Documentof The World Bank FOR OFFICIALUSEONLY . ReportNo: 43202-LA PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDGRANT INTHEAMOUNT OF SDR 5.6MILLION (US$9.00 MILLIONEQUIVALENT) TO THE LAO PEOPLE'S DEMOCRATIC REPUBLIC FOR THE KHAMMOUANE DEVELOPMENT PROJECT May 19,2008 RuralDevelopment,Natural ResourcesandEnvironment Sector Unit SustainableDevelopmentDepartment EastAsia andPacific Region This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCY EQUIVALENTS (Exchange Rate Effective January 312008) CurrencyUnit = LaoKip Kip9500 = US$1 1SDR = 0.0001USD FISCAL YEAR October 1 - September30 ABBREVLATIONS AND ACRONYMS AAA Analytical andAdvisory Services ADP Agricultural Development Project ALG Agriculture and LivelihoodGrant BBG Basic Block Grant CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CPI Committee for Planning and Investment CRPF Compensation andResettlement PolicyFramework DA Designated Account DAFO District Agriculture andForestry Office DOF Department of Finance DO1 DepartmentofIrrigation DDF District Development Fund DIW District IntegrationWorkshop DPC District Planning Committee DPI Department ofPlanning and Investment DPM District ProcurementManual DPT District PlanningTeam DIMU Downstream IrrigationManagementUnit EIRR Economic Internal Rate ofReturn ESSF Environmental and Social SafeguardFramework FM Financial Management FY Fiscal Year GDP Gross Domestic Products GoL Government o f Lao PDR GPAR GovernanceandPublic Administration Reform ICB International Competitive Bidding IDA InternationalDevelopment Association IDF InstitutionalDevelopment Fund IRR Internal RulesandRegulations IEE InitialEnvironmental Assessment PDF Indigenous PeopleDevelopment Framework IPM IntegratedPest Management FOR OFFICIAL USEONLY IRR Internal Rules andRegulations JICA JapanInternational CooperationAgency JPER Joint Portfolio Evaluation andReview KDP Khammouane Development Project KDR Khammouane Development Report K D S Khammouane Development Strategy kumbanh Cluster of villages LEA Lao Extension Approach LWU Lao Women's Union MAF MinistryofAgriculture andForestry MoF MinistryofFinance M C MinimumCondition MPI MinistryofPlanning and Investment MRC MekongRiverCommission MTEF MidTerm Expenditure Framework M&E Monitoring andEvaluation NAFES NationalAgriculture and Forestry Extension Services NGO Non-Governmental Organization NGPES National Growth andPoverty Eradication Strategy NSEDP National Social andEconomic Development Plan NT2 NamTheun2 NTPC NamTheunPowerCompany NTSEP Nam Them Social Environmental Project PACSA Public Administration and Civil Service Authority PAD Project Appraisal Document PAFES ProvincialAgriculture andForestry Extension Services PAFO ProvincialAgriculture andForestry Office PCAP Project for Capacity Building for PIP (Public Investment Plan) PCS Project Coordination Section PDF ProvincialDevelopment Fund PDO Project Development Objective PDR People's Democratic Republic PEM Public Expenditure Management PEMSP Public Expenditure Management StrengtheningProgram PER Public Expenditure Review PFM Public Financial Management PHRD Policy andHuman ResourcesDevelopment PI0 Planning andInvestment Office (district office o fthe DPI) PrMO ProcurementManagement Office PPT ProvincialPlanning Team PRF Poverty Reduction Fund PSC Project Steering Committee RAP ResettlementAction Plan RD Regulating Dam SA0 State Audit Organization SBSD Support for Better Service Delivery 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. SDR SpecialDrawing Rights SWORD Sustainable Forestry andRuralDevelopment UNCDF UnitedNations Capital Development Fund uxo UNDP UnitedNations Development Programme vsc Unexploded Ordinance Village Saving and Credit WUG(s) Water User Group(s) Vice President: James Adams Country Director: Ian C. Porter Sector Director: Christian Delvoie Sector Manager: RahulRaturi Task Team Leader: Tom Konishi, Steven Schonberger LAO PEOPLE'S DEMOCRATIC REPUBLIC KHAMMOUANE DEVELOPMENT PROJECT CONTENTS I STRATEGY.CONTEXTANDRATIONALE . .............................................................. 1 A. Country and sector issues .................................................................................................... 1 B Rationale for Bank involvement . ........................................................................................ 5 C. Higher level objectives to which the project contributes .................................................... 6 I1 . PROJECTDESCRIPTION ............................................................................................. 6 A FinancingInstrument.......................................................................................................... . 6 B. Project development objective and key indicators .............................................................. 6 C. Project components ............................................................................................................. 7 E. Alternatives considered andreasons for rejection ............................................................ 13 I11 . IMPLEMENTATION .................................................................................................... 15 A. Partnership arrangements., ................................................................................................ 15 B Institutional andimplementationarrangements . ................................................................ 16 C. Monitoringand evaluation o f outcomehesults ................................................................. 17 D Sustainability . . . . ..................................................................................................................... 18 E. Critical risks and controversial aspects ............................................................................. 19 F. Grant conditions andcovenants ........................................................................................ 20 IV. APPRAISAL SUMMARY ............................................................................................. 21 A. Economic and financial analyses ...................................................................................... 21 B. Technical ........................................................................................................................... 23 C. Fiduciary ........................................................................................................................... 24 D Social................................................................................................................................. 25 . E. Environment...................................................................................................................... 27 F. Safeguard policy............................................................................................................... 29 G. Policyexceptions andreadiness........................................................................................ 30 Annex 1: CountryandProvinceBackground .......................................................................... 31 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies .................36 Annex 3: ResultsFrameworkandMonitoring ....................................................................... 39 Annex 4: DetailedProjectDescription ..................................................................................... 45 Annex 5: ProjectCosts .............................................................................................................. 60 Annex 6: ImplementationArrangements ................................................................................ 63 Annex 7: FinancialManagementandDisbursementarrangements ..................................... 69 Annex 8: ProcurementArrangements ..................................................................................... 86 Annex 9: EconomicandFinancialAnalysis ............................................................................ 91 Annex 10: SafeguardPolicyIssues ........................................................................................... 99 Annex 11: ProjectPreparationandSupervision .................................................................. 105 Annex 12: Documentsinthe ProjectFile .............................................................................. 107 Annex 13: Statementof LoansandCredit ............................................................................ 108 Annex 14: Countryat a Glance .............................................................................................. 109 Annex 15: Maps ......................................................................................................................... 111 LAO PEOPLE'S DEMOCRATIC REPUBLIC KHAMMOUANE DEVELOPMENT PROJECT PROJECT APPRAISAL DOCUMENT EASRE Date: May 19,2008 Team Leaders: Toru Konishi, Steven Schonberger Country Director: IanC. Porter Sectors: Agriculture, Sub-national Sector Manager: RahulRaturi Government Administration, and Irrigation Sector Director: Christian Delvoie andDrainage Themes: Rural Services and Infrastructure, Decentralization Project ID:PO87716 Environmental screening category: B LendingInstrument: SIL ~ ~- -~ ProjectFinancingData [ ] Loan [ ] Credit [X ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: IDA Grant Total Bank financing. SDR 5.6 million (US$ 9.0 million equivalent) Recipient: The Lao People's Democratic Republic (Lao PDR) ResponsibleAgencies: TheProvince ofKhammouane Clumulativel 1.00 I 2.50 I 4.50 I 6.50 I 8.00 I 9.00 1 Project implementation period: Start: September 2008 End: September 30,201 3 Expected effectiveness date: September 1, 2008 ExDectedclosing:date: March 31. 2014 u Does the project depart from the CAS incontent or other significant respects? [ ]Yes [XI No Re$ PAD Section I.C Does the project require any exceptions from Bank policies? Re$ PAD Section IV.G Have these been approvedby Bankmanagement? I s approval for any policy exception sought from the Board? [ ]Yes [x] No Does the project include any critical risks rated "substantial" or "high"? Re$ PAD Section III.E [x]Yes [ ]No Does the project meet the Regional criteria for readiness for implementation? Re$ PAD Section IV.G [x]Yes [ ]No Project development objective Re$ PAD Section II.B The Project Development Objective (PDO) is to strengthen the planningprocess andpublic financial management associated with the decentralized delivery o f services and infrastructure, including irrigation development, inKhammouane Province. Project description [one-sentence summary of each component] Re$ PAD II.C Component 1 - LocalDevelopment andProvincial Capacity Building(Estimated cost US$6.87 million). This component will support: (a) a District Development Fundto support rural development sub-projects at the district and the village level; and (b) provincial capacity development on public financial management, public investment planning, monitoring and evaluation, rural livelihoods support, andcomplementary, strategic investments at the provincial level. Component 2 - Support for Irrigation Development along NT2 Downstream Channel and Lower Xe Bang Fai River (Estimated cost US$ 3.56 million). This component will assist with the rehabilitation and development o f irrigation facilities inGnomalat District andlower Xe Bang Fai River to utilize the discharge water from the NT2 hydropower station. Which safeguard policies are triggered, ifany? Re$ PAD SectionsIV.F Environmental Assessment (OP 4.01) Pest Management (OP 4.09) Indigenous People (OP 4.10) Involuntary Resettlement (OP 4.12) International Waterway (OP. 7.50) Significant, non-standard conditions, if any, Re$ PAD Section III.F EffectivenessConditions (a) Establishment o f the project Steering Committee (PSC) by the Recipient to monitor the overall progress o f the project andto provide strategic guidance duringimplementation; (b) Establishment o f the Project Coordination Section (PCS) by Khammouane Province for the purpose o f executing Component 1o fthe Project; (c) Establishment o f the Downstream Irrigation Management Unit ( D N ) by MAF's Department o f Irrigation (DOI) for the implementation o f Component 2; and (d) Formal adoption o fthe OperationalManualbythe Recipient. Other ImplementationConditions (a) Agreement shall be made by December 31,2008 between the Nam Theum Power Company (NTPC) and the GoL stipulating the NTPC's commitments to: (i) take specified measures to mitigate the impacts o f the downstream channels to the existing irrigation scheme in Tha Thot Village; and (ii) construct a new facility to divert water from the regulating dam to the Tha Thot area; (b) Mid-Term Review report prepared based on agreed Terms o f Reference should be submitted to Bankby March 30,201 1. WithdrawalConditions (a) Disbursement condition for goods, works, consultant services and incremental operating costs for Component 2-1 (Rehabilitation o fthe Existing IrrigationFacility inTha Thot Village), and Component 2-2 (Support for Pilot Downstream IrrigationDevelopment inTha Thot Area): the Agreement between the NamTheumPower Company (NTPC) and the GoL referredto above inOther Implementation Conditions - Section (a), should be finalized. I.STRATEGY,CONTEXTANDRATIONALE A. Country andsector issues Country Issues 1. With an estimated annual Gross National Income per capita o fUS$460 (2004-2005), the Lao People's Democratic Republic (Lao PDR) remains among the poorest and least developed countries in the East Asia region. Social indicators are also low; in 2003, Lao PDR was ranked 135thout o f 175 countries in the Human Development Report, the lowest rankingo f South-East Asian countries. However, over the past few years Lao PDR has maintained relatively stable macroeconomic conditions and steady growth stimulated by the rapid economic growth o f its neighboring countries. The proportion o f people living below the poverty line has decreased significantly from 46 percent in 1992-1993 to 31 percent in2004-2005. The real growth rate o f the Gross Domestic Production (GDP) increased from 6.4 percent in2004 to 7.0 percent in2005 and 7.5 percent in 2006. The mid-term outlook remains positive, with the real annual GDP growth rate projected to remain at 6-7 percent mainly through regional trade and the utilization o fnatural resources, and the poverty headcount i s expected to be reduced to 23 percent in2010. 2. However, the country's rapid growth has also raised risks and challenges. Weak governance, the low capacity related to public financial management and service delivery, and slow private sector development has beenidentified as among the most significant constraints to development. Increasing rural-urban income inequalities are a serious concern, indicating that the distribution o f the benefits o f economic growth has been uneven across the country. The incidence o f poverty for rural areas was 38 percent in 2002-2003, compared to 20 percent for urbanareas. This issue is further complicatedby significant ethnic diversity inthe more remote areas o f the country. Furthermore, although natural resource exploitation is a key driver o f economic growth, the most pressing challenge is to ensure the equitable benefits to the rural communities, who are most affectedby such natural resource exploitation. 3. The Government o f Lao (GoL) has therefore been pursuing a variety o f strategies to make growth more sustainable, inclusive and equitable. In particular, the GoL has adopted a National Social and Economic Development Plan (NSEDP) for 2006-2010 that sets out the following areas as the most critical: (a) macroeconomic management, (b) structural and fiscal reform, (c) capacity and human resources development, and (d) improved service delivery. Decentralization in Lao PDR 4. Lao PDR, while a unitary state, has traditionally delegated significant administrative powers to the provincial levels, but with limited accountability mechanisms to provincial citizens. Elected representation i s limited to the National Assembly, which confirms the President, who, in turn, appoints provincial governors. The prime minister appoints district governors. Village chiefs (there are no village councils) are also elected but based on lists established by district authorities. Government staff at the national and sub-national levels are hired, appointed and promoted as part o f centrally-led line ministries, although authority for "within-province" assignment and payment o f staff resides with the provincial governors, to 1 whom the staff i s accountable. Citizen concerns are primarily voiced through the national assembly members inthe local constituencies, the Lao Front for National Construction, and mass organizations such as the Lao Women's Union (LWU), the Youth Unionand Trade Unions. 5. Administrative delegation to the provincial level has been complemented in the past by significant fiscal autonomy - particularly in the "surplus provinces" that have limited "upward accountability" vis-a-vis the government. Provinces account for 60 percent o f GoL revenues (of which 90 percent i s retained for expenditures at the province level) and 45 percent o f total GoL expenditures. Provinces were provided with significant discretion in the manner in which revenues were raised and expenditures budgeted. Given their significant fiscal independence and the dependency o f the national level on provincial-level revenue collection, provinces have been subject to limited fiscal oversight from the national level, particularly those provinces that are net contributors to the central budget. 6. Districts have not yet played an important role in planning and budgeting. In theory, districts are the lowest level o f local government, and are responsible for budget planning and execution. However, in reality, provinces have retained most o f the responsibility for decision- making over investment budgets, partly due to perceptions about limited human resource capacity at the district level. As a result, district-level budgets are largely limited to recurrent expenditures. 7. GoL has started to take some concrete actions to rationalize the administrative and fiscal roles and accountabilities o f the provinces and to increase accountability to the national government for revenue management and budget planning and implementation, in line with the pillars o f the NSEDP. First, a new Budget Law passed by the National Assembly inDecember 2006 provides for a fundamental change in the inter-governmental fiscal framework: the law centralizes tax and customs functions, channeling almost all revenue to the national level from where it is redistributed to provinces through refined revenue-sharing arrangements. Implementation o f the new law has already begun: provincial-level customs, tax and treasury officials are now all directly paid from the national level, for example, and in 3-5 years the implementationo fthe Budget Law should be fully completed. 8. Second, in addition to the key changes on the revenue side initiated by the new Budget Law, there is also an ambitious program of public expenditure management strengthening. The law also centralizes the treasury function, and provides for a single treasury account framework to replace the large number o f separate accounts that are currently used at all levels o f government. With the assistance o f the Japan International Cooperation Agency (JICA), the Ministry o f Planning and Investment (MPI) i s currently carrying out a project for capacity building for public investment plan management (PCAP), rationalizing public investment planning procedures at both the national and provincial levels. The MPI has also started a program to strengthen the M&E systems at both levels. 9. Inparallel, a number of approaches to strengthen accountability to local communities in planning and public expenditure management are under way, aimed at making resource utilization more effective and improving service delivery, particularly in rural areas. Among these approaches, it is noteworthy that a Poverty Reduction Fund (PW) has been established 2 with the support o f the Bank to provide public infrastructure and improve service delivery in selected poor districts. The PRF i s near completion o f its first phase (covering 20 districts) and a second phase is under preparation. In addition, and with the support o f the United Nations Capital Development Fund (UNCDF), a District Development Fund (DDF) has been piloted in Saravane Province to engage districts and kum banhs (a group o f villages) as the core vehicles to carry out participatory budgeting for public investment. The pilot has been deemed successful, and the GoL now intends to expand the DDF approach to other provinces through a (US$5.0 million) national DDFfacility embedded within the recently-approved Support for Better Service Delivery (SBSD) program. 