Document of The World Bank FOR OFFICIAL USE ONLY Report No: 51918-LA PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING GRANT IN THE AMOUNT OF SDR 1.9 MILLION (US$ 3.0 MILLION EQUIVALENT) TO THE LAO PEOPLE'S DEMOCRATIC REPUBLIC FOR THE LAO ENVIRONMENT AND SOCIAL PROJECT (LENS) December 18, 2009 Social, Environment and Rural Development Sustainable Development Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Exchange Rate November 30, 2009 Currency Unit = Lao KIP (LAK) 8,500 LAK = US$ 1 1 US$ = 0.62105 SDR (Special Drawing Rights) FISCAL YEAR October 1 - September 30 ABBREVIATIONS AND ACRONYMS CAR Compensation and Resettlement MEM Ministry of Energy and Mines CBI Community and Biodiversity Investments M-IWRM Mekong-Integrated Water Resources Management CCN Community Conservation Network MOF Ministry of Finance DAFO District Agriculture and Forestry Office MOIC Ministry of Industry and Commerce DESIA Department of Environment and Social NT2 Nam Theun 2 Impacts Assessment DMH Department of Meteorological and NT-NKD Nam Theun-Nam Kading Hydrology DOE/ Department of Electricity of the Ministry of NPSH National Policy on Environmental and MEM Energy and Mines Social Sustainability of the Hydropower Sector in Lao PDR DOE/ Department of Environment of the Water NUOL National University of Lao WREA Resources and Environment Administration DOF Department of Forestry PAFO Provincial Agricultural Forestry Office DWR Department of Water Resources PDO Project Development Objective EIA Environmental Impact Assessment PICE Policy Implementation and Capacity Enhancement EPF Environmental Protection Fund RBC River Basin Committee ESIA Environment and Social Impacts RBO River Basin Organization Assessment ESSF Environment and Social Safeguards SIA Social Impact Assessment Framework FM Financial Management SOE Statement of Expenditure GOL Government of Lao PDR TOR Terms of Reference HMTA Technical Assistance for Capacity Building WERI Water Resources and Environment Research in the Hydropower and Mining Sectors Institute IDA International Development Agency WMU Window Management Unit LEnS Lao Environment and Social MAF Ministry of Agriculture and Forestry WREA Water Resources and Environment Administration Regional Vice President: Mr. James W. Adams, EAPVP Country Director: Ms. Annette Dixon, EACTF Sector Director: Mr. John Roome, EASSD Country Manager: Mr. Patchamuthu Illangovan, EACLF Sector Manager: Ms. Jeeva Perumalpillai-Essex, EASTS Task Team Leader: Mr. Jitendra Shah/Viengkeo Phetnavongxay, EASTS FOR OFFICIAL USE ONLY LAO PEOPLE'S DEMOCRATIC REPUBLIC ADDITIONAL FINANCING FOR LAO ENVIRONMENT AND SOCIAL PROJECT TABLE OF CONTENTS I. Introduction ........................................................................................................................ 1 II. Country Context and Project Background ...................................................................... 1 III. Rationale for Additional Financing and Proposed Changes .......................................... 6 IV. Consistency with Country Assistance Strategy ............................................................... 8 V. Appraisal of the Restructured and Additional Financing Activities ............................. 8 VI. Expected Outcomes .......................................................................................................... 11 VII. Risks and Mitigation Measures ....................................................................................... 11 VIII. Financial Terms and Conditions for the Additional Financing ................................... 12 Annex 1: Sector Review and Update .......................................................................................... 13 Annex 2: Social Safeguards Capacity Building Program ......................................................... 22 Annex 3: Nam Theun-Nam Kading (NT-NKD) River Basin Management Program............ 27 Annex 4: Project Description and Implementation Arrangements ......................................... 36 Annex 5: Revised Performance Indicators ............................................................................... 41 Annex 6: Project Cost .................................................................................................................. 46 Annex 7: Risks and Mitigation Measures .................................................................................. 48 Annex 8: Financial Management and Disbursement Arrangements ...................................... 54 Annex 9: Procurement Arrangements ....................................................................................... 64 Annex 10: Safeguard Policy Issues ............................................................................................. 73 Annex 11: Country At a Glance .................................................................................................. 77 Map IBRD 37436 .......................................................................................................................... 79 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. LAO PEOPLE'S DEMOCRATIC REPUBLIC ADDITIONAL FINANCING FOR LAO ENVIRONMENT AND SOCIAL PROJECT Project Paper Data Sheet Date: December 18, 2009 Team Leader: Jitendra Shah/Viengkeo Country: Lao People's Democratic Republic Phetnavongxay Project Name: Lao Environment and Social Sector Director: John Roome Project ID: P090693 Country Director: Annette Dixon Environmental Category: B Recipient: Lao PDR ­ Environment Protection Fund (EPF) Revised estimated disbursements - additional grant (Bank FY/US $ m) FY FY10 FY11 FY12 FY 13 Annual 0.3 1.2 1.0 0.5 Cumulative 0.3 1.5 2.5 3.0 Current closing date: December 31, 2010 Revised closing date: June 30, 2013 Does the restructured or scaled-up project require any exceptions from Bank policies? Yes X No Have these been approved by Bank management? Not applicable Is approval for any policy exception sought from the Board? Yes X No Project development objectives/outcomes are slightly modified from the original project as follows: To assist the Recipient to strengthen the management of environmental and social issues associated with the sustainable use of natural resources in Lao PDR. · 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 environmental change; (b) invest in on-the-ground environmental improvement activities, with emphasis on sustainable biodiversity management, community environmental management and livelihoods enhancements; and (c) operationalize the Environmental Protection Fund (EPF) to become a permanent entity that is eligible to use Nam Theun 2 (NT2) revenues for priority environmental protection activities by developing two Windows that serve as models for EPF operation and potentially become permanent structures. · Three intermediate outcome indicators include: (a) improved policies and instruments that 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 enhanced livelihood options; and (c) EPF emerges as a competent institution, eligible to receive NT2 revenues. · Outcome indicators and associated targets have been adjusted and made more specific. Does the scaled-up or restructured project trigger any new safeguard policies? No. For Additional Financing [ ] Loan [ ] Credit [X] Grant For Loans/Credits/Grants: Total Bank financing (US$ m.): US$ 3 million Proposed terms: NA Financing Plan (US $ m.) Source Local Foreign Total IDA 2.0 1.0 3.0 Total 2.0 1.0 3.0 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to: (a) provide an additional grant from International Development Agency (IDA) in the amount of Special Drawing Rights (SDR) 1.9 million (US$ 3 million equivalent), and (b) restructure the Lao People's Democratic Republic (PDR), Lao Environment and Social Project (LEnS) (IDA Grant H1770). 2. The proposed additional grant would deepen existing activities by focusing on a few core project areas which have grown in importance due to institutional and economic changes in Lao PDR. These activities will be done under the two project windows, i.e., Policy Implementation and Capacity Enhancement (PICE) and the Community and Biodiversity Investment (CBI). Additional financing will help scale up the impact of the project, improve its development effectiveness and sustainability, and directly contribute to the achievement of the Project Development Objective (PDO). Specifically, the additional grant would support: (a) the Department of Environmental and Social Impact Assessment (DESIA) of the new Water Resource and Environment Administration (WREA) to perform its functions related to environmental and social impact assessment and monitoring; (b) the Department of Water Resources (DWR) of WREA to forge effective cooperation among key agencies and stakeholders to address basin-wide impacts in the Nam Theun-Nam Kading (NT-NKD) river basin, including the establishment of a community conservation network; (c) WREA, the three target provinces, and other beneficiaries at the central and provincial levels, to address priority activities related to social safeguards capacity, climate change, pollution control, and stakeholder consultation and coordination; and (d) the Environmental Protection Fund (EPF) to enhance its portfolio management and sustainability. This additional financing is refocused on WREA key functions and EPF and is eventually expected to be complemented by other projects to be supported by IDA which are currently under preparation including: strengthening capacity of the agencies of the Ministry of Mines (MEM) through the Technical Assistance for Capacity Building Project in the Hydropower and Mining Sectors (HMTA) (FY10) and the Mekong Integrated Water Resources Management (M-IWRM) Project designed to provide policy and institutional support and priority investment for several Mekong countries, including Lao PDR. 3. The PDO is slightly modified by taking out reference to "enhancing quality of growth and reducing poverty". The specific objectives, project components and implementation arrangement, and the three intermediate outcomes of LEnS remain unchanged for the additional financing period. Based on experience, outcome indicators and associated targets will be modified to be more specific and more directly linked to the contributions of LEnS and to reflect local capacity, on the ground reality, and institutional changes during the period 2006-2008. II. Country Context and Project Background 4. Natural Resources Management: More than half of the Lao PDR Gross Domestic Product (GDP) is generated by the agricultural and natural resource sectors such as forestry, hydropower, and mining. Forging effective management of its vast natural resources, especially forests and water, has become critical due to rapid development of private investment in 1 hydropower and mining. Implementation of the Nam Theun 2 (NT2) Project has demonstrated ways to address social and environmental issues in line with international standards and expectations. During the past five years, the Government of Lao (GOL) has undertaken significant reforms that have strengthened the legal and institutional framework for hydropower, mining, water resources and environmental management. This has been done by building capacity among public sector agencies, raising awareness more broadly, establishing procedures for environmental assessment and monitoring, designating protected areas, and making some site-specific investments. Successful implementation, however, will depend on the technical and management capacity of the agencies to respond to the pressing needs for minimizing potential negative impacts and ensuring an equal playing field for investors. Thus, building the capacity of key agencies to ensure achievement of acceptable standards has become imperative. 5. Rapid Development of Hydropower Projects. During this project's mid-term review in 2008, it was noted that a large number of hydropower and other development projects (mining, industries, and plantation) planned by the private sector are anticipated (see Annex 1 and the figure 1). At present, there are four large hydropower projects under operation, seven under construction, nine under Concessional Agreement (CA) negotiations, and 30 more have been identified and for which feasibility studies are being conducted. To ensure that the development of these projects will not adversely impact the country's resources and local people, effective application of the new Environmental and Social Impact Assessment (ESIA) decree and the 2005 Compensation and Resettlement (CAR) decree, including strengthening technical and management capacity of key agencies to review and monitoring the implementation, is of great importance. Figure 1 Number of Large Hydropower Plants in Operation (Planned) in Lao PDR 35 30 30 28 25 23 20 16 15 11 10 10 7 4 4 4 4 5 5 5 5 5 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 6. Project Background. The original project provided a US$ 4 million grant to build the capacity of environmental agencies through the EPF. The project was approved on June 30, 2005 and became effective on April 14, 2006; its original closing date is December 31, 2010. The project provides funding to both Government and non-government agencies, including the provinces and local communities, through a demand-driven mechanism. Funds are allocated 2 through two windows: PICE and CBI. The Window Management Unit (WMU) of EPF is responsible for day-to-day operations. The LEnS Project Steering Committee is responsible for ensuring that the sub-grants are in line with national policy. Sub-grants larger than US$ 50,000 are approved by the EPF Board while smaller grants can be approved by the EPF Executive Director. Under the PICE window, funds are allocated for: (a) supporting environmental and social safeguard planning and monitoring, especially for the three target provinces (Bolikhamxay, Khammouane, and Savannakhet; (b) developing and implementing integrated management in the NT-NKD river basin, (c) initiating the implementation of the National Policy on Environmental and Social Sustainability for the Hydropower Sector (NPSH); (d) improving capacity to address social safeguards; and (e) increasing environmental and social public education and awareness in general. Under the CBI window, funds are allocated for: (a) improving government capacity to manage protected area and natural habitats; and (b) increasing involvement of local communities and other constituents. 7. Project Development Objectives (PDO). The PDO for the additional financing is to assist the Recipient to strengthen the management of environmental and social issues associated with the sustainable use of natural resources in Lao PDR. 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 environmental change; (b) invest in on-the-ground environmental improvement activities, with emphasis on sustainable biodiversity management, community environmental management and livelihood enhancements; and (c) operationalize the EPF to become a permanent entity that is eligible to use NT2 revenues for priority environmental protection activities by developing two Windows that serve as models for EPF operation and potentially become a permanent structure within EPF. The PDO was slightly modified (para 3) for reasons described in paragraph 14. 8. Project Operation and Rating. The project got off to late start with a ten month delay in effectiveness. However, due to policy level support from the Energy and Environment Ministries and funding support from LEnS, the EPF is now fully operational, albeit with operational costs which have not yet gone down as anticipated. EPF has an adequate organizational structure and operational procedures for facilitating capacity building of agencies and engaging active involvement of local communities, non-government, and the private sector. LEnS staff has also gained implementation experience at managing funds. Out of the 301 sub-grant applications received so far, 147 were approved (46 for PICE and 96 for CBI), of which 69 have been complete and 78 are ongoing. All funds are now fully committed and disbursements for the sub- grants have accelerated and now exceed US$ 2.69 million (> 67% of the grant). LEnS's computerized financial system (APIS) is in place, and is beginning to generate required reports quickly. During 2006 - 07, due to lack of knowledge and experience with Bank operations, a high staff turn-over rate, and delays in implementation and meeting legal covenants, a "marginally unsatisfactory" performance rating was assigned. After the mid-term review in mid 2008, EPF organization, the sub-grant approval process and supervision of fiduciary performance improved. There are substantial increases in the quantity and quality of sub-grants. Details on sub-grant processing, disbursements, and EPF sustainability are provided in Annex 1. LEnS performance, in terms of its progress toward achieving the PDO and the appropriateness of its monitoring indicators, is summarized below and detailed in Annex 5, together with revised indicators and targets. Given that LEnS has contributed to strengthening the country's capacity 3 to address safeguard and water resources related issues, the overall project performance is currently rated `satisfactory' a rating given after the November 2009 mission. (Annex 1 includes a history of project ratings). 9. Project Performance. As detailed in the Annexes, LEnS has made progress towards achieving its PDO of strengthening the management of environment and social issues associated with the sustainable use of natural resources, across its components, albeit at various paces. While it has proven challenging to operationalize the PDO indicators originally envisaged (because of their breadth and ambiguity) to capture the aggregate contribution of LEnS, the specific contributions of the project by component can be summarized as follows: · PICE A1: Environmental and Social Monitoring and Policy Implementation Support. LEnS has provided technical and funding support to initiate awareness and capacity building on environmental planning and monitoring in Bolikhamxay, Khammouane, and Savannakhet. The activities were implemented as part of the Provincial Environmental Strategy Action Plan (PESAP), the Protected Areas management, and/or the community initiatives. Each of these provinces received about US$ 500,000 comprising mostly small sub-grants (74% are < US$ 10,000). LEnS is playing a key role in developing and facilitating the approval process by assigning a team of provincial facilitators in each of the three provinces. The provincial decision-makers and staff have gained experience in social impact assessment and monitoring and development of livelihood options for local communities, especially those located next to Protected Areas. · PICE A2: Integrated River Basin Management. Through LEnS, the process of applying the principles of an integrated river basin management in NT-NKD was initiated for the first time in Lao PDR. Initial activities focused on improving the understanding of key agencies and stakeholders on issues related to basin-wide impacts and the concept of integrated river basin management, including completion of the NT-NKD river profile. Through a series of meetings and workshops, cooperation among key agencies has improved and detailed discussions are on-going on the priority issues facing NT-NKD and the need to set up a river basin organization (RBO) to forge effective cooperation among key agencies. · PICE A3: Hydropower Sector Policy Support. The project is facilitating the implementation of the National Policy on Environmental and Social Sustainability of the Hydropower Sector (NPSH) which was established in 2005. The implementation of the NPSH began slowly because of the institutional changes that took place in 2006. It took some time for new Ministry of Energy and Mines (MEM) and the Departments under it to get organized and gain the required capacity. Despite these changes, the political commitment for NPSH remained strong. NPSH covered both existing and new facilities. The project provided technical assistance to MEM to undertake a preliminary compliance review of hydropower projects, including field visits to the three existing hydropower facilities (Houey Ho, Nam Leuk, and Theun Hin Boun). The review identified gaps in compliance centered mainly related to the watershed protection, consultation and information disclosure, monitoring and revenue sharing, and levels of livelihood restoration. The three existing facilities predated the NPSH and already had Concession 4 Agreements (CA) in place that set out the legal obligations of the owners based on the prevailing requirements of the GOL at that time. Nam Leuk and Thuen Hin Boun are taking actions to address these gaps, while in the case of Houey Ho, further assessment is being planned. MEM is having further discussions with the owners of these facilities. MEM and WREA also conducted national level workshops on NPSH to raise awareness with developers, and followed up with local level workshops to explain the government environmental regulations and NPSH requirements to provincial and district officials, and some local communities. MEM has prepared a first status report on the implementation of NPSH, including a draft action plan, and disclosed it through its website. It is anticipated that the NPSH will be reviewed and updated in line with the new ESIA decree which is expected to be effective in early 2010. LEnS support has facilitated close cooperation between Department of Environment (DOE)/MEM and DESIA/WREA to address the issues related to hydropower. · PICE A4: Social Safeguards Management. The project supported the strengthening of WREA and provincial capacity to implement the CAR Decree of 2005. This included: (a) rapid assessment of training needs; (b) dissemination of CAR and finalization of the technical guidelines; (c) finalization of public participation guidelines; (d) dissemination of the decree and guidelines; and (e) a knowledge exchange program with Chinese agencies to learn from their experiences and apply these lessons in Laos. · PICE A5: Environmental Education and Awareness. A number of small sub-grants to widen public education and awareness on various issues related to natural resources and environment were funded. 10. Community and Biodiversity Investments. Through CBI, on-the-ground small investments in environmental improvement activities were implemented (nearly 100 sub-grants). Site plans are being prepared for six priority Protected Areas in Bolikhamxay, Khammouane, and Savannakhet. About 221 local communities in these three provinces have benefited from activities ranging from awareness-raising, outreach, boundary demarcation, ecotourism, resource use regulation, monitoring and enforcement, and training. An independent review by an internal expert on Protected Area Management concluded that while the CBI sub-grants are many and mostly small (less than US$ 10,000), they are in line with the PDO and could contribute significantly to the future conservation of biodiversity in Lao PDR. Future activities, however, should be better defined and focus on sustainability and improved impacts. EPF could play a key role in bridging the gaps between agencies, local communities and other stakeholders in Protected Area Management and conservation of biodiversity. Additionally, efforts are being made to pilot sustainable livelihood development activities in protected areas in the NT-KND river basin (Annex 3). 11. Compliance with Legal Covenants: Eight out of ten key legal covenants have been met. The first pending covenant, i.e. "By June 30, 2007, acceptable institutional framework for river basin management on Nam Theun-Nam Kading River Basin in place" was delayed due to institutional reorganization. A lot of work is currently underway and this is expected to be met by June 30, 2010. The second pending covenant, i.e. "By June 30, 2008 Action Plans to bring each hydropower facility constructed since 1990 into full compliance are prepared and disclosed 5 by each owning company" can be only partially met. This is due to complexities associated with existing concession agreements for hydropower under the operations as mentioned above. This covenant was originally designed to ensure that NT2 was not an isolated case of good practice, and that a plan would be prepared to make each of the other three existing hydropower facilities responsive to NPSH. Accordingly, the project-financed technical assistance reviewed the environmental and social measures being implemented by the three facilities, and findings are noted above. Since the national policy was introduced after the signing of these CAs, the GOL has discussed with IDA the complexity of revising the CAs and getting the owners to retroactively implement actions that have cost implications. Separately, the MEM and WREA (both created after the issuance of NPSH) have prepared a sector action plan to implement the national policy in phases. The Action Plan will be finalized after the new Environment and Social Impact Assessment Decree becomes effective at the end of the year (2009). Given that the CAs for all the existing hydropower owned by the private sector were signed a long time ago, it has proved difficult, and in practice impossible, to convince private owners to agree to draft action plans to fully meet this covenant. Thus this covenant will only be partially met, and will not be pursued further. Delay in meeting the first pending covenant and partially meeting the second will not impact achievement of the PDO. The proposed Technical Assistance for HMTA Project is expected to further strengthen MEM's capacity to implement the NPSH including the sector action plan that was mentioned earlier. III. Rationale for Additional Financing and Proposed Changes 12. In order to meet the challenges related to the anticipated growth, GOL has undertaken significant institutional changes by reorganizing and creating WREA for water resources and environmental management and MEM for hydropower and mining. All LEnS funds are now allocated. The proposed Additional financing is in response to GOL's request to: (a) strengthen technical and management capacity of WREA's key agencies (DESIA, DWR, DOE, and the Cabinet) and Bolikhamxay province to forge effective implementation of the new ESIA and Compensation and Resettlement Decrees; (b) strengthen institutional arrangements for better management of NT-NKD river basin to reduce basin-wide impacts of development activities, especially hydropower operations; (c) improve the country's capacity to address social safeguard issues in general, including consultation with ethnic groups; (d) provide time to implement all sub-grants; and (e) facilitate effective operation and sustainability of EPF. These activities will strengthen the basic foundation (ESIA process, monitoring capacity at local level, enhancing cooperation between agencies and stakeholders, and funding mechanism) for environmental and social development in Lao PDR. LEnS Additional financing is therefore critical to close the financing gap, ensure satisfactory achievement of the PDO, and demonstrate IDA's ability to respond to the country's urgent need to build capacity for sustainable development. 