMarch 2005. As the implementing entity would be the Environment ProtectionFund(EPF), a new autonomous institution yet to be established, the assessmentwas limitedto country inherent risk, and appropriateness o f the proposed arrangements. The assessment concluded that average risk was considered high, since adequate financial management (FM) systems are not inplace. To mitigate this risk, appropriate FM systems and arrangements should be put into place before the project starts. The following actions should be taken: i)establishment of a financial management unit within EPF with adequately qualified staff with responsibility for project financial management; ii) appointment o f a manager and a project accountant with qualifications acceptable to IDA; iii)development o f the PIP that includes financial management requirements acceptable to IDA; iv) establishment o f an acceptable accounting system, and v) the training o f project staff on IDA requirements and project financial managementprocedures. CountryIssuesandRiskAssessment The Country Financial Accountability Assessment (CFAA), carried out in mid 2002 concluded that the overall fiduciary risk in Lao PDR i s high due to a weak internal controls for the management o f public funds and resources, and insufficient transparency related to public finances. The budget process is not yet transparent and public access to government financial information i s limited. There i s inadequate awareness of modem practices of internal control in the public sector, oversight functions and the State Audit Organizationneeds substantial improvements, accounting and auditingprofessions and institutions remain underdeveloped, and technical capacity o f financial staff i s limited. With respect to externally funded projects, the overall financial management system remains weak. A number of key issues and weaknesses include: (i) inconsistent and inadequate financial management standards, procedures and software in each PIU; (ii)delayed project implementation resulting from management of Special Accounts by MOF; (iii)delayed audits and lack o f consistent external audit standards and procedures; (iv) poorly staffed and equipped PIU accounting departments; (v) poor internal control procedures and absence of internal audit within line agencies; and (vi) lack o f financial management capacity at provincial and district levels. Overall the Project's financial management risk i s assessed to be high.Possible risks relating to financial management (FM) have been mitigated through autonomous FM systems adopted for the Project. A Special Account will be established and managed directly by the Project with annual audits. Qualified staff will be recruited to ensure an efficient FMsystem. FMprocedures will be documented and instilled through regular training and supervision. Overall project supervision will be facilitated by submission o f quarterly FinancialManagement Reports (FMRs). FinancialManagementArrangements Implementing Entity. The implementation arrangements for the Project are explained in Annex 6. EPF has been establishedas an administratively and financially autonomous organization to fund environment 42 and sustainable natural resources management activities. The EPF Decree allows the creation of Specialized Financing Windows to manage and account for funds intended for specific environment protection and natural resourcesmanagementpurposes. The management structure of EPF will include an Executive Director appointed by the Board to manage the Executive Office, which implements day-today financial operations, dissemination, and monitoring duties. An Administration and Financial Section will be established within the EPF Executive Office. This Section will be headed by a qualified financial management professional, and include an accountant, an administrator and a procurement officer. To implement the Project, two specialized windows under the responsibility o f the MUManager, are being established. A team of financial managementspecialists will be hired. They will report to the Manager on the financial management aspects o f the Project. The proposed management arrangements are considered adequate. The administrative autonomy o f the EPF will overcome some of the FMdifficulties commonly faced by donor projects inLao, and enable the competitive recruitment of qualified staff. Flow of Funds. IDA funds will be channeled through a Special Account under EPF authority and approval, to be established at the Bank of Lao PDR(see Figure A7.1). Disbursements from the IDA grant will be based on Statements of Expenditure (SOE) together with Withdrawal Applications and Direct Payment Applications. The Manager of MU will prepare Replenishment Applications for MOF's signature prior to their submission to IDA. FigureA7.1 -Flow ofFunds Payment of Expensesand/or LEnS SpecialAccount Conrroctsfor Operotional Supportfor Project Managedby the Window Manager(Head 2 Implementation of the WindowManagementUmt) (Component3) 1 i CommunityAccounts openedat Banksat Puymentof Contracts and/or Contracts and/or Expensesfor PICE Expensesand Sub-grants Contractsfor NPA cr (Component I) Sub-grants I (Component2) Payment of Expenses und'or Contractsfor Community Grunts (Component2) Sub-projects grants will be paid directly from the Special account. These disbursements will occur according to the schedule of payments indicated in the sub-project agreements. These will be accounted as project expenditure. For fund flows to communities, community project accounts would need to be opened in the nearest district town to receive the proceeds. The sub-project agreement will be made betweenthe Manager of MUand community representatives. On submission of claims from sub-project proponents, the MUwill initiate payment based on payment approval procedures established for the project. The MU will directly process payments for centrally managed sub-project procurement and other project expenditures initiated by the MU. The accounting staff of MUwill be responsible for ensuring that the necessary approvals are obtained prior to processing 43 payment. Payments from the Special Account will only be in respect of expenditures actually incurred and mustbe supported by approved vouchers for payment. Staffing. The MUfinancial staff, incooperation with the EPF Finance and Administration Section will be responsible for ensuring that IDA guidelines and procedures are followed on disbursements, auditing and overall financial management. This will include maintaining the Project's accounts, making payments from the Special Account, monitoring overall project disbursements, coordinating with the Ministry of Finance (MOF) on annual counterpart fund requirements, preparation and submission o f withdrawal applications to IDA through MOF, producing quarterly Financial Monitoring Reports (FMRs), preparation o f annual financial statements and having them audited, producing annual work plans in coordination with the provincial offices for incorporation into the project's overall annual budget and for overall financial management of the project. The MU Financial staff will include an accountant and a disbursement officer. The staffing levels should be consistent with the needs o f a computerized accounting system that will be put inplace prior the Fundbecomingoperational. -Accounting Policies and Procedures. The MUwill establish a basic computerizedaccounting system to capture and provide sufficient financial information for managing and monitoring project activities by window, component, category and area. The structure and software should assist inthe preparationo f the Financial Monitoring Reports (FMRs), annual financial statements and statutory requirements ina format acceptable to IDA. The FMsystem, including detailed guidelines on payment authorization, cash management, monthly and end-of-year closing and financial reporting have been detailed in the Financial Management Manual o f the draft PIE'. Finalization o f the FM system and appointment of qualified WMU financial staff are conditions of effectiveness Internal Audit. Project financial management will comply with overall EPF procedures and guidelines, and will be subject to internal EPF auditing procedures. External Audit. An independent auditor acceptable to the IDA shall be appointed to audit the annual financial statementsaccording to aTerms o f Reference (TOR) acceptableto IDA. Reporting and Monitoring. The Project shall provide IDA with regular reports on fiduciary aspects including Financial MonitoringReports (FMRs). The Financial MonitoringReports will be inaccordance with the Guideline to Borrowers issued on November 30, 2001. The FMR reports will include: (i) discussion o f Project progress; (ii)balance sheet; (iii) and uses o f funds statement; (iv) uses o f a sources funds by Project expenditures (v) output monitoring