10. Interms of administrative measures, the Government has identifiedthe kurn banh as the mechanism to strengthen coordination between villages and districts. The Prime Minister's Decree No. 1 o f March 2000 and Decree No. 10 o f June 2001 on decentralization provides for increased local responsibilities and ownership at the grassroots level as a means to enhance socio-economic development. The Decrees also stipulate that rural development activities should be planned and carried out at the lowest possible level o f authority, starting with the village. However, in reality, villages in Lao PDR are relatively dispersed, and it is thus logistically difficult for villagers and district officials to interact with each other on a regular basis. Inresponse to this, the GoLhas recently identified the kurn banh as a coordinating level to facilitate interaction between the district (the most decentralized budget level) and local communities. 11. While officially recognized, the formal role o f the kurn banh i s still being determined through the piloting o f various initiatives. A kurn banh, which typically contains five to ten villages, i s not a formal administrative unit but a platform for a "bottom-up" and locally owned development process. Nonetheless, kum banhs can be used to help coordinate inter-village socio-economic planning, service delivery, and monitoring activities. The UNCDF supported Saravane DDF project, for example, has been piloting the inclusion o f kurn banhs in the local- level planning process and the preliminary outcome is positive. In addition, the Ministry o f Agriculture and Forestry (MAF) has also recently developed a new strategy (the Lao Extension Approach, or LEA) through which district agricultural extension staff will be decentralized to the kum banh level inorder to increase interactionwith villages. Khammouane Province. 12. Khammouane Province i s strategically placed in the center o f the country. It sits astride several potential trade routes between Thailand andVietnam, and i s the site o f the Nam Theum 2 (NT2) hydropower project. The province has a total population o f almost 340,000, o f which 85 percent live inrural areas. Khammouane Province has been one o f five fiscal surplus provinces', which has reinforced a degree o f autonomy in administrative and fiscal management. Khammouane consistently collects and reports revenues that are about 5 percent greater than its own expenditure needs. Inpart, this reflects the opportunities to tax trade and commerce moving between Vietnam and Thailand. It also reflects revenues associated with natural resources extraction, mainly timber and mining. 'Namely, Vientiane Province and Municipality, Savanaketh, Champasak, Khammouane and Boulikamxay. 3 13. Khammouane Province's population overall has social indicators for food security, health, education, and access to roads and clean water that are above the national average; however, the benefits o f economic growth have not been distributed equally throughout the province. Two o f Khammouane's nine districts (Boulapha and Nakai) are among Lao PDR's 47 poorest districts, and three districts (Gnomalat, Mahaxay and Xaibouathong) are amongst the 72 poor districts. Analysis o f the growth elasticity o fpoverty reduction inthe province (the decline inpoverty for each unit of growth) indicates that Khammouane has been amongst the least able to transform its economic growth into poverty reduction. 14. Today, Khammouane Province stands poised at a key juncture in its development. The changes brought by the market liberalization inLao, PDR over the past 15-20 years are expected to accelerate in the period to 2008-2015, driven by developments such as global and regional trade liberalization, the recent completion o f National Road 12 to Vietnam, the construction o f the US$l.1billion N T 2 hydropower project, the completion o f a bridge across the Mekong River in the neighboring province of Savanaketh and the planned construction of a trans-Mekong bridge from the provincial capital o f Thakek. In the coming decade, the province will likely benefit from significant opportunities for economic growth; the key challenges faced being how these opportunities will be translated into pro-poor and inclusive growth and an overall improvement in social indicators. These challenges are significant, and success will depend upon improvements the equity and quality o f service delivery, and the ability o f the province to plan, manage, monitor and evaluate the use o fits resources. Nam Theun 2 (NT2)Hydropower Project 15. NT2 is the largest hydropower development project inthe country and i s located largely in Khammouane Province. Just as there are clear national opportunities and challenges associated with this project, so there are for the province. Meeting most o f these local challenges, particularly the immediate social and environmental challenges, are the responsibility o f the Nam Theun Power Company (NTPC), which owns the NT2 hydropower stations. The Bank is fully engaged in supporting appropriate mitigation measures and in restoring the livelihoods o f affected families within the framework o f the Nam Theun Social and Environmental Project (NTSEP). Interms o f opportunities, the GoL andthe province are keen to utilize the discharge water from the NT2 hydropower station to develop irrigation facilities. 16. NT2 would also create additional accountabilities at the provincial level. Most immediately and directly, the provincial and district administrations have specific oversight, management and implementation roles and responsibilities in the context of N T 2 and related mitigation activities. In addition, the province is sensitive to the fact that provincial residents, fully aware o f the substantial resources going into NT2, have high expectations that GoL will ensure that benefits are translated into improved services and broad-based economic opportunities across the province. The challenge now is to translate this acknowledgement into capacities and sub-national governance reforms which enhance, in particular, accountability mechanisms to communities as well as improving the ability to deliver highquality policies and services. 4 KhammouaneDevelopment Strategy (KDS) 17. The province has developed a strategy, closely aligned with the NSEDP, which articulates the province's development goals and strategies over the medium term. The Khammouane Development Strategy (KDS) 2006-2015 (to follow up on the 7thParty Committee Conference Agreement o f the province) was prepared mainly with assistance o f UNDP and the Bank, and is based on the following four goals: (a) improving governance; (b) enhancing rural livelihoods; (c) promoting economic development; and (d) promoting social development. The K D S was prepared through a process o f extensive consultations, focusing on the direct participation o f villages, particularly those identified as poorest by the National Growth and Poverty Eradication Strategy (NGPES) criteria. The discussion groups also included vulnerable groups (ethnic minorities and women) and covered a range o f sectors such as agriculture, infrastructure, education, health, and private sector development, as well as gender and governance as cross-cutting themes. The province has also prioritized investments to capitalize on opportunities for the use o fwater resources inconjunction with the operation o fNT2. B. Rationale for Bank involvement 18. The proposedproject is highlycomplementaryto NT2-related activities, which are under- writtenby a major commitment on the part the GoL and the Bank. With its strong emphasis on capacity-building and complementary investments, the proposed project would ensure that NT2 upstream and downstream compensatory activities are followed up by measures that enhance institutional sustainability and establish a provincial-level public sector framework that i s able to deliver quality goods and services in the long term. The project, moreover, will provide opportunities - beyond those already envisaged - to profit from the downstream irrigation potential generated by the N T 2 facility. 19. As a prelude to this project, the Bank has also been instrumental in supporting the province to articulate a strategic vision for its own development, defined in the KDS. While UNDP will be largely responsible for supporting the implementation o f a program focusing on the public administration reform aspects o f Goal 1, Improved Governance, other donors, the province, and the Government recognize the Bank's considerable expertise and experience (gained through past projects, such as Agricultural Development Project (ADP) and Sustainable Forestry and Rural Development (SWORD) in providing village-level livelihoods support, and insupporting the overall financial management reformprogram, andhave requested the Bank to support implementation o fthe K D S through a follow-up investment project. 20. Inaddition, the Bankwill mobilize its considerable experience inLao PDRwith support to building capacity in bottom-up planning systems, linking planning and budgetingprocesses, strengthening public financial management, improving the investment climate, and strengthening monitoring and evaluation systems. In each o f these areas the Bank i s in a position to integrate national policies and lessons learned into stronger systems at the local level. For example, the Bank's leadership in the public financial management strengthening area makes it particularly well placed to help GoL take a coordinated approach to implementing the new inter- governmental fiscal framework inKhammouane Province over the coming years. 5 C. Higherlevelobjectivesto whichthe projectcontributes 21. The project will make a substantial contribution to the pillars o f the Bank's supports in Lao PDR, as stipulated in the Country Assistance Strategy (CAS) Progress Report (Report No. 39688-LAYM a y 4,2007). The report sets out the four pillarsto guide the Bank's support during 2009-2011 period; (a) Sustaining the Growth, (b) Improving Social Outcomes, (c) Strategic Approach to Capacity Development and Partnerships; and (d) Supporting Nam Theun 2 (NT2) Implementation. 22. While much o f the strategy is implemented through national counterparts, the GoL has been keen to see the Bank work directly with provinces given their significant role in service delivery. Khammouane Province has been selected as the first o f two provinces to work with because: (a) it is the site o f the NT2 project, which brings numerous opportunities and responsibilities to the province while requiring strengthened capacities to support rural community development andto manage water resources; (b) it i s a relatively strong province and therefore easier to develop new integrated approaches with; and (c) the Bank has significant experience working with the province inthe context o fNT2 and other projects. 23. Regarding specific project components, the DDF, to be implemented as part o f Component 1will contribute directly to CAS pillar (ii) on improved social outcomes. Pillar (iii) i s directly addressed through the provincial capacity development activities under Component 1, and is a key vehicle within the CAS for responding to the Government's request that development partners increasingly address local, rather thanjust national, capacity constraints. 24. By design, the project will also address pillar (iv) o f the CAS through supporting complementary activities such as irrigation facilities and improvements in the Gnomalat and lower Xe BangFai (Xe Bang Fai River), under Component 2. Component 2 activities will take place in areas where the Nam Theum Social and Environmental Project's (NTSEP's) downstream livelihood restoration program is planned, and will thus provide opportunities for considerable positive synergies with NTSEP. 11. PROJECTDESCRIPTION A. FinancingInstrument 25. The proposed project will be financed by an IDA Grant o f SDR 5.6 million (US$ 9.00 million equivalent). Additional financial support i s being sought from Japan PHRD Fund for capacity building activities under Component 1. Additional donor support will be identified to provide parallel fimding to expand implementation o f the irrigation development plan to be prepared under Component 2. B. Projectdevelopmentobjectiveandkey indicators 26. The Project Development Objective (PDO) is to strengthen the planning process and public financial management associated with the decentralized delivery o f public services and infrastructure, including irrigation development, inKhammouaneProvince. 6 27. The PDO will be achieved through the following activities: (a) Strengthening the procedures for infrastructure and service delivery with improved local transparency and accountability (Component 1); (b) Supporting through technical studies and piloting, the development o f a strategic vision for the technically, economically and socially sustainable development o f irrigation along the NT2 Downstream Channel and in areas situated along the lower Xe Bang Fai River (Component 2); 28. The expected outcomes of the project are (see Annex 3): (a) The adoption o f the procedures for planning and monitoring public investments initiated underthe project at the provincial anddistrict levels; (b) The phased andrationalized planningfor developing downstream irrigation incorporating technical, economic, andinstitutional aspects. C. Projectcomponents 29. Khammouane province is responsible for implementation o f the two components with the support from MAF and concerned central ministries. The proposed project was originated as a complement to NT2 interms o f ensuring that the broader downstreampopulation benefited from NT2 related development beyondthe mitigation measures. The rationale for the two components i s based on the overall need to complement N T 2 mitigation requirements with support for livelihoods improvement more broadly and sustainability in the province. This includes a combination o f complementary rural infrastructure and livelihoods support as well as larger investments in downstream irrigation development. Support to strengthening decentralization under Component 1 will both provide direct livelihood support benefits to districts not covered byNT2 or similar programs (such as ThinHinBounHydropower) as well as develop the district and provincial capacity to sustain transparent and demand-responsive service delivery beyond the NT2 mitigation support period. Support to developing irrigation under Component 2 will complement the obligations o f NTPC regardingmeasures for flood mitigation and construction o f water gates at the downstream channels. This Component would support the development of downstream irrigation through a realistic and sequenced manner, considering the constraints in operational capacity in the irrigation sector. Inaddition, Component 2 will hrther provide the knowledge and experience base for GoL and Khammouane Province to exploit further benefits from downstream flows and mitigate flood risks through rehabilitation and extension o f existing schemes and help develop a technically and financially feasible plan for future development o f large scale irrigation. The summary o f the project activities are described below, while greater detail is available in Annex 4. The cost estimates shown here include both physical and price contingencies. 7 Component1: LocalDevelopmentandProvincialCapacityBuilding(EstimatedCost:US$ 6.867 million). 30. The component would support Khammouane province to: (a) pilot and adopt more transparent and participatory procedures for public investment to improve rural livelihoods and (b) strengthen key provincial departments to implement and sustain this approach. As a result, the provincial departments would be able to implement the new procedures and approaches adopted bythe GoL. 31. Sub-component 1-1. The District Development Fund PDF) (Estimated Cost: US$ 3.128 million). This subcomponent will provide support to the province to develop and implement the DDF, as a more transparent and participatory way to finance investments in public infrastructure and service delivery with rural communities. Civil works, goods, training, TA and incremental operating costs will be financed for approved sub-projects. This sub- component will strengthen the districts' capacity for conducting stakeholder consultation and developing and executing multi-sectoral investment plans for public infrastructure and service delivery in a participatory manner. It would be initiated in three districts (Boulapha, Himboun, and Nongbok) during the first year and expanded to all nine districts in the province over a period o f five years. It is expected that the province will adopt the procedures upon completion o f the project so that the project impacts would be sustainable andreplicable. 32. The DDF facility will finance infrastructure and service delivery in support o f poverty alleviation based on priorities identified through stakeholder consultations carried out with village and kum banh representatives. An inter-departmental team (District Planning Team - DPT) will carry out stakeholder consultations, prioritize proposed investments, and prepare a DDF investment plan for each year. The investment planwill be implemented by the districts after approval by the province. The DDFhnding will consist of: (a) Basic Block Grants (BBGs) to finance public infrastructure and services, mainly at the kum banh and village levels; (b) Agriculture and Livelihood Grants (ALGs) to support production groups at the village level, and (c) contingency h d s for unexploded ordinance (UXO) clearance for infrastructure investment supported bythe BBGs. 33, The allocation o f the BBGswould be pre-determined for each district by a formula taking into account the size o f the district's population and the percentage o f poor households. Typical investments supported by the BBGwould cost US$3,000 - 5,000 each, inthe following sectors: transport (improvement in access roads), education (rehabilitation and upgrading of primary schools), health (up-grading the local clinics), andwater supply (basic water and sanitation at the villages). Inaddition, in order to support the implementation o f the DDF, incremental operating costs and technical assistance would be provided within the BBG. It is estimated that the BBGs would benefit about 1,000 villages comprising 50,000 households. In order to monitor the transparency and accountability o f the BBG activities, local representatives o f the Lao National Front (LF) and Lao Women's Union (LWU) will be invited to review (on an annual basis) district-level compliance with agreed procedures, such as the allocation o f investment funds, investments in ineligible activities, and the participatory process for decision making. These representatives would be assisted by international and national consultants to be recruited under Component 1-2 (Capacity Development for the Department o f Planningand Investment). 8 34. ALGs will support the livelihood activities for 27 villages in Mahaxay, Himboun, and Boulapha districts already identified by Khammouane Province. These villages have been classified as severely poor by national criteria yet are not currently participating in any GoL or donor-funded rural livelihoods programs. ALG will support groups o f villagers through the financing o f community facilities (e.g., rice mills, equipment), and demonstration materials (e.g., seeds, livestock) for village production groups, which would cost up to US$lO,OOO per village. Each target village will prepare a proposal with the technical support o f the District Agriculture andForestry Office (DAFO) andsubmitthis to the district for approval. 