13. LEnS additional financing is expected to be complemented by the technical assistance project for capacity development in the hydropower and mining sectors through HMTA to be implemented during 2010 - 2014 with IDA financing. The HMTA project will strengthen the oversight function and capacity development of MEM's agencies at the national level and selected provinces in technical and management aspects, including safeguards, improved river basin planning related to hydropower development in the Nam Ou river basin, and implementation of the sector action plan to implement the NPSH. Experience and outputs from 6 the implementation of the NT-NKD activities will compliment the preparation of an investment project being prepared under the M-IWRM Project. Key activities of these three projects are summarized in Annex 4. Proposed Changes 14. Additional Financing Design Consideration. Implementation experience, progress in achieving the PDO, results of sub-grants, and monitoring indicators were discussed with EPF and the implementing agencies responsible for the three large sub-grants, i.e., DOE/MEM, and DESIA and DWR of WREA. While assessment of achievement of the PDO is hampered by the broadly defined outcome indicators that reach beyond the project scope, the project agencies felt confident that the PDO remains relevant given the current institutional arrangements, the new ESIA decree and the institutional and regulatory reforms that GOL has implemented in the last few years. However it will be difficult to measure the connection between the management of environmental and social issues associated with the sustainable use of natural resources and the enhancing quality of growth and reducing poverty. For these reasons, they have requested for slight modification of the PDO as indicated in paragraph 7 and modification of the project outcomes and intermediate indicators in line with an agreement on the design, targets and ways to measure them. It was also agreed that priority will be given to the sub-grants that are in line with the priority program designed to enhance achievement of the PDO as follows (see details in Annexes 1, 2, 3): o Strengthening technical and management capacity of WREA and EPF, including facilitating activities to tap NT2 revenue, and enhancing capacity to implement the CAR Decree and ESIA decrees, overall coordination and training, climate change, and pollution control (such as setting up standards and solid waste management); o Strengthening technical and management capacity of the central and local agencies to address the social impacts; and o Strengthening capacity of national and local agencies to plan and address cumulative impacts through adaptive management following an integrated river basin management approach for NT-NKD, including development of a conservation community network. 15. Proposed Changes. The original project outcome indicators had several shortcomings: (a) some were not measurable; (b) some were not clear; and (c) linkages between the indicators and actions on-the-ground through the sub-grants were not obvious, especially with the activities to be financed from the proposed additional financing. Therefore, the project outcome indicators and the intermediate outcomes indicators were revised in close consultation with EPF and the potential sub-grantees (see Annex 5). It is also proposed that the pending legal covenant requiring the development of action plans to bring each hydropower facility constructed since 1990 into full compliance be prepared and disclosed by each owning company (see paragraph 11) can only be partially met. A description of the additional financing activities, implementation arrangements, project costs, risks, financial management, procurement, and safeguards are summarized below. (Further details are provided in Annexes 4 to 10). 7 16. Project Description and Implementation Arrangements (Annex 4). Additional grants will be used to provide technical assistance and operational support, including the necessary equipment and vehicles, to the key agencies of WREA through the existing PICE window. Additional budget has also been allocated to the CBI window with priority given to activities located in NT-NKD. Close coordination with other projects (HMTA and M-IWRM) regarding hydropower development, benefit-sharing, watershed management, river basin organization, and pollution control will increase effectiveness and demonstration efforts. All funds will flow through the EPF and audit arrangements will be the same as for the existing LEnS activities. 17. Project Costs, Financing Plan, and Procurement Plan. The LEnS additional financing costs are summarized in Annex 6. With additional financing, the total IDA Grant to the project will be US$ 7 million. Financial and procurement management arrangements for the additional financing are summarized in Annexes 8 and 9, respectively. The key findings are: · Most of the potential sub-grantees for LEnS additional financing (DESIA, DOE, DWR, and PWREOs) have some experience in procurement and financial management under IDA projects. They are following the EPF procurement and financial management manual which is acceptable to IDA. However, more training on procurement, financial management, and accounting practices as required by LEnS remains necessary for all the sub-grantees to ensure that they understand the concepts and can correctly prepare the required reports in a timely manner to avoid delays in procurement processing and replenishment. WMU, both in Vientiane and the three provinces will have to improve their performance on replenishment and advance clearing to the sub-grants. Training of WMU staff, especially at provincial level, remains necessary. 18. Closing Date Extension. The Closing Date of the Grant would be extended by thirty months from December 31, 2010 to June 30, 2013. IV. Consistency with Country Assistance Strategy 19. The project - including this Additional Financing is consistent with the Country Assistance Strategy for Lao PDR that was discussed by the Board in March 2005 which focused on forging effective planning and implementation of NT2 and promoting sustainable use of natural resources and capacity building. This Additional Financing would contribute to GOL's ability to sustainably manage its natural resources by enhancing the performance of its institutions, strengthening the implementation of policy reforms, providing opportunities for communities to be involved in environmental management, and replicating good practices from NT2 hydropower and other projects. V. Appraisal of the Restructured and Additional Financing Activities 20. IDA has appraised GOL's proposal for additional financing, the resulting monitoring indicators and targets, and the request for an extension of the project closing date. The Recipient has identified about 17 potential sub-grants of which about five are large sub-grants (about US$ 1.4 million or half of additional financing). These sub-grants are designed to strengthen the GOL's capacity to address environmental and social safeguard issues and cumulative impacts, 8 especially in Bolikhamxay and Khammouane provinces and river basin management in NT- NKD. IDA's appraisal concluded that the restructuring and additional financing project activities have been prepared satisfactorily. Details of the appraisal are discussed below. 21. Technical. The implementation program and technical approach for the coming three years (2010 - 2012) are well established. However, even though institutional reforms are in place, most of the budget is already committed and more resources are needed in order to deepen the achievement of the PDO. Thus, the scope and specific objectives of priority programs to be included under the additional financing through the existing sub-grants mechanism have been identified and developed (Annexes 1, 2, 3) and draft proposals have been prepared by the agencies and discussed with EPF and the Bank. Given that GOL is reviewing and revising the Environmental Protection Law (1999) and the Water and Water Resources Law (1992), a small modification of the programs may also be necessary to accommodate the possible institutional and regulatory changes which will be made in close consultation with the Bank. 22. Monitoring and Evaluation Framework. Project performance indicators have been modified to: (a) reflect better the contribution of LEnS; (b) respond to the need for more specificity in targets, in line with the present institutional and legal arrangements; (c) better demonstrate the impact of priority activities under the additional financing; and (d) agreement with EPF and the key executing agencies on the key monitoring indicators (see Annex 5). To ensure that the key sub-grantees understand and commit to timely implementation of the activities, WMU is requested to review and obtain prior consent of the monitoring indicators with key agencies as a prerequisite to financing. 23. Financial Management. The financial management and disbursement arrangements will remain largely unchanged for the additional financing. The Project will be implemented in an inherently high risk environment. Fiduciary risks are rated "moderate" after mitigation due to the overall weak control environment in the country and low capacity, particularly at the provincial level. Periodic supervision mission reviews of financial management have found that financial management performance is improving gradually. While the additional financing is being implemented, the project will, at the very least, maintain the qualified FM and accountant at the WMU/EPF office as well as the provincial facilitators and provincial financial staff. Additional measures (beyond those already being implemented in the Project) include: (a) refresher training will be provided to all WMU financial staff on the computerized APIS accounting system in order to ensure its effective utilization; (b) one full time financial staff with an accounting background and experience will be appointed for all sub-grants greater than US$ 50,000; and (c) training on Excel will be provided to the financial staff of all new sub-grants before commencement of the sub-grant (in order to ensure efficient use of Excel as an accounting tool) and on sub-grant accounting and reporting. A separate Designated Account will be set up under the additional financing with a ceiling of US$ 500,000, which can be changed if necessary. The reporting requirements for the additional financing will remain the same. IFRs will be submitted 45 days after the end of each quarter and the audit report will be submitted within six months after the end of each fiscal year. The auditor for the additional financing will be appointed under the audit bundling exercise currently being carried out by the MoF. In conclusion, the proposed financial management arrangements put in place by the WMU for the additional financing are considered adequate and meet the Bank's minimum requirements. 9 24. Procurement. Keeping in view the country's weak procurement environment, the overall procurement risk is high. However, after the mid-term review in 2008, substantial changes were made to improve procurement capacity and this has reduced the risk. It was decided to focus on larger sub-grants with agencies and communities that have capacity and have demonstrated performance. The WMU has benefited from the experiences in procurement and contract management under the on-going project for the selection of consultants and procurement of office equipment and consumable materials to support the WMU's activities. Procurement under the sub-project grants should be for office equipment and consumable materials costing less than US$ 30,000 per contract and will be done by Shopping procedures. To address the procurement risk, training and close supervision have been provided to the EPF procurement staff, and close supervision will need to be maintained throughout implementation. With the existing capacity of WMU, and the incorporation of the capacity strengthening measures and the extensive requirements for improving governance including transparency and accountability in the procurement process, the residual procurement risk under the Project is "moderate." The Procurement Plan, which was found satisfactory by the Bank, along with the detailed findings of the procurement assessment, is provided in Annex 9. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreements. 25. Environmental and Social Safeguards. Activities under the PICE sub-grants will include training, hiring consultants, workshops, development of guidelines on consultation with Indigenous People (IP), procurement of office and other small equipment, small renovations of existing building, etc. and these are expected to trigger safeguard policies. The sub-grants under the CBI window were reviewed by expert on Protected Area Management. It was suggested that future sub-grants, especially those to be implemented under PA site plans, may involve restrictions on the use of resources. Management of protected areas may involve limited access to natural resources and other social considerations for some of the disadvantaged ethnic groups, especially in the NT-NKD river basin. Considering the small size of the sub-grants, the project ESSF (Environmental and Social Safeguard Framework) was reviewed and updated by EPF and found satisfactory by the Bank in order to make it more suitable for these small size sub-grants. The ESSF was translated into the Lao language and was shared with ethnic groups in Bolikhamxay province. It was also disclosed in the InfoShop as well as in-country. If sub-grant screening indicates a need for preparation of safeguards documentation as per the ESSF, those documents will be subject to Bank prior review and clearance (at least for the first year of implementation). LEnS additional financing is designated as a Category B project and triggers the following World Bank's Safeguard Policies: Policy Triggered Environmental Assessment (OP/BP 4.01) Yes Natural Habitats (OP/BP 4.04) Yes Forests (OP/BP 4.36) No Pest Management (OP 4.09) No Physical Cultural Resources (OP/BP 4.11) No Indigenous Peoples (OP/BP 4.10) Yes 10 Involuntary Resettlement (OP/BP 4.12) Yes Safety of Dams (OP/BP 4.37) No Projects on International Waterways (OP/BP 7.50) No Projects in Disputed Areas (OP/BP 7.60) No 26. Policy Exceptions and Readiness. The project is compliant with all applicable Bank policies and will not require any exceptions. VI. Expected Outcomes 27. The expected outcomes of the project remain the same. Three outcome indicators include: a. Improved policies and instruments that are understood by stakeholders, institutionalized within government agencies and system, and implemented by technical competent staff; b. Selected protected areas and local communities benefit from improved environmental management, and enhanced livelihood options; and c. EPF is a competent institution, eligible to received NT2 revenues. Specific revised targets to be achieved by each component and sub-component have been developed and are included in Annex 5. VII. Risks and Mitigation Measures 28. The overall project risk is considered modest. Although additional financing will strengthen the capacity of the EPF and WREA, their operational experience remains weak due to the limited number of qualified staff and limited operational budgets of agencies. Additional measures as listed in Annex 7 will be implemented to ensure satisfactory performance of the project during the additional financing period. As with all Technical Assistance (TA) projects, while a few sub-grants to improve WREA capacity will be carried out to implement its ESIA system, this does not guarantee that all future transactions will be fail safe. The action plans on procurement and financial management will also be implemented to reduce fiduciary risks. To further mitigate the risks, the Bank's no-objection for signing of sub-grants larger than US $100,000 will be required. Special attention during supervision will be given to the following aspects: (a) DESIA of WREA has disseminated the ESIA decree, the CAR technical guidelines, and the public involvement guidelines satisfactory to the Bank; (b) Establishment of the NT- NKD river basin committee (RBC), including an agreed institutional framework; will be completed; (c) Assignment of a core full time Government staff and agreement for no-objection for EPF to reallocate funds if implementation progress is significantly delayed; and (d) Satisfactory action plan to address the outstanding safeguard issues in the provinces, especially those related to World Bank operations. 11 VIII. Financial Terms and Conditions for the Additional Financing 29. The additional financing of US$ 3 million equivalent would be provided as an IDA Grant. 30. Effectiveness Conditions: The conditions of effectiveness would include: (a) the Environment and Social Impact Assessment Decree has been duly adopted by the Recipient; and (b) the Subsidiary Grant Agreement and the Project Implementation Plan have been amended to include the Additional Grant and the new activities to be financed under the Project. 12 Annex 1: Sector Review and Update Lao Environment and Social (LEnS) Project--Additional Financing A1.1. Introduction 1. Sector background and LEnS: As highlighted in the LEnS Project Appraisal Document (PAD), Lao PDR is a country very rich in natural resources and biodiversity. With high levels of poverty and limited economic diversification, Lao PDR relies heavily on its natural resources to support national development and secure livelihoods for its primarily rural population. Effective management of environmental and social issues related to sustainable use of natural resources remains critical. Key issues include: (a) depletion of natural resources, especially forest and biodiversity; (b) development and social challenges, especially those related to hydropower development and relocation of ethnic groups; (c) economic growth and poverty reduction, especially through hydropower and mining development; and (d) weak legal and institutional framework for natural resources and environment. Implementation of the Nam Theun 2 (NT2) and LEnS projects during 2006 - 2009 has demonstrated Government's commitment to address these issues. Key actions undertaken include: (a) implementation of the environment and social activities of NT2 project in line with the project agreement, including promotion of public disclosure; (b) undertaking legal and institutional reforms; and (c) with LEnS support, forging implementation of the national policy on environmental and social sustainability for hydropower sector (NPSH), an integrated river basin management in Nam Theun-Nam Kading (NT-NKD), and the Compensation and Resettlement (CAR) Decree of 2005. 2. Increasing concerns about environment and social issues: Environment and social safeguard capacity building in Lao PDR has faced a major challenge since 2005 when private sector activity in investments in development projects picked up, especially in hydropower, mining, and plantations. There are more than 40 large (more than 50 MW) hydropower projects listed in the Government database (most of them will be implemented by the private sector). Figure A1.1 shows an increasing trend in hydropower project development in Lao PDR with about 10 - 16 large hydropower projects expected to be in operation by year 2014. As of early 2009, there are four projects operating, seven under construction, and nine under Concessional Agreement (CA) negotiation. In mining, there are two large mining industries (Sepon mining) and lignite power generation plant (Hongsa Lignite) under operation now along with hundreds of other small and medium size mining activities. Industrial development and plantations (mostly rubber) have also increased in number all over the country while urban development, especially in Vientiane and other major cities (e.g. Thakhek, Champasak, etc.), has also been rapid. The number of private investments and speed of development are greater than anticipated during the preparation of the LEnS project. Planning and monitoring capacity of the agencies and effective involvement of local authorities and communities in the environment and social impacts of these development activities as well as effective protection of watershed and use of water resources became more urgent and crucial. 3. Cumulative impacts: While mitigation of specific development projects is required by Government's regulations, of particular concern is the way to address cumulative impacts. Construction of the Nakai dam for NT2 project will divert large amounts of water from the NT- NKD river basin starting 2010. Downstream of the Nakai dam, there is one existing hydropower 13 project in operation, two more projects under construction, and one project under CA negotiation. By 2013, these four large hydropower projects will be in operation, so addressing the potential cumulative impacts on the local environment and communities may become a major challenge. A study done during the preparation of NT2 suggested that adequate institutional capacity of agencies in the NT-NKD river basin will be necessary for addressing such cumulative impacts. It is therefore urgent to strengthen these agencies' institutional capacity, decision-making ability and their capacity to engage local communities in the NT-NKD river basin. Strengthening the capacity in the Bolikhamxay and Khammouane provinces in safeguard monitoring and social safeguard aspects is also a priority; all these will be included in LEnS project additional financing. Review of locations of potential hydropower development suggests that cumulative impacts in other river basins may occur and the NT-NKD experience can be then applied. Figure A1.1 Hydropower Plants in Lao PDR Number of Large Hydropower Plants in Operation (Planned) in Lao PDR 35 30 30 28 25 23 20 16 15 11 10 10 7 4 4 4 4 5 5 5 5 5 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 A1.2. Institutional and Legal Reform 4. Hydropower, mining, industry and handicraft: The GOL has taken actions to strengthen the institutional and legal arrangements related to key development sectors including the environment and social aspects in response to the rapid increase in development projects by the private sector. In 2006, the Ministry of Industry and Handicraft (MIH) was divided into two new ministries: the Ministry of Energy and Mines (MEM) and the Ministry of Industry and Commerce. Under MEM, the Department of Electricity (DOE) is responsible for regulating compliance of hydropower development and operations while the Bureau of Secretariat (BOS) of the Lao National Committee on Energy (LNCE) has been upgraded to the Department of Energy Promotion and Development (DEPD) and is responsible for negotiating and fostering compliance with private investors. DOE's key function includes policy and planning, regulations and standards, environment and social safeguards, and rural electrification; this department has around 35 - 40 government staff (mostly engineers and technicians). From the mining side, the Department of Mines (DOM) plays a dual role of policy, planning, and oversight as well as promotion of mining development while the Department of Geology is 14 responsible for data collection and other technical aspects. There are 17 Provincial Departments of Energy and Mines (PDEM) in Lao PDR and they are responsible for undertaking MEM functions at provincial level reporting directly to the Minister. The number of government staff at the provincial level ranges from 20 to 70 people depending on the size of the province. 5. Legal aspects for each sector: In line with this new arrangement, sector laws and regulations have been reviewed and updated. In 2008, the 1997 Electricity Law was updated and an effort is being made to update the implementation decree and other related internal regulations. For the mining sector, the 1997 Mining Law has also been updated and approved by the National Assembly. The updated Electricity and Mining Laws have also included some provisions on environmental and social aspects, including provision of budget for mitigation of the potential impacts. MEM is initiating an effort to build its technical and management capacity to strengthen its planning and oversight functions with technical and financial assistance from the Bank. This project (Technical Assistance for Capacity Building in the Hydropower and Mining Sectors, HMTA) is expected to be implemented during 2010 - 2014. 6. Water resources and environment sector: To strengthen the environment management capacity, as part of LEnS effectiveness, the Environmental Protection Fund (EPF) was established in 2006. EPF performance is discussed in Section A1.3 below. In 2007 - 2008, a new agency called the Water Resources and Environment Administration (WREA) was established under the Prime Minister's Office. WREA is responsible for ensuring effective management of the water resources and environment sector and is comprised of a Cabinet; the Lao National Mekong Committee (LNMC); the Water Resources and Environment Research Institute (WERI); and five departments: the Department of Environment (DOE), the Department of Meteorological and Hydrology (DMH), the Department of Water Resources (DWR), and the Department of Environment and Social Impact Assessment (DESIA). WERI took over responsibilities for the Environment Research Institute (ERI) of the Science Technology and Environmental Agency (STEA) and is responsible for research and development of the water resources and environment. DOE was also separated from STEA and is responsible for national policy, control of pollution, climate change and public education and outreach. DMH was separated from the Ministry of Agriculture and Forestry (MAF) and is responsible for collection and analysis of meteorological and hydrological data, including emergency preparedness. DWR was newly created by combining the Water Resources Coordination Committee (WRCC) functions and the LNMC office and is responsible for ensuring effective management of water resources and promotion of an integrated river basin management. DESIA is also newly created by upgrading the Environment Impact Assessment (EIA) division of DOE to a department level and is responsible for ensuring effective implementation and monitoring of the EIA/SIA process. 