report; and (vi) procurement report. The above reports shall emphasize linkages between expenditures and physical progress as an important aspect of overall project monitoring, andreport formats will be agreed at negotiation. The chart of accounts andthe reporting module of the computerized accounting systemwill be customized to facilitate reporting needs. The Manager o f MUwill be responsible for submittingthe FMRs to IDA within 45 daw after the end of each quarter. The first quarter begins following the Project's first disbursement. Additional output monitoring reports and key performance indicators will be identified and developed to suit Project needs during implementation. Impactof procurementarrangements The implementation risks associated with procurement are considered high due to lack o f capacity and experienced staff, and lack of experience in the implementation of sub-project grants, procurement of equipment and selection of consulting services. Mitigation measures to address the risks include: (i) the 44 PIP to be finalized by effectiveness, covering the procurement and contracting for subproject grants; (ii) an experienced procurement staff recruited into the MU; and (iii) and external procurement internal training to project staff. FinancialManagementAction Plan Inorder to meet IDA minimumFMrequirements, the EPF is requiredto develop financial management systems for the EPF Windows as summarized below. The following action plan was agreed with GOL during negotiation, and its provisions will be incorporated in the subsidiary agreement to be signed between the Ministry of Finance (MOF) and EPF. Actions I Responsibility I Completion Stafing: 1.Appoint Manager for the MU EPF Board Effectiveness 2. Appoint financial managementstaffinthe MU EPF Director Effectiveness Financial Management Systemand Reporting: 3. Put inplace abasic project accounting systemincludinghardware, sohare and EPF BoardiPSC Effectiveness chart o f &counts capable-ofproducingfinancial monitor& reports(FMRs), SupervisionPlan The supervision of the Project will include close monitoring of the FMrelated aspects implemented by the EPF. Quarterly FMRs are to be submitted to IDA within 45 days after the end o f each quarter. IDA supervision i s plannedat least twice a year for the first year of project implementation, or ifneededmore fkequently . Audit Arrangements The Manager of MUwill be responsible for ensuring that the annual financial statements are audited and forwarded to IDA within 6 months after the end of the precedingyear. The audit would be carried out by an independent auditor appointed under terms o f reference satisfactory to IDA. As was early noted, the audit environment in Lao PDR is weak, this auditing firm would have to be reviewedand acceptable to IDA and selectedthrough a competitive process followingIDA procurementguidelines. 45 DisbursementArrangements Allocation of GrantProceeds Disbursements from the IDA Grant will be made based on the traditional system (from the Special Account with reimbursements made based on full documentation and against Statements o f Expenditure (SoE), and direct payments from the Grant Account). The proposed grant will be disbursed against the project components shown in Table A7.1. It i s expected that the proceeds o f the grant will be disbursed over a period o f five years. TableA7.1- Allocationof Grant Proceeds Expenditure category Amount inUS$ Financing percentage Grants for Sub-projects 3,065,000 100% Goods 80,000 100% Consultant Services 725,000 100% Training 75,000 100% IncrementalOperating Costs 55,000 100% Total Project Costs 4,000,000.00 100% Use of Statements of Expenditures (SoEs) Some o f the proceeds of the grant are expected to be disbursed on the basis o f Statements o f Expenditure (SoEs) as follows: (a) goods, works and services under sub grants; (b) consultant service contracts for individual consultants costing less than $50,000 equivalent eachand consultant service contracts for firms costing less than $100,000 equivalent each; (c) goods; and (d) incrementaloperating costs. Disbursements for services and goods exceeding the above limits will be made in accordance with respective procurement guidelines and provisions inthe Development Grant Agreement (DGA) against submission of full documentation and signed contracts. The documentation supporting SoE disbursements will be retained by the EPF during the life o f the project and one year after the receipt o f the audit report for the last year inwhich the last disbursement was made. These documents will be made available for review by the auditors and IDA supervision missions. SpecialAccount To facilitate timely project implementation and grant disbursement, the EPF, under MoF's authority and approval, will establish and operate a Special Account (SA) at the Bank o f Lao PDR on terms and conditions satisfactory to IDA including appropriate protection against set off, seizure and attachments. The accounts would be denominated in U S dollars. The Special Account, which would cover the IDA share of eligible expenditures in all disbursement categories, would have an authorized allocation of US$300,000 with an initial withdrawal o f US$lOO,OOO to be withdrawn from the Credit Account and deposited inthe SA. When the amounts withdrawn from the Grant totals US$700,000 the initial withdrawal will be increased to the authorized allocation. The Special Account will be replenished on a monthly basis to assure liquidity of funds or when the account is drawn down by 20 percent of the initial deposit, whichever comes first. All replenishment applications will be accompanied by reconciledbank statements from the depository bank showing all transactions inthe Special Account. 46 Annex 8: ProcurementArrangements Lao EnvironmentandSocialProject A. General Procurement for the Project will be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits May 2004" and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers'' May 2004, and the provisions stipulated inthe Grant Agreement. A general description of various items under different expenditure categories i s described below. For each contract to be financed by the IDA grant, the Procurement Plan, as agreed upon between IDA and GOL, details the required procurement or consultation selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame The Procurement Planwill be updatedat least annually or as requiredto reflect the actual project implementationneeds and improvements ininstitutional capacity. Procurement through Sub-project Grants (US$ 3.064 million). The main types of grants and procurement arrangements inthe Project are: (i)Grantsfor ComponentI PolicyImplementationandCapacityEnhancement.Thiscomponent - will provide grants for proposals to hire technical qualified consultants at national and provincial levels, as well as training, workshop, operating cost, office equipment to support the sub-projects. Grants will be available for agencies, institutions and organizations to support institutional and policy development activities. Grants to be awarded directly by the Manager will be for a maximum o f $10,000, and can be spent over up to a two year period. Grants exceeding $10,000 or with duration of more than two- years will require the approval o f the Project Steering Committee (PSC). (ii) for Component2-Community andBiodiversityInvestments.This Component will Grants finance two-types o f grants: Grants are availablefor priority Protected Area (PA) Management, and the amounts awarded will depend on the activities described in a proposal. Grants for a maximum o f $10,000 and duration of a one-year period will be awarded based on recommendations from the Windows Manager. Grants over $ 10,000 or longer then 1year will require the approval of the PSC. Community Grantsfor local environmental management and livelihood development. Sub-grant projects will be available for communities to develop small livelihood and environmental improvement projects. The provincial and district government, supported by the province facilitators and MUTechnical staff, hired under the project, will assist the villagers indeveloping and implementation of the grant projects. The project menu offers a wide range of small village infrastructure, equipment and training activities that qualify for sub-project proposals. The value of each subproject proposal to be approved by the MU Manager will not exceed $10,000 per village. Community Participation in Procurement as mentioned in the Bank Procurement's Guidelines will be applied in these activities. Proposals for community development and environmental management activities exceeding $10,000 may be submitted, but will require the approval of the PSC, and will not beprovided directly to communities without the involvement o f more experienced partners. 