35. Sub-component 1-2. Provincial Capacity Development (Estimated Cost: Approximately US3.096 million). This sub-component will mainly support the capacity building o f the provincial government to carry out provincial-level public investments that are strategically important for rural livelihoods, and increase the capacity o f a few key departments. Capacity buildingwill be based on both training o f civil servants as well as "learning by doing" through pilot implementation o f provincial level investment through participatory planning and implementation. 36. Activity 1-2-1. The Provincial Development Fund (PDF) (Estimated Cost: approximately $ 1.060 million). It will provide assistance to the province to support the undertaking o f provincial level investments which support multiple districts and which complement those identified through the DDF at the district level. Such investments may include: the expansion o f teacher training facilities, improvements to the provincial agriculture extension services center, and other small-scale infrastructure improvements expected to cost up to US$50,000 per investment. The planning for the PDF sub-projects would be carried out by the DPI through prior consultation with the district governments and involve an annual multi- stakeholder planning workshop, to which users o f sector services, as well as concerned line ministries will be invited. Proposed PDF sub-projects would be selected by the Provincial Planning Team (PPT) comprising the representatives o f line departments according to the specific criteria linked to the K D S and stipulated in the operational manual. The subproject would then be presented to the Provincial Advisory Committee for Component 1 for approval. The implementation procedures would follow the guidelines developed by the JICA funded PCAP. Similar to the DDF, respective provincial line departments will be responsible for the implementation o f PDF investments, whereas the DoF will manage the funds and the DPI will monitor the overall progress. 37. Activity 1-2-2. Provincial Capacity Building (Estimated Cost: approximately US2.036 million). Technical assistance and training will be provided inthe following areas to strengthen provincial capacity to manage the development process consistent with NSEDP and K D S priorities: (a) Implementation ofPDF and DDF. Technical assistance will be provided to the province andthe districts to assist inimplementing the PDF and DDF. Particular attention would be given to: (a) proper consultation and priority setting, (b) overall resource allocation, (c) public disclosure o f information, (d) reporting and oversight, and (e) fiduciary management (particularly procurement and financial management). The project will 9 contract UNCDF on a sole source basis to provide technical assistance in order to maintain consistency and allow accelerated learning with the other DDFs being implemented inother provinces in Lao PDRwith UNCDF support; (b) Public Financial Management. Further technical assistance would be provided to strengthen the core public expenditure and financial management activities o f the province consistent with the GoL's new Budget Law. The first technical assistance activity would be a participatory capacity needs assessment o f the Department o f Finance, which would provide a basis for a series o f support and training activities addressing the institutional, organizational, and individual-level capacity gaps within the provincial PFM system. The activity would include support extending down to finance officials at the district level; (c) Investment Planning, Monitoring, and Evaluation. The project will provide additional technical assistance and capacity buildingaimed at strengthening the key functions o f the DPI, with a focus on local level planning, monitoring and evaluation, particularly in alignment with the NSEDP priorities and to monitor the outcomes of its investment planningprocess; (d) Agriculture Extension Services. Support will be provided to update the knowledge and facilities so as to be ready to implement the LEA inthe ALG targeted villages. 38. Sub-component 1-3. Component Management (Estimated Cost: Approximately US$0.643 million). Implementation o f decentralization and provincial capacity buildingwill be supported by a small provincial Project Coordination Section (PCS) within the DPI o f Khammouane Province. Although key personnel and office space will be provided by the Province, this component will finance equipment, technical assistance (including contracted project staff) and incremental operational costs. Component2: Support for IrrigationDevelopment along NT2 Downstream Channel and Lower Xe BangFai River (EstimatedCost $3.555 million) 39. The water to be discharged by the NT2 dam i s an opportunity for increasing agricultural production during the dry season, but also poses a risk o f increasing floods during the wet season. Given that the NTPC i s constructing five outlets along the downstream channel to help the GoL to develop irrigation facilities utilizing discharge water from the NT2 hydropower station, this subcomponent would mainly support the GoL's effort to develop downstream irrigation. Further, as an alternative to protect livelihoods in the lower Xe Bang Fai River from possible floods, this component would also support the rehabilitation o f small pump-based irrigation facilities. 40. Sub-component 2-1. Rehabilitation of the ExistingIrrigation Facility in Tha Thot Village (Estimated Cost: US$ 0.884 million). The existing irrigation facilities were designed to cover about 470 ha but have deteriorated and the irrigation area has been reduced to one-third o f the designed area. While the facilities had originally been planned for rehabilitation in 2004 under the Bank-financed ADP, it was excluded as one o f the main canals o f the scheme and two o f the secondary canals were cut by the N T 2 downstream channel. N o w that NTPC plans to restore the connection o f the main and a secondary canal through two siphons are nearing completion, this sub-component would support the originally planned rehabilitation o f the 10 existing irrigation facilities. This sub-component would include rehabilitation works and technical assistance for capacity building for Water User Groups (WUGs), to improve the administration andmanagement o f the irrigation facility. 41. Sub-component2-2. Support for Pilot DownstreamIrrigationDevelopment in Tha Thot Area (Estimated Cost: Approximately US$0.989 million). This sub-component would support the feasibility study, detailed design, and construction o f irrigation facilities utilizing discharge water from N T 2 hydropower station for four new facilities serving an area o f about 710 ha surrounding the existing irrigation facility inTha Thot Area. The area has been indicated as high priority given that it is already developed for agriculture and farmers' interest in irrigation i s high; operation costs are expected to be reasonable as the delivery o f water i s gravity-fed. Accordingly, NTPC plans to construct a pipeline to draw water from the regulating dam and cross the downstream channel through an inverted siphon to provide water to the area. Financing under this sub-component would support the feasibility study and detailed design for the four separate facilities duringthe first two years o fproject implementation. Starting from the third year, the project would also finance the construction o f one irrigation facility to serve about 130 ha. Efforts are being made to identify possible donors to finance the other three facilities. This sub-component would include civil works andtechnical assistance for capacity buildingfor WUGs, to improve the administration and management o fthe irrigation facility. 42. Sub-component 2-3. Strategic Plan for IrrigationDevelopment along Downstream Channel(Estimated Cost: US$0.500 million). The objective o f this sub-component is to help GoL to develop a strategic planto utilize water flowing through the NT2 downstream channels. With the support o f the NTPC, a scoping study has been carried out to explore the possibilities for developing five irrigation facilities comprising about 21,000 ha intotal. The study concluded that while it i s technically feasible, economic viability needs to be carefully examined on a site- by-site basis, with possible breakdown at the sub-scheme level, as the area in question is quite heterogeneous in terms o f social, environmental, topographical, and geo-morphological conditions and access to the market. The plan would support the GoL to develop:(a) scheme level pre-feasibility study to identify priority development area with basic canal layout, (b) recommendation on the institutional arrangement for operation and maintenance and capacity buildingprograms for the WUGs, (c) technical scoping study for additional sites and modes o f water storage to further utilize the discharge water, and (d) feasibility study for the identified highpriority area. Technical assistance and incremental operating costs would be financed to implement the study. 43. Sub-component2-4. Rehabilitationand InstitutionalStrengtheningof Small Pump Irrigation Facilities along Lower Xe Bang Fai (Estimated Cost: Approximately US$0.591 million). While the first three sub-components aim at supporting downstream irrigation along the NT2 downstream channel, this sub-component would assist the communities along the lower Xe Bang Fai River. It would strengthen PAFO's initiative to rehabilitate the small pump irrigation facilities and re-establish a sustainable institutional framework for operation and management. In particular, the sub-component would support the rehabilitation o f pumping stations, minor concrete works (e.g. repairs to headworks), technical training and institutional strengthening for WUGs and PAFO. The cost for repairs differs from schemes to schemes 11 depending on the actual situation, but typical repair cost for one scheme would be less than US$5,000. 44. The GoL has developed about 30 small pump-based irrigation facilities rangingfrom 20- 100ha inthe lower Xe BangFai River inKhammouane province. Most o f these pumps are still operating; WUGs are responsible for operation, including payment for the electricity and operational costs. However, W G s have experienced serious performance problems due to poor maintenance as they do not have proper technical knowledge. With few exceptions, most o f the pump equipment is relatively small and simple, and WUGs can manage with good technical knowledge. Through a rapid rural assessment, it has been confirmed that the farmers are in general keen to continue irrigation during the dry season, as the dry season crop would provide them with reliable income. It has also been confirmed that farmers have actually paid substantial amounts o f the cost for operation, mainly electricity and labor costs, which amount to US$15 - 25 per ha. The discharge water from the NT2 hydropower will result in an improved economic outlook for these pumpingstations, as it would increase the water level o f the Xe BangFai River by one to two meters. This would certainly improve the economic viability o f these pump facilities. 45. Subcomponent 2.5. Component Management (Estimated Cost: Approximately US$0.591 million). This small sub-component would support the MAF, particularly its Department o f Irrigation (DoI) and the PAFO in Khammouane province. Vehicles and goods, technical assistance and incremental operating costs will be provided to support their ability to work with WUGs and technical specialists in carrying out planning, training and construction activities, as well as to support administration, procurement and reporting needs. D. Lessonslearnedand reflectedinthe projectdesign 46. Project implementation arrangements reflect the important lesson o f avoiding the establishment o f project-specific parallel government institutions (such as a project management unit and a team o f external consultants), instead supporting the existing government structures, including the line ministries and the provincial and district governments. As the project's main objective is to strengthen the planningprocess and public financial management associated with the decentralized delivery o f services and infrastructure, this i s critical to achieve sustainable and effective impacts that will last beyond the project's lifetime. The project has been designed to work closely with Khammouane Province to support local economic development and improve service delivery (Component 1); and (b) the MAFto capitalize on the opportunity for developing new irrigation facilities (Component 2). 47. Technical design for each component has taken into consideration lessons learned from similar operations supported by the Bank as well as other donors. The DDF and PDF elements o f Component 1 have drawn heavily on the experience gained through the Poverty Reduction Fund(PRF) financedby the Bank, as well as the Governance andPublic Administration Reform (GPAR) Saravane Project, jointly funded by UNCDF, UnitedNations Development Programme o P ) and the European Community (EC), and operational since early 2005. Both PRF and the DDF project in Saravane have demonstrated that community-driven development approaches to provision o f local infrastructure and services i s feasible inLao, PDR. Inaddition, the DDF in 12 Saravane has shown that a DDF facility can deliver locally prioritized public goods and services without recourse to parallel planning, budgeting and implementation arrangements. Moreover, Saravane has also demonstrated that it is possible to introduce a substantially improved degree o f transparency, accountability and participation into local public expenditure management. DDF- financed investments in Saravane have also been shown to be largely pro-poor, with expenditures being concentrated in the education, transport infrastructure, health, and agricultural sectors. 48. The lessons learned from ADP and SWORD have also been incorporated into the design of the DDF's ALGs. These two projects have helped to introduce bottom-up, farmer-driven, marketed-oriented and proposal-based approaches for village support. At the same time, they have shown that the participation o f the poor requires effective facilitation, and that care must be given to ensure that the wishes o f villagers, rather than the views o f the agricultural extension staff, guide the determination o f priorities. The Village Investment for the Poor component o f ADP has demonstrated that poor villages and households can be effectively targeted through application o f simple indicators and facilitated village processes. The ALG has been designed to engage agriculture extension services at the provincial level, and support the implementation o f the current government policy on agricultural extension (LEA), while maintaining the bottom-up approach. Implementation o f the ALG will rely on agricultural extension staff assigned from the districts to kum banhs to assist target villages in organizing village production groups and to prepare proposals, and the process will be monitored by Provincial Agriculture and Forestry Extension Center (PAFEC), with technical guidance from the National Agriculture and Forestry Extension Services (NAFES). 49. Activities related to irrigation (Component 2) have also been designed based on Bank and donor experience in fhding development o f the irrigation sector in Lao PDR. Under ADP, extensive rehabilitation of irrigation schemes has been supported with clear lessons regarding the importance o f ensuring effective formation o f water user groups and linking irrigation management to extension and marketing support. The Irrigation Diagnostic Study (August 2007), commissioned by the DoI, recommends the following orientations for hture irrigation projects: (a) incrementally developing irrigation facilities given limitations in management capacity; (b) assigning clear responsibilities to WUGs for operations and management; (c) providing continuous technical support and guidance to WUGs after the transfer o f management responsibilities; and (d) monitoring the performance o f WUGs. 50. Lastly, it should be noted that overall project design has also been strongly influenced by the acknowledged need inLao PDRto strengthen capacities. Reform andhighlevel change will only translate into practice when stakeholders are equipped with the right kinds o f skills and knowledge, and provided the opportunity to directly apply those new procedures and competencies. The proposed project design reflects this in a variety o f ways: an emphasis on real-time "learning by doing" (for both Components 1and2 facilities). E. Alternatives consideredand reasons for rejection 51. Overall Project Design. A project limitedto support for district-level investments was considered. Limiting the project to a DDF was rejected because sub-national fiscal reforms require improved planning, budgeting and monitoring o f execution at both the provincial and 13 district levels in order to be sustainable. Accordingly, while the DDF is the heart o f the project, it is complemented by the PDF which will allow for capacity building and testing o f complementary reforms amongst provincial-level agencies. In designing the DDF, providing additional agriculture and livelihoods support to the poorest villages has also been recognized by the province and the GoL to be a key element o f the project. Whereas lowland villages around Thakek are experiencing relatively rapid economic development as a result o f increasing trade opportunities with Vietnam and Thailand, upland villages in the eastern part of the province continue to experience food insecurity. Annual household incomes invillages inthe eastern part o f the province (mainly upland) are estimated to be substantially lower than those o f households inthe eastern areas (mainly lowland). Now that under the NTSEP, substantial support is being provided to villages inNakai District, the province is very keen to support villages inBoulapha andMahaxay Districts, which havereceivedmuch less support from donor programs. 52. The incorporation o f the irrigation development component i s consistent with priorities identified under the KDS, as well as the national priority assigned to better utilization o f discharge water from the N T 2 hydropower station to support irrigation while protecting concerned villages from possible floods. For specific activities planned under Component 2, small investment funds to support the GoL's effort to develop downstream irrigation have been included to allow the GoL to capitalize on the potential benefits o f a few outlets from the downstream channel to be constructed by the NTPC. The focus on empowering local water users complements the participatory planning andbudgeting mechanisms being introduced under DDFandPDF inComponent 1, though applied to larger-scale investments. Onthe other hand, it has been agreed that the project will focus on irrigation while the GoL will collaborate with the NTPC andother donors to support the implementation o f flood mitigation measures. 53. With respect to the agriculture and livelihoods support sub-component o f the DDF, due consideration was given to the alternative o f promoting the development o f a village savings & credit (VSC) system. However, given the intensity o f effort and level o f resources required to establish a viable VSC system, this option was discounted and preference given to a simpler, well-targeted small grant facility and the facilitation of village-level group production and marketing. Another alternative also examined for the village agriculture and livelihoods support was more comprehensive support for extension services inthe province. Again, this was judged to be beyond the scope o f the project; instead, the proposed project will focus on piloting a more livelihoods-based approach to extension services in a limited number o f poor communities and households. 54. Approach for addressing Governance. A wider approach to "governance" was examined as one way for the project to address a broader range o f capacity development issues in Khammouane. This was deemed to be better dealt with by GPAR, managed by the Public Administration and Civil Service Authority (PACSA). The project, however, still intends to address a more focused set o f governance issues by undertaking Component 1 activities aimed at strengthening public investment planning and public financial management capacities which are closely linked to the DDFPDF investment financing facility and by extending this approach in the context o f strategic investments inirrigation. 