7. Environmental impact assessment: The EIA regulation of 2003 is being revised, expanded and upgraded to a decree. The new Environmental and Social Impacts Assessment (ESIA) decree is expected to be approved by GOL in October 2009. The ESIA explicitly requires the preparation of a Social Impact Assessment (SIA), public involvement, consultation, information disclosure, and monitoring of the Environment and Social Compliance Certificates (ESCC), including the establishment of a high level committee to monitor hydropower and mining projects for compliance with ESCC. DESIA is also finalizing the technical guidelines for the implementation of the 2005 Compensation and Resettlement (CAR) decree and guidelines 15 for public involvement. Upon effectiveness of the new ESIA decree (90 days after the signing by Prime Minister), the internal regulations related to the EIA/SIA processes in hydropower and mining as well as other sectors will be revised accordingly. WREA is making an effort to increase effectiveness of pollution control and integrated river basin management through the revision of the 1999 Environmental Protection Law (EPL) and the 1992 Water and Water Resources Law. These processes are expected to be completed in 2010. At present there are limited regulations controlling the discharge of toxic wastes (solids, liquids or gases), including those having a pH lower than 6 and higher than 9.5, into the environment and public water sources. There are specific regulation on concentration standards for some industries (sugar mills, textiles and garment industry, pulp and paper mills, slaughter houses) and specific pollutants. Efforts are also being made to establish ambient standards for water and air. Lao PDR has been active in regional activities through the implementation of the 1995 Mekong River Commission (MRC) agreement and other international conventions (Biodiversity, Climate Change, RAMSAR, etc). Building the technical and management capacity of WREA agencies is therefore critical and urgently needed to forge effective management of water resources and environment. Those to be implemented under LEnS additional financing are summarized in Section A4. 8. Other related sectors: Forest, land, protected areas, biodiversity, and natural habitats are critical natural resources for Lao PDR. Management of these resources is under the responsibility of MAF. In 2007 - 2008, MAF revised the Forestry Law (1996) and the Wildlife and Aquatic Law (1996) and established a new agency (the Department of Forest Inspection or DFI) to take the lead in the regulation, monitoring, and enforcement of forest utilization. The Department of Forestry (DOF) is responsible for managing the forestry sector and through its Division of Forest Reserve and Conservation (DFRC) is drafting a Protected Areas Law. A1.3. EPF Operation and Sustainability 9. Environmental Protection Fund: Establishment and operation of EPF is stipulated in the 1999 Environmental Protection Law as a mean to provide financial resources to facilitate achievement of the environmental objectives. The EPF decree and regulations were established in 2006. EPF is an independent entity operated under the EPF Board chaired by the Minister of Finance. An EPF office has been established to provide secretariat support and is responsible for EPF day-to-day management and operations. ADB provided a loan of US$ 5.7 million as an endowment while the interest (about US$ 250,000 per year) could be used for EPF operations and sub-grant support. The EPF Board, Executive Director, staff, and Project Steering Committee (PSC) have been on board since May 2006. World Bank, through LEnS, provides US$ 4 million to EPF of which about US$ 3 million is available as sub-grants. 10. Project operational performance: In mid-2006, as part of the effectiveness of LEnS, the Window Management Unit (WMU) was established and staff recruited. Efforts were made to formally establish LEnS operational procedures, including translation of technical guidelines and manuals into the Lao language, and establishment of a list of peer reviewer on various aspects. In early-2007 the first annual stakeholder consultation was conducted and the first sub-grant was signed. In terms of sub-grant development, processing, and disbursement, out of the 301 sub- grant applications, 142 were approved (46 for PICE and 96 for CBI); 76 have been completed 16 and 66 are still ongoing. The WMU has increased and improved sub-grants disbursement, financial management and procurement and addressed internal organization. All LEnS funds are now fully committed. Disbursement for the sub-grants is over US $2.69 million (> 67% of the grant). Each of the three targeted provinces received about US$ 500K. Most of the sub-grants (74%) are for small projects (< US$ 10,000). The remaining 20% are medium-sized (US$ 10,000 - US$ 50,000), while 6% are over US$ 50,000. Figure A1.2 below presents EPF performance in terms of number of cumulative sub-grants and fund approved. Records on sub- grant applications show that the demand for sub-grants reached US$ 9 million (around 300 applications). In addition to the PICE and CBI windows under LEnS, EPF has also expanded its operation by opening three additional windows (water resources, land management and pollution control) using about 40% of the EPF budget. Figure A1.2. LEnS cumulative sub-grants and budget 11. In terms of sub-grant beneficiaries, around 80% of implementing partners are government offices at various levels (national, provincial and district), while the remaining are villagers, educational institutions and public organizations. PICE sub-grants largely benefited two key national agencies (WREA and DOE/MEM) and the PWREA of the three targeted provinces. Within WREA, three departments were targeted: the Departments of ESIA, Water Resources; and Environment. On the other hand, CBI sub-grants primarily benefited the Provincial Agricultural Forestry Office (PAFO) of the three targeted provinces. 12. Despite initial delays and difficulties the PDO will likely be achieved, particularly after the technical and operational capacity of EPF and WREA is strengthened through activities financed with the proposed additional financing. The last five ISR ratings are included below. 17 Lao Environment and Social Project: A Summary of ISR Ratings ISR#5 ISR#4 ISR#3 ISR#2 ISR#1 11/05/2009 02/10/2009 12/05/2007 03/12/2007 12/29/2005 PDO S MS MS MU S Overall IP S MS MS MU S Financial Management S MS MS S S Project Management S MS MS MU S Counterpart Funding S S S S S Procurement S S S S S M&E S MS MS MU S Project Component 1 S MS MS MU S Project Component 2 S MS MS MS S Project Component 3 MS MS MS MU S 13. EPF capacity and sustainability: EPF operations have been active and recognized by the public and many stakeholders. However, EPF financial sustainability is critical for ensuring achievement of EPF objective. It is expected that additional funding for EPF will come from NT2 revenues and contributions from development projects, however, detailed regulations and/or mechanisms to make this happen remain a challenge. Building EPF capacity to tap additional funding is one of the intermediate outcomes of LEnS and technical and financial support has been provided for this purpose. At present and with LEnS support, EPF has established a funding mechanism for protection and conservation of natural resources and capacity building and has engaged active participation of the target provinces, local communities, and NGOs. It is critical that EPF strengthen its capacity (financial, technical, and management) to tap additional funding from various other sources. Voluntary contributions, although possible in principle, will be difficult materializing without a strong commitment of high-level Government decision makers. Discussion with development projects and key regulatory agencies suggested that although voluntary contributions are possible, specific regulations and clear procedures on the level of contributions and how to develop them will be necessary to secure adequate contributions from development projects. It is anticipated that this requirement may have to be stipulated in the Environmental Protection Law or the investment law. A share of royalties is also another option which is being explored by EPF´s Board of Directors. It is anticipated that this will be discussed as part of the preparation/update of the EPF vision and the Five-Year Strategic Plan. Close cooperation and policy guidance of WREA will be necessary during the process. 14. EPF and LEnS additional financing: Through the WMU, EPF will continue to play a key role in managing sub-grants and fund flows for additional financing. Given that there will be a number of related sub-grants to be implemented by different agencies, WMU/EPF in consultation with the key sub-grantees and the Bank, agreed to develop four programs to facilitate effective coordination among the sub-grantees and demonstrate effectiveness of the EPF operation. One of these programs is the EPF program that aims to demonstrate effectiveness of EPF operation and its potential impact on the PDO. Capacity building efforts for EPF will be necessary to demonstrate effectiveness and usefulness of EPF operations. 18 A1.4. Urgent Need for Capacity Building and Priority for LEnS Additional Financing 15. Capacity for ESIA review and monitoring process and integrated river basin management: Rapid development of hydropower, the legacy of past development, and cumulative impacts of these developments are among major concerns. Hence capacity building for DESIA, the provincial WREA, DWR, and DOE/DEQP of MEM will be critical. Technical assistance will be provided to DOE/DEDP of MEM separately. Capacity of DESIA, DWR, and the three target provinces is being built through LEnS and additional technical assistance and operational support will be provided under the additional financing. Priority will be given to intensify activities to build capacity on social safeguards and to strengthen effectiveness of the NT-NKD river basin operations. 16. Emerging priorities and coordination: Updating of the national policy on natural resources and environment for the next five years (2011 - 2015) and concerns about potential impacts of climate change on the rural population and effective management of solid wastes, pollution control, and sector coordination have been identified as important emerging issues. Effective coordination among agencies, training, and monitoring and evaluation are also considered priorities for strengthening WREA performance and tapping of additional resources. A capacity development strategy for WREA is being developed through a learning-by-doing process and through cooperation among the cabinet, other WREA agencies, and the Bank. 17. Priority for additional financing: Through discussion with EPF, WREA, and other key agencies, priority for additional financing will be given to: (a) social development capacity building for DESIA, the provinces, and general public; (b) NT-NKD river basin management support, including establishment of a Community Conservation Network; (c) operation of EPF; and (d) other priorities related to EIA/SIA process; implementation of priority activities or PA plans, climate change, pollution control, and training/coordination. Details on (a) and (b) are given in Annexes 2 and 3. WREA's cabinet and DOE will be invited to submit proposals related to other priority issues. The project's results monitoring framework has also been revised as shown in Annex 5. A1.5. Financial Sustainability and NT2 Revenue 18. Inadequate Government budget allocation for the sector: As stated in the LEnS PAD, in 2005 about US$ 37,000 was available for the environmental unit under STEA while US$ 15,000 was available for the entire protected areas system in the country. No budget was allocated for these purposes to the provinces. Most environmental activities largely depend on donor agencies and this is not effective or sustainable. Although the World Bank has provided technical assistance and operational budget throughout EPF's operation (since 2006) and a few projects are under preparation for technical assistance, the availability of funding remains too low compared to the need. At present, the Government budget for environmental conservation and activities remains very low and no budget has been made available for EPF. 19. Given the significant environment and social impacts of future development, allocation of additional budget will be critical for ensuring effective management of water and other natural resources and maintain acceptable environmental and water quality. To perform proper 19 regulatory and oversight functions, the budget allocations for WREA and the sector agencies (especially DOE, DEPD, DOM) must be adequate to ensure effective planning, monitoring and good governance. Allocation of additional budget from NT2 revenues could significantly improve performance of WREA and sector agencies, provinces and districts. Given the limited public resources, strong coordination among agencies for NT2 revenue is expected. Therefore WREA and these agencies must be pro-active and build their capacity to prepare eligible programs and to deliver the expected outputs and outcomes. 20. NT2 revenue: NT2 is a large hydropower project designed to export electricity to Thailand and is expected to be in operation in early 2010. Over the life of the project (25 years), it is anticipated that GOL will receive an income stream estimated at some US$ 1.9 billion or an average of about US$ 78 million annually (equivalent to 10% of total expenditure in 2007/08) through three separate streams - royalties, company tax on profits, and dividend payments on its equity. In 2010, about US$ 8 million could be made available for supporting eligible programs and this amount could increase to US$ 20 to 30 million in the following years. The figure below summarizes the basic principles for allocation of NT2 revenue and its progress to date. Figure A1.3: Estimated Revenues from Nam Theun 2, 2010 - 2034 160 140 Dividends 120 US$ million 100 Company Tax 80 60 40 Royalty 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Source: Estimates based on NTPC presentation to Government of Lao PDR, Vientiane, April 2009. o Allocation of NT2 revenue will be determined through the public sector expenditure planning and budget process, as part of the allocation of overall public resources. The authorities will prepare a list of eligible programs that may benefit from NT2 revenues through close consultation with key agencies. o The eligible programs will be selected in accordance with the country's priorities and each program should demonstrate a significant and verifiable poverty reduction impact, providing public goods, services and infrastructure used by the poor in rural areas; and/or a significant and verifiable reduction on conservation or environmental impacts. The eligible sectors for initial years include: basic health, basic education, rural roads, and specific environment and poverty reduction programs. These priorities can be changed. 20 o Eligible programs must have: (a) clear objectives; (b) key performance indicators (KPI); (c) monitoring systems; and (d) mechanisms for performance evaluation by key stakeholders at or close to service level. Government plans to develop (b)-(d) above, once eligible program selection is finalized. Eligible programs with clearly defined objectives, performance indicators and systems in place for monitoring performance in terms of the volume and quality of services provided are expected. o NT2 revenues will provide additional resources to support eligible programs and will not substitute financing from other sources. Additionality of budgeted and actual expenditures for eligible programs will be verified against base expenditures which will be determined as follows: (a) budgeted expenditures in the previous year expressed in real terms for the comparator year; (b) the average expenditures in the three previous years, also expressed in real terms for the comparator year; and (c) eligible programs' percent share of budgeted and actual total expenditures, excluding expenditures related to debt servicing, in the previous year. 21. Government is expected to establish mechanisms for program monitoring and performance evaluation, involving key stakeholders at or close to the field level. Identification of the 2010 allocation was completed in July 2009 and a very small amount of NT2 budget is allocated for WREA (~ US$ 235,000 out of US$ 5.9 million which is ~ 4%). 21 Annex 2: Social Safeguards Capacity Building Program Lao Environment and Social (LEnS) Project--Additional Financing A2.1. Rationale 1. Lao PDR is experiencing rapid growth in development projects in hydropower, mining and agriculture sectors. These projects are inevitably raising social and environmental issues. There is particular concern over the social impacts and the slow progress of social safeguard policy implementation and institutional capacity development to cope with the growing challenges from the central to the provincial level. The proposed LEnS additional financing is therefore designed to consolidate the achievements of the original LEnS financing for social capacity building of the new Department of Environment and Social Impact Assessment (DESIA) of the Water Resources and Environment Administration (WREA). It is also tailored to support the establishment and development of provincial agencies to effectively review if the social impact assessment (SIA) process and monitoring of compliance with social safeguards by project developers are in line with the revised the Environment and Social Impact Assessment (ESIA) Decree. In parallel, the additional financing will support a specialized training program to develop human resource nationwide to produce qualified personnel for the SIA sector. 2. During the identification mission for the additional financing during March - April 2009, discussions were held with DESIA, the National University of Lao (NUOL) and the provincial WREA (PWREOs) of 5 provinces namely Bolikhamxay, Khammouane, Savannakhet, Champasack and Attapeu. DESIA, NUOL, Bolikhamxay, Khammouane, and Attapeu expressed their strong interests to take actions on capacity building on social safeguards and will submit a sub-grant proposal to the EPF as soon as possible. Given that these sub-grants may be submitted and/or considered through different windows, this program would facilitate effective coordination and monitoring of the sub-grants and facilitate common understanding. 3. In light of the country's limited technical capacity on social safeguards, it is necessary to address the issues through a medium and long term capacity building project as well as short term and specific training. The section below summarizes priorities and strategic approaches for building capacity on social safeguards in Lao PDR and proposes tentative work plans including budget estimates for key agencies/beneficiaries of the additional financing. (a) Development of Social Impact Assessment Capacity-Building Program 4. A specialized training program needs to be designed and implemented. This is intended to serve three purposes: (a) an immediate program to develop curricula and training of trainers; (b) a near-term program to develop technical capacity for existing professional staff in social impact assessment, including resettlement planning and monitoring; and (c) a medium-term program of social science instruction (both academic and technical) to develop a broader pool of potential candidates for employment. 22 Strategic approach: 5. Social impact assessment capacity-building program will be operated through the National University of Lao PDR, with support primarily to the Faculty of Social Sciences (FSS), with participation from other departments as needed and available. Due attention will be given to increasing knowledge of the technical aspects of social safeguards for government agencies, academia, and the general public. This will include enhancement of awareness and understanding of the scope and implementation procedures of the Compensation and Resettlement decree (2005) and its technical guidelines. Key outputs will include: (a) appropriate curricula on social safeguards for key target groups; and (b) number of people trained. Activities are expected to be implemented during 2010 - 2012 and a draft work plan will be included in the Project Implementation Plan (PIP) of the additional financing. 6. As the key implementing agency, the FSS has assigned a coordination team of three staff to execute this sub-grant. With support from the EPF and the Bank, this team will prepare a full sub-grant proposal for submission to EPF for funding approval. A consultant will be hired to assist the FSS to develop and organize a training program for FSS staff. The consultant will also help the FSS design SIA curricula for both the short and medium terms. The SIA subjects will be incorporated into the existing courses of the Bachelor and Master Degree programs such as Social Research and Social Development offered by the FSS. 7. Close coordination with WREA (DESIA and the cabinet), the provinces and NUOL and LFNC will also be necessary. Networking with academic and sector agencies in neighboring countries will also be cultivated for the purpose of knowledge sharing and mobilizing technical and financial support. Relevant central and provincial staff from other sectoral ministries and NUOL staff will be invited to participate in the technical training program organized by DESIA. In the longer term, SIA staff of DESIA would also attend training to be provided by the FSS, NUOL. Detailed discussions among NUOL, DESIA, cabinet and the provinces will be periodically undertaken to propose changes to the training programs. (b) Utilization of Social Impact Assessment Capacity within DESIA. 8. To date, it remains unclear whether DESIA organizational arrangements will promote effective utilization of social impact assessment capacity, when developed. At present, no DESIA staff has extensive social assessment or resettlement experience, and no in-house training program has been initiated. Based on international experience (within development agencies and within government agencies in neighboring countries), it is essential to rely on staff specialization and division of labor for environmental assessment and social impact assessment. Also, management and organization arrangements within DESIA remain unclear, making it difficult to assess whether issues associated with social impact assessment will receive the attention and support necessary for effective management. Unless DESIA intends to undertake active and thorough review of planning decisions advanced from the provincial level, and to provide oversight and problem management support for provincial implementation, there would appear to be no value added by increasing and training staff. 23 Strategic approach: 9. A two to five-year transition plan for strengthening ESIA prepared by DESIA for enhancement and utilization of specialized social impact assessment skills as part of the additional financing process. This plan will address arrangements to ensure selection and training for social impact assessment specialists, and organizational arrangements to ensure that social impact assessment receives sufficient attention in internal management and clearance processes. The main expected outcome from this program is that a number of qualified staff of DESIA will be trained to render them capable of reviewing and monitoring the SIA process. The existing team of three staff with extensive experience in the sub-grant implementation under the LEnS will continue to execute the additional financing sub-grants. One additional staff has been appointed as deputy manager to strengthen sub-grant implementation under the overall guidance of the Director General of DESIA. (c) Interim Support for Social Impact Assessment Guidance and Review 10. At present, DESIA lacks the in-house expertise required to provide guidance on social impact assessment, or to review social aspects in ESIA process or other project documents. While development of in-house capacity is a key objective of LEnS and the proposed additional financing, interim arrangements are necessary if effective guidance and review are to be available for projects currently under preparation. Strategic approach: 11. DESIA has included a budget in this plan for provision of social impact assessment guidance and review. A short-term consultant will be mobilized to provide the required technical support for DESIA. The consultant will develop user-friendly guidelines and a check list, and provide SIA staff with hands-on support to review SIA process and documents. S/he will also participate in field monitoring of SIA compliance by project developers and provide experiential learning support for SIA staff as required. (d) Strengthening of Provincial-Level Social Impact Assessment Capacity and Implementation 12. On a pilot basis, the additional financing will focus its support on SIA strengthening in two provinces. The primary selection criteria are a relatively robust future pipeline of major infrastructure investment, and an expression of interest on the part of the provincial government. To date, Khammouane and Bolikhamxay have been identified for participation in the pilot program based on their future investment pipeline and interest expressed by the provincial governments. However, some funds will be allocated under the A1 to support possible demand for project initiatives to build their SIA capacity from other provinces. Strategy approach: 13. ESIA, in collaboration with participating provincial WREA offices, will undertake a workshop to clarify roles and responsibilities for social impact assessment and monitoring 24 processes, and establish internal oversight arrangements. The two identified provinces will submit their own sub-grant proposals to EPF for participation in the pilot program. Two different institutional models will be piloted in these provinces based on the existing organizational structures and their experiences. In Khammouane, the existing RMU which is relatively well- established with support from the NT2 project will be strengthened to become a Social Management Unit (SMU) to expand its mandate while Bolikhamxay will need intensive support to build a SMU under the PWREO. Administratively, the RMU in Khammouane will continue to report to the Resettlement Committee chaired by the Provincial Governor whereas the SMU in Bolikhamxay will be established under the PWREO. A number of staff from each province will participate in SIA training to be organized by DESIA and NUOL. As stated in the new ESIA decree, technically the SMU will report to and seek support from the DESIA of WREA. A consultant will be recruited to assist the two provincial SMUs to develop and organize their training program. Short and medium-term training combined with study visits to development projects will be carried out in Laos and neighboring countries. It is expected that the trained SMU staff will be able to review and monitor the SIA process as well as compliance by project developers in their respective provinces and report on findings to the DESIA. With support from EPF and the Bank, SMUs will prepare and submit a full proposal with work plan to EPF for funding approval. (e) Strengthening Regulatory Approaches and Enforcement 14. Achieving effective LEnS results requires clear and enforceable regulatory approaches. Additionally, an effective capacity-building program should be based on the regulatory framework that is intended for implementation. To date, the revision of DESIA regulations (and any accompanying guidelines) has been finalized and submitted to the PMO for approval. While a resettlement regulation (Decree 192) was adopted in 2005, it has not been widely disseminated or enforced, at least in part because accompanying technical guidelines on compensation and resettlement still need to be consolidated in line with the revised DESIA regulation. Strategic approach: 15. A national workshop to disseminate the new ESIA Decree and Compensation and Resettlement Decree was held in July 2008. This was followed by provincial level workshop in November 2009. This will be followed by the technical workshop with sector agencies and project developers to discuss and review the technical guideline on Compensation and Resettlement and Public Involvement Guidelines. However, the Compensation and Resettlement Decree has been disseminated at various workshops organized by WREA such as the National Workshop on Sustainable Hydropower Development held in March of 2009. Furthermore, a series of informal workshops and discussions on the Compensation and Resettlement Decree and its technical guidelines are on-going within DESIA and sector agencies. A2.2. Preparation Schedule of Potential Sub-grants 16. During preparation of the additional financing, five sub-grants aiming to build social safeguard capacity at the national and provincial levels were identified as the potential sub-grants and the potential sub-grantees will submit their proposals to EPF for approval by the EPF board. 