47 The PIP details the procurement and contract managementsfor the Project, including defining the roles of PSC, MU-EPF, institutions, organization and communities, includingrequirements for IDA'Sprior and/or post reviews. Procurement of Goods (US$ 78,950). Goods procured under this project would include but not limited to: office equipment, vehicles and field equipment. Goods estimated to cost less than $100,000 may be procured through National Competitive Bidding, in accordance with IDA'SProcurement Guidelines and following the detailedprocedures for Public Biddingas laid out inthe Decree No. 03PM dated January 9, 2004, and Implementing Rules & Regulations No. 0063MOF (IRRs) dated March 12, 2004. The applicable draft national standard bidding documents developed by Procurement Management Office (PrMO) will be used. Goods estimated to cost less than $30,000 per contract may be procuredthrough shopping, following the detailed procedures for price comparison as laid out in the above-mentioned Decree and IRRs, incorporating the special provisions listed below, and usingthe national standard RFQ developed by PrMO. Special Provisions for Shopping For purposes o f improving economy, efficiency and transparency, the following special provisions shall apply to contracts for goods estimated to cost betweenU$5,000-30,000: Invitations to quote shall be advertised in at least one newspaper of provincialh-egional (or national) circulation, and a minimum o f 10 days for the preparation and submission of quotations shall beprovided. Prior-registration shallnotbe a requirement to participate inquotationprocedures. Quotations shallbe requiredto be submittedinsealedenvelopes. Quotations shall be opened in public immediately after the submission deadline in the presence o fbidders and Projectbeneficiaries who chooseto attend. A copy of the quotation opening record shall promptly be posted at a prominent location outside the Procuring Agency office, and a copy will also be sent to all bidders who submittedquotations. There shall be no post-bid negotiations with the lowest or any other bidder.Incase the lowest evaluated responsive quotation exceeds the pre-bid cost estimate by a substantial margin, the Procuring Agency will assess the reasons for the price difference and recommend the course of action for approval by the Head of the Procuring Agency. The rejection o f any quotation for exceeding pre-quotation estimates shouldbe cleared inwritinginadvanceby IDA. A summary of contract award information shall be made public through an announcement in the press and updatedon a quarterlybasis. Consultant Services andTraining [US$752,050]. Consulting services may include butis not limitedto: the Chief Technical and Management Advisor, canying out the development o f a MIS, conducting baseline studies, finalizing the Operations Manual, and tasks related to external audits and the hiring o f WMU staff. Depending on the nature, value, and complexity of the assignments, these services should be procured through various selection methods including QCBS, CQ, LCS (for firms) and using guidelines from the Selection of Individual Consultant (IC). The use of these methods will be reviewed and cleared by IDA in the annual Procurement Plan. The CQ methods apply to assignments whose costs are estimated to not exceed US$ 100,000 per contract. For services estimated to cost less than USD$100,000 equivalent per contract, a short list of candidates may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the IDA Consultant Guidelines. Such contracts will beprocuredinaccordancewith IDA'SConsultant Guidelines. 48 Training [US$ 50,0001. Annual Learning Forums, various trainings for EPF (EO and MU) and other authorities and training of communities would be procuredusingprocedures acceptable to the Bank with due consideration to quality, efficiency and cost effectiveness. IncrementalOperationalCosts [US$ 55,0001. Incremental operating costs are applicable for per diem, transportation and accommodation of E P F N M U staff, reports, maintenance o f office and field equipment, maintenance and fuel of vehicles & motorbikes, among others excluding staff salaries. These operating cost shall beprocuredusingthe procedures acceptable to IDAwith due considerationto quality, efficiency and cost-effectiveness. B. Assessment ofthe agency's capacityto implementprocurement An IDA procurement accredited staff carried out an assessment of the Science, Technology and Environment Agency (STEA) which i s the main GOL agency responsible for preparing the Project. The assessment was undertaken inMarch 2005, and follow-on discussion continuedthrough appraisal. At present, STEA's Environment Research Institute (ERI), which is working as the Project Preparation Unit, is staffed by one administration officer who is responsible for procurement matters in EN. The procurement assessment mentioned above concluded that E N does not have the adequate capacity and experienced staff to handle procurement matters satisfactorily. The EPF i s a new organization; therefore, procurement capacity needs to be created. Thus, the implementation risks associatedwith procurement is considered high.Mitigation measures to address the risks include: (i) finalization o fthe Project ImplementationPlan (PIP) which includes the Procurement the Manual by effectiveness; (ii) an experienced procurement staff to handle/advise procurement matters will be recruited in WMU; and (iii) internal and external procurement training provided to project staff. This also presents an opportunity to harmonize procurement requirements o f the EPF to be consistent with that of the Bank and ADB. Inthe EPF Executive Office, a Management Unitwill be established with qualified procurement staff to screen, approve and monitor sub-projects for the two Windows financed by the Project. The EPF will oversee the monitor and oversee procurement for the Project, with beneficiaries beingresponsible for sub-project procurement under the supervision o f EPF. C. ProcurementPlan The PIP includes aProcurementPlanthat details the procurement methods, procedures andtime table that will be usedby the EPF to implement the Project. This plan was reviewed during appraisal, and agreed changes were finalized during negotiations. This Plan will be updated, annually or more frequently as required, to reflect the actual project implementation needs and improvements ininstitutional capacity. D. FrequencyofProcurementSupervision In addition to prior review of IDA, the capacity assessment of the Implementing Agency has recommended that supervision missions be undertaken half-yearly, including ex-post reviews. Ex-post review will include review of the procurement process, fiduciary checks, end-use verification, record- keepingarrangements,procurement capacity update, control mechanisms etc. Detailsofthe ProcurementArrangementinvolvinginternationalcompetitivebidding. (a) No contract Packageswhich will be procuredby ICB method. 49 (b) The first Shopping contract each for goods irrespective of value and each contract for goods exceeding $100,000 will be subject to prior reviewby the Bank. ConsultingServices. (a) List o f IndividualConsultingAssignments. 1 2 3 4 5 6 7 Ref. Descriptionof Estimated Selection Review by ExpectedProposals Comments No. Assignment cost Method Bank Submission (PriorI Date Post) 1 CTMA $277,200 Individual Prior Year 2005 Consultants (b) Consultancy services estimated to cost above $100,000 per contract for firms, or estimated to cost above $50,000 for individuals and all contracts involving Single Source Selection of individual consultants irrespective of value, will be subject to prior review byIDA. (c) Short lists of consultants for services estimated to cost less than $ 100,000 equivalent per contracts may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 o f the Consultants Guidelines, if there i s a sufficient number of qualified firms available to prepare a short list of firms with competitive costs. 