14 55. Approachfor CommunityDrivenDevelopment. Two community-driven development (CDD) approaches currently co-exist in Lao PDR: the Poverty Reduction Fund (PRF) approach andthe DDF approach. The PRFapproach is based on a project implementationunit(PIU) with staff at the national, provincial, and district level that manage the sub-project cycle. Such an approach has a priori greater capacity o f empowering communities, as it places staff on the ground that can assist in promoting an often inexistent dialogue between communities and district officials. The DDF adopts a program approach, and puts stronger emphasis in reinforcing the district capacity o f planning and implementing local infrastructure subprojects with proper consultation with the stakeholders. Therefore, DDF does not have a National PIU and staff at the district level, as funds are managed directly by district authorities. DDF is currently beingimplementedinSaravane province, andthe proposed project also has adopted the DDFapproach as part o f strengthening the capacity o fKhammouane Province. Considering the current stage o f the development o f Lao PDR, the Bank considers that these two approaches have to be continued for the time being. However, discussions are ongoing within the Government o f Lao to evaluate each approach's strengths and weaknesses and develop a harmonized approach suited to the needs and conditions o f Lao PDR. It has been agreed that ajoint evaluation would be carried out duringthe implementationo f the proposed project with the PRF. 111. IMPLEMENTATION A. Partnershiparrangements 56. The project i s expected to work in partnership with a number o f other development partner organizations andprograms, inter alia: (a) NT2 hydropower downstream activities - Component 2 o f the proposedproject will have a direct linkage with the NT2 downstream activities. During appraisal, agreement has been reached with the GoL and NTPC about the responsibilities o f NTPC regarding the construction o f the siphons and outlets from the downstream channel to ensure a maximumo f synergies; (b) JICA PCAP activities - JICA proposes to continue providing technical assistance for strengthening investment planning processes at the provincial level. The project's PDF and DDF facility will provide tangible leverage for the implementation o f investment planning reforms. Capacity development activities planned under Component 1will also involve a partnership with PCAP; (c) UNCDF technical assistance and linkages with other DDFprograms (SBSD, Saravane) - through an agreement between the province and UNCDF, the proposed project will call upon UNCDF's specialized technical support for the implementation o f Component 1. In addition, the project will collaborate with G P W S B S D (which includes a substantial DDF-stylecomponent that will roll out to four or five provinces) and ensure that lessons learned are shared; (d) While not yet finalized, it is likely that the Province will work with the UNDP supported GPAR-SBSD project which i s supporting governance reforms throughout the country. Key issues supported here might include a strengthening o f the Office o f the Governor, as well as kum-ban strengthening; (e) UNDP supported improvements to provincial monitoring and evaluation (M&E) systems, which i s part o f a broader national project on improving national M&E for the NSEDP; 15 ( f ) The Public Financial Management Strengthening Program i s a multi-year and multi- donor initiative (underpinned by a World Bank administered multi-donor trust fund) operating at the national level. The project has developed close linkages with this program in order to support complementary reforms and capacity strengthening at the local level. B. Institutionaland implementationarrangements 57. Overall Project Execution. The Province will assign a Project Director and Project Coordination Section (PCS) which will be established within the Department o f Planning and Investment (DPI) responsible for overall project implementation coordination and reporting for both Components 1 and 2. Given the national importance o f the NT2 related downstream irrigation development activities, component 2 activities will be closely coordinated with MAF's Department o f Irrigation (DOI). Component1. Localdevelopmentandprovincialcapacitybuilding. (a) Sub-component 1-1, District Development Fund (DDF). The province will establish the DDF and assign responsibilities for management to the DPI, which will delegate the implementation o f the BBG and ALG under the DDF to the districts. Both BBG and ALG will be managed by the DPT; execution of the BBGwould be assigned to the line departments at the district level (e.g., Department o f Education for school rehabilitation); the DAFO will help the target villages prepare a proposal, and the DPT will review and approve. DPT will prepare an annual report to D P I for review and approval. DPI will release the UXO contingency funds inresponse to the request by the district; (b) Activity 1-2-1. Provincial Development Fund (PDF). The DPI will manage the PDF. The PCS will be responsible for coordinating line departments in the province as well as district governor offices andpreparing a proposal for the PDF investment plan. The plan will bepresented to an Advisory Committee for Component 1for review and approval; (c) Activity 1-2-2. Provincial Capacity Building. The DPI is responsible for overall management o f this subcomponent, particularly for fiduciary matters; however, the DPI will delegate to the respective line departments the activities related to the public financial management (Department o f Finance, (DOF)), public investment planning (DPI) and livelihood support respectively in terms o f preparing terms o f reference, technical specifications (PAFO). Procurement o f the consultants and civil works will be carried out jointly by the procurement committee, including the staff o f the PCS and the representative o f the DOF, DPF and the PAFO, which will be established for each procurement case; (d) Sub-component 1-3. Component Management. The DPI will be responsible for the implementationo f this sub-component. 58. To fully integrate the component to the province's structure, the flow of funds would be managed bythe DOF, which will release funds to the concerned parties with an instruction o f the PCS. 16 Component 2. Support for irrigation development along NT2 downstream channel and lower Xe BangFai river. 59. The Province will implement this component through MAF's Department o f Irrigation (DOI) and ensure that the day-to-day management is carried out by the PAFO. The DO1will assign one o f its staff as a Component Manager for Component 2. 60. Considering the fact that the project activities would largely take place inthe province, a small unit named the Down Stream Irrigation Management Unit (DIMU) will be established within PAFO to manage component activities. DIMU will be headed by the Component Manager described above, and responsible for: (a) preparing procurement documents for review and approval by the Project Procurement Committee, (b) monitoring the performance o f the consultants and contractors; (c) liaising with the stakeholders; (d) managing Component 2 account; (e) preparing the periodical reports for the review o f the Project Steering Committee. 61. Project Oversight. A Project Steering Committee (PSC) will be established for overseeing both components, the PCS serving as its secretariat. The main task o f the PSC will be to: (a) review and approve the periodical project progress report and plan, (b) provide technical advice to PSC and DIMU for general project implementation issues, (c) review and follow up the annual audit report, and (d) major implementation issues (e.g., revision in the operational manual, appointment o fkey staff inthe PSC andDIMU). 62. PSC will organize a meeting every six months. The PSC will be chaired by the Deputy Governor o f Khammouane Province and comprise the representatives o f the key departments o f Khammouane Province and a representative o f the key ministries at the central level. 63. Financial Management. IDA funds for the project will be deposited into one Designated Account (DA) established inthe Bank o f Lao PDR and managed by the Ministry o f Finance. Under the DA, two component accounts denominated in Kip would be established within a commercial bank. The two components accounts will be established in Khammouane province to support activities under Component 1 and Component 2, and would be managed by the respective component managers under the supervision o f the Project Director. The quarterly and annual action plans o f the two components will be prepared, and then approved by the project steering committee. Both components will prepare and submit their financial reports for the verification o f the project director. PCS will then combine them so as to make up consolidated financial statements and reports for the entire project. Such consolidated financial statements and reports will be submitted to the PSC andto the World Bank. C. Monitoringand evaluationof outcome/results 64. The PCS will ensure regular monitoring o f the project and prepare quarterly financial reports and semi-annual progress reports. This will include a close tracking o f inputs provided, activities undertaken, and outputs achieved, as well as qualitative assessments o f process implementation. 17 65. The project will also assess its progress towards results and overall objectives through impact evaluation. Baseline and follow up surveys for a sample o f districts, kum banhs and villages, including those receiving irrigation assistance, as well as institutional skills assessments for the key provincial and district departments will be carried out at the beginning, mid-termand end o f project. The results o f these surveys will be used to (a) measure the comparative cost effectiveness, targeting and demand responsiveness o f the investments under DDF and PDF as compared with other rural investment approaches, including PDF; and (b) confirm the level o f skills improvement and integration o f new processes and procedures in standard planning, budgeting and investment management under Component 1; and (c) the economic returns to irrigation development under Component 2. D. Sustainability 66. Project activities have been designed to ensure sustainability and replicability by avoiding parallel implementation units. The DDF and PDF are based on GOL's own planning and budgeting reforms so that the processes used during project implementation will stand a good chance o f being replicated after the completion o f the project. The GoL has already expanded the implementation o f the DDF inother provinces after successful piloting inSaravane Province. 67. Sustainability o f the activities supported by the villages will depend largely upon the target villages. The activities have been designed to support financially and technically feasible livelihoods activities identified jointly by the villagers and extension staff with the support o f external technical consultants. The project will also support capacity building o f the villages' entrepreneurial skills. However, it should be noted that the replicability o f the ALG will depend on the financial commitment o f PAFEC to support its extension staff to carry out necessary visits to villages, andthe province to continue funding for ALG facilities for other villages. Duringthe mid-term review, the effectiveness o f the ALG would be reviewedjointly by the Province, MAF, and villagers inorder to develop a strategy and action planfor possible continuation. 68. Irrigation-related activities have been designed to incorporate the lessons learned and ensure sustainability for the irrigation facilities rehabilitated or established by the project. The proposed irrigation facilities are relatively small, corresponding to the management capacities o f WUGs. The rehabilitation o f pump-based facilities will only be carried out where pumps are simple and for which WUGs can therefore ensure routine maintenance. Finally, following scheme rehabilitation a technical assistance program covering administrative as well as technical aspects o f irrigation management will be implemented to strengthen WUG management and operational capacities. 18 E. Critical risks and controversial aspects 69. The overall risk rating for the project is estimated as substantial mainly because o f concerns regarding fiduciary governance, coordination between provincial and national administrations in project execution, provincial implementation capacity and generic Lao PDR corruption. The primary mechanisms for mitigating these risks in the project are the incorporation o f transparency mechanisms to strengthen accountability for the use o f funds and implementation at all levels, clear designation o f responsibilities and significant capacity building support. Specific actions and details are covered in the annexes on Financial Management (Annex 7) andProcurement Arrangements (Annex 8). Particular attention has been made to mitigate the following major inherent risks relatedto fiduciary aspects o f the project: (a) National treasury operation in Lao PDR is still weak in terms o f cash management, internal and external control. Low salary levels o f public servants may trigger abuse o f the per diems and training allowances to be granted by the project. Inorder to mitigate this risk, the project would induce the following mechanisms in the provinces: assignment o f an internal auditor with each o f the implementing agencies (DPI and DoI) supported by technical assistance for training and oversight, annual audits by the State Audit Organization (SAO), external audit for the project accounts, extensive monitoring and training under Activity 1-2-2 in financial management (on particularly fuel and per diem allowances), as well as the Bank's regular supervisionmissions; (b) Procurement Risks. Problems o f bid collusion amongst contractors, inappropriate disqualification o f lowest bidders, unequal access to bidding documents and failure to provide contracted works, goods and services, are specific concerns, as are simple errors inprocurement procedures dueto the lack ofexperience ofdistrict staffandcommunities. These risks would be mitigated through: (a) fairly low thresholds to limit shopping arrangements to very small works and goods packages; (b) use o f standardized bidding documents, including specifications, for typical BBG subprojects; (c) adoption o f community accountability mechanisms including public display at the village, kum banh and district levels o f the biddingprocess, results and contract costs, as well as sign offby the communities prior to payment to contractors for all components; (d) technical audits to confirm quality o f works reported as completed and satisfactory; (e) periodic analysis o f contracting unit costs, etc. for common subprojects under the proposed project and similar projects operating in Khammouane Province and Lao PDR to identify potential collusion, (f) well publicized sanctions in terms o f reduction or freezing o f funds allocation to districts which have not complied with DDF procedures; (g) advertisement o f the phone number o f the State Inspection Authority and procedures for anonymous reporting o f concerns and agreement with the Authority on monitoring investigation o f concerns received; and (h) technical assistance for preparation o f bidding documents and analysis o fbids for N C B andI C B procurement; (c) In addition to the specific fiduciary risks, a number o f risks related to coordination and capacity issues are identified inthe following risk table: 19 Potential@ks . RiskMitigationMeasures -ack o f coordination Establishment o f oversight committee including central ministry and )etween local and provincial government representatives :entral administrations Clear assignment o froles andresponsibilities inthe Operational Manual Ielays implementation for technical implementation as well as financial management, flow o f funds, procurementandreporting Zormption infinancial The following measureswould be carried out under Activity 1-2-2: Technical S nanagement and/or Assistance to help implement the DDF and the PDF. xocurement diverts Integration o f community accountability mechanism, includingpublic hds from objectives display o f allocations and contract awards 0 Training infinancial management andprocurement responsibilities and accountabilities consistent withbroader country approach 0 Technical field audits to supplement financial audits Comparison o fcosts betweendistricts and with results from other UNCDF-supported DDFs and similar projects inLao to identifycost outliers 0 Sanctions interms o f reduced funds availability incases o f not following keyprocedures at district level 0 Financial management software would be installed after three months from effectiveness .nadequate 0 Advancing preparednessfor implementation o fthe project using Japan M ireparedness for projeci PHRD Grant to finance key activities such as: (a) detailed design for mplementation and rehabilitation o f the existing irrigation facility inTha Thot Village and (b) iesulting delay in preparation o f OperationManuals, and (c) initial stakeholder consultation nitial implementation Neak local capacity 0 Phasedimplementation to allow learning / fme tune inactivity design. M ;upport mechanism 0 Technical backstoppingfrom UNCDF technical support team 0 Experience and training o f core provincial civil service group under GPAR-LSP preparationphase 0 Intensivetraining incore skills o fplanning, budgeting andM&E. Inadequatecompliance 0 Very limited anticipated landlossesassociated withcanal andruralroad M vith safeguards, rehabilitation iarticularly regarding Training insafeguardsprovisions incorporated inmanual and .esettlement disseminationto villagers as part o f training o f participants :ompensation 0 Required reporting and Bank follow up supervision ?oorquality design Prior review o f designs S mdor operation o f 0 A priori agreement andprogramming o ftechnical support for formation o f rrigationworks. WUGs, construction oversight and training o f villagers inwater management l i g h staff turnover Careful selection o f participants based on criteria o f in-service M imits effectiveness o f responsibilities and expected tenure inpositiodagency :apacity enhancement 1 OveralRisk S Rating: H(High); S (Substantial); M(Modest); N(Low or Negligible) F. Grant conditions and covenants Effectiveness conditions (a) Establishment o f the project Steering Committee (PSC) by the Recipient to monitor the overall progress o f the project andto provide strategic guidance during implementation; 20 Establishment o f the Project Coordination Section (PCS) by Khammouanne Province for the purpose o f executing Component 1o fthe Project; Establishment o f the Downstream Irrigation Management Unit (DIMU) by MAF's Department o f Irrigation (DOI) for the implementation o f Component 2; and Formal adoption o fthe OperationalManual by the Recipient. Other ImplementationConditions (a) Agreement shall be made by December 31,2008 between the NamTheum Power Company (NTPC) and the GoL stipulating the NTPC's commitments to: (i) take specified measures to mitigate the impacts o f the downstream channels to the existing irrigation scheme in Tha Thot Village; and (ii) construct a new facility to divert water from the regulating dam to the Tha Thot area; (b) Mid-Term Review report prepared based on agreed Terms o f Reference should be submitted to Bankby March 30,201 1. WithdrawalConditions (a) Disbursement condition for goods, works, consultant services and incremental operating costs for Component 2-1 (Rehabilitation o fthe Existing IrrigationFacility inTha Thot Village), andcomponent 2-2 (Support for Pilot Downstream IrrigationDevelopment inTha Thot Area): the Agreement between the NamTheum Power Company (NTPC) andthe GoL referredto above inOther ImplementationConditions - Section (a), should be finalized. IV. APPRAISAL SUMMARY A. Economicandfinancialanalyses 70. DDF and PDF. It is not possible to calculate ex ante economic internal rates o f return (ERR) for the investments to be financedthrough the DDFandPDF, largelybecause the project will be providing discretionary annual allocations to the province and districts, which would then prioritize investments through consultations with and participation o f the stakeholders. The investmentswill be small insize, each o f which would cost less than US$50,000. Judging from the experience ina similar project in Saravane Province, financed by UNCDF, most o f the DDF- funded investments would be between US$3,000 and US$5,000. The investments also would cover many sectors rangingfrom education, health, water and sanitation, androads. 