25 The approved sub-grants will contribute to the achievement of the PDO and the revised results monitoring framework (see Annex 5). Table A2.1 summarizes the preparation schedule of these sub-grants. Potential sub-grantees Estimated Expected proposal Expected sub- Remarks budget (US$) submission date grant signing date (1) DESIA (part of the overall 240,000 End Nov. 2009 January 2009 DESIA proposal) (2) Bolikhamxay social 120,000 End Nov. 2009 January 2009 (3) Khammouane social 120,000 End Nov. 2009 January 2009 (4) National University of 80,000 End Nov. 2009 January 2009 Lao (NUOL) (5) Lao Front for National 80,000 End Jan. 2010 March 2010 Construction (LFNC) Total 640,000 26 Annex 3: Nam Theun-Nam Kading (NT-NKD) River Basin Management Program Lao Environment and Social (LEnS) Project--Additional Financing A3.1. Background and Key Issues 1. Cumulative impacts and LEnS: While mitigation of specific development projects is required by GOL regulations, of particular concern is the way to address cumulative impacts, especially in a river basin where large dam operations are located. Construction of the Nakai dam for the Nam Theun 2 (NT2) project will divert large amounts of water from the Nam Theun- Nam Kading (NT-NKD) river basin starting 2010. Downstream of the Nakai dam, there is one existing hydropower project in operation (Theun Hin Boun, THB), one project is under construction (THB extension), and one project (Nam Theun 1) is under Concessional Agreement (CA) negotiation. By 2013, these four large hydropower projects are expected to be in operation and there is potential for significant cumulative impacts on the local environment and people. Studies during the preparation of NT2 suggested that adequate institutional capacity of agencies in the NT-NKD river basin will be necessary for addressing such cumulative impacts. It is, therefore, urgent to strengthen institutional capacity and decision making and engaging local communities in the NT-NKD river basin. Strengthening capacity of Bolikhamxay and Khammouane provinces on safeguard monitoring is also priority and all these will be included under the additional financing. Review of locations of potential hydropower development suggests that cumulative impacts in other river basins may occur and the NT-NKD experiences can be applied to other river basins as well. 2. GOL has made an effort to address these concerns through an Integrated River Basin Management (IRBM) with technical assistance and funding support from the World Bank through the Environmental Protection Fund (EPF). A budget has been allocated from the LEnS project to implement IRBM activities in NT-NKD during 2006-2010. The Department of Water Resources (DWR) of the Water Resources and Environment Administration (WREA) is taking the lead on building institutional arrangement and capacity for forging effective coordination among agencies. 3. Effective management of an IRBM requires adequate technical and managerial capacity as well as effective cooperation and coordination among key agencies and stakeholders. During 2007 - 2008, DWR conducted a series of meetings on the RBO concept and a river basin profile, including preparation of priority activities for implementation during 2009 - 2010. Establishment of a RBO is a legal covenant and expected to be met before June 2010. A national committee on Lao National Mekong Committee was established in April 2009 and is responsible for overseeing effective management of river basin. Changes in institutional arrangements during 2007-08 caused some implementation delays. 4. Watershed protection: Nakai Nam Theun Protected Area (NNT-PA), Nam Kading Protected Area (NKD-PA) and Hin Nam Nor Protected Area (HNN-PA) are the National Protected Areas located within two provinces (Bolikhamxay and Khammouane) in central Lao and have been developed into important watersheds for many hydropower projects within the river basin. The Nam Theun - Nam Kading (NT-NKD) river basin is rich in natural resources 27 and it is important for biodiversity conservation. In conjunction with the THB, THB-EX, NT2 and NT1 hydropower projects development, the protection of watersheds to ensure regular and enough flows for sustainable operation of these hydropower projects will be critical. Given the richness of natural resources and the globally important biodiversity in the NNT and NKD PAs, active conservation efforts have been supported in the PAs by GOL and international organizations including IUCN, WCS, WWF, the Bank, the THPC and the NTPC. However, the past engagements are individually contributed in each PA as project driven for conservation. These are centralized at the river basin management dimension and at a community level for river basin management. Therefore the participation of local government and community as well as the sustainable of project activities are an issue during and after project implementation. The current conservation effort is mostly a combination of biodiversity conservation and livelihood development at community level. Effective conservation needs strong institutional arrangements and must improve the living conditions of communities living both inside the PAs and in surrounding areas. 5. Ethnic groups and poor people: There are about 30 villages in NT-NKD river basin whose livelihoods somewhat depend on the NT-NKD River. Most of these villages contain ethnically distinct groups and are very poor. Some of these villages in the upstream area have been receiving livelihood support from the NTPC and THPC. 6. Water flow, water quality, and fisheries issues: Operation of these hydropower plants will significantly change the duration, amount and characteristics of water flows and water quality as well as fisheries and the downstream ecosystem in the river. Discharge of polluted water from reservoirs and/or discharge of sediments and toxic chemicals (including from mining) could cause adverse impacts on water quality. A3.2. Objective and Priority Activities for LEnS Project Additional Financing 7. During the identification mission of the LEnS project additional financing in March-April 2009, discussions were held with WREA on priority activities and it was agreed that deepening capacity building support in NT-NKD river basin would be a priority of the additional financing. It is important to: (a) build technical capacity to monitor water flow, water quality, fisheries, and ecology in target areas to ensure that minimum cumulative impacts can be managed; (b) ensure effective coordination among these hydropower stations to optimize water resources use yet mitigate the cumulative impacts for riparian communities from the four hydropower stations; (c) ensure effective protection of the watershed; and (d) provide riparian communities with a fair share of the water resources to better their livelihoods. 8. In light of the limited technical capacity and financial resources both at central and local levels, it is necessary to support the operation of River Basin Organization (RBO) as well as to build a Community Conservation Network (CCN). The main objective of this program is to facilitate a common understanding among key players. The program comprises two subprograms: Policy and institutional support for RBO operations and Development of CCN. These subprograms outline priority activities of the policy and institutional support and the setting up of CCN; details are provided in Section C and D respectively. 28 A3.3. Policy and Institutional Support Subprogram 9. Given the speed of current development in various sectors throughout the country and through Nam Ngum river basin management activities (financed by ADB) and a LEnS subgrant in NT-NKD, GOL is now aware of the cumulative impact of development activities, especially from hydropower and mining development, and recognizes an urgent need to address the issue through an integrated river basin management. It is anticipated that the main function of the NT- NKD RBC would be to coordinate activities related to water resources development and ensure their sustainable use. Key activities may include: monitoring of water use and water quality (especially near water protection areas and pollution sources); identifying priority issues of social, economic, and environmental concern; coordinating development activities and/or mitigation measures; and/or carrying out priority investments and issuing licenses, etc. These activities encompass many sectors and involve various stakeholders; therefore close collaboration among different stakeholders (communities, private sector, and central and local governments) and different sectors (hydropower, irrigation, floods, fisheries) is needed. The RBO will comprise a River Basin Committee (RBC), a secretariat, and working groups and/or sub-basin committees as appropriate. Four possible mandates of the NT-NKD RBO have been identified and discussed: · Mandate 1. Leading coordination with the support of NT-NKD RBCs, on identified issues in river basin management and analyzing the cumulative impacts and taking appropriate measures to address these issues. The RBC, with help from its secretariat and working group, would identify issues in the river basin related to: (a) the development of hydropower projects including water distribution (quantity) within the hydropower projects and with agriculture activity, and water quality that may impact the livelihoods of local communities; loss of fish and other aquatic species; land and biodiversity losses from construction activities, erosion and inundation; and physical relocation of local communities and other related social issues; (b) prolusion from mining operations; (c) infrastructure development such as construction of access roads, schools, water supply, and health centers; (d) agriculture development especially forest clearance, floods and droughts, and overuse of chemical fertilizers; and (e) solid waste management. The RBC will facilitate discussion and find appropriate measures for addressing all identified issues. · Mandate 2. Technical monitoring. The mandate of NT-NKD RBO should include direct technical monitoring of developments in an area especially issues related to water quality (pollution from development projects), watershed area protection and land use planning. NT- NKD RBO would monitor issues mentioned in collaboration with PWREOs and related agencies in each province. This requires certain procedures, i.e. developing guidelines for water quality monitoring and procedures for intercepting the pollutants, if necessary; applying the protected area conservation regulations and ensuring that land use planning is properly done for biodiversity conservation and watershed protection. · Mandate 3. Preparing and implementing the Basin Management Plan. RBO would coordinate with the communities and authorities managing watersheds and line ministries, and develop a basin management plan based on integrated water resources management (IWRM), identifying the high priority investment to improve the livelihoods of the 29 communities and watershed management. Further, the RBO could use part of the government's share of revenues from hydropower operations to invest in watershed management and to support communities to carry out identified priorities. · Mandate 4. Conflict resolution. In case any conflicts regarding water resources occur, the RBO would provide a forum for discussion and conflict resolution among those involved in disputes. 10. A national committee on water resources, namely the National Mekong Water Resources Committee, has been established to take the lead in ensuring effective management of water resources in Lao PDR, and an October 2009 meeting focused on roles and responsibility of key agencies (DWR, provinces, and sector agencies) in the context of a River Basin Organization (RBO). The RBO for Nam Ngum and NT-NKD will be established before June 2010. 11. Additional financing will provide additional technical assistance and operational support to: (a) the RBC/secretariat to establish operational procedures and facilitate effective meetings, consultations, and field visits; and (b) the Technical Working Group to build their capacity to understand/monitor the management issues (water quantity, water quality, watershed, fisheries) and identify mitigation measures, especially those for addressing cumulative impacts. Key outputs/outcome will include, but are not limited to: (a) an agreed institutional framework for operational procedures for the RBO; (b) agreement on priority issues and action plans to mitigate them; (c) number of actions taken to address priority the issues; (d) development of a sustainable flow of funds; and (e) lessons learned to be shared on how to actually address the river basin management issues and how the top down and bottom up approach can be used. A3.4. Community Conservation Network Support Subprogram 12. This subprogram is designed to enhance knowledge and understanding of local communities on the need to protect the watershed, to conserve natural resources and biodiversity, and to provide knowledge and opportunities on various livelihood development options that may be applicable to them. Objectives and detailed tasks are described below. Budget will be allocated according to the proposal to be developed by the PWREO in close consultation with the Bank technical team, Bolikhamxay province and WMU/EPF. Objectives 13. This subprogram aims to pilot, with selected communities surrounding the NNT and NKD NPAs, building a base network and improving livelihoods to change behaviors from over- exploiting natural resources to actively participating in the protection of NPAs. The assumption is that if livelihoods increase incrementally, natural resource conservation will increase incrementally. The objective above will be achieved through the flowing specific objectives: 1) Increase awareness of communities surrounding NNT and NKD-NPAs of the global biodiversity significance of their PAs and of the need to protect the watershed for current and future hydropower projects development in their river basin. 30 2) Enhance the biodiversity conservation network at community level, and maximize community participation in NPA conservation activities. Develop, publish and disseminate rules, regulations and guidelines related to biodiversity conservation. 3) Improve community livelihoods through increased crop and livestock production, thereby increasing household incomes, with direct links to reduce dependence on forest resources. 4) Sustainable management and use of Non Timber Forest Products (NTFPs) in the project target villages surrounding NNT and NKD-PAs. Principles and Approach 14. Additional financing activities aim to maximize benefits to selected communities and ensure maximum community participation and ownership of NPA conservation activities. Project activities therefore will be built on the following principles and approaches: 1) Institutional framework and capacity need to be built to coordinate and implement conservation activities in NNT and NKD-NPAs at both district and community levels. 2) Villages targeted through the additional financing will be selected by Khamkeut and Pakkading districts based on the following criteria: (a) the village is impacted by, and causes impacts to, the NNT and NKD-NPAs protection and conservation activities; (b) a village significantly threatens the NNT and NKD-NPAs including wildlife trade and hunting, illegal logging and over NTFP extraction; and (c) activities are welcome and ready to be implemented by the villagers. 3) Livelihood support activities are identified and initiated by villagers through a participatory planning consultation and facilitation process. 4) Additional financing should provide technical and financial support for livelihood improvement activities but will not finance any infrastructure activity in the villages; the implementing agency should consult with EPF and the Bank if a sub-grant infrastructure activity is proposed. Target Areas 15. Activities under additional financing will be implemented in 12 selected villages (table 1) of two districts in Bolikhamxay province which are affected by, and impact both the NT2 watershed and NKD PA protection programs. At the beginning the project will focus on six villages (including other two sub villages of Ban Phonsaat) in Khamkeut district and another six villages in Pakkading district, Bolikhamxay province. Target villages were confirmed with the two districts' deputy chiefs in September 2009. Additional Financing Intervention 16. Additional financing will support: (a) creation of an institutional network at the district and village levels for coordination and implementation of NPA conservation activities; (b) strengthening of district and village conservation capacity in managing their territory (activities 31 include training, meetings, study tours, etc.); (c) community outreach and awareness-raising to provide knowledge and technical capacity for natural resource management and conservation; d) support for alternative livelihood development to improve villagers' living conditions for them to participate in natural resources protection activities; (e) based on existing laws, the development, publication and dissemination of rules, regulations and guidelines on biodiversity conservation at district and village level; and (f) provision of technical and financial support for stainable management and use of the natural resources in their village territory. Additional Financing Subcomponent I. Institutional arrangement and capacity building 17. This subcomponent will support the establishment within the province of Bolikhamxay and district cabinet offices of a staff to oversee activity implementation; build at village level development and conservation networks to implement activities at village level; build district and village capacity in coordinating with the water resources management and biodiversity conservation activity in their territory to contribute to the NPA conservation effort. The additional financing will strengthen technical capacity of the District Agriculture and Forestry Office (DAFO) and District Water Resources and Environment Office (DWREO) in planning, implementing and monitoring natural resource management activities including: (a) assessing and organizing training related to technical capacity for both district authorities and villagers; (b) organizing a workshop for coordinating development and conservation activities which contribute to PA conservation activity and NT-NK river basin management as a whole; and (c) organizing a study tour and events to exchange lessons related to natural resources management and livelihood development activities with other organizations in and outside the country. II. Community outreach and awareness-raising 18. The main activity of this subcomponent is to raise community awareness on importance of and threats to natural resources in the NNT and NKD-NPAs including biodiversity habitat and water resources and to mobilize maximum community participation in natural resources management which would contribute to biodiversity conservation in those NPAs. Activities include: (a) an awareness campaign at community level; (b) use of campaign materials such as posters and radio spots related to conservation activities; and (c) dissemination of all government rules, regulations, and best practices in community-based natural resource management and biodiversity conservation. An assessment needs to be carried out before implementation to avoid activities already underway under other projects in the area. III. Community livelihood development 19. The community livelihood development subcomponent will support additional financing target villages to ensure their livelihoods are not negatively impacted by restricted access to some areas of natural resources, but rather would improve their livelihoods in support of conservation efforts in the NNT and NKD-PAs. Activities include: (a) establishment of fish and or other aquatic conservation zones; (b) food security activities such as providing techniques and seeds for increasing of rice production, promotion of secondary cropping and livestock extension 32 to improve productivity and nutrition; (c) sustainable income generating activities such as handicrafts, weaving for women, aquaculture (but not construction of fish ponds); and (d) promotion of social support, particularly basic sanitation and education support (but not school construction). Livelihood support will be directly linked to conservation through contractual agreements with villagers, as well as indirectly linked by improving living conditions such that villagers rely less on forests for unsustainable harvest of NTFPs and wildlife. Monitoring will be undertaken by villagers and district staff of simple indicators of livelihood and conservation outcomes. IV. Natural resources management and biodiversity conservation 20. This subcomponent will contribute mainly to natural resource management and biodiversity conservation. The objective is to sustain use of village natural resources including water resources, NTFP, and to protect endangered wildlife species and their habitats. Activities include: (a) village land use and forest zoning; (b) build-up of a law enforcement team to patrol the village territory (Since there are already patrols inside the PA, the WMPA will finance patrols in the NT2 watershed area); (c) development and publication of consultation guidelines, rules and regulations for natural resources conservation at district and village levels; and (d) reports on the situation, threats to natural resources in their respective village zones to the DAFO. For Khamkeut district, DAFO will coordinate with the WMPA branch office in Khamkeut district for activity implementation and reporting. Infractions and follow-up actions, as well as patrol hours and locations, will be recorded to show enforcement outcomes per unit effort. V. Implementation arrangements 21. For all activities implementation will be arranged through government agencies at provincial and district level. There is a need for Khamkeut's district governor office to coordinate with WMPA and NTPC for more effective activity implementation and avoid duplication. A staff will be assigned within the governor's office of both Khammkeut and Pakkading districts to oversee activity implementation and coordinate across districts issues with concerned line agencies and report directly to provincial authorities. The Governor Office of Bolikhamxay province in coordinate with related agencies will be engaged through the implementation process to ensure their capacity enhanced for future responsibility of the activity at the province. Participatory consultations will be carried out with selected communities to identify their priorities and develop livelihood support activities based on their allocated budgeted. 22. Under the guidance of EPF and WREA/DWR at national level, provincial governor office will coordinate with selected district's governor offices and concerned agencies to arrange activities implementation in NNT and NKD PAs. Provincial agriculture and Forestry Office (PAFO) will provide technical guidance to DAFO for activity implementation at district and village level. A Community Development (CD) consultant will be mobilized and based at DAFO to support technical aspects. A TOR will be prepared jointly within PWREO, DWREO and DAFOs. Village Development Committee (VDC) and Village Conservation and Management 33 Unit (VCMU) will be established in 12 selected villages (if not already existing) to support activity implementation at village level. 