50 Annex 9: EconomicandFinancialAnalysis Lao EnvironmentandSocialProject EconomicAnalysis Dueto the Project's demand-driven design and extensive menufor sub-grant options, detailedcost-benefit calculations cannot be made ex-ante. The main benefits of the project are in capacity building, which i s not readily analyzed using cost benefit analysis, and in providing incremental funding for largely field- based activities. Past experience suggests that economic costs o f environmental degradation are substantial. Furthermore, environmental and social costs of development projects which draw upon Lao PDR's vast natural assets are often unaccounted for, underestimating the true costs of such projects. Strengthening institutions and instruments for assessment, monitoring and compliance for environmental and social sustainability would also yield significant benefitsinthe long-term as the highabatement costs would be avoided. The LEnS Project takes a "framework" approach where most o f the major investments are not fully identified indetail upfront. Economic and financial sustainability criteria are integratedinto the eligibility and review process to ensure that the sub-grants would be selected based not only on the technical and practical soundness, but also on economic and cost effectiveness considerations. Experience from social funds financing locally-driven, small-scale projects has indicated favorable rates ofreturn from individual sub-projects. This precedent i s expected to be continued in the Project given that the demand-driven nature o f sub-projects will avoid elaborate project structures and mismatches with implementing capacity, and that small sub-grants will involve simple procurement procedures and employ mainly local materials and services. Financial monitoring of sub-grant dispersal by the WMU will ensure that expenditures are reasonable, and for relevant community-based sub-projects, the unit cost database and standard activity costs developed under the PRF will be applied. Grant cost-effectiveness is an appraisal criteria, and its basic principles are included inthe PIP, and will be refinedover the course of the project on the basis o f EPF's experience. The MU'S monitoring procedures will cover not only their own disbursement to administrative cost ratio, but also average unit cost figures for appropriate projects and assessments of the effectiveness of individual subprojects. Detailed sub-grants eligibility and selection criteria and implementation arrangements are further described inAnnexes 4 and 6, respectively. Detailedprocedures will be elaborated inthe PIP. The delivery of sub-grant benefits must be achieved within a certain envelope of resources devoted to administering the project including provision o f capacity-building services, training costs for MU staff, and technical assistance to monitor and evaluate the project's performance. As specified in the Annex 3, the annual operating costs per volume o f transactions will be regularly monitored. 51 A summary of expected benefits is listedbelow byproject component: Part A: Policy Implementation and Capacity Enhancement Environmental and - Increase effectiveness o fsafeguardspolicy - New policies need to be Social Monitoring implementation, monitoring, and evaluation developed and Policy - Increase implementation support of provincial - Existingpolicies needto be Implementation environmental management plans effectively implemented support -- Higher quality o f investment portfolio - Need support from Increase community participation inenvironmental and provincial governments natural resources management IntegratedRiver -- Improve credibility o fenvironmental authorities Establishment o f management framework for Nam - Review lessons learned Basin Management - Increase TheudNamKading river basin from the IntegratedRiver participation inriver basin management from Basin Management Planfor local communities N a mNgumriver basin - Increase transparency andaccountability o fthe river basinmanagement Hydropower Sector the sustainability o f hydropower project - Needto institutionalize the Policy Support -- Improve Reduce negative impacts from hydropower sustainable hydropower development projects sector policy - Create opportunity for payment for ecological services - Needto provide where the payment canbe used to finance implementation support environmental and social responsible activities Resettlement - Reduce possible negative impacts from resettlement - Need to provide support to Management causedby development activities implement National Policy - Increase knowledge and awareness o fthe resettlement on Resettlement and management Compensation - Increase involvement of local communities in - Low level o f awareness of resettlement management resettlement rights Environment - Increase inhumanresources with environment and - Limitedhumanresources in Educationand natural resources management knowledge and skills the environment andNRM Awareness - Increase public awareness o f environment and natural fields resources management - Low level o fenvironmental - Inducebehavioral change toward conservationand awarenessby the public sustainable natural resources management Part B: Community and Biodiversity Investments Conservationand - Increase the efficiency inPA management - Limitedcapacity to Community Sub- Lower environmental violations effectively manage the PA grant -- Increase empowerment o f localcommunities innatural system - Improve resources management - Needto empower local livelihoods o f local communities and reduce communities inthe decision poverty making, monitoring, and evaluation processes Part C:Project ImpL rentation and Monitoring Support Management and - Improvedidentification and targeting o f environmental I - Need to buildcapacity of Monitoring Support investments that yields high economic returns EPF andMUto be able to - Increase efficiency and responsiveness o fproject utilizeNT2 revenues - Improve screening - Services should be the quality o f sub-grant implementation efficiently delivered with - Increase transparency and accountability o fproject minimumcosts management - Improveparticipation o flocal communities indecision Drocess 52 FinancialAnalysis Giventhe current stagnation of GOLrevenue, itis notunexpectedthat only 0.6 percent ofthe government budget i s allocated to environment related agencies. STEA annual budget i s estimated to be around USD 100,000, of which only USD 37,000 is available for the environment units within STEA. Whereas, only USD 15,000 is available for entire NPA system. The Project would provide much needed resources to bothnational and provincial levels to enhance their environmentalprotection and conservation works. The overall impact of the Project on GOL finances i s estimated to be insignificant as the project is proposed as an IDA grant and EPF will be eligible to receive annual revenue from the NT2 Hydropower Project and future hydropower and other development projects. The establishment of operational mechanisms o f the EPF will ensure that future revenues from the NT2 will be channeled to finance priority environmental and NRM activities. Although counterpart funding i s not required, GOL i s committed to provide in-lundsupport inthe form o f staff time and meeting and work facilities. Recurrent costs funded by the project would be eligible for continued support from the EPF after NT2 revenues come on-stream. 53 Annex 10: Safeguard Policy Issues Lao Environment and Social Project Applicable Safeguard Policies. The proposed project would trigger four of the ten policies, namely Environmental Assessment (OP 4.0l), Natural Habitats (OPBP 4.04), Involuntary Resettlement (OPBP 4.12) and Indigenous Peoples (OD 4.20). Based on national legislation and the characteristics for identification inthe Indigenous Peoplespolicy, ethnic groups belongingto the Mon-Khmer, Hmong-Mien and Sino-Tibetan ethno-linguistic groups, and upland Tai ethnic groups categorized as Lao-Tai should be categorized as Ethnic Minorities. The Project is consistent with but does not trigger safeguard policies addressing Pest Management OP (4.09), Cultural Property (OPN 11.03) and Forests (OPBP 4.36) in as much as sub-grant proposals which would trigger specific measuresunder these policies may conceivably be received, but would notbe accepted. The identification and rejection of such proposals would occur at an initial safeguard screening stage of the application process, as will be detailed in the Project Implementation Plan. The environmental category of the project i s B. All sub-grants will be small, especially for all the community grants sub-component, as defined by the Project eligibility criteria, and no major environmental and adverse social impacts are expected. Safeguards screening will be applied for all sub-grant applications by the Provincial Facilitators or MU Safeguards Team depending on size and type o f project. Inthe case that environmental or social impacts are expected, all necessary safeguard documents will be prepared prior to sub-grant approval by the recipient and with support by the Provincial Facilitator. The givenapproach i s consistent with safeguardregulationso f the Lao PDR. Environmental and Social Safeguard Framework (ESSF). The ESSF i s responsive to national requirements and Bank operational policies, and its principles are incorporated into the operational documents o f the PIP. It provides background on safeguards issues of potential concern, and detailed principles for ensuring that these are avoided, minimized and mitigated in the implementation o f sub- grants inaccordance withBank policies and with the level o f impacts acceptable to the Project. Prohibited activities to be identified and excluded at the proposal screening stage are listed, as