71. Nevertheless, DDF-funded investments will most likely be economically sensible, mainly because they would be determined through consultations with the concerned stakeholders at the village level. Although there is no data from Lao PDR to assess how such efficiencies resulting from better resource allocation translate into economic rates o f return, evidence from a similar project in Bangladesh suggests that discretionary facilities implemented by local governments achieve productive efficiency gains ranging from 23 to 37 percent. Assuming these savings accrue at a similar rate for the DDFPDF grants that will be allocated by the proposed project, then the project can expect to yield absolute gains inproductive efficiency in an amount ranging 21 from about USD $1 million to $1.5 million over the project implementation period alone. The proposed project's DDF and PDF facilities are thus expected to generate substantial benefits in terms o f allocative and productive efficiency, as well as a large number o f infrastructure related but unquantifiable benefits. The relative cost effectiveness o f DDF and PDF investments compared with other approaches applied in Lao PDR will be assessed as part of mid-term and final evaluation. 72. DDF ALG. A preliminary assessment carried out for a small number o ftarget villages - has indicated good commercial potentials for certain products (e.g., bamboo crafis and livestock). Although at the appraisal stage there i s no a priori detailed analysis on the financial and economic returns on support to village-level production groups; during the first phase, a detailed analysis (both demand and supply side) would be prepared with the technical assistance. Inaddition, technical assistance would assist the concerned villagers in organizing themselves into production groups and developing a business plan. The second phase, the support for the production group through the provision o f seed grants, would be started only after the business planwould clearly show good financial viability. Technical assistance is planned to monitor the performance o f the village production groups and provide timely guidance to facilitate them. 73. Irrigation. The three types o fthe irrigation investment are plannedunder Component 2; (a) Rehabilitation o f the existing irrigation facility in Tha Thot village. The EIRR o f the proposed rehabilitation work is estimated at about 12.9 percent under a conservative scenario without assuming the conversion to higher value crops (e.g., vegetables), confirming the economic viability o f the proposed rehabilitation works. The proposed rehabilitation work would benefit about 400 families with about 1.2 ha each in the scheme. The estimated cost for rehabilitation (US$2,408 per hectare) is relatively high compared to other projects, as extensive repairs, such as resectioning the main canals and repairs to the weir would be needed. The current irrigation area is about 150 ha and average yield o f rice, which i s the main crop is 2.2 tons per ha; without the project, the irrigation area would decline to 100 hectares as a result o f continued deterioration o f the scheme. With the project, the irrigation area would be filly restored to the planned 250 ha with the yields o f 4.5 tons per ha. The estimated return for labor would also be increased from about US$3.2 per day to US$5.8 per day, which i s far above alternative income opportunities inthe province; (b) Development o f a pilot downstream irrigation scheme inTha Thot Area. Sub-component 2-2 would support the GoL's aspiration to develop a series o f new irrigation facilities using discharge water from the NT2 hydropower station. The preliminary EIRR estimated by the pre-feasibility study financed by the NTPC i s about 12.0 percent for entire downstream irrigation area comprising about 17,000 hectares; andduring appraisal, the preliminary ERRwas estimated at about 13.0 percent for the project area. While the detailed economic analysis would be carried out during the first and second year o f project implementation in conjuction with the planned feasibility study, the economic viability of the particular irrigation scheme proposed under the project is very likely because: (a) the proposed area is filly cultivated (mainly rice) and farmers' interest in irrigation is quite high, therefore quick benefits from the construction are expected; (b) the NTPC will provide an outlet and the construction cost would thus be reduced by at 22 least 20 percent compared to the other irrigation facilities in the country, and (c) the proposed system is gravity based, and operation o f the scheme would be affordable and technically feasible for the concerned farmers; (c) Rehabilitation o f small pump facilities along Xe Bang Fai River. A preliminary ERR based on the 8 irrigation schemes i s estimated at 89.5 percent. This activity would support rehabilitation o f about 30 pump facilities (20-100 ha). The activity would mainly support minor repairs to pumps and head concrete structures, which would cost up to US$5,000 per scheme. Rapid rural surveys carried out duringpreparation confirmed that the farmers are paying the operation cost (mainly electricity and labor), but do not perform necessary routine maintenance works due mainly to a lack o f knowledge and insufficient technical support from the PAFO The ERR o f these small repair works are very high, as these works are inexpensive deferred maintenance, and the repair works would substantially increase the efficiencies o f the current operations (typically, there i s substantial leakage from pumps and canal distribution system) and increase the sustainability o f the scheme. Further it i s noteworthy that the operation costs for these pump facilities would be substantially reduced after completion o f the NT2 hydropower station, as water levels inthe Xe BangFai River during the dry season would increase by 2-3 meters and pump lift would be reduced accordingly. The activity would also include technical training for WUGs to ensure the sustainability o f the facilities upon rehabilitation. B. Technical 74. DDF and PDF. Based on the Saravane pilot and consultations during the KDS preparationprocess, the majority o f infrastructure supported by the DDF would be upgrading o f rural roads, village potable water supply, and upgrading/expansion o f school and health post buildings. Standard designs have beenprepared based on government specifications as the basis for sub-projects and final designs and supervision o f construction will be carried out by the private sector. The process would be monitored and guided by the UNCDF technical support team, to be financed under the project. An annual technical audit o f sub-projects will identify design or construction quality concerns in order to strengthen the standard designs, as well as training o ftechnical staff anddistrict committees. 75. Irrigation. The existing irrigation facility inThat Thot village was constructed inthe late 1980s, serving about 470 ha o f the command areas inthe wet season and about 280 ha inthe dry season, mainly for rice farming duringboth seasons. While the system i s still being used, most o f it has deteriorated seriously andneeds major rehabilitation including repairs to the reservoir and the canal system. The reconnection o f the main irrigation canal, which has been cut by the NT2's downstream channel, will be completed shortly. 76. The potential irrigation development area o f the Tha Thot area using the discharge from the NT2 hydropower station is estimated at approximately 1,200 ha in total, divided into five sub-facilities. Duringthe pre-feasibility study, the GoL and the NTPC agreed that one o f the two outlets at the Regulating Dam will have a capacity o f 3.18 m3/s for releasing water to the Tha Thot area o f 1,200 ha. The outlet for the Tha Thot area will be further divided into two outlets, one o fwhich will have a capacity o f 1.52 m3/sfor the rightbank o f the Downstream Channel and the other o f which will have a capacity o f 1.66 m3/sfor the left bank. The proposed expansion 23 would be the second sub-scheme located on the right bank o f the Downstream Channel. Water would be released from the Regulating Dam and distributed by gravity. Detailed feasibility study and the detailed designwould be carried out duringthe first year o f implementation. C. Fiduciary FinancialManagement 77. Ingeneral, and as noted by the 2007 Public Expenditure Review (PER), fiduciary risk in Lao PDR is high.According to the PER, the reasons for this are a lack o f realism inbudgets and weaknesses in the budget processes, budget execution, accounting and control, and reporting. Weak institutional arrangements and capacity for internal and external audits contribute to the high fiduciary risk. Skills shortages inPFM and insufficient capacity buildingmechanisms and coordination exist at all levels. There is an acute shortage o f staff with P F M skills. These skills range from public expenditure analysis and planning and Treasury administration to procurement, accounting, auditing, and financial information and communication technologies. Skills are particularly poor at the local level. Capacity-building mechanisms are inadequate. Riskat the sub-national level is compounded bya lack o fmechanisms for downward andupward accountability. 78. The proposedproject, which places a particular emphasis on district- andprovincial-level financial management to handle DDF and PDF activities must, therefore, be seen as "high risk" in fiduciary terms. As a result, a range of measures will be introduced by the project, aimed explicitly at either building sub-national FM capacities or at establishing basic systems and procedures (e.g. timely and regular financial reporting) tailored to the capacities o f local officials. Regular external audits o f all project activities will be supported, and carried out in tandem with the SAO. In addition, the DDF and PDF introduce nascent mechanisms for downward accountability and disclosure requirements. Although such measures are generic capacity development activities, they are also intended to reduce the fiduciary risk associated with the project's decentralized investment financing facilities. Finally, the PSC budget includes provision for a dedicated andproject-housed FMunit. 79. As with FM in general, public procurement in Lao PDR is also subject to substantial risks. Although GoL has adopted new and improved regulations and created an office dedicated to establishing procurement policy and procurement monitoring practices (the Procurement Monitoring Office, PrMO), clear processes still do not exist for managing procurement operations, monitoring procurement outcomes (and collecting and publishingsuch information), and ensuring the application and enforcement o f improved procurement procedures. Inaddition, little systematic procurement capacitybuildinghas taken place at the local level. 80. The proposed project's procurement activities are expected to be carried out by the procurement committee established by the project steering committee. As a general principle, the project will rely upon Lao PDR's existing set o f procurement rules and regulations for all goods and works procured by the National Competitive Bidding, and on Bankprocedures for the procurement o f consultant services. 24 81. DDF and PDF. Giventhe decentralized modality inherent inthe DDF facility, districts will need to undertake procurement o f a range o f goods, works and services. Districts, in other words, will operate as procuring entities. However, districts inKhammouane have limited or no experience inpublic procurement. The proposedproject will therefore: Develop a District Procurement Manual (DPM), based on national procurement regulations2 and on the existing District Procurement Manual used by the Saravane project. The DPM will be a part o f the operational manual and will be subject to Bank approval; Provide relevant district-level staff with intensive training in the use o f procurement methods and application o fprocurementprocedures; Establish district procurement activity reports as an integral part o f regular district reporting; Closely monitor district level procurement activities so as to ensure compliance with agreed procedures andto identify any bottlenecks or problems. A similar set o f arrangements will apply to provincial-level procurement activities linked to PDF expenditures. 83. In both cases (DDF and PDF), the Bank will not need to ensure prior reviews of procurement packages and processes. However, the Bank will require that districts and the province allow for a sample-based post-review o f up to 10percent o f all procurement packages. 84. ALG. For this sub-component, procurement will be handledby the PCSDPI, acting on behalf o f the province. Any open tendering processes, however, will be delegated to PAFEC but with the PCS and DPI making final decisions on PAFEC's recommendations. Technical assistance for this sub-component will be procured by the PCS with the terms o f reference prepared by the PAFEC andPAFO. 85. Other procurement. The PCS andthe DIMUwill procure goods and services that are required for the overall management and administration o f the project in accordance with the Bank'sprocurement guidelines. D. Social 86. Overall Approach. The community-drivedparticipatory approach to planning prescribedby the proposed project ensures that development options or interventions produce the maximum benefits to the community while minimizing or avoiding negative impacts to the villagers. For unavoidable impacts, the Bank's Policy on Involuntary Resettlement and Land Acquisition (OPBP 4.12) requires that losses are compensated at replacement cost and should be done in close consultation with the affected households/persons. Compensation and relocation assistance are required to be completed prior to the commencement o f civil works. A grievance redressal structure and procedure is also included. The technical guidelines to mitigate the 2 See Lao PDR Procurement Manual (September/October 2004), based on "Implementing Rules and Regulations, Ministry Of Finance No. 0063/MOF, 12 March 2004" and on "Decree of Government Procurement of Goods, Works, Maintenance and Services, Prime Minister, 9 January 2004". 25 identified social impacts are included in the Operation Manual and they will be applied during project implementation. Given that the specific project sites for some activities would be identified by the province and districts during project implementation, the Environmental and Social Safeguard Framework (ESSF) have been developed andwould be applied. 87. Land acquisition and Resettlement. Implementation o f the project will improve the social conditions o f local people, and adverse impacts resulting from land acquisition and resettlement are not expected. A rapid social assessment, carried out with assistance from an international social specialist, concluded that the project i s not expected to require relocation but that minor land acquisition may become necessary for small infrastructure investment activities. Given that specific project sites and activities will be identified by the province and districts during project implementation, the Compensation and Resettlement Policy Framework (CRPF) and the Environment and Social Safeguard Screening Framework (ESSF) have been developed and they will be applied to the sub-projects that involve resettlement and land acquisition. The CRPF, including a guideline for preparation o f the Resettlement Action Plan (RAP), has been included in the project Safeguard Manual. If land donation is required, efforts will be made to ensure that it i s voluntary and will not cause adverse impacts on the livelihood o f the landdonor. Proper records on this will also be kept. 88. Indigenous Peoples. The population o f Khammouane Province is ethnically heterogeneous, with almost 40 percent o f the total population being made up o f ethnic minorities. For the most part, ethnic minority populations inhabit the upland and eastern parts o f the province, whilst the Lao Loum population i s generally located in the Mekong valley and immediately adjacent areas. Ethnic minority groups live inBoulapha, Gnomalat and along some stretches o f the Xe Bang Fai River. The ethnic minority communities to be involved in the project are expected to benefit from investment activities. Small infrastructure investments financed through the project may trigger the need for land for project-funded investments and consequently adversely affect some ethnic minority households or communities. An Indigenous Peoples Development Framework (PDF) has been developed to ensure adequate consultation with and participation o f the local population during the planning and implementation o f the project. The PDF includes the description o f the impact, socio-economic characteristics o f the ethnic grouph and suggested mitigation measures. A preliminary screening o f ethnic groups in the development process has also been prepared in the safeguard section o f the Operational Manual. This PDF will help maximize project benefits to the ethnic minority communities and mitigate any possible adverse impacts. 89. ConsultationFramework. The process o fdeveloping the KDR andK D S which formed the basis for the project design was based on extensive consultations with stakeholder groups, including villagers, mass organizations (LWU, LF), district officials, the private sector and donor and NGO representatives. These consultations were arranged around specific themes (such as education, health, gender, and rural development or private sector development) as well as part o f the overall priority setting process across themes. The proposed project, which i s to support KDR and KDS in general, has also been discussed with the stakeholder groups. Efforts will be made to facilitate effective communication and consultation with the local communities, especially the affected population, throughout the implementation o f the project. In particular, under Component 1 extensive consultation is plannedto set out priorities for investment to be 26 carried out by the DDF (Subcomponent 1-1) and PDF (Activity 1-2-1). Under Component 2, a technical assistance program i s plannedto provide direct support to the concerned communities to ensure maximumbenefits from the planned irrigation works. E. Environment 90. Overview of the Project Activities. Implementation o f the project will involve small civil works for: (a) rehabilitation o f the existing Tha Thot irrigation facility; (b) development o f small downstream irrigation facilities in Gnomalat; and (c) construction o f small infrastructure (roads, water supply, schools, etc.) as selected by the distridprovince. These activities will take place in a variety o f agro-ecological settings ranging from riverside areas o f the Mekong valley (Gnomalat and Xe Bang Fai) to uplands in the Annamite Mountains bordering Vietnam (Boulapha). The major form o f land use in Gnomalat is paddy field and town development (including NT2 major camps) while that along Xe BangFai i s paddy field andvillages, including Buddhist temples. 