23. Roles and responsibilities of stakeholders include the following: · EPF: issue guidelines, approve sub-grant proposals and monitor implementation including technical and fiduciary aspects. · WREA/DWR: review sub-grant proposals and submit them to EPF for approval; guide PWREO and DWREO to monitor implementation in view of EPL and ESIA regulations. · The Governor Office of Bolikhamxay province (GOB): lead the government agencies in the province and districts supports by EPF Coordinator based in Bolikhamxay province to develop proposals and submit them to WREA/DWR and EPF for approval. Supervise implementation; be responsible for the procurement and financial management of the component, submitting regular progress reports to WREA/DWR and EPF. · PWREA: as mandated contributes to the planning and implementation of project activity both at provincial, district and village levels. · PAFO and Line Agencies at provincial level: support DAFO/line agencies at the district level on technical aspects to ensure successful implementation at village level. · District Governor Office: assign a staff to oversee implementation at district and village levels; ensure coordination and involvement of line agencies in activity implementation; coordinate activity implementation and resolve issues across districts within the river basin and report progress to the province. · DAFO: main body to coordinate and liaise with DWREO and concerned line agencies in implementing activities at village level; plan and ensure all financial aspects for activity implementation; maintain, record and report all expenses to the provincial governor office through the district; organize/facilitate meetings/workshops and training events related to project activities at district and village levels. · DWREO and line agencies at district level: support day to day implementation and ensure technical aspects for communities to perform their activities; report technical progress to PWREO and DAFO and district governor office for their further reporting. · Village/VDC/VCMU: active participation in the program and ensure maximum involvement of villagers. Lead day to day implementation activities and ensure their success, and bring issues to the district over sight staff and concerned agencies to resolve any problems in timely manner. 34 Implementation Structure: GOB/DWR EPF Dist Gov-Office PAFO/Line agencies DAFO/Line agencies Consultant Villages 35 Annex 4: Project Description and Implementation Arrangements Lao Environment and Social (LEnS) Project -- Additional Financing A.4.1. Component Description 1. Component 1: Policy Implementation and Capacity Enhancement (PICE). This component will continue to support the national, provincial or district agencies to undertake the priority activities related to the environment and social safeguards. However, priority activities/programs have been developed to maximize positive impacts of the project, facilitate effective coordination among various sub-grants, and ensure achievement of the PDO. Details on the priority programs related to social safeguards capacity building program and Nam Theun- Nam Kading (NT-NKD) River Basin Management Program are provided in Annexes 2 and 3, while the description per component, windows and sub-windows are briefly described below. · PICE A1 (US$ 0.45 million): Environmental and social monitoring and policy implementation support. This subcomponent will continue to support the capacity of national agencies and the targeted provinces to develop, implement, and monitor environment and social safeguard policies. Priority however will be given to build social assessment capacity and operational support in line with the Social Development Plan described in Annex 2. There would be 4 to5 proposals under this sub-window, including two proposals on building social safeguard capacity of Bolikhamxay and Khammouane and three proposals to strengthen the environmental management system of the three provinces (Bolikhamxay and Khammouane, Savannakhet). Given the locations of hydropower development projects to be under operation during the next few years, building social safeguard capacity of Attapeu province could also be considered. These proposals will enhance achievement of the PDO by strengthening the environmental and social planning and monitoring capacity of the three target provinces, especially the social aspect for Bolikhamxay and Khammouane. · PICE A2 (US$ 0.34 million): Integrated river basin management. There could be 1 - 2 proposals from DWR and/or WERI to continue providing technical assistance and operational support to the NT-NKD River Basin Organization (RBO). A NT-NKD technical working group comprising representative from key agencies has been established while the NT-NKD River Basin Committee (RBC) and its secretariat are expected by end of 2009. This subcomponent will also support the activities of the working group considered necessary for addressing the priority issues and follow-up actions as appropriate. Close coordination and cooperation with the sub-grants to be carried out by Bolikhamxay province on the environment and social aspect (under A1 and A3) will be necessary. These proposals will enhance achievement of the PDO by increasing capacity of DWR, WERI, and Bolikhamxay province to address cumulative impacts in the context of integrated river basin management. 36 · PICE A3: Hydropower sector policy support. No budget will be allocated for this sub- window, but implementation of the national policy to promote sustainable development of hydropower (NPSH) will be provided under the Hydro-Mining TA project. · PICE A4 (US$ 1.1 million): Environmental and social capacity development. This subcomponent will continue to support GOL capacity to implement the Resettlement and Compensation Decree and capacity building on social assessment and review. The support will also be extended to other sector priorities including the public outreach and the implementation of the new ESIA decree, priority activities related to the climate change, pollution control, overall coordination, and overall training and capacity building (technical and management) for the sector. Priority activities have been identified in Annex 2. There would be 3 to 4 proposals under this sub-window. The larger one (about US$ 0.7 million) will be allocated for technical assistance and operational support to DESIA for the implementation of the new ESIA decree which is expected to be effective in late 2009 and the Compensation and Resettlement decree, including training to the provincial and sector agencies. The remaining sub-grants may be used for the update of the national policy on natural resources and environment; pollution control and management; climate change; and/or WREA coordination, training, and capacity building aspects. These proposals will enhance achievement of the PDO by strengthening WREA capacity to implement the ESIA and Compensation and Resettlement decrees given priority to hydropower and mining development. · PICE A5 (US$ 0.16 million): Environmental education and awareness. This subcomponent will continue to support activities that increase public knowledge and awareness however with a more focus on the subject (social assessment) and target group (Ethnic groups). There would be 1 to 2 proposals under this sub-window. One proposal from the National University of Lao PDR (NUOL) will focus on social safeguard capacity training while another will be implemented by the Lao Front for National Construction (LFNC) to develop the national guidelines for Ethnic Group consultation, including training of government staff. These proposals will enhance achievement of the PDO by strengthening the country capacity to conduct a meaningful consultation with the poor and disadvantaged ethnic groups. 2. Component 2: Community and Biodiversity Investments CBI (B1 and B2). This subcomponent will continue to support technical and management capacity of the protected areas through development of necessary law and regulations to increase effectiveness of PA management and the implementation of priority activities of the six selected priority PAs. Priority will be given to forge effective coordination and cooperation among concerned agencies and key stakeholders through the concept of a river basin management in NT-NKD and active engagement of local community. The following activities have been identified: · CBI B1 (US$ 0.15 million): Protected areas management. There will be 2 to 3 proposals under this sub-window; one (about US$ 0.05 million) has been identified for strengthening effectiveness of PA management by updating PA regulations and consultation with key stakeholders. DFRC will be the implementing agency for this sub- 37 grant. The remaining funds will be allocated for the PA priority of the three provinces, including implementation of the priority site plans. These sub-grants will enhance achievement of the PDO by strengthening regulation and management capacity of PAs management system. · CBI B2 (US$ 0.45 million): Community environmental development. There would be about 1 to 2 proposals under this sub-window of which one (about US$ 0.45 million) has been identified for development of the Community Conservation Network (CCN) in NT- NKD. This proposal has been designed to incorporate lessons leant from various conservation activities in the area and to build capacity of local authorities as well as the local community. This proposal will enhance achievement of the PDO by strengthening the bottom-up planning process for the integrated river basin management and integration of local community in the PA management. 3. Component 3: Management and monitoring support (US$ 0.35 million): This component will support the management of WMU/EPF. From the management point of view, given that the potential sub-grants would be larger in size ($) but smaller in number (about 16 to17 sub-grants), role of WMU will be shifted toward facilitating early development and submission of the sub-project proposal development, sub-project supervision and monitoring, including assisting the potential sub-grantee to plan and implement their activities timely and effectively. WMU will require all the large sub-grants to hire at least one full time staff to assist in the sub-grant management, including timely submission of budget request, clearance, and progress report and to secure agreement of the sub-grantees to achieve the expected outputs/outcome shown in Annex 5. With assistance from national and/or international experts, WMU will provide training (meetings and/or on-the-job) to the sub-grantees. A.4.2. Implementation Arrangement 4. The current project implementation arrangement will not change. LEnS additional financing will be implemented following the mechanism proposed during the Mid-term Review. All fund flows will be through EPF following the EPF operation manual on FM and procurement. From the technical point of view, given that majority of the large sub-grants will be implemented by WREA, WREA will be responsible for ensuring timely implementation and satisfactory performance of their sub-grants while WMU will facilitate the fund flows and will ensure that the fund is used according to the Bank's guidelines on procurement and financial management. WMU however, will provide technical assistance to other sub-grants to ensure that the quality and performance are satisfactory. 5. Given limited technical expertise in the country, the Bank technical team will provide close supervision and guidance, especially on social safeguards and integrated river basin management. Project implementation plan for the social safeguard capacity development, NT- NKD implementation, and capacity building for EPF and WREA has been identified. Specific sub-grants will be prepared during the implementation in line with these plans. 38 6. It is also noted that some of LEnS activities will be complimentary to other Bank funding projects which are under preparation. Table A4.1 summarizes the three program and shows how they are linked with LEnS. Table A4.1: Summary of the Three Programs (* the new design is being considered) LEnS and additional HMTA M-IWRM* financing Objectives To strengthen the To strengthen technical To promote IWRM management of environment and management and cooperation and social issues associated capacity, including among the riparian with the sustainable use of safeguard for MEM, countries natural resources in Lao including provincial PDR MEMs Components 1. PICE 1. Joint training for 1) Regional MEM (focus on technical component ­to be 2. CBI and management) implement by MRC 3. WMU/EPF 2. Hydropower support: 2) Transboundary (a) planning and data cooperation - promote collection in Nam Ou; cooperation among (b) NPSH support; Lao-Cambodia, and (c) CA management Vietnam 3. Mining support: 3) National component (a) governance; comprising two (b) oversight, M/E; subcomponents: (c) community policy and institutional consultation support and priority investment identified 4. Project management through people participation process for Lao PDR; Thailand; Cambodia; Vietnam. 39 Activities (A1). Safeguard building 1. Joint component on 1. Policy and capacity for Bolikhamxay, training institutional support Khammouane, Savannakhet (A2). Nam-Kading RBC 2. Hydro development 2. Priority investment operations (a) a Hydropower in Xe Bang Hieng and (A3). Initiate planning and data Xe Bang Fai implementation of NPSH collection in Nam Ou (A4). Strengthen safeguard (b).Continue support of capacity, planning, and NPSH implementation coordination (c). CA management (A5). Strengthen knowledge and training on social 3. Mining development safeguards and consultation (a) Governance, with Ethnic Groups regulation, including CA (B1/B2). Strengthen (b) Oversight/M/E, capacity to management including community protected area and consultation conservation community (c) Technical network (C). Strengthen EPF Common NT-NKD RBO ­the process Nam OU planning and River basin activities could identified priority data collection will build management activities investment that can be capacity of MEM to plan included in the M-IWRM and monitor the activities of development projects based on a river basin management concept Other WREA activities could also be considered in the M-IWRM 40 Annex 5: Revised Performance Indicators Lao Environment and Social (LEnS) Project-- Additional Financing Project Project Outcome Status and Implementation Revised Indicators for Development Indicator( per Experience as of August 2009 Additional Financing Objective original PAD) (PDO) To strengthen * % of development This indicator has proved difficult Increase in the % of the projects complying to measure because of its broad and Environment management of with relevant national ambiguous definition (scope of Compliance environment policies "development projects" is unclear; Certificates (ECCs) and social implementing rules and regulations issued by WREA that issues for the national policies are still are of adequate quality associated with evolving) also the system or as judged by a third the sustainable database to measure the baseline party annually starting use of natural and progress is not available. June 2010 as a baseline resources in Anecdotal evidence suggests that, and agree on the % Lao PDR. while at the beginning of the project increase by September there were three large hydro 30, 2010. The target projects that should comply with is by the end of the relevant national policies, an Project to increase the increasing number of smaller issuance of said the projects are now going through the ECCs by WREA by a screening of WREA. Going percentage to be forward, it is proposed to refocus agreed between the this indicator on the improved Recipient and performance of the ESIA system Association based on (regulation, institution, the baseline data. coordination, EPF, etc) that LENS is supporting. * Prevalence of This indicator has also proved to be Increase in the % of selected prohibited too broad and beyond the direct complaints resolved in environmental scope of the project, and difficult to Bolikhamxay and activities in target measure: People in the province Khammouane provinces have complaints (mostly social) but Provinces. there is no formal mechanism for follow up. The list of prohibited First measurement of environmental activities needs to be this indicator will be discussed and agreed with clients so conducted by that they can be monitored. As a December 2010 to replacement for this indicator, it is serve as a new proposed to focus on the complaint baseline. The target is mechanism at two provinces by the end of the (Bolikhamxay, Khammouane) Project to increase which will be established to complaints resolved in improve performance and reduce Bolikhamxay and prohibited activities. Khammouane Provinces by a percentage to be agreed between the 41 Recipient and the Association by March 30, 2011 based on the baseline data. Intermediate Intermediate Status and Implementation Revised Indicators for Outcomes (IO) Outcomes Indicators Experience as of August 2009 Additional Financing (original PAD) Component 1 (PICE) Improved (A1) * This indicator can be considered By December 31, 2010 policies and * Three provinces as achieved and will be deepened as database for tracking instruments are effectively part of the additional financing. type and number of understood by implementing the Three provinces (Bolikhamxay, development projects stakeholders, Provincial Khammouane, Savannakhet) have for which ECCs are institutionalized Environmental adopted and disseminated its issued in the Selected within Strategy and Action PSAPs; prepared an action plan at Provinces is government Plans (PESAPs). district level and implemented some established. agencies and of priority activities, including systems, and training; developed a database to By December 31, implemented monitoring environmental 2012, a unit by technical performance; the results are being responsible for competent staff. evaluated by a national consultant monitoring social and improvement is being made to impacts and a increase effectiveness and reliability functional complaint of the provincial databases. handling mechanism * Under additional financing, are established in technical and management capacity Bolikhamxay and in social impacts and mitigation Khammouane aspects in Bolikhamxay and Provinces. Khammouane provinces will be strengthened. By June 30, 2010, the (A2) Good progress has been made but River Basin *Framework for this has not yet been fully achieved, Committee for NT- addressing cumulative but will require the additional NKD is established. impacts in NT-NKD financing to be fully achieved as in place. specified in the next column. An By December 31, integrated river basin management 2012, an in NT-NKD was initiated for the implementation model first time in Lao PDR. Activities for a river basin focused on improving the organization in Lao understanding of various PDR is developed. stakeholders on cumulative impacts and the concept. NT-NKD river By December 31, profile was completed. Through a 2010, WREA has series of meetings and workshops, prepared guidelines for cooperation among key agencies incorporating ECC has improved and discussions are measures in on-going on the priority issues Concession Agreement facing NT-NKD and the need to set for hydropower up a river basin organization projects signed by the 42 (RBO). Recently established Recipient after the national committee on water enactment of the resources is in the process of Environment and establishing RBO. The review of Social Impact the 1992 water law and GOL policy Assessment Decree. to promote RBO is initiated. (A3) * Implementation of NPSH, under By December 31, * Number of existing difficult scenario has begun. Phase I 2012, social safeguard hydropower projects focused on preliminary review of training program is responsive to the existing hydro projects, capacity developed for agencies National Policy on assessment, and implementation and provinces Environment and strategy. However, actions by the participating in the Social Sustainability agencies have been hampered due Project and at least 60 (NPSH) by preparing to changes in institutional trainees are trained (10 action plans and arrangement (creation of MEM in from DESIA, 5 from implementing agreed 2006, WREA in 2007) and revised provinces, 20 from mitigation measure regulations being proposed. This private sector and 25 contained therein. means that the NPSH will need to students from * New hydropower be revised. WREA and MEM academic). projects responsive to indicate that all new Concessional the NPSH. Agreement (CA) after 2008 include By December 31, 2012 environmental and social mitigation national guideline for measures as described in the Ethnic Groups' Environmental Compliance consultation has been Certificate (ECC). completed and key staff have been trained * NPSH implementation will be on how to conduct continued under a separate World such consultation. Bank supported TA for MEM. (A4) * A social unit to implement CAR *Number of qualified was established at DOE as required. staff at the national A Department of Environment and and provincial-levels Social Impacts Assessment to implement the (DESIA) was established as a part Decree on of newly created WREA. To better Compensation and understand and implement CAR, Resettlement (CAR). representatives from WREA and MEM visited China to study the institutional aspect, resettlement and livelihood development issues related to hydropower projects during 2008. The CAR Decree was disseminated through national and regional workshops. Technical guideline for implementation of the Decree is finalized in line with the new ESIA decree and is submitted for GOL approval. Another dissemination workshop and training is planned before the end of 2009. 43 (A5) * No targets were included in PAD *Environmental for this activity. Twenty one sub- Education and grants were provided to various Awareness entities (NGOs, institutions, mass organizations, etc.) to increase public awareness and environmental knowledge . *Under additional financing, sub- grants will be provided to the University of Loa (NUOL) to provide training on social impact assessment and monitoring and to the Lao National Front for Construction to develop national guidelines for consultation with ethnic groups and provide training to staff at provincial level. Component 2 (CBI) Selected (B1) * Six priority protected areas were By December 31, protected areas *Six protected areas identified in consultation with an 2010, site plans for six and local with management international expert. Due to the protected areas are communities plans prepared in complexities and lack of capacity, available and the site benefit from consultation with training was provided and is on- plans have identified improved ethnic groups, and going to relevant staff. The priority actions. environmental thereafter actively preparation of these six management, managed according to management (site) plans, in By December 31, and enhanced these plans. consultation with local 2012, at least 60% of livelihood communities, is ongoing and will be the priority activities options. concluded soon. Priority activities identified are being identified will be implemented in implemented in the six selected protected areas. protected areas. (B2) *Number of target communities in By December 31, *Number of the legal agreement are met. 2012, at least 10 communities *Increased capacity of villagers as conservation benefitting from at least 43 of the 96 CBI sub-grants communities are sustainable involved training on a range of established in NT- environmental conservation and livelihood NKD. management activities such as agriculture, eco- activities. tourism, village fund, tourism development, outreach, boundary demarcation, and project management and planning and management committee operations. *Increased participation in developing and implementing resource use regulations. *Increased awareness on environmental issues, and involvement in planning, 44 implementation and monitoring of sub-project activities. * 96 sub-grants, of which 13 focused on six priority protected areas while 83 sub-grants supported a wide range of local community activities ranging mostly from agricultural production, eco- tourism, forest management, alternative livelihood, etc. *Under additional financing, efforts will be focus on building conservation network in selected communities in Nam-Theun Nam Kading River basin. Component 3 EPF is a *Reduction in annual The original designed annual By December 31, competent operating costs per operating cost was 33%. It was 2012, EPF's annual institution, volume of transaction. expected that this will go down administrative cost eligible to progressively (e.g. by 15% of the which is about 33% of receive NT2 33% in 2006) has proved far too a Sub-grant amount revenues. ambitious. Establishment of EPF has been reduced to no to support demand driven sub-grant more than 15% of an operations and meeting our additional Grant. technical, procurement and financial reporting requirements 80% of Sub-projects was much more difficult than financed by the originally envisaged. Additional Original Grant have people were hired after the MTR to been completed improve operation. EPF has started satisfactorily by to reduce layers by combining EPF December 31, 2010. and LENS management. A better computerized management 80% of Sub-projects database is available and sub- financed by the projects have already been additional grant have identified, which will help reduce been completed EPF operating costs substantially. satisfactorily *% of projects *Of the 147 sub-grants approved, December 31, 2012. completed 76 are completed (i.e. 51%) and 71 satisfactorily and EPF are on-going. 84% of the 76 EPF and WREA have meeting audit completed projects are considered received part of the standards . satisfactory (achieved their targeted NT2 revenue for outputs/outcome within the agreed financing their time and cost). What about audit respective priority standards. development projects by December 31, 2010. *To increase effectiveness of operation and financial reporting, a computerized system (APIS) was installed in 2009 and is generating required reports. 