are activity types which may be permitted, but would trigger specific sub-grant safeguards procedures to address issues related to involuntary resettlement (minor voluntary land acquisition or resource access restriction), environmental assessment, and ethnic minorities. Sub-grant specific procedures detail requirements and responsibilities for local consultation and disclosure, monitoring and supervision. A complaint mechanismis also described. The objective ofthe ESSFis to ensure that: e selected subprojects are designed to be beneficial to the environment and local communities and that negative environmentaland social effects are minimized or avoided; e any negative effects are identified and appropriate mitigation measures are developed and implementedas part o fthe subproject; e incases where ethnic groups are affectedby or participate ina subproject, appropriate measures are taken to include them in the various stages o f project development and implementation, to ensure they benefit from project activities, their customary rights are recognized and adverse affects are avoided; and e in cases where land acquisition or loss of assets are necessary, compensation is provided to affected personsthrough participatory planningprocesses. The ESSFis basedon the experiences from the Poverty Reduction FundProject (PRFP) and is consistent with the safeguards approach of NTSEP, particularly those of the SEMFOP. Its application will ensure that the requirement for environmental assessment according to World Bank policy (World Bank OP 4.01 Environmental Assessment), and in so doing ensure consistency with other World Bank safeguard 54 policies (i.e.; World Bank OP 4.04 Natural Habitats; World Bank OPBP 4.12 Involuntary Resettlement; World Bank OD 4.20 Indigenous Peoples; World Bank OP 4.36 Forestry; World Bank OPN 11.03 Cultural Property). To ensure compliance with all applicable World Bank safeguard policies, an approach will be applied in which an initial environmental and social screening of the grant proposals will be conducted. The safeguard screening principally consists of a two-step approach: a A first screening ofcompliance witha list ofeligible sub-grants 0 A screening on possible environmental and social impacts according to basic standard screening forms* Ifenvironmentalandsocialimpactsareexpected,aproperassessmentwillbeconducted,accordingto Lao PDR regulations and World Bank policies. Inaddition, basic standard operating procedures to avoid or mitigate adverse environmental impacts of small scale sub-grants will be incorporated into the technical guidelines andtraining programs. Relevant NationalPolicies and Legislation. Environmentallegislationhas evolved quickly inLao PDR. The EnvironmentalProtectionLaw of 1999, supported by its ImplementingDecree (2002) i s the principal environmental legislation in the country. It includes measures for the protection, mitigation and restoration of the environment as well as guidelines for environmentalmanagement and monitoring. The Decree on Environmental Impact Assessment (EM) was approved in 2000. This regulation describes the process for consideration, approving and certification of development projects. All development projects mustbe screened, andunless assessedto causeminimalenvironmentalimpacts, mustproceedto carry out an InitialEnvironmental Examination, including either an Environmental Management Plan or a TORfor a fuller Environmental Impact Assessment. Project procedures reflect national policies through inclusion of a screening stage and preparation of simple environmental management plans as required. Inpractice, however, Project standards may be applied more stringently than national standards; i.e. subprojects that would be cleared under national screening standards may still be required to apply standard environmental operating procedures or prepare simple environmental management plans under the ESSF. Any activities requiringa full EL4 under either national or IDA policies would not be supported by the Project. The national Resettlement Decree, currently being finalized by GOL, will include provisions on resettlement parallel to IDA policies, but inpractice may not be commonly applied to activities on the scale of those to be supported by the Project. The Ethnic Minorities Committee under the National Assembly is responsible for drafting and evaluating proposed legislation conceming ethnic groups as well as lobbying for its implementation and the implementation of socioeconomic development plans. Lao PDR does not have specific legislation to safeguard ethnic minorities in the development process in parallelto IDApolicies on IndigenousPeoples, butreferences to appropriate inclusion of and consultation with ethnic groups are included in both the draft Resettlement Decree and the National Sustainable Hydropower Policy, whose implementation will be supported under the Project. Institutional Responsibilities. The Management Unit (MU) will be responsible for the initial safeguard screening of the sub-grants. The MUTechnical Officer, with support o f STEA, the Provincial facilitators, and the PSC, will make a recommendation to the MUManager for approval o f the sub-grant, or provide the necessary safeguard documents to be prepared. The MUwill also be responsible for monitoring of compliance with the applicable safeguards during sub-grant implementation (see below). The detailed institutional arrangements are described inthe PIP. 55 Summary EnvironmentalBenefits, Impacts, Risks and MitigationMeasures. Ingeneral, social and environmental impacts of sub-grants are expected to be positive as the eligibility criteria for sub-grants are established to support improved environmental management,20natural resource management and community development. Project benefits have been defined in the Results Framework and Monitoring (Annex 3). The nature and scale of sub-grants are such that the vast majority will result in only minor and easily mitigable negative environmental effects (i.e., those associatedwith small construction works). Although the cost of the subprojects will limit the size of infrastructure projects, in some cases, municipal environmental infrastructure such as small wastewater treatment plants or trash disposal facilities may be proposed. Ifapplicable, sub-grantagreementswillincludeconditionsandmitigationmeasurestoaddressall possible adverse impacts. These would focus on sensible site selection criteria, good construction practices and diligent management practices inthe operational phase for different types o f sub-grants. In addition, construction contracts will include common-sense environmental clauses, with specific expected performance standards relating to environmental protection. These include measures to ensure that erosion i s controlled and waste materials are disposed of inappropriate manners. IndigenousPeoples. Itis acknowledged that the socio-economic andethnic diversity ofLaoPDRandthe traditionally centralized development planning processes are key challenges for designing and implementing any community development component successfully. Ethnic minority research i s the responsibility o f the Institute for Cultural Research under the Ministry o f Information and Culture. The lead institution for ethnic affairs i s the mass organization, the Lao National Front for Construction (LNFC), which has a Department for Ethnic Affairs. The Project will coordinate with a proposed IDF Grant for Ethnic Minorities which will provide capacity building support to the LFNC and the Institute for Cultural Research. Experiences from the District Upland Development and Conservation Project and the Poverty Reduction Fund Project, consistent with the SEMFOP (NNT watershed) approach, will be used in designing sensible strategies for appropriate local decision-making processes that would ensure the participationof vulnerable groups such as ethnic groups and women. The Projectwill support enhancedmanagement o fprotectedareas and improvedimplementation of social safeguard policies inrelation to development projects, particularly inthe hydropower sector. As such, the Project will provide benefits to local ethnic groups, including improved management of the natural resources they use and funding for small-scale community development activities. However, since the ethnic groups living in and near protected areas are heavily dependent on forest resources for their livelihood, Project activities also pose certain risks to them, particularly if restrictions are made to accessing forest resources. As such, concerns o f ethnic groups are met primarily through the design o f the project itself, since the demand-driven and participatory design features aim to allow local decision- making over the use of development funds through a facilitated and inclusive process. Inaddition, other measures support the involvement of ethnic groups, such as: inclusive consultative approaches to protected area management; training o f project staff and facilitators on ethnic group issues; gnevance redress mechanism that allows ethnic groups an avenue for complaints; and particular attention to ethnic group issues in monitoring and evaluation. The customary rights o f ethnic groups will be respected and incorporated into the various field-based activities o f the Project, including conservation activities. Finally, the project includes screening procedures in the ESSF to address situations where vulnerable ethnic groups may be adversely affectedby sub-grants. 