91. Environmental Assessment and Proposed Mitigation Measures. An initial environmental examination (IEE) was carried out with assistance from an international environmental specialist. The IEE study concluded that implementation o f the project will not create adverse impacts on the local environment and local people. However, good engineering practices will have to be applied during the execution o f all the civil works with close supervision and monitoring o f contractor performance. The project will not procure any pesticides. Increases in the use o f pesticides and fertilizers due to rehabilitation o f Tha Thot irrigation system would be small, and mitigation would be made through applying a "chemical prohibition list" and trainindincreasing knowledge o f local official and farmers on pesticides, Integrated Pest Management (IPM) and other options are considered adequate. The IPM program developed for the NTSEP would be used as a startingpoint for the development o f the training materials. Given the small scale o f the civil works and location o f the project sites, the study confirmed that the project will not create large degradation o f natural habitats as specified in the policy and significant loss o f natural habitats is not expected; therefore the IDA OPA3P4.04 (Natural Habitat) will not be triggered. However, to ensure full compliance with the Bank's safeguard policy, concerns regardingnatural habitats, culture property, and safety o fdam are included in the ESSF, to be applied for all the sub-projects. Code o f practice and technical guidelines for addressing various issues have been prepared and included in the safeguard section o fthe Operational Manual. 92. Review andDisclosure. The IEEhas beensubmittedto the Department o f Environment o f the Water Resources and Environmental Agency through its Khammouane provincial office for review and approval. The report has been sent to the Bank before appraisal and found to be satisfactory. In line with the GoL and the Bank's public disclosure policy, the IEE (including ESSF) was disclosed in English on March 3, 2008, and Lao language version was disclosed on March 8,2008. The IEE and other safeguard relatedreports are available for public access at the World Bank Vientiane office, the DO1 office in Vientiane, and the PAFO offices in Khammouane and all the districts. 93. Implementationof the MitigationMeasures. A safeguard section o f the Operational Manual developed for the project have been translated into actions by implementing entities 27 (PCS for Component 1 and DIMU for Component 2) in close consultation with the Bank. The Manual outlines the basic principles o f the environment and social safeguard activities, the screening and approval o f ESSF, and technical guidelines for good engineering practices during construction, IPM,upgrading o f small rural roads, and other small-scale infrastructure, including the monitoring forms. The code o f good engineering practices will be included in the bidding document and the potential contractors will be informed o f this obligation. Training o f farmers and local officials on IPM and other options to avoid increasing use o f chemicals has been included inthe project design. Farmers will be encouraged to adopt organic farming and/or other appropriate technology/practices. When possible, a program to exchange knowledge and experience between Lao PDR and the northeast o f Thailand will be developed and an effort will be made to secure additional hnds for its implementation. Close consultations with local officials and farmers will be continued duringproject implementation. 94. Environmental and Social Safeguard Framework. To mitigate the potential negative impacts due to unidentified activities, an ESSF has been developed (Annex 10) to ensure that adverse impacts will be identified and adequately mitigated. The ESSF describes how safeguards issues will be dealt with by: (a) detailing specific safeguards procedures andmeasures for activities with environmental and/or social impacts, (b) detailing the types o f activities that will not be supported by the proposed project, (c) detailing the types o f activities that may only be permitted in conjunction with specific safeguards procedures, and (d) outlining institutional and monitoring arrangements. Specific procedural requirements and implementation arrangement on key safeguards aspects have been developed and attached to the ESSF as annexes. 95. Training. Training o f safeguard principles and instruments (ESSF, Environmental Management Plan (EMP), CRPF, PDF, etc.) will be provided to the project staff and key farmers. This i s to ensure that: (a) the proposed project activities will be properly screened through the ESSF; (b) a code o f good engineering practice is included inthe bidding documents and contracts and supervision and monitoring o f the contractor performance i s conducted by the supervision consultant; and (c) close consultation with local agencies and communities is carried out throughout project planning and implementation. A budget ($50,000) has been included as the project cost for the safeguard training for the province and the MAF, to ensure compliance with the environmental safeguard stipulated under the project. 96. Special note for linkage with NT2 activities. The project would have a linkage with the N T 2 activities, mainly through irrigation activities planned in Gnomalat. However, the linkage is passive, and the project team would not expect major environmental or social issues to be caused by the linkage with the NT2 activities under the proposed project. In particular, the existing irrigation facility in Tha Thot Village would not be affected by the NT2 activities in terms o f water sources. In order to define the scope o f the project to support the irrigation activities under the project, an agreement would be made by December 31, 2008 between the GoL and NTPC to define the NTPC's commitment to mitigate impacts o f downstream channels to Tha Thot Village, and construct a new facility to divert water from the regulating dam to the Tha Thot Area. Whereas development o f a small irrigation scheme utilizing water to be discharged from NT2 is expected, the proposedproject i s not responsible for water quality o f the 28 discharge. NTPC will continue to monitor the water quality as part o f their obligations under the NT2, andwater quality would be assuredbefore construction o fthe irrigation scheme starts. F. Safeguardpolicy 97. The Bank has defined the proposed project as a `Category B' project. The activities proposed for the different components will involve only small scale civil works, for which no major adverse impacts on the local environment and local communities are expected. Five o f the Bank's safeguard policies, four policies are triggered:Environmental Assessment (OP 4.01); Pest Management (OP 4.09); Indigenous Peoples (OP 4.10); Involuntary Resettlement (OP 4.12), and International Waterway (OP 7.50). Although the policy on the Natural Habitat (Op 4.04) and the Physical Cultural Resources (Op. 4.1I)are not triggered, efforts will be made to avoid adverse impacts duringthe planning, design, construction, and operation o f investment supported bythe proposed project. 98. Project activities will occur within the Xe Bang Fai River, and not the Mekong river mainstream; therefore, prior agreement with the riparian countries is not required according to the Mekong Agreement signed jointly by Thailand, Vietnam, Cambodia and Lao PDR in 1995. Further, the notification i s not required under the Mekong Agreement, as the planned activities are minor. However, the project has been notified through the Bank to Cambodia, Vietnam, China, Thailand and Myanmar incompliance with OP 7.50. 99. The IEE confirmed that taking into consideration the small o f scale civil works, scope o f the project, and location o f the proposed project sites, the project will not create large degradation o f natural habitats as specified inthe policy, while significant loss o f natural habitats is not expected; therefore, OP/BP4.04 (Natural habitat) will not be triggered. The IEE also confirmed that the project will not adversely affect sites with archeological, paleontological, historical, religious, or unique natural values and will not involve logging or large forest clearance as defined in the Bank's Forestry Policy (OP. 4.36). Supporting the rehabilitation o f the existing irrigation facility in Tha Thot Village, which draws water from a weir (less than 6 meters high);will not trigger the Dam Safety Policy. The project will not involve`construction of any dam as specified in the policy, but may be affected by the operation o f NT2 dam, to be operational in 2010. Given that the design and construction o f the NT2 dam are periodically reviewed and supervisedby a team o f international experts on Dam Safety, the risks due to N T 2 failure i s small. 100. The project is not located in any known area o f territorial dispute as defined under the policy. The project activities may involve small land acquisition and may impact on ethnic groups; these issues will be addressed through the involuntary resettlement and indigenous people policies. Limited UXO clearance associated with the investments to be carried out under the project may be necessary and a small contingency fund has been allocated for this purpose. Fieldvisits to the potentialproject sites at Boulapha, Gnomalat, and along the Xe BangFai River confirmed this conclusion. 29 I1Indigenous Peodes (OPBP 4.10) 1 x 1 Involuntarv Resettlement (OPBP 4.12) 1 x 1 II II Safety ofDams (OPBP 4.37) X Projects on InternationalWaterways (OPBP 7.50) X Projects inDisputed Areas (OPBP 7.60) X Piloting the Use of Borrower Systems to Address Environmental and Social Safeguard Issues inBank- X Sumorted Projects (OPBP 4.00) G. Policyexceptionsand readiness 101. Nopolicy exceptions apply to this project. 102. Project readiness is considered to be satisfactory based on institutional arrangements and the progress achieved incompletion o f the operational manuals for both Component 1and 2. A Project Coordination Section, and a Downstream IrrigationManagement Unit(DIMU)have been set up for preparation, and it is expected that the PCS and DIMUwould be formally established for implementation upon Board approval. as part o f the conditions for effectiveness. The Operation Manual will set out detailed procedures for implementing the project activities, including preliminary terms o f reference for major technical assistance under Component 1 and Component 2. On implementation capacity, key staff o f the DPI and DO1 have been strengthened during the extensive preparation period for the K D S and found adequate for implementationo f the project. 30 Annex 1:Country and ProvinceBackground LAO PDR: KhammouaneDevelopmentProject Lao PDR- Povertyinthe midstof developmentpotential 1. Despite a rich natural resources endowment and the considerable opportunities for socio- economic development offered by its geographical location at the heart o f a dynamic Mekong region, Lao PDR andmany o f its people remainremarkably poor. By regional standards, income levels are low, and social indicators are even worse. There has been economic growth, and large numbers o f people have been able to cross over the poverty line - but it is abundantly clear that the country's potential far exceeds its current socio-economic situation. There i s no single, simple explanation for this - a wide range of factors (governance, inequalities, human capital endowments, private sector development, etc.) underpin Lao PDR's relative inability to perform andto deliverpro-poor, inclusive and sustainable socio-economic development. Khammouaneprovince 2. Khammouane province, in many respects, embodies many o f the problems and constraints that have hobbled Lao PDR's development. Although one o f the historically better off provinces in Lao PDR, economic opportunities and relative fiscal "surplus" have not translated into significantly more pro-poor growth, better public services and socio-economic development to the extent that might havebeen expected. 3. Khammouane's potential for economic growth is clearly in evidence. Lying inthe centre of Lao PDR, Khammouane i s situated in a geographically advantageous position. The changes brought by the market liberalization o f the past 15-20 years are due to accelerate inthe period to 2015, driven by developments such as global and regional trade liberalization, the recent completion o fNational Road 12 to Vietnam, the construction o f the USD 1.1billion NamTheun 2 hydropower project, the imminent completion o f a bridge across the Mekong River in the neighboring province o f Savanaketh and the potential construction o f a trans-Mekong bridge from the provincial capital o f Thakek itself. The opportunities for enhanced economic growth - and the concomitant potential for poverty reduction - are considerable. The primary issue is one o f carpe diem, seizing opportunities, and turning them into sustainable, inclusive and pro-poor development. Khammouane'sdevelopmentreportandstrategy 4. Inresponse to the developmental challenges that it faces, Khammouane has (with Bank support) engaged in a consultative process o f assessing problems and constraints, and - as a consequence - has drawn up a coherent development strategy. The principal outputs from this overall process have been the Khammouane Development Report (KDR) and the Khammouane Development Strategy (KDS). 31 5. Khammouane Development Report. The KDR spells out a range o fproblems, constraints and issues - in terms o f four basic "sectoral" areas (governance, rural livelihoods, economic development, and social development, as well in terms o f a number o f cross-cutting areas (environmental management, infrastructure and gender). The following sections provide a very brief summary o f the issues examined inthe KDR. 6. The assessment o f governance, which the KDR treats in very broad terms, reveals a province where decentralizationhas beenmanaged inan ad hoc way, such that powers, functions and resources have not been coherently devolved to lower tiers o f the local administrative system. Planning and budgeting in Khammouane reflect this, with the province taking on the preponderant responsibility for these activities, to the detriment o f districts - despite a broad- based recognition that districts should be on the front-line o f service delivery. The delivery o f public goods and services i s seen as being constrained by local capacities. Gender issues are also highlighted as being o f some concern inthe KDR's governance assessment. 7. With respect to rural livelihoods, the KDR makes a number o f important observations. Firstly, there is a clear poverty "corridor" in Khammouane provinces, with districts situated in the eastern part being significantly poorer than those in the western, Mekong "corridor". Secondly, agriculture continues to be the principal source o f employment for most o f the province's population. Farming and livestock production systems are generally characterized as traditional, with only limited use being made o f modem technology and inputs. Thirdly, the key constraints to improving rural livelihoods are knowledge and financial capital. Fourthly, and finally, extension services are limited. 8. According to the KDR, the structure o f the provincial economy i s gradually changing - the agriculture and forestry sector is declining in relative importance, whilst the industrialhandicrafts and service sectors are gradually becoming more important elements. Increased trading opportunities with Thailand and other ASEAN countries are an important stimulus to economic growth inKhammouane. Tourism i s also developing inthe province. 9. Much o f the assessment o f social development in the KDR focuses on the health and education sectors. Provincial and local health services are generally o f low quality, and are often inaccessible (particularly in the more mountainous eastern districts). Health indicators for the province are surprisinglybad giventhe relative prosperity o f Khammouane-the infantmortality rate, for example, is significantly higher than for Lao PDR as a whole. In the education sector, primary education is characterized by high drop-out and repeater rates, closely correlated with poor access to schools and ethnicity. The province's network o f secondary education facilities is under-developed - as a result, may secondary school aged children simply do not continue their education because the nearest secondary school is too far away. 10. Khammouane's environment and natural resources are crucial to rural livelihoods. However, forest resources have been severely depleted - largely due to unsustainable levels o f logging, fuelled in turn by high demand from the province's wood processing sector. Local fisheries also seem to be under threat due to a combination o f factors - hydro-power development, irrigation, deforestation and over-exploitation. However, the province i s endowed 32 with significant water resources, which are now subject to major hydro-power developments, as well as important mineral resources, which have only recently begunto be exploited. 11. The final part o f the KDR looks at the province's infrastructure endowment, particularly its road network. The provincial road network i s patchy - and many villages still cannot be accessed by road, especially in the eastern areas o f the province. The electricity grid is equally patchy - although 57 percent o f all villages inthe province have access to electricity, indistricts like Boulapha andNakai, less than 10percent o f villages are connected to the grid. 12. Khammouane Development Strategy. Based on the findings o f the KDR, the province has developed an over-arching development strategy, the KDS, aimed at addressing some of the major developmental challenges facing Khammouane inthe coming years. The K D S identifies four major goals, as follows: Goal 1: Improve Governance By 2015, local government will be more effective, transparent and gender inclusive, through capacitybuildingo f government staff at all levels. To achieve this goal, a wide range o f activities havebeen identified, inter alia: 0 promoting the rule o f law; 0 buildingthe capacity o fofficials inkey service delivery agencies; strengthening the provincial planningprocess; 0 improving public financial management; promoting decentralized anddemand-driven infrastructure and service delivery; 0 increasing popular participation; 0 fostering gender equality. Goal 2: Strengthen RuralLivelihoods By 2015, the quality o f life o f rural communities has been improved and poverty has been reduced through improved infrastructure andthe uptake o f sustainable livelihood alternatives. Actions identified for achieving this goal are as follows: agricultural production development; rural enterprise development; training and capacity building; planning,monitoring andevaluation; regulations reform and development particularly in areas o f land tenure and agri-business enhancement andpromotion; social services improvement: a cross-sectoral strategy area affecting all aspects o f rural livelihoods andincluding rural infrastructure expansion (roads and electrification), health and 33 education improvements, local governance improvement and promotion o f greater co- management; financial access expansion: strengthened financial organisation and promotion o f appropriate micro-finance for production inputs and post-harvest processing based on business plans. Goal 3: Promote Economic Development By 2015, the economy has been continuously and strongly developed (averaging 12percent per annum growth) through the linking of agriculture with industry and services, the promotion of production activities in all sectors and the sustainable utilization of natural resources. Here several areas o fwork were identified that would promote economic development: 0 developing the private sector by: - linking farmers to markets on the basis o f extension through Kum Bans and producer -- groups; promoting contract farming; clarification o fthe role o f the province andprovincialpublic sector inprivate sector - development; strengthening linkages to central level institutions specialized inprivate sector development; 0 promoting tourism throughout the province. Goal 4: Promote Social Development By 2015,people of all ethnic groups have better quality of Iqe, better knowledge, improved capacity and health through the improvement of social services and thepromotion of cultural values. Inthe healthsector, priorityactions identifiedwere as follows: 0 improving the quality and availability o fbasic preventative andcurative services, through increasingthe number of (female) village healthworkers, undertaking school health programs, and strengthening technical backstopping; 0 introducing pre-payment schemes (such as community-based health insurance); improving humanresources as a way o f raising the quality o f services. For the education sector, activities such as the following were prioritized: 0 -- increasingretentionrates and reduce repetition rates inprimary school education through: developing appropriate curricula; reviewing and improvingteacher training; improve access to, and increase retentionrates in, secondary school educationby: - reviewing the existing secondary school network and extending it through the - construction o f new schools; reviewing and improvingthe secondary school curriculum; 34 -- sensitizing secondary school students on postsecondary educationopportunities; improving the quality of secondary school teaching; expanding access to vocational schools. 