45 Annex 6: Project Cost Lao Environment and Social (LEnS) Project - Additional Financing Project cost1 by component and subcomponent is summarized in Table A6.1 while the project cost by disbursement category is summarized in Table A6.2. Table A6.3 provides cost breakdown by disbursement category for the first group of the sub-grants. Table A6.1 Estimated project cost by component Project Cost (US$)2 Project Component/Window Local Foreign Total US$ million US$ million US$ million Component 1 Sub-grants for Policy Implementation and Capacity Enhancement (PICE) A1 Environmental and social monitoring 400,000 50,000 450,000 and policy implementation support A2 Integrated River Basin Management 140,000 200,000 340,000 A3 Hydropower Sector Sustainability - - - Initiative A4 Environment and Social capacity 640,000 460,000 1,100,000 development A5 Environmental Education and 100,000 60,000 160,000 Awareness Subtotal 1,280,000 770,000 2,050,000 Component 2. Sub-grants for Community and Biodiversity Investment (CBI) B1 PA management activities 100,000 50,000 150,000 B2 Community environmental 400,000 50,000 450,000 development activities Subtotal 500,000 100,000 600,000 Component 3 Management and Monitoring Support C1 Capacity building/business 70,000 70,000 140,000 development C2. WMU operations 100,000 30,000 130,000 C3.Monitoring and evaluation 50,000 30,000 80,000 Subtotal 220,000 130,000 350,000 Total baseline costs 2,000,000 1,000,000 3,000,000 Physical Contingencies 0 0 0 Price contingencies 0 0 0 Total Project Cost 2,000,000 1,000,000 3,000,000 Total Financing Required 2,000,000 1,000,000 3,000,000 1 This cost excludes GOL contribution which is about 15-20% of the project cost 2 Grant total under each activity category are indicative totals based on discussion with the potential sub-grantees. Final budget allocations between the various types of sub-grants will be flexible and demand responsive, in that budget may be moved from low-demand to high-demand activities types if requested by the PSC and/or EPF and subject to NOL by the World Bank. Ten percent of the sub-grant amount will be allocated under the unallocated amount in the disbursement allocation of the Financing Agreement (Table A6.2). 46 Table A6.2 Estimated cost by disbursement category Item Categories Amount of the Grant % of Expenditures to be Allocated (US$) Financed (1) Sub-grants 100% of sub-grant amount (a) PICE 1,845,000 disbursed (b) CBI 540,000 (2) Consultants' services 236,000 100% (3) Training/workshops 64,000 100% (4) Goods 10,000 100% (5) Incremental operating cost 40,000 100% (6) Unallocated 265,000 100% Total 3,000,000 Table A6.3 Estimated cost (US$) breakdown for WMU and the first group of the sub-grants Priority sub-grants /WMU US$ Consultant Training/ Goods/ IOC Remarks WS Works DESIA (A4) 700,000 200,000 140,000 320,000 40,000 Most NOUL (A5) 80,000 20,000 40,000 10,000 10,000 consultant SMU (BRKX) (A1) 120,000 20,000 50,000 30,000 20,000 services SIU (KM) (A1) 120,000 20,000 60,000 20,000 20,000 will be CCN (BRKX) (B2) 450,000 70,000 100,000 180,000 100,000 individual WMU (C) 350,000 236,000 64,000 10,000 40,000 Total 1,820,000 566,000 454,000 570,000 230,000 % of total cost (US$ 3M) 60 19 15 19 7.7 % of total cost identified 100 31 25 31 13 (US$ 1.82M) 47 Annex 7: Risks and Mitigation Measures Lao Environment and Social (LEnS) Project -- Additional Financing Risk factors identified for LEnS remains valid but the complexity, time and resources needed to address these were underestimated. Table A7.1 below summarize the risks factors, lessons learnt (Table A7.2), actions undertaken and additional mitigations to be carried out under LEnS additional financing. Table A7.1. Risk and Proposed Actions Risk identified in PAD Additional mitigation measures Risk Risk (Level) Risk mitigation measures with additional financing To achievement of PDO The three - GLIP for NT2 commits GOL to - Strengthen institutional capacity Modest factors likely to implement specific actions aimed at of WREA, especially DESIA, and affect improving environmental and the target provinces to improve their achievement of resettlement management in the environment and social the PDO are: country. The NT2 legal agreements management capacity. (a) the delays in provide recourse mechanism to the project Bank for non fulfillment of such - Review and update the NPSH in implementation, commitments. line with the new ESIA decree and - Specific policy commitments facilitate effective cooperation (b) inadequate needed for the project will be among key agencies (MEM, availability of sought before approval or included WREA, MAF) to ensure its human and as dated covenants as specified in effective implementation. financial Part C6 below. resources, and - Incentives are built into the project - Continue to strengthen the to attract community participation involvement of local communities. (c) lack of - Availability of NT2 revenue for public EPF will sustain project inputs. - Continue to strengthen EPF involvement. capacity and eligibility to receive (Modest) NT2 revenue and other funding supports. To achievement of component results (i) External - EPF has been established as an - Strengthen cooperation between Modest factors and independent and autonomous EPF and other key agencies administrative organization. Further, the following (WREA, MOF, MPI) to facilitate interference measures are designed to fund flow from NT2 revenue and limited of the specifically address the risk in the other sources, and strengthen reach effectiveness of project via: (a) application of strict out activities to decision makers. EPF (modest). selection criteria; (b) disclosure of project activities, including subproject approval and performance; and (c) external monitoring and semi-annual stakeholder workshop. (ii) EPF is a - Acceptable staff plan is a - Continued training (procurement, Modest new condition for effectiveness, FM, safeguard and technical) of 48 organization, -Adoption of procurement and FM staff and beneficiaries. and delays in contained in the PIP is a condition recruitment and for effectiveness. - Review EPF procedures to provide developing -EPF has flexibility to recruit staff appropriate incentives and capacity could from the market. disincentives for the staff and hinder project Specialized staff will be trained in beneficiaries. implementation. project procedures, safeguards, (Modest). procurement arrangements, and financial management system. (iii) Selection - Detailed procedures for grant - Identified the potential sub-grants Low of weak or selection are detailed in the PIP to before appraisal and require Bank inappropriate ensure high quality applications in no objection for the sub-grant larger projects. (Low) accordance with the ESSF. than US $100,000. (iv) Lack of - The project design features - LEnS additional financing will Modest capacity at all demand driven capacity building provide additional supports but levels to activities that require upfront focus on strategic target groups and implement the commitment including preparation area (NT-NKD) to forge project of plans, assignment of staff, and achievement of PDO. .(Modest) allocation of recurrent expenditures. (v) National - Project design is explicit about - LEnS additional financing will Low agencies involvement of target provinces in provide additional supports but receive undue capacity building activities. focus on strategic target groups and preference over - Site-specific investments at the area (NT-NKD) to forge provincial or local-level will be through a achievement of PDO. community demand-driven process in which interest and both provinces and communities priorities. will have a significant stake. (Low) (vi) Lack of - Incentives (benefits, capacity, -LEnS additional financing will Low local ownership, consultation) have been continue to engage local community community built into the project design to participation with a more focus are participation encourage community involvement (NT-NKD river basin) and clear .(Low) in project activities. objective. - Project design encourages the involvement of civil society group (international/local) to partner with local communities. (vii) Lack of - Provinces participating in the -LEnS additional financing will Modest recurrent project will need to commit to assist the key agencies (WREA, budget will risk financing recurrent expenditures provinces, EPF) to access to NT2 the either through their budget or cost revenue and other external funding sustainability of recovery from communities. sources. sub-projects (Modest) (viii) Limited This was not identified in PAD, but -Financial management capacity of Modest in-country Bank supervision reflects a high potential sub-grantees has been capacity on risk. High turnover rate of FM and assessed, specific training on financial account staff at WMU/EPF, financial management will be management extensive training, and low quality provided to the main sub-grantees at (FM) of consultant suggested that overall National and provincial levels. 49 FM capacity on FM in the country is limited. (ix) This was not identified in PAD, but -Procurement capacity of potential Modest Procurement Bank supervision reflects a high sub-grantees has been assessed, risk is rated risk. High turnover rate of specific training on financial substantial, procurement officers reflect limited management will be provided to the especially for procurement capacity in the main sub-grantees at National and the sub-grants. country. provincial levels. (x) Safeguard Only CBI sub-grant that might Negative checklist approach will be Low involve safeguard. A negative continued. The CCN support checklist has been prepared and activity will only support incorporated in operation manual. communities surrounding the Appropriate measures will be taken National PAs (NNT and NKD) if any negative impacts identified. which were identified during 1990. It will not support new PA creation where community access to natural resources will be restricted. 50 Table A7.2 Lessons Learned from LEnS Operations Lessons Learned Incorporation into Project Design Capacity Building LEnS provides technical assistance, training, and *LEnS additional financing will continue building operational supports to key agencies at national and local technical and management capacity of key agencies level, EPF, and local community. Key lessons learnt are: giving due attention to increase potential * Much more time and resources will be required to build achievement of the PDO and impact of the project. technical and management capacity of key agencies, Additional financing priority will be given to build local communities, and EPF to achieve the PDO due to EA/SA capacity especially on social aspect and water (a) limited number of qualified human resources in the resources management of key agencies of the Water country in the area of environment and social impacts Resource and Environment Administration (WREA) planning and monitoring, especially on social aspect; and Bolikhamxay province, including GOL capacity project management; procurement, and financial to communicate and consult with ethnic groups. management; (b) limited coordination among agencies; *Capacity building of Bolikhamxay will focus on overlapped institutional and legal framework; (c) the lack social aspect, monitoring of environment and social of government budget for operation; and (d) the lack of impact in the province, secretariat function of NT- knowledge and experience on World Bank procurement, NKD, and connection with local community network financial management and operational guidelines. on protected area (PA) conservation and watershed Limited number of qualified staff, English proficiency, protection. Hiring of consultants, training and and physical facilities exacerbate the issue. operations supports have been included in the design. *Financing capacity building through the sub-grant Capacity building of EPF will also be continued. mechanism can provide flexibility to be responsive to *The project will continue to apply the sub-grant change in priority due to legal and institutional reform. mechanism, but the number of the potential sub- Operation of EPF as an independent entity could broaden grants have been reduced to less than 20 and constituencies and facilitate active participation of local identified upfront. The project monitoring indicators community and NGOs in the environmental conservation have also been modified in close consultation with efforts. However, existing weaknesses such as large EPF and the potential sub-grantees. number of small sub-grants, difficult to assess the project impacts, and high management cost, that need to be addressed. It is noted that demand requested for financial support from LEnS is much more than the existing budget available at the EPF. LEnS provides technical assistance and operational Additional financing will provide technical and supports to Bolikhamxay, Khammouane, and operational support to the three target provinces, but Savannakhet focusing on the finalization and high priority is given to Bolikhamxay to maximize dissemination of the Provincial Environmental and Social the impact of LENs project. Bolikhamxay is the Action Plan (PESAP). Given that a number of large major province in NT-NKD river basin and will hydropower will be in operation in Bolikhamxay and experience significant impacts from hydropower Khammoune in 2012, priority should be given to build projects (at least four large hydropower operation knowledge and experience on safeguard planning and after 2014). PWREO will be the main executing monitoring of these two provinces, especially on social agency for 2-3 sub-grants. A series of visits and aspect. Both technical and management capacity will be meetings with the provincial government has been needed. held to assess and confirm the provincial commitment and readiness to implement the sub- grants. EPF, DESIA and the Bank team will provide intensive support for the province to implement the sub-grants. An integrated river basin management is very new Additional financing will provide additional fund to concept to Lao PDR. LEnS has initiated the consultation support NT-NKD activities including support to 51 process for the need to establish the NT-NKD river basin River Basin Committee (RBC) and its secretariat and committee (RBC) under a national coordination to the technical working group. Development of committee and the progress was very slow. With the Community Conservation Network will also be establishment of the new Department of Water Resource implemented in the target villages surrounding NNT (DWR) in 2008, role and responsibility of the national (the PIZ villages) and NKD National Protected Areas committee on water resources has been clearer and and communities to be selected by the provinces moving forward a river basin management can be faster. through the consultation process. Livelihoods It is expected that at the end of 2009, a coordination support activity will be engaged associate with committee (RBC) can be established in Bolikhamxay. conservation activity. Technical and management capacity building of the provincial WREO at Bolikhamxay provinces will also be provided. LEnS provides a number of small sub-grants to wider Under additional financing, a more strategic support recipients as a mean to raise public awareness and active has been designed to increase knowledge on social participation of academic group. Given the lack of impact assessment and other social aspect and specific focus, a large number of proposals were received consultation with ethnic groups. The National while limited supports could be provided due to limited University of Lao (NUOL) and the Lao Front for budget available for this sub-window. National Construction (LFNC) will be the implementing entities for these sub-grants. Development of social safeguard curriculum and training will address the lack of social capacity in the country while development of ethnic group. Environmental Protection and Conservation LEnS provides support to prepare site plans, including Under additional financing, the fund has been training of PA staff, for six provincial protected areas as designed to support the national protected area well as activities proposed by local communities in the management unit (the Department of Forest three target provinces. Large number of small sub-grants Resources Conservation) to strengthen the regulation requires extensive supervision and high transaction costs. and technical capacity as well as to follow-up priority Improving effectiveness of protected area management, activities as identified from the six site plans (which however, may trigger Bank safeguard policy related to is being developed). In light with NT-NKD river restriction of natural resources uses. Close consultation basin management, development of Community between protected area staff and local community will Conservation Network will be a key element of the therefore be necessary. Although consultation with local project activity in Bolikhamxay province. Provincial community appears to be a normal practice in Lao PDR, PWREO and Provincial Agricultural and Forest the ways and extent of the consultation may have to be Office (PAFO) will work closely together in improved. facilitating district WREO and DAFO to prepare a proposal and to implement the sub-grants with active participation of the target communities. LEnS was designed to assist the key agencies responsible Additional financing will provide technical for the implementation of the Compensation and assistance and operational support. Priority has been Resettlement decree (which was about to be approved by given to strengthen capacity on social aspect and the the Government), the river basin management in NT- NT-NKD river basin. The potential sub-grantees NKD, the national policy to promote sustainable have been actively participated in the design of the development of hydropower, and the protected area sub-grants and their procurement and financial management as well as to encourage active participation management capacity has also been assessed. of local community. These issues are complex and Clear commitment with staff assignment from the difficult and require extensive consultation among key large sub-grants will be a condition for effectiveness stakeholders at various levels. Given the present of the project. Assistance to the target communities constraints mentioned above, achieving the targets will be made during the project through participatory established in the original design is not possible. process. 52 LEnS experience confirms flexibility of the sub-grant Additional financing will continue to apply the sub- approach. However, more time and technical assistance grant approach and provide on-the-job training to will be required to increase capacity of EPF and the EPF and/or the agencies through assistance of agencies/communities to the level that they can specialists (international, regional, and/or national). effectively manage/benefit from the open-menu Close WB supervision, especially on technical aspect approach. will also provide on-the-job training for EPF and the agencies. Fund Management LEnS provides sub-grants directly to beneficiaries During the preparation of additional financing, through EPF and its respective Windows. However, procurement and financial assessment of potential delayed occurred due to the lack of Bank operational key sub-grantees were assessed and an action plan experience, especially on procurement and financial prepared for those found to have inadequate capacity. management, of the window management unit (WMU) These plans will be included in the sub-grants and and sub-grantees and difficulty in recruiting qualified implemented during the project. consultants. A number of training, especially on Bank procurement and financial management has been provided. LEnS supports EPF to develop a fund management Establishment of specific agencies responsible for system and it is now operational. The lessons learnt from EA/SA process and monitoring and water resources this is that more time and effort will be necessary on how management under WREA is a long term to secure NT2 revenue for WREA agencies responsible institutional commitment. Additional financing will for EA/SA and NT-NKD programs. EPF is drafting a support technical and management capacity of these strategy to tap GOL budget and/or revenue from agencies given priority on on-the-job training and hydropower and other development projects and plan to building capacity to secure additional budget from conduct consultation with key agencies. government and other sources, including NT2 revenue. LEnS provides about 83 sub-grants to 203 local Additional financing will continue to build capacity communities of the three target provinces. Lessons learnt of local community and local government, but with a include (a) technical assistance will be required to assist more targeted design. Hiring of consultants and the community in the preparation of proposal and provision of operational supports will be provided. implementation of the activities and (b) large number of small sub-grants require extensive supervision and monitoring to ensure full compliance with World Bank operation. EPF assigns one facilitator and one accountant to assist the sub-grants in each province. 53 Annex 8: Financial Management and Disbursement Arrangements Lao Environment and Social (LEnS) Project - Additional Financing Financial Management Capacity Assessment and Risk Mitigation 1. The aim of the assessment was to determine whether the Window Management Unit (WMU) of Lao Environment and Social Project (LEnS) project has adequate financial management capacity and arrangements in place for the effective implementation of the extended activities financed under additional financing and meets the minimum requirements stipulated in OP/BP10.02. As the WMU will be responsible for management of the additional financing, the financial management and disbursement arrangements for the Project during the additional financing period will remain unchanged. These arrangements have been reviewed, assessed, and found to be adequate for the additional activities to be financed. This assessment was conducted in August 2009 and consisted of review of the documentations and discussions with the staff of the WMU and the identified potential sub-grantees at both central and provincial level. 2. The financial management capacity assessment indicates that the Project will be implemented in an inherently high risk environment. Previous supervision missions found that the project financial management performance has improved gradually. The project financial management performance was rated as marginally unsatisfactory during the latest supervision mission in early June 2009, but it was subsequently upgraded to marginally satisfactory after the quarterly Interim Financial Reports (IFRs) were submitted retroactively and the audit report of FY08 was submitted at the end of June 2009 with unqualified (clean) opinion. Additional measures (beyond those already being implemented by the Project) that will reduce the residual risk of the Project to "Moderate", include: (a) refresher training to be provided to all WMU financial staff on the computerized APIS accounting system in order to ensure the effective utilization of the software; (b) one full time financial staff with an accounting background/experience is to be appointed/recruited by all large sub-grants (> = US$ 50,000); and (c) training to be provided to the financial staff of all new sub-grants before commencement of the sub-grant on Excel (in order to ensure efficient use of Excel as an accounting tool) and on sub-grant accounting and reporting. With these additional measures, the proposed financial management arrangements for the additional activities put in place by the WMU are considered adequate and meet the Bank's minimum requirements for project financial management as per OP/BP 10.02. Project Development Objectives 3. Project development objective for additional financing is to assist the Recipient to strengthen the management of environmental and social issues associated with the sustainable use of natural resources in Lao PDR. 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 environmental change; (b) invest in on- the-ground environmental improvement activities, with emphasis on sustainable biodiversity management, community environmental management and livelihoods enhancements; and (c) 54 operationalize the Environmental Protection Fund (EPF) to become a permanent entity that is eligible to use Nam Theun 2 (NT2) revenues for priority environmental protection activities by developing two Windows that serve as models for EPF operation and potentially become permanent structure within EPF. LEnS additional financing will deepening the support to: (a) the Department of Environmental and Social Impact Assessment (DESIA) of the Water Resources and Environment Administration (WREA) to perform its functions related to environmental and social impact assessment and monitoring; (b) demonstrate ways to address cumulative impacts in Nam Theun ­ Nam Kading (NT-NKD) river basin, including establishment of community conservation network; and (c) support priority activities at the central and provincial levels related to social safeguard capacity, pollution control, climate change, and coordination. This additional financing will compliment the Bank's other support projects aiming to build technical and management capacity of the sector agencies in the hydropower and mining sectors (Technical Assistance for Hydropower and Mining Sectors Project, HMTA) and the Mekong Integrated Water Resources Management (M-IWRM) Project which are under preparation. Scope of Additional Financing 4. With the proposed additional grant of US$ 3 million, the project will be extended for 30 months until June 30, 2013. Priority will be given to the sub-grants that are in line with the following four priority programs which were designed to facilitate effective coordination among the sub-grantees and demonstrate effectiveness of the EPF operation: · The social safeguard capacity development program: To guide the planning and implementation of the social safeguard capacity building activities to be implemented by DESIA, Bolikhamxay, Khammouane, NOUL, and LFNC and facilitate effective cooperation. · The NT-NKD river basin management program: To guide the planning and implementation of the NT-NKD related activities to be implemented by DWR/WERI and PWREO Bolikhamxay, including the development of Conservation community network. · WREA program: To increase effective planning, implementation, and monitoring of the sub-grants under WREA responsibility. · EPF program: To demonstrate effectiveness of EPF operation and its potential impact on the PDO. 5. Close coordination with other projects (HMTA and M-IWRM) regarding hydropower development, benefit sharing, the management of watershed, river basin organization, and pollution control will increase effectiveness of various measures and demonstration efforts. 