2oAll activities supported bythe Projectmustavoidor minimize negative environmental impacts by exploring viable altemative designs and by following the Project Implementation Plan . 56 Resource Restrictions. Conservation activities may result inrestrictions o f access to naturalresources. If protected area management proposals involve involuntary resource access restriction, the Project will follow a standard participatory framework basedon models developed inthe SEMFOP. Such impacts will be avoided or minimized, mainly through a participatory planning process that aims to strike a balance between the needs and circumstances of local communities and improvedbiodiversity conservation. Any impacts resulting from restrictions that are needed to curb unsustainablepractices will be compensated to maintain or improve existing levels of livelihood. Detailed procedures are included inthe ESSF to meet the requirements o f the Bank's policy on Involuntary Resettlement (OP 4.12). Based on the approach developed for SEMFOP, land use planning activities supported for individual protected areas will divert from the standard land and forest allocation model and instead identify the customary tenure systems of local communities, and incorporate these into the village resource use agreements. Communities will be able to decide how they want to allocate the land within their territories, and they need not necessarily proceed to the issuance of individual land use certificates. Issues surrounding stabilization of shifting cultivation will be dealt with through threat analysis and assessment of current and customary land and resource use practices and rights and based on a real appreciation o f soil capability. While activities will involve improved natural resource management and use practices they may also support improvedrotational agriculture inefforts to stabilize shiftingcultivation rather than phasing it out, at least on a short andmediumterm. Land Acquisition and Resettlement. No significant resettlement or land acquisition i s anticipated. No involuntary resettlement will be allowed and the Project will not fund the acquisition o f land. However, there may be some land acquisition or voluntary resettlement based on voluntary contributions or with compensation providedby the village. Insuch cases, project facilitators will ensure that affected families agree with the proposed arrangements, as discussedand recordedinopen village meetings. LEnS project activities will not support forced relocation. Villages with govemment activities, such as village consolidation or focal site areas, which have involved involuntary relocation inthe last five years, or have plans to do so, will be excluded. In addition, project activities will provide in-situ support to upland and forest dependent communities by involving them inimproved and participatory management o fnatural resources and fundingsmall scale community development sub-projects. Safeguard Monitoring and Reporting Arrangements. Safeguard monitoring will be the responsibility o f the M&E CoordinatorlOfficer of the WMU. As part o f the overall monitoring tasks, M&E activities will include a special focus on the application and compliance with the Social and Environmental Safeguard Framework. Further details on Monitoring and Reporting arrangements are given in Project Implementation Plan. The CTMA will directly oversee all safeguards screening and monitoring activities until such time as sufficient capacity is built within the WMU permanent staff to implement these independently. Consultation and Participation. Public transparency, participation, and accountability are key elements inmaintainingcredibility ofthe govemment decision-makingprocess and good governance results. This i s inherently more challenging in political systems like the Lao PDR. There i s also a lack o f technical understanding o f the environmental and social implications o f development activities among civil society and local communities. The Project will provide transparent procedures for sub-project planning and approval and involve civil society in implementation, e.g. through involvement in sub-projects, participation of mass organization on the Board of the EPF, and consultations in regards to the development of plans and frameworks for riverbasinmanagement. During the preparation of the Project STEA has organized multiple meeting o f the inter-ministerial Project Steering Committee, which includes representatives o f all relevant Govemment agencies .and 57 Provincial Govemments. Duringthe consultations all applicable Project procedures have been presented and discussedextensively, including the applicable safeguardpolicies andreview procedures. The Project has also benefited from the extensive consultations undertaken for the NT2 Project, the preparation o f the Lao Environment Monitor 2005, and the drafting of the decree for the EPF. The need for the Project emerged from these consultations and its design was influenced by discussions among government stakeholders, and with development partners (ADB, SIDA and UNEP). A series of consultations with local communities were conducted inthe NT2 Watershed since 1996 and involved all 31 villages inside the Nakai Nam-Theun National Protect Area and a large number of villages in the peripheral impact zones. These consultations informed the approach in SEMFOP, which is also the basis for the Project approach inrelation to activities inandnear protected areas. The Project incorporates communityparticipationand stakeholder involvement inits design, andwill aim to further advance and deepen such opportunities, which are relatively recent in Lao PDR. The first component will assist GOL to upgrade policies, decrees and guidelines to include consultation and participation as an integral part o f their implementation, while the second component will provide participatingcommunities with directresponsibility for implementing certain sub-projects. Community grants will be developed and approved through a consultative process. The project will not fund any investment that is not acceptable to the majority of villagers involved, and all of the villagers directly affected. Decisions on the use o f funds are made by villagers themselves, through a negotiation process, and with informationprovidedby project facilitators and technicians. A complaints resolution system is considered central to the project, and a complaints and response database will be maintainedas part of the project, bothat the province and national level. Disclosure: Safeguard documents prepared for the Project were publicly disclosed on May 20, 2005 at the InfoShop inWashington and inthe Library o f the World Bank Vientiane Office. At that time, a set of reports was also sent to the Library o f STEA, MM and to the Provincial Government of the 3 target provinces. Likewise, all sub-project specific safeguard documents to be prepared during the Project will be disclosed. 