13. Finally, in the cross-cutting area o f infrastructure, the K D S points to the need for major investments inthe road and other infrastructure networks, prioritization of which requires a more participatory and consultative planningandbudgetingprocess. 35 Annex 2: Major RelatedProjectsFinancedby theBank and/or other Agencies LAO PDR: KhammouaneDevelopmentProject 1. The following i s the list o f the Bank financed projects in the rural development and natural resources management, which are considered to relevant to the proposed project; the description o f the implementation status is as o f January 15,2008. 2. Lao PDR: Poverty Reduction Fund (PRF) (P077326) Current ISR Rating: Satisfactory. The main objectives o f the project is to improve the access to public infrastructure and services at the village level, build capacity and empower villages in poor districts to manage their own public investment planning, and strengthen local institutions to support participatory decision makingandconflict resolutionprocessesat the village, anddistrict levels. 3. Ingeneral, implementation of the project is satisfactory. The project has supported the construction o f schools, irrigation, roads, and water supply; the overall implementation i s on schedule, and the outcome o f the project has meeting the appraisal target. Extensive village participation inidentification andprocurement o fthe subprojects has resulted inhigh satisfaction rate and good control over overall budget. The project has set a standard on the CDD project in Lao PDR. 4. The challenges for the PRF i s to institutionalize the outcome into the government's structure to ensure replicability and sustainability, as the implementation o f the project i s carried out mainly by the project funded special entity. In this context, under the forthcoming second phase o f the PRF, extensive technical assistance would be provided to the concerned district governments so as to learn about better resource utilization for poverty reduction through effective engagement o f the villages. 5. Lao PDR: Sustainable Forestry for Rural Development (P064886) Current ISR Rating: Moderately Satisfactory. The main objective o f the project is to assist achieving forestry management o f production forests and to achieve rural poverty in selected forest areas and to help advance a broad set o f forest policy reform. 6. The current implementation status o f the subcomponent Village Development Fund, which aims to provide the poor villages with a small grant to support infrastructure and/or livelihood improvement, is particularly relevant to the proposed project. While the project provides accelerated support for village development (234 villages inDecember 2006 compared to 20 in December 2005), the following issues have been found: (i)size o f the grant is too small,(US$3,000 i s too small for village infrastructure), and about 80 percent o f the funds are used for livestock to help individuals (ii) the current guidelines does not specifically address to protect vulnerable groups (ethnic minorities, women) to ensure fair share o f the benefits, (iii) the grant program has been converted to the village based revolving funds (as the grant is mainly supporting private goods for particular individuals), but not adequate monitoring has not been carried out. The implementation o f the subcomponent is carried out mainly by the project, without engaged concerned agriculture extension services. 36 7. This particular project provide with the following lessons: (i)well targeted grant, particularly focusing on inclusion o f vulnerable groups and support to groups, rather than individuals, be deployed to provide livelihood support to the villages, (ii) separate financial a facility to support infrastructure to address critical basic human needs (e.g. water supply) to ensure adequate funding, (iii) engagement o f the concerned government entity to ensure their responsibilities for implementation and sustainability beyond the project's life. These lessons havebeen incorporatedindesigning the ALG o f the DDF. 8. Lao PDR: Agricultural Development Project (PO65973) Current ISR Rating: Satisfactory. The main objective o f the project i s to reduce rural poverty by improving and increasing agriculture production. This will be achieved by supporting components such as irrigation, livestock and village level infrastructure through a community based approach. 9. The project mainly supports the construction o f rehabilitation o f the existing irrigation schemes (mainly medium to large size), village water supply, and access roads in the four provinces, including Khammouane province. The project also aims at improving skills o f agriculture extension staff to support the villages. The implementation o f the project has been improved substantially during the last 12 months, while in the past, serious fiduciary issues have been encountered. The project provides the following positive lessons in project design: (i) relatively simple menu approach for village support is effective and manageable and (ii) involvement o f agriculture extension staff i s effective for farmers to apply appropriate technologies to improve yields, whereas the project also emphasizes the importance on technical supervision (construction o f some irrigation facilities has been delayed due to the design flaws) as well as oversight on fiduciary aspects. 10. Lao PDR: Nam Theun Social and Environmental Project (NTSEP) (P049290) Current ISR Rating: Moderately Satisfactory. The objective o f the project is to generate revenues, through environmentally and socially sustainable development o f NT2's hydropower potential, which will be used to finance priority poverty reduction and environmental management programs. 11. The core o f the project i s the livelihood restoration and sustainable development for the affected population in sustainable NT2 hydropower development. The project mainly comprises the following three parts: (i) the plateau program to help affected people to restore livelihood through forestry, fishery, and agriculture activities, (ii) the project area program to provide fair compensation for the land appropriation and facilitate livelihood restoration, and (iii) downstream program to mitigate the potential risks caused by the discharge and restore livelihood for the affected people mainly through combination o f a village based credit and saving scheme, rural infrastructure, and various agriculture activities. Particularly, in designing the proposed project (KDP), synergies with the downstream program has been sought to support the downstream irrigation andmitigate potential flood risks under Component 2. 12. The NTPC has been implementing the project mainly by its own staff; the implementation o f the downstream program has been delayed due to the staff constraint. Sustainability o f the project impacts have also become an issue. The NTPC is currently 37 finalizing an implementation planto rearrange responsibilities sharingwith the respective staff o f the central andprovincial government. 13. Lao PDR: Provincial Infrastructure Project(P042237) Closed on June 2007, Final ISR Rating: Satisfactory. The objectives o f the project are to build, strengthening, management and technical capacity o f the local governments and provide infrastructure, particularly water supply and roads to meet the local needs. Inaddition to the construction o f infrastructure, the project has provided extensive training to local government officials on technical and administrative aspects. The project has been closedina satisfactory manner with an extension o f 7 months. 14. The basic design o f the project has been found practical and effective; first, the project has successhl establish a model in the country for provincial development engaging the line ministries responsible for respective sector. The technical training program benefiting all levels o f stakeholders - from the government to the village level has been well integrated with infrastructure portion o fthe project. 38 Annex 3: ResultsFrameworkandMonitoring LAO PDR: KhammouaneDevelopmentProject Primary Project Objective: More equitable access to Project Year 1-3 (Prior to mid-term strengthen the planning process and infrastructure andproduction review) public financial management and social services during the associated with decentralized project implementationperiod Basis for any adjustments to delivery o f public services and targeting mechanisms to ensure infrastructure, including irrigation Improvement o fprovincial reaching underservedareas. development, in Khammouane budget procedures according as Ensureparticipation o fGovt, Province. the new Budget Law NTPC and donors in Development o f a sustainable development and discussion of Interim Objective 1: strengthening approach to utilizationo fNT2 the irrigation strategy. infrastructure and service delivery downstreamwater and irrigation with improved local transparency rehabilitation along Xeibang Fai Project Year 4-5 (After mid-term and accountability (Component 1); based on studies and results o f review): pilots. InterimObjective 2: supporting the Duringthe mid-termreview, development of a strategic vision for policy review would be carried the technically, economically and out with the province, PAFES socially sustainable development o f and Do1andjointly develop irrigation along the NT2 new budget procedures, and Downstream Channel and in areas policy to be adopted. situated along the lower Xe Bang 0 Basis for consideration along Fai River. with UNCDF pilots, o fnational scale-up o f DDFPDF approaches 0 Basis for joint review by Government, NTPC and donors of experience underpilot for updating strategy 39 OutcomeIndicators Use of OutcomeInformation Component1-1(District DevelopmentFund): Basic Block Grant: Through Confurnation that target villages Years 1to 3: Adjust targeting and implementation o f DDF, the project selected for public investment planning processes as needed. would set out a standard to are underserved Determine ifprocedures from other strengthen infrastructure and service Numberoftarget villages with projects, such as PRF canprovide delivery through introduction o f prepared interventionplans lower costs. kumbanh level planning and village approved for funding. representatives and district level Correlationbetweenvillage Assess the degree to which PAFO budgeting and implementation and priorities and hnded can facilitate the development o f improved transparency local subprojects village production group based on transparency and accountability. Estimated cost savings due to the targeted village potentials better targeted and transparent through an effective participatory investment inthe targeted planning. village compared to other projects involving similar Years. 3 to 5: infrastructure. Assess consistency between districts inimplementing DDFto strengthen Agriculture and Livelihood Grant: Number ofagriculture management approach for Complementing local infrastructure production groups which replicability with targeted production support achieve plannedproduction (technical and financial inputs) in goals Determine if support i s sufficient to the poorest villages which are not develop sustainability o f village covered by current assistance groups. programs Component1-2-1 (Provincial DevelopmentFund): Provincial public investments clearly drivenby improved planning PDF investments reflect Year 1and : PDF i s not active process. priorities expressedthrough consultationprocess Years. 2 to 5: Compare planned and 0 Public access o f informationon actualprovincial expenditures with public investments approved at priorities inKDR and emerging the provincial level from PDF process. 0 Recurrent costs o f PDF investments identifiedand included inprovincialbudget Component 1-2-2 (Support for Provincial Capacity Building) Enhancedprovincial level capacity Updated Public InvestmentPlan Year 1-3: Review withProvince and to ensure allocation o f public planning format usedat district central ministries (MoF and CPI) for resources consistent with agreed andprovincial levels. alignment and integration with priorities and ability to attract Annual provincialbudget plan updatednational systems. private investment. aligned with priorities identified through K D W S Year 4-5 compare planned and Comprehensive and timely actualprovincial expenditures with budget reports priorities inKDR and emerging Capital and recurrent budgets from DDF and PDF process. Review clearly linked whether improved linking o f capital and recurrent budgets has increased 40 PDO Outcome Indicators Useof Outcome Information sustainability o f localpublic investments. Component 2 (Downstream Irrigation): Support irrigation development Strategic plan for irrigation Year 1:Determine ifapproach to along the NT2 downstreamchanne includes participation, irrigation for rehab and extended and inareas situated along the low environmental, social, economic scheme is effectively incorporating Xe Bang FaiRiver. and market analysis .participation and economic aspects Numberofwater user groups formed under project taking Year.2 Assess ifthe Government over the responsibilities o f has formulated a technically and O&M requirements ina financially feasible solution to sustainable manner utilize discharge water from NT2 Actual economic returns to hydropower station irrigationinvestment at least 12 percent Year. 3 to 5:.Upon rehabilitation, Assessment with stakeholders Farmers have improved returns and o fpilot experience withuse o f irrigationworks are being downstreamwaters and effectively maintained and managed. rehabilitated pump facilities Year. 3 to 5: Provide preliminary results as inputto nationalprogram for strengthening irrigation management inLao PDRand possible development for NT2 downstreamirrigationand other hydropower stations. 41 0000 QDbm x m \ o m m m m N d o m m m m m m o o Dbnm o m m b N N X 0 0 0 m 0 0 0 0 0 r- 2 2 2 I- N N h l 2 c 0 0 W 2 2 2 0 P m m N 4 - 2 0 m d m 0 W E:3 P 0 0 K, 0 g 2 2 2 m v , E: 0 0 0 0 0 0 0 0 0 0 0 X 0 N 2 X Annex 4: DetailedProjectDescription LAO PDR:KhammouaneDevelopmentProject Component1-Supportfor LocaldevelopmentandProvincialCapacityBuilding 1. The main objectives o f this Component would be to support the province to: (i)adopt more transparent and participatory procedures for the planning and implementation o f public investments to improve rural livelihoods; and (ii)strengthen the capacity o f the three key provincial departments which are most directly involved inthe improvement o frural livelihoods, namely, the Department o f Finance (DOF), the Department o f Planning and Investment (DPI), and the Provincial Agriculture and Forestry Office (PAFO) so that they would be able to implement the new procedures and approaches adopted by the central government. This component consists o f two main sub-components respectively addressing the above-mentioned two objectives: (i) District Development Fund (DDF) and (ii) Provincial Capacity Development. The sub-components are summarilydescribed below: Sub-component 1. District Development Fund (DDF) (Total Estimated Cost: ApproximatelyUW6.867 million) 2. This sub-component aims at assisting the province indeveloping a more transparent and participatory way to carry out investments in public infrastructure and service delivery. This sub=component would support the districts' capacity for carrying out consultations with communities and develop and execute multi-sectoral investment plans for public infrastructure and service delivery. Through this component, the District Development Fund (DDF) will provide all nine districts o f the province with access to Basic Block Grants (BBGs) and to Agriculture and Livelihoods Grants (ALGs). 3. This sub-component would support the GoL's initiative to scale up the DDF facility that has been piloted in Saravane. The DDF i s a financial facility that would initially allocate annual grants to the districts in order for the districts to finance a range o f infrastructure and service delivery investments, and livelihoods support for poverty alleviation. The design o f this component has been strongly influenced by the on-going pilot operation in Saravane province, supported by UNCDF andUNDP since 2005. 4. The main objective of the DDF i s to develop the role o f the district as the key budget planning and executing agency working closely with villages and kum banhs - or group o f villages. While districts are in theory the lowest level o f the local government for planning, budgetingand implementing service delivery and public investment, inpractice provinces have been mainly incharge o f planning and executing investments. Inpractice and for the most part, districts are only responsible for the management o frecurrent costs -mostly personnel costs. As villages in Lao PDR are typically geographically dispersed, interaction between the villages and provincial government officials is limited, making it difficult to develop an investment plan that i s hlly responsive to the villages' needs. Inthis context, the DDF intends to engage districts in 45 budget procedures, and give kum banhs a role o f inter-village coordination inpublic investment planning so as to ensure the participation o f direct stakeholders. 5. The DDF will finance pro-poor infrastructure and service delivery based on priorities identified through stakeholder consultations carried out with village and kum banh representatives. An inter-departmental team - the District PlanningTeam (DPT) - will carry out stakeholder consultations, appraise and prioritize proposed investments, and make a DDF investment plan for each year. The DDF will consist o f the following three facilities: (i) the Basic Block Grant (BBG), to finance a range o f public infrastructure and services, mainly at the kurn banh and village levels; (ii) Agriculture and Livelihood Grant (ALG) to support the livelihoods improvement in the 27 poorest villages already identified by the province; and (iii) contingency funds for UXO clearance for infrastructure investment supported by the BBG. In addition, inorder to cover costs associated with DDFplanning and implementation, incremental operating costs andtechnical assistance will be provided to the districts. 6. Annual BBG allocations to districts will be determined by a simple formula which takes into account the population size and relative poverty o f each district. Typically investments financed by the BBG would cost US$3, 000 - 5,000 and cover the following sectors: transport (improvement in access roads), education (rehabilitation and upgrading of primary schools), health (upgrading local clinics), and water supply (basic water and sanitation improvements in the villages). ALGs will typically finance the purchase o f community facilities (e.g. rice mills, equipment), andor demonstration materials (seeds, livestock), which would cost up to US$lO,OOO per village. 7. Eligible Investments. BBG-funded investments would largely be targeted at poverty reduction. Districts will be expected to invest at least 70 percent o f their BBG allocations on kurn banh or village level sub-projects, which are likely to be of direct benefit to local communities. No more than 30 percent o f BBG allocations can be used to finance district-level investments. BBGs can be usedby districts to finance investments in a range o f sectors such as education, health agriculture, transport and water supply, depending on the needs and priorities o f the local communities and kum banhs. The following table summarizes the indicative investments. 