55 Risk Analysis 6. The detailed risks to project funds and related mitigating measures are as analyzed and articulated in the following table: Risk Risk Risk Mitigation Measures Residual Rating Risk Inherent Risk Country H Public Financial Management weaknesses are being addressed through S level the Financial Management Capacity Building Project. These include establishing internal audit, improving budget execution, implementing a GFMIS and building capacity at the State Audit Office (SAO). Entity level H Project specific financial management arrangements have been put in S place for this project. Financial Management and Procurement Manuals are in place for WMU; and a Sub-grant Implementation Manual is in place for sub-grantees. Overall H S Inherent Risk Control Risk Inability to H The project is currently subject to annual audit by independent M use funds external auditors. The appointment of the external auditor for efficiently Additional financing will be carried out under the audit bundling and exercise.EPF is also audited by the SAO annually. economical ly for The Provincial Finance Officer reviews the financial reports and purposes supporting documents prepared by the sub-grantees before forwarding intended to WMU Financial Unit. WMU Financial Staff at central level reviews all supporting documents submitted by sub-grantees before clearing the amount advanced to book as sub-grant expenditures. Implementi H The same implementing agency, WMU, will implement the additional M ng entities financing activities under the same FM and disbursement and staff arrangements with additional measures to be put in place. WMU financial staff at the central level has gained a lot of experience during the implementation of the on-going LEnS. However, to enhance financial capacity, a refresher course on computerized APIS accounting system is suggested for WMU finance staff as a whole. At least one full time staff with accounting background /experience should be appointed/ recruited by the large sub-grant (greater than US$ 50,000). While the sub-grantee at the central level receives direct support from WMU for both finance and procurement aspects, the sub-grantees at the provincial level are supported by Provincial Facilitator and Provincial Finance Officer. However, in order to supervise more effectively, the provincial staff need to be retrained to gain a deeper understanding of sub-grant accounting and reporting. 56 Budgeting S Annual budgets based on project annual work plans will be prepared M by WMU and approved by the Bank. Sub-grantee prepares an overall budget at the proposal stage. This is submitted to the WMU Manager for review and approval. Quarterly work plan, which lists all activities and associated costs, is required to support the funds requested by sub-grantee. Accounting H There has been high turnover of project finance personnel since the S project commenced. Currently the WMU Finance Unit consists of 4 staff, headed by the EPF's head of finance unit. A review of the financial reports prepared by sub-grantees has identified some common mistakes. This indicates that the people reviewing the reports (the provincial finance staff and the WMU financial staff) need further training to enhance their understanding of the accounting requirements. The customized APIS accounting system is functional and the accounting records in Excel have been reconciled to records in the computerized APIS accounting system. However, minor adjustments are still needed to improve the Sub-grant Advance Register. Therefore, accounting records are still being recorded in Excel in parallel to the APIS accounting system. Long outstanding advances have been gradually cleared but progress is still quite slow. WMU and provincial financial staff need to supervise closely the timely clearance of the advances to sub-grantees. Fixed asset registers are prepared by both WMU and sub-grantees; however, the fixed assets registers prepared by the sub-grantees are not reconciled to the accounting records. FM and Sub-grant Implementation Manuals are in place; however, a revision or update is still needed to incorporate the changes suggested by the Bank during the FM capacity assessment mission. Although finance staff has now gained some experience in the implementation of the on-going LEnS project, it is recommended that they need refresher training in accounting concepts and implementation procedures before the start of the additional financing. This will also ensure that comprehensive guidance is provided to new sub-grantees. Reporting S The reporting requirements, the timelines and the IFR formats will M remain the same, i.e. quarterly un-audited IFRs (within 45 days after the end of each quarter) and an annual external audit (audit report to be received within six months after the end of each fiscal year). The M&E system will be enhanced to capture the needed information. External S The annual external audit of the Project Financial Statements will be M Audit carried out by an independent auditor in accordance with TOR satisfactory to the Bank. Overall H M Control Risk Overall FM H M Risk 57 Financial Management Arrangements Implementation Arrangements and Staffing 7. The current LEnS implementation arrangement will be maintained. LEnS additional financing will continue to apply the sub-grant approach and provide on-the-job training to EPF and/or the agencies through assistance of specialists (international, regional, and/or national). Close supervision by the Bank, especially on the technical aspects and on-the-job training to EPF and the agencies will also be provided. The applicants will submit their proposals to WMU for consideration. WMU will endorse acceptable proposals to the EPF Management/Board for approval. 8. The project activities will be implemented through sub-grant mechanism following the WMU/EPF procedures and operation manuals. The sub-grantees will submit their progress reports periodically and WMU will submit the project progress report to the Bank every three months. From technical point of view, given that majority of the large sub-grants will be implemented by WREA, WREA will be responsible for ensuring the quality and performance of their sub-grants while WMU will ensure that IDA guidelines and procedures are followed on disbursements, auditing and overall financial management. This will include maintaining the Designated Account, making payments from the DA, monitoring overall project disbursement, preparation of annual budget and work plans, coordinating with the MoF on annual counterpart fund requirements, preparation and submission of withdrawal applications to IDA, producing quarterly Interim Financial Reports, preparation of annual financial statements and having them audited. 9. Currently WMU finance unit comprises of 4 staff ­ the head of Finance Unit, one accountant and two assistants. Given the implementation experience of LEnS, the potential sub-grants will be larger in size (US$) and smaller in number, the role of WMU will change toward sub-project proposal development, sub-project supervision and monitoring, including assisting the potential sub-grantees to plan and implement their activities timely and effective manner. WMU will require all large sub-grants (sub-grant amount exceeding US$ 50,000) to hire at least one full time staff to assist in the sub-grant management, including timely submission of budget request, clearance, and progress report. One Provincial Facilitator and one Provincial Finance Officer are also assigned to assist the sub-grant in each province. Flow of Funds 10. For the LEnS additional financing, the same flow of funds will operate. IDA funds will be channeled through a segregated Designated Account under EPF authority and approval, to be established at the Bank of Lao PDR. The ceiling of the DA will be set at US$ 500,000. Any invoice above 20% of the outstanding advance can be made by direct payment, with full supporting documentation and signed contracts. Each sub-grant will open a bank account in the name of the sub-project at the nearest town/district to receive the sub-grant proceeds. Two signatures will be required to withdraw money from the bank account. 58 Specific Risk 11. Sub-grant Implementation. Given the implementation experience of LEnS, the potential sub-grants will be larger in size (US$) and smaller in number, this will enable timely and closer supervisions. The number of sub-grants will be reduced significantly from 147 under LEnS (74% are for < US$ 10,000, 20% are for US$ 10,000 ­ US$ 50,000, and 6% are for > US$ 50,000) to 17 potential sub-grants of which about 5 are small sub-grants (amounts less than US$ 50,000). Around 80% of implementing partners are government offices at various levels (national, provincial and district), while the remaining are villagers, educational institutions and mass organizations. According to the revised procedures, the proposals for small sub- grants will be approved by the EPF Executive Director, the proposals of large sub-grant (amount greater than US$ 50,000) will need to go to the EPF Board for approval. WMU, therefore, require all large sub-grants (sub-grant amount exceeding US $50,000) to hire at least one full time staff to assist in the sub-grant financial management functions. Each sub-grant will open a bank account in the name of the sub-project at the nearest town/district to receive the sub-grant proceeds. Two signatures will be required to withdraw money from the bank account. Funds will be transferred to sub-grantees on a quarterly basis based on the budget requested to WMU, which will detail the planned activities and associated costs. In addition, the sub-grantees will also report the actual expenditures incurred together with the activities accomplished. No additional advances will be made if the actual expenses of the previous advance had not been reported. The sub-grant will be closely supervised by WMU staff. The WMU staff/Provincial Facilitator will periodically visit the sub-grantee to review the implementation progress and to ensure that funds are used for intended purposes. The Provincial Finance Officer reviews the financial reports and supporting documents prepared by the sub-grantee before forwarding to WMU Finance Unit. WMU financial staff reviews all supporting documents before clearing the amount advanced and book the sub-grant expenditures. The M&E staff provides technical support to sub-grantees. The ex-post and transactions reviews will also be conducted by the Bank staff to identify the ineligible expenses, weaknesses and provide recommendations for improvements. 12. Control of Soft Expenditures. Soft expenditures are those related to fuel, per diems, accommodation, travel, training/workshops, stationary and maintenance costs, etc. The sub- grants activities under additional financing will involve training, meeting, study visits to build capacity and awareness. These soft expenditures will contribute to almost 50% of total project proceeds. The Financial Management Manual and the Sub-grant Implementation Manual provide details of controls relating to soft expenditures, such as the daily subsistence allowance rates to be applied, eligible rules for attending training/workshops, define evidence to be submitted by attendees for reimbursement of expenses, etc. These expenditures will be looked at closely during the Bank FM supervisions. The Bank will also specifically discuss and agree the extent of testing the external auditor will do in this area. 59 Accounting System and Procedures 13. The Project will continue to use the existing computerized APIS accounting software for data processing and financial management reporting. The Sub-grantee will continue to use Excel to maintain simple worksheet to track the transactions and produce reports to be submitted to the WMU quarterly. 14. The existing Financial Management Manual of the Project describes the flow of funds, responsibilities and delegated of authorities, disbursement procedures, internal control, accounting policies and procedures, transaction flows and reporting procedures as well as budget preparation procedures. The existing Sub-grant Implementation Manual describes the sub-grant procedures together with the funds flow and reporting requirements for sub-grant. Both are deemed adequate for the project implementation under additional financing. However, during the FM capacity assessment, some weaknesses have been identified and communicated to the WMU Finance Unit including some suggested revisions in the sub-grant financial reports. The WMU will ensure that the manuals are updated to reflect all changes made. Interim Financial Report (IFRs) 15. Due to the high turnover of the financial staff at the beginning of LEnS, the computerized accounting system was not functioning. In order to maximize the use of the computerized APIS accounting system, the chart of accounts has been re-designed and all transactions have had to be re-entered into the system. Due to the extended absence of the head of the WMU Finance Unit (due to personal reasons), the progress of the data re-entering has been slow and the computerized APIS accounting system has only recently been completely installed and become fully operational. The quarterly IFRs have just been generated from the system and submitted retroactively to the Bank in June 2009. 16. The LEnS additional financing will still be required to submit quarterly IFRs together with narrative report on the progress of the project and analysis of variance between actual and planned expenditures. The format of these reports will remain is the same for the additional financing period. Designated Account (DA) 17. A segregated DA will be maintained for LEnS additional financing at the Bank of Lao PDR, and the ceiling for the DA will be US$ 500,000 (this can be changed during the project implementation if necessary). The DA will be replenished on a monthly basis to assure liquidity of funds or when the account is drawn down to 20% of the initial deposit, whichever comes first. All replenishment applications will be accompanied by reconciled bank statements from the depository banks showing all transactions in the DA. Independent auditors acceptable to the Bank will audit the DA annually. 60 Disbursement Arrangements 18. Applicable disbursement methods include: Advance, Reimbursement and Direct Payment. 19. The allocation of Grant proceeds against eligible expenditures is outlined in the table below. Allocation of the Additional Financing Loan Proceeds Item Expenditure Category AF Allocations Financing in US$ Percentage (1) Sub-grants 100% of sub-grant amount disbursed (a) PICE 2,050,000 (b) CBI 600,000 (2) Consultants' Services 236,000 100% (3) Training/workshops 64,000 100% (4) Goods 10,000 100% (5) Incremental Operating Costs 40,000 100% Total Project Costs 3,000,000 Supporting Documents for Disbursement 20. For reporting eligible expenditures paid from the DA and requests for reimbursement: · Statements of Expenditures (SOEs) are accepted for the following expenditures which are not subject to prior review: (a) goods costing less than US$ 100,000 equivalent per contract; (b) services from consulting firms costing less than US$ 100,000 equivalent per contract; (c) individual consultants costing less than US$ 50,000 equivalent per contract; and (d) all training/workshops and incremental operating costs. · Full documents including records evidencing eligible expenditures, e.g. signed contracts, invoices, are required for any expenditure exceeding the above limits and any prior review contract. 21. Applications for direct payments, purchase records evidencing eligible expenditures (such as copies of contracts, purchase orders, supplier's invoices and receipts, etc.) will be submitted together with Withdrawal Applications setting out clear payment instructions. 22. The related documents should be retained by the Project during the life of the project and until at least the later of: (a) one year after the Recipient and the Bank have received the audited financial statements covering the period during which the last withdrawal from the 61 Financing Account was made; and (b) two years after the Closing Date. These documents will be made available for review by the auditors and Bank supervision missions. 23. For Direct Payments: full documentation including records evidencing eligible expenditures, e.g. signed contract, invoices, will be required. Internal Audit 24. EPF is a newly established organization. There is no internal audit function within EPF. MoF is planning to establish an internal audit government wide soon. The compensating controls will be tight control over approval of sub-grant applications, close supervision of the WMU staff at both central and provincial levels and the Bank's task team including a low threshold to be set up of all types of activities that require a request for no objection from the Bank. The provincial staff (Provincial Facilitator and Provincial Finance Staff) will also closely supervise the sub-grants at the provincial level, provide guidance, review the sub-grants performance and review all documents before submission to the WMU Finance Unit. External Audit 25. An independent external auditor (PwC) has been appointed as LEnS's auditors for the whole project life. The submission of the first two years' audit reports has been late. In the first year late submission was due to late appointment of auditors. In the second year late submission was due to delays in preparation of FY08 financial statements. As the computerized accounting system has been in full operation and the transactions input into the financial system is up-to-date, the potential for delay in submission of the FY09 audit report has been reduced. In addition, the auditor is scheduled an earlier start of their field work in November 2009. Although, the audit opinions were unqualified (clean), numerous audit findings relating to internal control and accountability were reported. An action plan has been set up to overcome these weaknesses. 26. All government ministries and departments are supposed to be audited by the Supreme Audit Office (SAO) under the new audit law. However, at the moment the SAO can only do compliance audits due to its limited capacity. The EPF operations are audited by SAO annually, but not the LEnS activities. As such, an external auditor, satisfactory to the Bank, will be required to conduct the audits in accordance with International Standards on Auditing, under term of reference satisfactory to the Bank. The selection of auditors for all World Bank financed projects is currently being carried out by the Ministry of Finance (MoF) under audit bundling exercise. Therefore, LEnS additional financing will be audited by auditors appointed by the MoF. However, the cost of the audit will be financed from the project proceeds. In addition to providing an audit opinion on the Project's financial statements, the auditor is also required to issue management letter. The audited financial statements will be submitted to the Bank within six months after the end of each fiscal year. 62 Supervision 27. As the financial management overall risk is assessed as substantial, supervision of project financial management will be done at least twice a year. The supervision will review the Project's financial management systems including but not limited to operation of designated accounts, evaluating quality of budgets, project financial management reports, financial reports submitted by sub-grants, assessing relevance of Financial Management Manual, Sub-grant Implementation Manual, statements of expenditures, internal controls, reporting and follow up of audit and mission findings. The review will also include random reviews of financial transactions concentrating soft expenditures: on per diems, training and workshop costs, fuel and accommodation expenses as well as compliance with covenants. It will also involve visits to various sites and physical verification of assets bought by the Project. During each supervision, the Project's financial management risks and the frequency of future supervisions will be reassessed. FM Action plan 28. Following actions are required to address the identified weaknesses: Action Responsible Date of Completion by Provide the refresher training on sub-grant WMU/WB Completed in August accounting and reporting to all WMU financial 2009 staff. Update FMM and Sub-grant Implementation WMU October 2009 Manual Obtain refresher training on the computerized WMU December 20009 APIS accounting system. All large sub-grants (> = US$ 50,000) are required WMU Before commencement to appoint/recruit one full time financial staff with of the sub-grants accounting background and experience in accounting. Provide training concerning sub-grant accounting WMU Before commencement and reporting to the financial staff of all new sub- of the sub-grants grants. Ensure that the financial staffs for all sub-grants WMU Once fund has been obtain training on Excel in order to ensure transferred to the sub- efficient use of Excel as an accounting tool. grant 63 Annex 9: Procurement Arrangements Lao Environment and Social (LEnS) Project - Additional Financing A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreements. For National Competitive Bidding (NCB), the Government's procurement procedures as provided in Decree 03/PM dated January 9, 2004, and in the Implementing Rules and Regulations (IRR) dated March 12, 2004 as amended May 5, 2009, will be followed subject to the improvements listed in the NCB-Annex to the legal agreement. The appropriate Standard Bidding Documents developed by the Procurement Monitoring Office, Ministry of Finance, will be used for procurement of goods and works under NCB and Shopping, subject to IDA's prior concurrence. For International Competitive Bidding (ICB), IDA's Standard Bidding Documents shall be used. The complaints handling mechanism specified in the Government's IRR will be followed and also incorporated in the bidding documents. Contract award information shall be made publicly available in accordance with IDA's Procurement Guidelines in a format agreed with IDA. The general descriptions of various items under different expenditure category are described below. 2. For each contract to be financed by the IDA Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the IDA project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 3. Procurement of Works. Works procured under this project would include: office renovation at national, provincial and district offices, and small scale infrastructure for sub- project grants. Contracts for these works costing US$ 300,000 or more each would be procured through International Competitive Bidding (ICB). Works estimated to cost less than US$ 300,000 per contract may be procured through National Competitive Bidding (NCB) method and the procedures set forth in the Decree 03/PM dated January 9, 2004, and in the Implementing Rules and Regulations (IRR) dated March 12, 2004 as amended May 5, 2009, including national standard bidding documents with IDA's prior concurrence, will be followed subject to the improvements listed in the NCB-Annex to the Legal Agreement. Works estimated to cost less than US$ 30,000 per contract may be procured through Shopping method and the procedures, including standard bidding documents, set forth in the aforesaid Decree and IRR. Small scale infrastructure for sub-project grants of the Project, estimated to cost less than US$ 30,000 meeting the criteria in the Project Operation Manual may be procured through Community Participation in Procurement method as stipulated in IDA's Procurement Guidelines and described in the Project Procurement Manual. Works under the sub-project grants, including electrification works and water and sanitation works, that are of the 64 proprietary nature or obtainable from one source, may, with the IDA's prior agreement be procured in accordance with the provision of paragraph 3.6 of the Procurement Guidelines. 4. Procurement of Goods: Goods procured under this project would include: office equipment, vehicles, computer, and furniture for national, provincial and district office and goods for sub-project grants. Contract for goods costing US$ 100,000 or more each would be procured through International Competitive Bidding (ICB). Goods estimated to cost less than US$ 100,000 per contract may be procured through NCB method and the procedures set forth in the Decree 03/PM dated January 9, 2004, and in the Implementing Rules and Regulations (IRR) dated March 12, 2004 as amended May 5, 2009, including national standard bidding document with IDA's prior concurrence, will be followed subject to the improvements listed in the NCB-Annex to the Legal Agreement. Goods estimated to cost less than US$ 30,000 per contract may be procured through Shopping method and the procedures, including standard bidding documents, set forth in the aforesaid Decree and IRR. Goods for sub-project grants that are of the proprietary nature or obtainable from one source, may, with the IDA's prior agreement, be procured in accordance with the provision of paragraph 3.6 of the Procurement Guidelines. 5. Selection of Consultants. Consultant services are expected in the following areas: financial audits, technical advisor, project staff support and for sub-project grants. These services would be procured through various selection methods including Quality and Cost Based Selection, Least Cost Selection, Selection Based on Consultant Qualifications, Single Source Selection and Individual Consultants depending on the value, nature and complexity of the consultant assignments. The use of the method i.e. Single Source Selection for specific assignments would be subject to IDA's prior agreement. However, Quality and Cost Based Selection would generally be the applicable method for each contract estimated to cost more than US$ 100,000 equivalent. Individual Consultants may be selected in accordance with the provisions of paragraphs 5.1 to 5.4 of the Consultants Guidelines. Under the circumstances described in paragraph 5.4 of the Consultant Guidelines, such contract may be awarded to individual consultant on a sole-source basis, subject to IDA' prior approval. B. Assessment of the Agency's Capacity to Implement Procurement 6. An IDA procurement accredited staff carried out a procurement capacity assessment during the project pre-appraisal in September, 2009. Since the commencement of Lao Environment & Social Project's (LEnS) implementation in year 2005 to-date, the Window Management Unit (WMU) of the Environmental Protection Fund (EPF) in Vientiane was fully responsible for procurement of vehicles, equipment, office materials and selection of consultant services to support the WMU's capacity. There was one national procurement staff in WMU to handle procurement at the central level which was only a few packages under NCB and Shopping. Post reviews conducted by IDA of the procurement undertaken at WMU level did not reveal any substantial deviations from IDA's required procedures. The capacity of WMU staff to handle procurement for WMU under the Project was adequate as there were not many packages of procurement. 