58 Annex 11:Project Preparation and Supervision Lao Environment and Social Project Planned Actual PCNreview 3/28/2004 3/28/2004 Appraisal May 23,2005 May 23,2005 Negotiations June 617 2005 June 718 2005 BoardRVP approval June 30,2005 Planned date o f effectiveness 180 days from approval Planned date o f mid-termreview April 30, 2008 Planned closing date December 31,20 10 Key institutions responsible for preparation of the project include: 0 Science, Technology and Environment Agency (Environment ResearchInstitute, Departmentof Environment), GOL. 0 MinistryofIndustryandHandicrafts(Secretariat ofthe LaoNationalCommitteeonEnergy), GOL. 0 MinistryofAgriculture andForests, GOL. 0 MinistryofFinance, GOL. Bank staff and consultants who worked on the project included Name Title Unit Maria Teresa Serra Sector Director EASES Thomas E. Walton Peer Reviewer AFTSD Jane Nishida Peer Reviewer SASES PatchamuthuIllangovan Team Leader EASES Laila Al-Hamad Social Development Specialist EASSD Nina Bhatt Social Development Specialist EASSD Chinnakorn Chantra Procurement SDecialist EAPCO Bank funds expended to date on project preparation: 1. Bank resources:US$ 140,000 2. Trust funds: _ _ _ 3. Total: US$140,000 Estimated Supervision costs: US$75,000 per year 59 Annex 12: Documentsinthe ProjectFile Lao Environmentand Social Project RecipientDocumentation 1. Project Implementation Plan (Draft) datedJune 7,2005 - General -- Financial OperationsManual Management Manual - ProcurementManual 2. Environmental and Social Safeguards Framework dated June 7,2005 Bankstaff assessments: 1. Aide Memoire ofNTSEPIdentification Mission, December 2002 2. Project Appraisal Document for NamTheun2 Hydropower Project -31764-LA 3. Appraisal Mission Aide Memoire o f Lao Environment and SocialProject Other: 4. Decree 146/PM of June 6,2005, establishing Environment ProtectionFund 5. National Policy onthe Environmental and Social Sustainabilityof the Hydropower Sector inLao -561/CPofJune7,2005 6. Draft Decree on Resettlement and Compensation (May 2005 Draft) 7. NamTheun 2 Hydropower Project Govemment Letter of implementation Policy (NT2 GLIP) dated March 7,2005 8. Lao Environment Monitor 2005 (draft) 9. State o f EnvironmentReport for Lao PDR2002 10. Project Document for Asian Development BankEnvironment and Social ProgramLoanNo.1867- LAO (SF) 11. Project Document for SwedishInternational Development Agency's Strengthening EnvironmentalManagement inLao PDR though STEA, PhaseI1(SEM11)Project 60 Annex 13: StatementofLoansandCredits LaoEnvironmentandSocialProject Difference between expectedand actual Original Amount inUS$Millions disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frill. ID Rev'd PO75006 2003 L A - SecondLandTitling Project 0.00 14.82 0.00 0.00 0.00 15.29 2.37 0.00 PO64886 2003 LA-SUSTAINABLE FORESTRY 0.00 9.90 0.00 0.00 0.00 10.74 0.37 0.00 FOR RURAL DEV. PO77620 2002 LA-Fin. ManagementCapacity 0.00 8.50 0.00 0.00 0.00 8.93 0.46 0.00 Building Cr. PO77326 2002 LA-Poverty ReductionFundProject 0.00 19.34 0.00 0.00 0.00 20.65 1.12 0.00 PO68069 2002 LA-Fin MngtAdj Cr (FMAC) 0.00 17.00 0.00 0.00 0.00 12.51 14.41 10.00 PO65973 2001 LA Agricultural Development 0.00 16.69 0.00 0.00 0.00 17.23 -2.02 0.00 Project PO64821 2001 LA-Road Maintenance 0.00 25.00 0.00 0.00 0.00 6.81 -0.57 0.00 PO42237 1999 LA-Provin. Infrast. 0.00 27.80 0.00 0.00 0.00 10.04 5.61 0.00 PO44973 1998 LA-SOUTHERN PROVINCERE 0.00 34.70 0.00 0.70 0.00 3.42 1.92 0.00 PO04208 1996 LA-LAND TITLING 0.00 20.73 0.00 0.00 0.00 7.18 8.42 6.62 PO04200 1995 LA-HEALTHSYSTEM REFORM 0.00 19.20 0.00 0.00 0.00 3.55 4.88 4.91 &M Total: 0.00 0.00 0.70 0.00 116.35 36.97 21.53 213.68 61 LAO PEOPLE'SDEMOCRATIC REPUBLIC STATEMENT OF IFC's HeldandDisbursedPortfolio InMillions ofUS Dollars Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval 1998 SEF Endeavor 0.15 0.00 0.00 0.00 0.15 0.00 0.00 0.00 1998100 SEF Settha 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 2001 SEF Villa Santi 1.15 0.00 0.00 0.00 1.15 0.00 0.00 0.00 Total portfolio: 1.48 0.00 0.00 0.00 1.48 0.00 0.00 0.00 Approvals PendingCommitment FY Company Loan Equity Quasi Partic. Approval Total pending 0.00 0.00 0.00 0.00 commitment: 62 Annex 14: Country at a Glance Lao Environment and Social Project East POVERTYand SOCIAL Lao Asia 8 Low- PDR Pacific income Developmentdiamond' ~ 2002 Population,mid-year(millions) 5.5 1,838 2,495 Lifeexpectancy GNI percapita (Atlas method, US$) 310 950 430 GNI (Atlas method, US$billions) 1.7 1,740 1,072 - Averageannual growth, 1996-02 Population(%) 2.4 1.o 1.9 Labor force (77) 2.2 I.2 2.3 Gross per PnmW Most recent estimate (latest year available,199642) ,capita nroiiment Poverty("7ofpopulationbelownationalpovertyline) 39 i Urbanpopulation(% oftotalpopulation) 20 38 30 Life expectancy at birth (years) 55 69 59 L Infantmortality(per 7,000live births) 88 33 81 Chiid malnutrition(ss ofchildrenunder 5) 40 15 I Access to improvedwater source Accessto an improvedwater source (% ofpopulation) 37 76 76 Illiteracy(% ofpopulationage 75+) 34 13 37 Grossprimaryenrollment (% ofschool-agepopulation) 113 106 95 1 -Lao PDR Male 121 105 103 Low-income group ~ Female 104 106 87 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1982 1992 2001 2002 Economic ratios. GDP (US$ billions) 1.1 1.7 1.7 Gross domesticinvestmenffGDP 22.1 Trade Exportsof goods and services/GDP 17.0 Gross domesticsavingslGDP Gross nationalsavings/GDP Currentaccount balancelGDP -4.3 -4.7 interest payments/GDP 0.3 0.6 0.6 Total debffGDP 170.0 142.6 158.6 Total debt service/exports 4.9 7.9 Presentvalueof debffGDP 74.0 Presentvalue of debuexports 235.5 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) ---Lao PDR GDP 4.5 6.3 5.7 5.0 GDP percapita 1.8 3.8 3.3 2.6 Low-incomegroup ~ STRUCTUREof the ECONOMY I (% of GDP) Agriculture 61 8 61.8 50.9 50 9 `a - Industry 178 17.8 23 4 23.4 " 6 Manufacturing ...... 134 13.4 177 17.7 Services _. 20 4 20.4 25 7 25.7 IO 4 I Privateconsumption 1 97 98 99 w 01 m Generalgovernment consumption 9 5 -GDI *GDP Importsof goods and services 27 1 1982-92 1992-02 2001 2002 (average annualgrowth) Agriculture 3.6 5.1 3.8 Industry 9.3 10.6 9.7 Manufacturing 12.4 12.3 Services 3.7 7.0 5.7 Privateconsumption Generalgovemment consumption Gross domestic investment importsof goods and services The diamondsshowfour kevindicatorsinthe WUntN finbold) comoaredwith its income-arouoaveraae. ifdataaremissina.the diamond will beinwmolete. 63 Technical notes Lao PDRat a glance 8/20/03 East I POVERTYand SOCIAL Lao Asia 8 Low- PDR Pacific income Developmentdiamond' 2002 Population,mid-year (millions) 5.5 1,838 2,495 Life expectancy GNI percapita (Atlas method, US$) 310 950 430 GNI (Atlas method, US$billions) 1.7 1,740 1,072 - Average annual growth, 199642 Population(y 2.4 1.o 1.9 Laborforce (%) 2.2 1.2 2.3 GNI Gross per primary Most recent estimate (latest year available, 199642) capita enrollment Poverty(% ofpopulation belownationalpovertyline) 39 Urban population("A of totalpopulation) 20 38 30 Life expectancyat birth (years) 55 69 59 - Infantmortality(per 7,000 live biffhs) 88 33 81 Child malnutrition(% of children under 5) 40 15 Access to improved water source Access to an improvedwater source (% ofpopulation) 37 76 76 Illiteracy(% ofpopulation age 15t) 34 13 37 - Gross primaryenrollment (% of school-agepopulation) 113 106 95 Lao PDR Male 121 105 103 __Low-incomegroup Female 104 106 87 KEY ECONOMICRATIOS and LONG-TERMTRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 1.1 1.7 1.7 Grossdomestic investmenffGDP 22.1 Exportsof goods and services/GDP 17.0 Trade Gross domesticsavings/GDP Gross nationalsavingdGDP Current account balance/GDP -4.3 -4.7 interest payments/GDP 0.3 0.6 0.6 Total debffGDP 170.0 142.6 158.6 Total debt service/expofts 4.9 7.9 Presentvalue of debffGDP 74.0 Presentvalue of debffexports 235.5 I Indebtedness 1962-92 199292 2001 2002 200248 (average annual growth) ~ Lao PDR GDP I ._ 4.5 6.3 5.7 5.0 GDP per capita 1.8 3.8 3.3 2.6 Low-income group ~ STRUCTUREof the ECONOMY (% of GDP) Agriculture 61 8 509 18T lndustry 178 23 4 Manufacturing 134 177 Services 204 257 Privateconsumption Generalgovernmentconsumption 9.5 " I P G D I *GDP Importsof goods and services .... 27.1 1982.92 199242 2001 2002 (average annualgrowth) Agriculture 3.6 5.1 3.8 Industry 9.3 10.6 9.7 Manufacturing 12.4 12.3 Services 3.7 7.0 5.7 Privateconsumption Generalgovernmentconsumption Grossdomesticinvestment Importsof goods and services 64 Annex 15: Environmental and Socially Sustainability of the Hydropower Sector in Lao PDR Lao Environment and Social Project LaoPeople's DemocraticRepublic PeaceIndependenceDemocracy Ur&yProsperity -0- No.5611CPI NATIONAL POLICY ENMRO"TAL AND SOCIAL SUSTAINABILXTY OFTHEEYDROPOWERINLAOPDR SECTOR BACKGROUND By the end ofthe 199Os, the hydropowersector accounted for three percent of LaoGDP and electricity sales to Thailandcurrently represent 30 percent of exports. Yet only an estimated 15-20 percent of Lao PDR's economically viable hydropower generating capacity has been dized to date. The National Growth and Poverty Eradication S&ategy recupizes the importance of the hydropower sector in economic p w t h and poverty reduction. The Government of Lao PDR acknowledges that hydropower development mustbe sustainable, ifits developmentpotentialto deliver ladugbenefitsto LaoPDR can befully realized Sustainable development of the hydro-power sector is founded on three important principles: (a) economicsustainabilityrelies uponthe maintenanceofthe renewableresourcebase, andthe useofnon- renewable resource rents to support the development of other factors of production; (b) social sustuinabiliois basedupontheprinciplesofinclusiveness,mutualunderstandingandconsensus; and(c) ecologicalsustainabilityreliesuponthe avoidance of irreversibleenvironmentalimpactssuch as the loss ofbiodiversity, accumulationofpenistentpollutants, or disruptionofecologicalcycles. The p l h ganddesign process for theNamThem 2 HydropowerProjecthasbeenunprecedentedfor a single development project inLao PDR interms of its length, comprehensiveness, inclusivenessand transparency. It has not only defmed new environmentaland social standardsfor a development project in Lao PDR, but has been inseparably linked to the development of national legal and institutional provisionsfor environmentaland social safeguards. National developments since the initiation of work onthe NT2 projectinclude: the establishment of S E A , Providcial Environmental Committees and Environmenral Monitoring andManagementUnits,andthe EnvironmentProtectionFund(EPF); the drawing up of the National E " r m t a t Strategy and A d o n Plan, and provincial e n v i t o n " strategies; and the promulgation of the EnvironmentatProtectionLaw (EPL) and Environment Assessment Regulations(EAR), andtheResettlementDecree. PlmPosE This National Policy aims to capitalize on these efforts by adaptiig and tailoring the principles developed under ihe NT2 project to the hydropowersector as a whole, thus enabling procedures to be streamlined andinstitutionalized.This Policy Statement, foundedonthe aformentionedthreeprinciples of sustainability, appliesto alllargehydropower dams, wherelargedams are definedas havinginstalled capacity of higher ihan 50 Megawatts or inundatingmore than 10,000 hectares of land at their fUUy 65 supply level. This National Policy applies to hydhpower projectsconstructedafter 1990. h integrated approach to river basin management will be practiced for multiple projects planned to dam a single river. .Suchan approachwill includeaddressing cumulative impacts and their mitigation, supported by anappropriateinStiMional andfinancingmechanism. 1. ENVIRO"TAL ~SESSMENT All large hydropower proj- i s stipulated above must produce a full Environmental Impact Assessment (EM)report and EnvironmentalManagement Plan(EMP) accordingto the Environmental protection Law of 1999, and EnvironmentalAssessmentRegulations 1770of 2000 or successorDecree. The EL4 will includea comprehemjverisk analysis over the entire life-span of project, an analysis of alternatives for projects f " e and location, incldhg the no-project alternative, lessons learned from previous projects, and sub-basin cumulative impact analysis. The EMP will include a strategy for avoiding and/or mitigation of impacts, and risks, including accidents and emergency events. The EMP will also provide cost estimates for these activiti- identify their sources of funding and an implementation schedule. A comprehensivemonitoring and evaluation framework consisting of both internal and independentor thirdpartymonitoringarrangementsshould also beincludedinthe EMP. The ELA process will include provisions for field based surveys of archaeological, historical and/or sacred sites. These surveys will providethe culturalresources sectionof the EMP. The EMP shouldalso includeprovisionsfor "chance h d " proceduresto address measuresto betakenwhen unknowncultural materialsare encounteredduringthe courseofprojectimplementationor operation. Theimplementation of EL4 activities related to cultural heritage would be coordinatedwith the Ministry of Culture and Information. 2. PROJECT-ikFFECTE.DPEOPLE Project-affectedpeople will be recognizedas those whose assets, resource use and livelihoods, and/or social or cultural stmc~uresare involuntarily alteredby the project, and will identified on the basis of social, economic, health and cultural studies and impact assessments. Assets and resource use will be recognizedon the basis of legally establishedand/or customaryuse rights. All involuntary resettlement issues will be handled in accordance with the Resettlement Decree, which will be enacted by the Government, shortly. The right of all project-affected people to sustainable livelihood options and services at least at the level previouslyenjoyedwill berecognized, and achievedthroughaResettlement / SocialDevelopmentPlan. The plan will consider distributional effects of develapmsnt activities and the participarion of vulnerable groups, including women and ethnic minorities, and will commit to targets for replacement or compensation for loss of assets, livelihoods restoration, and services and community development over the entire life-span of the projecf with provision for monitoring and evalUation, participatoryplanning and adaptive management Incases where ethnic groups are inthe project area a specific plan to meet their aspirations would.be prepared in consultationwith these communities. 3. WATERSEEDMA"TAND CONSERVATION Any loss of natural termtrial habitat Wiu be offset, where possible, by finding and implementing effective conservationmanagement innearby protectedareas of similar habitat and at least equivalent conservationimportance,mlinewiththe principlesset out for theNT2 WatershedinDecree39 of2005. A watershed adaptive management and participatory planning strategy will be developedto stabilize land use, maintain vegetation cover and manage National and Provincial Rot& Areas within the catchment areq and to enhance the productivity and sustainability of aquatic resources within the reservoirandits tributaries. Sustainable Biodiversity Managementplans will takeinto account the need to compensatepopulationsresidingWithinprotectedseas for eventual restrictionto the m o mbaseon whichthey dependandto developalternativemeansof livelihoods. 66 4. CONSULTATION F m prior and informed consul~on.~ be c o o d u d with all project-affected communitieg to will enable public involvement in environmental and social assessment accordingto the provisions of the EAR and Resettlement Decree, and to ensure public views are heard before a decision is made on a project. Consultations would be meaningful,balancedand transparent, for which additional guidelines will be issued. As much as possible. the villages will be afforded oppo&es to buildtheir skills through the involvement o f independent facilitators, who will guide the process at the village-level. Comprehensive envkonmentaleducation andawareness activities will also be undertaken. E v qeffort will be made to ensure representative participation of vulnerable groups such as women, elderly, disabled and ethnic minorities. Consultations on trans-boundary impacts, if materially identified, may also be conducted with neighbring governments through processes established by the Mekong River Commission. Consultationswill continue throughout projectimplementation. 5. DISCLOSURF: Project consultation reports, impact assessments, mitigation plans and monitoring reports, will be publicly disclosed. Project developers will be requiredto establish information centers in the project areaandinVientiane. InformationmightbedisclosedbothinLAO andEnglish, as the casemightbe, and appropriate methods will be usedto communicate with ethnic groups. Duringimplementation of the project, the project developers will be requidto make public progressreports on the project. M- party review will be encouaged. Gross project revenues and spending on environmental and social safeguardswill bedisclosed. 6.C0"CE Compliance with all relevant obligations under Lao national law, policies, strategies and action plans, and international conventions will be dthroughregular monitoring and reporting with oversight from a third party agencies. Provisions for immediate mrrective action and financial penalties, following instances of non-compliance, will be embedded in Concession Agreements. A grievance / disputemechanismaccessibleto project-af5ectedpeople will beestablished The Developer will cover the cost of implementing all environmental and social safeguard procedures underthe "user pays" principle. A certainportionof the revenuesh meachproject will be allocatedto general h d sor special financing windows withintheEnvironment ProtectionFundWF).These funds willbeusedto support nation-Wideenvironmental protectionandconservation efforts mthe country. In g e n d it is mguized that investment in future productive capacity, m the form of manufactured CapitaI, human capital, social capital, or maintenance of the mewable resource base., would be prioritized inthe useofrevenues. 8 " I X N G HYDROPOWER PROJECTS Fromthe start of 2007, all existing hydropower projects will be subject to a third-party monitoringand assessmentoftheir compliance with respectto the environmemd and social guidelines set forth inthis Policy Statement as well as in the National E d Party Monitoring Guidelines for the Energy and TranspartSectors, andwith pertin& legislation atthe national, provincial anddistrict levels, including the contractual agreements (e.g. concession agreements) under which these hydropower plants were approvedby the Government. Costalplans andtimehes to bring eachproject into full compliance will bedevelopedbyDecember31,2007. Theseplanswillalso specify thetime durationrequiredto achieve the agre& level of compliance, but not exceeding a five period h mthe date ofsuch approval the plans bythe Government.Annual performancereportswill detailprogressinlinewiththeseplanst h e . 67 .,. ._.._I . - -.. - I - ......,.- . . .-__ 68