65 7. For the sub-project grants, the responsibility for day-to-day implementation of procurement activities was carried out by the sub-project grantees in the central and relevant provincial line departments. With regard to Community and Biodiversity Investment (CBI) activities, the procurement process of the CBI Grants was managed by the communities. One national procurement staff in WMU was assigned to coordinate and oversee the implementation of procurement process of the sub-project grants, around 147 in number, at the central, provincial as well as community levels. Furthermore, each province had a project technical facilitator who along with the national procurement staff of WMU had received basic procurement training from IDA's procurement staff. A Project Procurement Manual in English and the Lao language version was adopted and used to guide the sub-project grantees to facilitate compliance with the agreed procedures. Expost reviews by IDA's procurement staff in Vientiane were conducted of the central sub-project grantees and also for the sub-project grantees in three provinces i.e. Bolikhamxay, Khammouane and Savannakhet, and found similar issues such as: (a) technical specifications being restrictive for procurement of office equipment; and (b) relevant procurement documents, particularly bids of unsuccessful bidders were not properly maintained for the Bank's post reviews. IDA provided specific recommendations along with procurement training and followed up with post reviews of the same sub-project grantees and compliance in these areas was found to have significantly improved. At this time five potential sub-grantees have been identified under the additional financing, including the Department of Environment, Department of Environmental & Social Impact Assessment, Department of Water Resources, National University Faculty of Social Sciences and Lao Front for National Construction. Most of the currently identified and future sub-grantees are not expected to have prior experience with World Bank financed procurement and will therefore require training and guidance by WMU which has been incorporated into the capacity building action plan below. 8. Keeping in view the decentralized nature of the procurement and the broader fiduciary risks in Lao PDR in the context of a weak procurement environment in the country, the procurement risk before mitigation is determined to be Substantial. However, considering that (a) WMU has benefited from the experience in procurement and contract management under the on-going project; (b) there will be significantly less number of sub-grants under the additional financing (around 17 compared to 147 in the original Project); (c) the procurement under the additional financing is expected to be of simple nature and small value, mostly estimated to cost less than US$ 30,000 per contract, which is to be procured through Shopping procedures for which standard request for quotation documents exist under the Government's procurement regulations; and (d) adoption of the procurement capacity building and risk mitigation measures listed below, the residual procurement risk is determined to be Moderate. 9. The Action Plan to improve procurement capacity and increase transparency for mitigating procurement risks is as follows: a. WMU in Vientiane will continue maintain at least one qualified and experienced procurement staff to carry out the procurement at national level and also to coordinate and provide advice for procurement under the sub-project grants. 66 b. IDA will provide refresher training to WMU procurement staff before effectiveness of the additional financing and thereafter once a year. The WMU procurement staff with support by the Procurement Monitoring Office, MOF, will in turn provide procurement training to all the sub-project grantees at least twice a year, with emphasis on the preparation of bidding documents and bid evaluation in accordance with agreed procedures, as well as hands-on advice upon request on a continuous basis. Each sub-project grantee will ensure that at least one staff responsible for procurement is assigned to receive the necessary training, and if the staff are moved or replaced, the replacement should be trained before allowing the staff to carry out any procurement or contract management. c. To the extent feasible, common procurement requirements of goods under the various sub- grants, such as vehicles and motorcycles, will be consolidated in bidding packages of similar goods with separate lots for each sub-grantee and the procurement process will be carried out by WMU while the contracts for each lot will be signed and implemented by the respective sub-grantees. d. A Procurement Plan for each sub-project grant will be prepared before effectiveness of the sub-project grant and will be reviewed by WMU and submitted to the Bank for information. e. For procurement through National Competitive Bidding (NCB) and Shopping methods to be carried out by WMU and the sub-project grantees, model procurement documents will be used under the additional financing based on the national standard bidding/request for quotation documents and evaluation report issued by Procurement Monitoring Office (PrMO), Ministry of Finance (MOF), and suitably amended, satisfactory to IDA, to include appropriate qualifications requirements and provisions for further increasing transparency such as procedures for complaints and debriefing, publication of contract awards, fraud and corruption clauses and remedies, integrity pacts by bidders/contractors, etc. The Project Procurement Manual for sub-grants will also be amended accordingly to include these provisions satisfactory to IDA before undertaking the first procurement under the sub-grants. f. A consolidated Schedule of Invitations for Quotations/requests for expression of interest of all contract packages for procurement under the sub-grants that are expected in the forthcoming Quarter shall be advertised by WMU on a quarterly basis in a national and provincial newspaper and in EPF website, and copies of the advertisement will also be posted on the bulletin board of the sub-grantee offices. g. All Invitation for Quotation advertisements, Request for Quotation documents, Invitation for CVs of individual consultants, evaluation reports and draft contracts under the sub- project grants shall be prior reviewed and approved by a Procurement Review Committee constituted by each Sub-grantee in accordance with the Government procurement regulations and additionally also include a representative of WMU. All members of the Procurement Review Committee shall sign a Declaration on Ethical Conduct in a format acceptable to IDA. 67 h. Immediately after award of any contract, the contract award information of each contract, in a form acceptable to IDA, shall be posted by WMU and each sub-project grantee on the EPF website and also on the bulletin board of the WMU and sub-grantee offices, and copies sent to all bidders/consultants who participated. i. A Procurement Manual as Part of Project Implementation Plan need to be reviewed and updated by WMU and submitted to the IDA for getting the clearance and then sharing to the sub-grantees. j. A database of common procurement goods, construction materials will be established by the WMU and shared with sub-grantees. k. WMU and the sub-project grantees will adopt a project procurement record and filing system acceptable to the IDA at national and sub-project grants level, including contracts register to be continuously maintained and reported to IDA every six months. IDA will conduct a higher level of ex-post procurement reviews (sample of 30%) with expanded scope to also include checks for transparency in the procurement process and verification of end-use deliveries, in addition to verification of compliance with the agreed procurement procedures. The ex-post procurement reviews, to the extent feasible, will be conducted jointly by Procurement and FM staff to enable an integrated review of the fiduciary functions. 10. With the incorporation of the capacity building and transparency strengthening measures, the residual procurement risk under the additional financing is determined to be "Moderate." C. Procurement Plan 11. National Level Procurement: A detailed Procurement Plan for the first eighteen months for national level procurement will be prepared and agreed during Project appraisal. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The Procurement Plan will be available in the Environment Protection Fund (EPF) website and also in the IDA's external website. 12. Sub-project Grant Procurement: Currently about 5 sub-grants have been identified. The procurement activities will be reflected in an annual procurement plan for each sub-project grant and will be included in the proposal of the sub-projects grant which will be approved by the EPF Board and to be provided to the Bank for its information and recorded at WMU. 68 D. Bank's Procurement Review Requirements 13. The following contracts shall be subject to the World Bank's prior review in accordance with the Procurement Guidelines or Consultant Guidelines: 1. All NCB contracts for goods and works. 2. All contracts for goods and works procured through ICB and Direct Contracting. 3. Each contract for consultants' services provided by a firm estimated to cost the equivalent of US$ 100,000 or more, 4. Each contract for the employment of individual consultants estimated to cost the equivalent of US$ 50,000 or more, 5. Each contract involving Single-Source Selection of firms or individual consultants and the employment of fiduciary consultants for procurement and financial management, irrespective of value. 14. All other contracts shall be subject to post review by IDA. 15. Frequency of Supervision. In addition to the prior review, the assessment of the capacity of the Project Implementing Agencies recommended that procurement supervision missions will be conducted at least twice per year. 16. Short lists composed entirely of national consultants. Short lists of consultants for services estimated to cost less than US$ 100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. E. National Competitive Bidding Procedures 17. The following procedures will be required in addition to the Government of Lao PDR's national procurement regulations: (i) Bidding documents and contracts under national competitive bidding procedures financed by the Association shall include a provision requiring suppliers contractors and their subcontractors to permit the Association to inspect their accounts and records relating to the bid submission and the performance of the supplier and/or contractor, as the case may be, and to have them audited by auditors appointed by the Association, if so required by the Association. The deliberate and material violation by the supplier, contractor or subcontractor of such provision may amount to obstructive practice. (ii) Immediately after completion of the bid opening proceedings, a copy of the bid opening record shall be posted at a prominent location, accessible to the public, outside the office of the concerned procuring entity and shall be retained at the same location until the award of contract has been notified. A copy of the bid opening record shall be provided to all bidders who submitted bids. (iii) The Recipient shall publish the following information on contract award on a free or open access website when it becomes operational or on another means of publication acceptable to 69 the Association: (a) name of each bidder who submitted a bid; (b) bid prices as read out at bid opening; (c) name and evaluated price of each bid that was evaluated; (d) name of bidders whose bid were rejected and the reasons for rejection; (e) name of the winning bidder, contract price, explanation if it is different that bid price as well as the duration and summary scope of the contract awarded; and (f) contract variation orders. This publication shall be updated quarterly. (iv) The eligibility of bidders shall be as defined under section I of the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits, published by the Bank in October 2006; accordingly, a firm or individual previously declared ineligible by the Association based on determination by the Association that this firm or individual has engaged in corrupt, fraudulent, collusive, coercive or obstructive practices shall be declared ineligible to be awarded a contract financed by Association. (v) The Association shall declare a firm or individual ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Association and the Recipient, if it at any time determines that the firm or individual has, directly or through an agent, engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in competing for, or in executing, an Association-financed contract. F. Procurement Plan (Year 2010-2012) I. General 1. Project information: Country Lao PDR Project Name Lao Environment and Social Project- Additional Financing PIA Window Management Unit (WMU) of Environmental Protection Fund (EPF) Amount of IDA Grant US$ 3,000,000 2. Bank's approval Date of the procurement Plan [Original.......; Revision 1:...] 3. Date of General Procurement Notice: .................... 4. Period covered by this procurement plan: 2010 to 2012 70 II. Goods and non-consulting services. 1. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement: Procurement Contract Value Prior Review Comments Method Threshold (US Threshold (US $'000) $'000) 1. ICB (Goods) >=100 100 All ICB 2. NCB (Goods) 30 ­ 100 - All NCB. 3. Shopping (Goods) <30 - None 2. Procurement Packages with Methods and Time Schedule GOODS 1 2 3 -4 -5 6 7 Ref. Contract Procurement P-Q Domestic Review Expected No. (Descriptio Method Preference by Bank Bid-Opening n) (yes/no) (Prior / Post) Date 1 Office Shopping No no Post March 2010 Equipment 2 Vehicles NCB No no Prior May 2010 3 Motorcycles NCB No no Prior May 2010 III. Selection of Consultants 1. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants: Selection Method Contract Value Prior Review Threshold (US $'000) Threshold (US $'000) 1. Competitive Methods (Firms) ­ >=100 >100 Quality & Cost Based Selection (QCBS) 2. Competitive Methods (Firms) ­ <100 Least-Cost Selection (LCS) and Selection Based on Consultant Qualifications (CQS) 3. Single Source (Firms) - All contracts 4. Individual Consultants - > $50 & all sole-source selection and the employment of fiduciary consultants for procurement & financial management, irrespective of value. 71 2. Consultancy Assignments with Selection Methods (prior & post reviews) and Time Schedule - Consulting Services 1 2 3 4 5 6 Expected Ref. Description of Review Proposals No. Assignment by Bank Remarks/ Comments Selection Submission (Prior/Post) Method Date 1 WMU Advisor IC Prior January 2010 20 months 2. WMU Manager IC Prior January 2010 The assignment is around 24 months 3 WMU staff IC Prior January 2010 24 months (Procurement, FM, etc.) 4. External Auditor LCS Post January 2011 It may be included in contract bundling for external audit. 3. Any Other Special Procurement Arrangements: The Action Plan to improve procurement capacity and increase transparency for mitigating procurement risks, as stipulated in Annex-9, Paragraph 10 of the Project Paper shall apply under the additional financing. 72 Annex 10: Safeguard Policy Issues Lao Environment and Social (LEnS) Project -- Additional Financing A10.1. Background and Safeguard policies Triggered 1. LEnS provides a grant fund of US$ 4 million to Lao PDR through the operations of the Environmental Protection Fund (EPF). The project effective date is April 14, 2006 and the project closing date is December 31, 2010. 2. The project was designed to provide funding to both Government and non-government agencies, including the provinces and local communities. Funds were allocated under two windows: the Policy Implementation and Capacity Enhancement (PICE) and the Community and Biodiversity Investment (CBI). Under PICE window, funds were allocated for: (a) supporting environmental and social safeguard planning and monitoring, especially for the three target provinces (Bolikhamxay, Khammouane, and Savannakhet); (b) developing and implementing an integrated approach in the NT-NKD river basin management, (c) initiating the implementation of the National Policy on Environmental and Social Sustainability for the Hydropower Sector (NPSH); (d) improving capacity to address social safeguards; and (e) increasing environmental and social public education and awareness in general. Under CBI, funds were allocated for: (1) improving government capacity to manage protected area and natural habitats; and (2) increasing involvement of local communities and other constituents. 3. As stated in Project Appraisal Document (PAD) four safeguard policies have been triggered for LEnS project; these are Environment Assessment (OP 4.01), National Habitats (OP/BP 4.04), Involuntary Resettlement (OP/BP 4.12), and Indigenous People (OD 4.20) as discussed at the end of this annex. 4. LEnS additional financing will provide additional of US$ 3 million grant for technical assistance and operational supports throughout three years, including necessary equipment and vehicles, to the key agencies of WREA through the existing PICE window. Additional budget will also be allocated to the CBI window but priority will be given to the activities to be conducted in NT-NKD and the priority 6 PAs; however all the sub-grant will be financed through LEnS existing windows. The safeguard policies identified for LEnS project will remain valid for the additional financing. A10.2. Project Description 1. The project activities in three components as described earlier will be implemented through sub-grant mechanisms following the WMU/EPF procedures and operation manuals. Type of activities include: (a) capacity building grants for Component 1 which will include studies, surveys, workshops, training, preparation of technical guidelines, monitoring and assessment of environmental conditions, small office renovation etc.; and (b) grants for protected area 73 management and community environmental management and community livelihood activities. In addition, the project will also support the sourcing of international expertise to assist in the implementation of some tasks for the project activities. A10.3. Borrower's Institutional Capacity for Safeguard Policies 1. The Recipient has limited but growing capacity for managing social and environmental impacts of natural resource development and extractive industry. Through financing provided by multilaterals and other development partners for various projects safeguards, policies are improving and practical training in monitoring and enforcement is being provided. Nevertheless, compared to the demands placed on the agencies due to rapid development of hydropower and mining sectors, the country is facing capacity constraints. A10.4. Potential Impacts and Proposed Mitigation Measures 1. Additional financing activities mostly are institutional and staff capacity building where adverse impact will not be accrued; Activities under the PICE sub-grants will include training, hiring consultants, workshops, development of guidelines on consultation with IP, office and other small equipments, small renovation of existing building, etc. The sub-grants under CBI window were reviewed by a PA expert. It was suggested that future sub-grants, especially those to be implemented under PA site plans, may involve restriction of the use of resources. Management of protected areas may involve limited access to natural resources and other social considerations for some of the disadvantage ethnic groups, especially in NT-NKD river basin. 2. Additional financing will also provide support to local community in building up their conservation network and support their livelihoods improvement where required a safeguard policy's attention to ensure additional financing activity is not involved with access to natural resources restriction and proper IP consultation has been taken part, and appropriate measures are identified and planed for impact mitigations. A proper IP consultation with 11 target ethnic villages in NT-NKD PA was conducted by Lao Front for National Construction (LFNC) to mobilize community support and participation in the project in September 2009. The villagers were well-informed of challenges and advantages of the proposed conservation project. They were also informed of the policy support and possible safeguard issues related to restricted access to their forest area. Appropriate measures for impact mitigation and villages' needs were discussed through this consultation process. These local voices and expectations have been incorporated into the sub-grant proposal to be submitted to the EPF for LFA funding approval. 74 A10.5. Proposed ESSF for Additional Financing 1. Environment and Social Safeguard Framework (ESSF) has been developed; negative checklist will be used for all sub-grants during the screening process. Each sub-grant proposal will be screened by WMU safeguard team and if any adverse impacts likely to occur, the proposal will be sent back for revisions to include mitigation measures. The WMU will be responsible for ESSF implementation and monitoring. 2. ESSF has also been simplified its procedures for easier following up and implementation. The ESSF for additional financing has been consulted with two target districts (Khamkeut and Pakkading) in Bolikhamxay province on September 11, and has been updated during additional financing pre-appraisal mission and it disclosed in the InfoShop and in-country. Safeguard Policies Triggered Yes No TBD Environmental Assessment (OP/BP 4.01) X Most of the sub-grants will be related to training and capacity building of government agencies at national and local levels to increase their ability to effectively implement and monitor the EIA/SIA process, the management water resources in Nam Theun-Nam Kading, the management of protected area, and the development of conservation community network. However, given that the target provinces (Bolikhamxay, Khammouane, and Savannakhet) are located in the central part of Lao which is rich in natural resources and inhabited by many ethnic groups, some small sub-grants may create negative impacts on local environment and communities and trigger the Bank safeguard policy related to natural habitats, resettlement, and indigenous people. To address this concern, an Environment and Social Safeguard framework (ESSF) has been developed to ensure that adverse impacts will not occur (via negative list) and that appropriate actions will be undertaken to mitigate the impacts. Bank consultation and post review will ensure that the agreed actions are carried out and the ESSF is adequate. Natural Habitats (OP/BP 4.04) X The sub-grants will not create negative impact on natural habitats. However, the target areas are located in the areas that may involve sensitive natural habitat. The ESSF has been designed to address this issue. Forests (OP/BP 4.36) X The project will not involve logging or large scale forest clearing as defined by the policy. Pest Management (OP 4.09) X The project will not involve procurement of large scale pesticides as defined in the policy. Physical Cultural Resources (OP/BP 4.11) X The subprojects are not located in any known archeological sites. 75 Indigenous Peoples (OP/BP 4.10) X Some subprojects are likely to be located in areas inhabited by ethnic minority groups, however significant negative impacts are not expected. To make sure that all ethnic groups are properly informed and aware of the need to use natural resources sustainably and to protect wildlife sanctuaries and protected areas, prior consultation will be required during the development and/or approval of the sub-grant. If significant impacts are expected, preparation of the Ethnic Group Development Plan (EGDP) will be required. This requirement is included as part of the Ethnic Group Policy Framework (EGDP) which has been included in the ESSF. In addition one sub-grant has been allocated to the Lao Front for National Construction for developing a national guideline on consultation with ethnic groups, including training and capacity building activities. Several small sub-grants have been allocated for the implementation support on the protected areas of which one sub-grant has been allocated for development of the national regulation for the protected area and building management capacity of staff. Consultation with local communities will be an integral part of the planning and consultation process. Involuntary Resettlement (OP/BP 4.12) X Population relocation and major land acquisition is prohibited and this is included in the negative list of the ESSF. Small land acquisition can be proceed in line with the Resettlement Policy Framework (RPF) which has been included as part of the ESSF. Possible restriction of natural resources used will be addressed through close consultation with the affected population, and will require preparation of a Resettlement Process Framework. Close consultation and WB post review during supervision will ensure that this issue is properly addressed. Safety of Dams (OP/BP 4.37) X The project will not involve any construction of dam and thus will not involve dam safety Projects on International Waterways (OP/BP 7.50) X The project will not involve water resource development activities and thus will not involve the international waters Projects in Disputed Areas (OP/BP 7.60) X All subprojects are not located in any know international disputed areas. 76 Annex 11: Country At a Glance L ao PDR at a g lance POVERTY and SOCIAL "- , ,- ~ ~ _. P""iI\c ~ - ..0- . ~_ (m_ ~, ,. 1.91. 1.296 ,m ..., ~ - .. -, GNI ,..,. 1iNI 1_ .., """"""" _ """'" 1" 01 .. . " ~ ., .......- ~- --- - ~ ~ 00 " - .->L"l I"' .... ~I_ ''''") r.n-,n.-y"",-" " 0 -~ ~ ,... af~~ _J "" 123 '" ,w ~ '00 w ~ '0' KEY ECOIK..c RATIOS an:llONG-TEI'III TRHIDS GOP (USS - . s ) 1ittIOS_~ ...".,.... af~ _ _<;()p , ~, U ... '''-'' ,~, m " - ,. ;U." -, " E_ < _' ,- ,.. "" -- * - Gn>os_~ ~ , Gt.- _ _ " ,. ~ IS_~ 19 .3 ~ -~ _10 .6 _13.4 ~ -~ 02 ·· ~ .~ .-~ e:opxts 106.8 ., , ~. '" . .-- _ ~J = ..... ., ,. 1 ..... _ -07 '''''7'{)7 ~, 2001_11 GOP _ _ ~ ., -- ~~ E.Q>orts of <0<>003 and _ _ " 4 _~ 10.9 ~. ~ _O " " .3 - - L._;,.....' "' ... __ ' T1>UCTU"'" '" _ - ...... .... EC ONOMY - -, --- ,~, , ~, G ' - ... _ .... GOP ",,) "'"- ....., =. 4~ . a · - ~ 1 _D ~, · 15.9 ~. · ~. 2<>.:; G~ · ~ ~ 17 .9 G_