46 Table 1: IndicativeMenuofEligibleBBGExpenditures District level Sub-District (or KumBan) level Health & sanitation: Health& sanitation: 0 district referral facilities andbasic healthcenters and basic equipment equipment drinking water supply systems (spring capping, tube- 0 district town water supply systems wells, wells, etc.) 0 public sanitationschemes Education: Education: secondary school facilities 0 pre-school facilities 0 dormitories for secondary schools primary school facilities (rehabilitation andupgrading, new classrooms, toilets, etc.) 0 adult education (functional literacy) centers Agriculture and natural resources: Agriculture and natural resources: medium-sizedirrigationfacilities small-scale irrigationfacilities (e10has.) 0 erosion control (gabions) 0 livestock vaccination pens erosion control (gabions, etc.) flood control structures Economy: Economy: 0 extensions to electrical grid 0 market sheds district market facilities Transport: Transport: 0 motorable bridges (including 0 culverts and improvedfords buttressesand gabions) 0 pedestrian bridges (including buttresses and gabions) 0 unpaved intra-district roads 0 tracks (including drainage) intra-Kum Banroads (rehabilitation, construction, 0 busderiots drainage) 8. DDF/BBG allocations will not, however, be used to finance a range o f items. In particular, districts will not be allowed to use their BBG allocations to finance the purchase o f vehicles, construction o f administrative facilities or salaries as such expenditures are not directly related to poverty reduction. Inaddition, BBGallocations will not be usedto finance investments that would result in negative social and environmental impacts. A detailed list o f non-eligible BBGinvestments isprovided inthe component operationalmanual. 9. Financing. InLao PDR, it is a customary for the Bank to finance 100 percent of the costs o f a project, due to the country's severe financial constraints. Khammouane province, however, i s one of the `surplus' provinces, and in order to ensure ownership o f the DDF, the province has agreed to finance 10percent o f the investment costs under the BBG. The Bankwill finance 100 percent o f other costs, such as technical assistance, ALG and related expenses (logistical support for agriculture extension services). 10. Consultation Process. To plan and budget for the use o f their DDF/BBG allocations, districts will, engage in a highly participatory process o f consultations, through which direct 47 stakeholders to identify and prioritize investment. This would ensure genuine community-level input into the identification o f priorities, as well as ensuring that local communities have a significant role in the finalization of any DDF investment plans and budgets. Table 2 below provides a summary o f the overall institutional framework that will apply to district level planningandbudgeting. Table 2: InstitutionalFrameworkfor DistrictLevelPlanningandBudgeting L Actors and levels Composition Role & responsibility Villagers 0 Village units 0 Identification o f Village development 0 Female focus group priorities 0 Male focus group Village 0 Village chief Organization o f Village Annual Planning Office/Committee 0 Village Office members Meeting 0 Facilitation o f Village-level prioritization 0 Submissiono fVillage priorities to KumBan level KurnBan 0 KumBanHead 0 Facilitation o fVillage-level prioritization 0 KurnBanCommittee 0 Screening o f Village-level priorities 0 Village representatives: -- Organization o fKurnBanAnnual Planning Chief o f eachVillage Workshop 1-2 women from each 0 Identificationo f KumBanpriorities Village Submission o f KumBanpriorities to DPT District Line 0 Education 0 Identification o f sector priorities for District- Departments 0 Health level investments Agriculture 0 Prioritizationo f sector level priorities for 0 Transport District-level investments 0 Submission o f sector priorities to DPT District Planning Team 0 District Planning & Investment Facilitation o fKurnBanAnnual Planning (DPT) Department Headand staff Workshops 0 Sector technicians Registration o f KumBan and sector priorities 0 Verification, appraisal and preliminary desigdcosting o f sub-projects 0 Preparationo f listing andbudgeting o f prioritizedprojects 0 Presentation o f DPT report and submission to DPC 0 DeputyHeadofDistrict 0 Endorsement o fDraft District Annual Committee (DPC) 0 Heado fDistrict Dept. o f Development Plan Finance 0 Submission o fDraft District Annual Heads o f main sector Development Planto District Head departments (Education, Health, Oversight o fplan implementation Agriculture, Transport) 0 3 representatives o f each Kum Ban: -- KumBanHead 1Village Chief from the KurnBan LLzT - 1woman from the KumBan District Integration 0 DPT 0 Discuss DADP Provincialand district line Ensureno duplication with other 48 Actors and levels Composition Role & responsibility departments programmes Donor-funded programmes Secure additional funding where possible for NGOs sub-projects District Administration District Head Approval o fDistrict Annual Development Plan Provincial Provincial Governor Final approval o fDistrict Annual Investment Administration Plan 11. Key aspects and dimensions o fthis institutional framework are as follows; It is intended to ensure that local communities are able to identify their own needs and propose their own solutions, firstly to their respective KumBans andthen to the district; To the extent possible, the institutional arrangements seek to ensure that women have a reasonable chance o f providing their input into the planning process, through their representation at various levels; The KumBan operates as an intermediary level between villages and the district, a level at which an initial screening andprioritization process takes place; At district level, line departments (headed by DPI) take the lead in carrying out the more technical activities linked to planninghudgeting - it i s the District Planning Team (DPT) which i s responsible for screening, appraisal, preliminary design and costing, and the preparation o f an initial set o fpriority investments; Final approval o f the draft district annual development plan and budget nonetheless rests with the District Planning Committee (DPC), which consists not only o f representatives of line departments, but also - and very importantly - village representatives (both male and female) from each o f the district's KumBans; Draft district annual development plans are also submitted to a consultative forum, the District Integration Workshop (DIW), to which other actors (NGOs, donor-funded projects, etc.) are invited so as to avoid duplication andor to obtain supplementaryfunding; Finally, at several stages in the planning and budgeting process, there are stringent public disclosure requirements (e.g. notification o f BBG allocations, publishing of annual planshudgets) which will enhance the extent to which the process is transparent. 12. DDFPlanning andBudgeting Cycle. The district levelplanningandbudgeting cycle will consist o f a set of well-defined steps, during which key activities will take place. These are summarized inTable 3. It i s important to note that the district planningandbudgeting process i s consistent with the overall planning process inLao PDRand is based on the Lao FY. 49 Table3: Steps inthe DistrictPlanningandBudgetingProcess Step Time-line Purpose 1. Announcement o f the MoF November To provide hardbudget ceilings within which BBGallocation Provincial Governor to meaningfully prioritize investments District Head 2a. Village level Villagers (women December To establish 1community-level priority per identification and and men) January village prioritizationo f sub- Village Offices & projects (Village Annual Chiefs Planning Meeting) KumBanfacilitator 2b. Sector identification Sector departments December To establish 2 priorities per sector andprioritization o f sub- January projects 3. KumBanscreening and KumBan January To prioritize Village level submissions prioritizationo f sub- Committee & Head February To identify 2 priorities for submission to DPT projects (KumBan Village Chiefs Annual Planning Women Village Workshoa) representatives 4. DPT registration and DPT February To register all submissions and carry out initial initial sector appraisal sector screening 5. DPT verification and DPT February IIITo collect technical & other informationon appraisal o f sub-projects March sub-project submissions 6. Preparation o fDPT DPT report and submission to April submissions DPC To develop initial prioritizationof all submissions 7. DPC discussion, DPT April To discuss DPT appraisals and prioritization and DPC recommendations recommendationo fDraft To finalize prioritization o f sub-projects for DAIP inclusion inDraft District Annual Investment Plan(DAIP) 8. District Integration DPT ApriVMay To discuss DAIP Workshop and follow-up Provincialand To ensure no duplication with other district line programmes departments To secure additional funding where possible for Donor-funded sub-projects programmes NGOs 9. Submission o f Draft District Head To approve District Annual Investment Plan DAIP to District Head for approval 10. Submission o fDraft Provincial Governor To approve District Annual InvestmentPlan DAIP to Provincial June Governor for approval 13. DDF Allocations - BBG. This core element o f the DDF will operate on the basis o f a maximumtotal annual funding pool for the province of about $ 675,000 per annum - calculated on the basis o f a $ 2.00 annual per capita allocation for the province as a whole. BBG 50 allocations from the DDF facility will be made directly to districts and will be determined on the basis o f the population size and relative poverty o f each district. The poverty data which will be used in the allocation formula derive from official GoL statistics. Population-based allocations will account for two-thirds o f the total fimding pool, whilst poverty-based allocations will account for the remaining third o f the total fimding pool. BBG allocations will thus be formula- drivenandtransparent. 14. The following table provides a summary o f the indicative BBG allocations to all districts andthus representing the total maximum BBGallocation. Table 4: IndicativeAnnualBBGAllocationsto All Districts(US$) 15. Technical support services (TSS). Districts will be able to use up to 5 percent o f their BBG allocations in order to finance costs related to planning, budgeting, implementation and supervision. This 5 percent sub-allocation (which should not be done on a sub-project by sub- project basis, but used a single composite item in the district's investment budget) will be referred to as the Technical Support Services (TSS) component. The following types o f TSS expenditures would be eligible: (a) consultancy fees for engineers involved indesigdcosting and supervision o fworks; (b) Transportationcosts (fuel) for district officials engaged inplanningor supervision activities; (c) Daily subsistence allowances (DSA) for district officials engaged inplanningor supervision activities; (d) Administrative expenses directly relatedto planning,budgetingandimplementation (e.g. stationery, photocopying). In the case of transportation and DSA payments, districts will be expected to use official Government norms. 51 16. Conditionsfor Access to DDF Allocations. Inorder to provide real incentives for districts to follow basic DDFBBGprocedures, their full access to annual block grant allocations will be conditional upon compliance with a set o f Minimum Conditions (MCs). Inthe event that a district fails to demonstrate full compliance with a given set o f MCs, its block grant allocation for the following year would be reduced by 50 percent. Thus a district that failed to comply with the full set o fMCs applicable to BBGs would be sanctioned by a 50 percent reduction inits BBG allocation for the following year. Any district which i s thus sanctioned can have its DDF allocation restored to 100percent through demonstrating full compliance inthe following year. 17. MinimumConditions will refer to compliance with process (and not to outcomes), and are intended to ensure that districts abide by "the rules o f the game". The inset below, adopted from the pilot Saravane DDF, provides an indication o f the kinds o f M C that will be developed andapplied inKhammouane. MinimumConditionsofAccess to DDFallocations Districts that will be eligible for DDF allocations will be expectedto demonstrate compliance with the following MinimumConditions inorder to accesstheir DDFallocations: (i) The District PlanningCommittee (as definedbythe DDFPlanning Guidelines) met at least twice during theprevious FY. (ii) The District has a finalized and approved Annual Investment Plan for the coming FY by a majority vote with a quorum of two-thirds o fits kum banh memberspresentinthe DPC meeting. (iii) The provisions and spirit ofthis Instruction for the DDFto be issuedby the province isrespected inthe formulation and implementation ofthe District's Annual InvestmentPlanfor the previous FY. (iv) The provisions and spirit o f the country's laws and official regulations concerning public procurement of goods, works and services were respected during the implementation o f the District's Annual InvestmentPlan for the previous FY. 18. Agriculture and Livelihood Grant. While the DDF inKhammouane i s largely modelled on the Saravane pilot, the Agriculture andLivelihoodGrant (ALG) has been introduced as a pilot to test whether the district and agriculture extension services can jointly play an important role for poverty alleviation in severely poor villages. The ALG will consist o f two basic sets o f activities: (i) support for incremental operating costs to promote a livelihoods-based approach to extension; and (ii) providing financial resources to groups, rather than individuals, in the target villages in order to invest in community facilities and small inputs to apply the acquired knowledge and exploit economic opportunities. Further, under the project, a technical assistance program has been designed to provide training to the extension service staff regarding value chain activities, and to the targeted villages regardingrevolving fimd management. Under this project, the ALG would be piloted in the 27 poorest villages in Boulapha, Himboun and Mahaxay districts already identified by Khammouane province. These villages have a high proportion of poor households, but are not covered by any existing village support programs, whether funded by donors or the government. 19. The ALG is a part o fthe DDF and hence would be managedbythe districts; however, the ALGwould involve the Provincial Agriculture andForestryExtensionCenter (PAFEC) as a 52 facilitator for the target villages to prepare a plan for the ALG. Inparticular, the following i s the process to trigger the disbursement o fthe ALG (refer Figure 1below) Figure 1:Modality ofthe ALG , , ALG FinancialSupport Supportfor OperatingCosts El- FIJ Kumban Committe (including buildings) ExtensionServices International Consultants Technicalassistance (Kumbanlevel) Technical assistanceConsultants ` T 1 - d (Valuechain) tmonitoring ExtensionServices *Note: District Financial Office (District and Provinciallevels) 20. Cycle 1. Funds Allocation. The province will transfer the ALG hnds to the district. The amount o f the ALG would be US$lO,OOO per village. While PAFEC i s expected to provide an office and appoint staff for this sub-component with its own budgetary resources, the project will cover incremental operating costs including: (i) equipment; (ii) and operational office utility costs; and (iii) per diems for the extension staff to visit the villages and monitor progress. The ALG will start from year 2 o fthe project; duringthe first year, extensive technical assistancewill beprovided to PAFEC andDAFO to ensure adequate capacity for implementation. 21. Cycle 2. Preparation of an ALG Proposal. Extension service staff assigned in the concerned kum banh will assist the target villages in developing an intervention plan based on the value chain analysis. An intervention plan would set out objectives (e.g. demonstration o f new crops, start-up village based production group, etc.), implementation program (contact person, schedule, expected benefits (impacts on vulnerable people), and use o f the resources (equipment, inputs)). The plan would then be reviewed and approved by the PAFEC for submission to the district. 22. Cycle 3 Review of theALG Proposal, Funds Release, and Monitoring. Upon submission, the District Planning Team (DPT) would review the proposal. Once it i s approved, the finds would be released to the villages, andthe villages would provide equipment and goods according to the Bank's community procurement guidelines. The concerned agriculture extension staff will facilitate the implementation o f the intervention plan and monitoring. The outcome o f the implementationwould be reported to the DPT periodically. 53 Sub-component1-2-ProvincialCapacityDevelopment(EstimatedCost:US$3.096 million) 23. This sub-component would be complementary to sub-component 1; whilst sub- component 1 aims at strengthening the capacity o f the district governments, this sub-component aims at strengthening the capacity o f the provincial government in terms o f public expenditure and budget planning. In particular, the following activities are planned under this subcomponent; e Sub-component 1-2-1 The ProvincialDevelopment Fund (PDF) (approximately - - US$ 1.060 million, includingthe province's contribution). As a complementary approach to DDF,the PDFwouldbe introduced as apilot to provide the provincewith the financial resources to carry out the strategic investments at the provincial level. The objectives o f this subcomponent are twofold. First, this sub-component will provide the province with an opportunity to undertake provincial level strategic investments which are unlikely to be identifiedat the district level. Investments may include, for example, support for teacher training facilities and upgrading the provincial agriculture extension services center. Second, this sub- component will provide an opportunity for Khammouane province to adopt the new provincial planning procedures developed through the JICA-funded PCAP project. Planning for the implementation o f the PDF will be based around the new procedures, and will include district level inputs, as well as inputs from provincial line departments; it will also involve an annual multi-stakeholder planning workshop, to which users o f sector services, as well as concerned line ministries will be invited. Respective provincial line departments will be responsible for the implementation o f PDF-financed investments. e The PDF activity would start inthe second project implementation year (FY2011-12) and make a modest allocation to the province, intended to finance provincial level investment expenditures in the following five key sectors: agriculture, education, health, transport and business development, which benefit all districts. Planningfor the use o f the PDF allocation will include district level inputs, as well as inputs from provincial line departments; it will also involve an annual multi-stakeholder planning workshop, to which users o f sector services, as well as concerned line ministries will be invited. Respective provincial line departments will be responsible for the implementation o f PDF-financed investments. Illustrative investments supported by the PDF would include: upgrading facilities in provincial agriculture extension services, expanding teacher training colleges, purchasing critical equipment and materials for key hospitals inthe province, etc. As with the DDFBBG facility, the province will provide 10 percent o f the counterpart funds; a Similar to the DDF, 2 percent o f the PDF resources would be allocated to support the province to mobilize the technical expertise and finance incremental operating costs to implement the PDF; e Sub-component 1-2-2 ProvincialCapacity Building (Estimated Cost: US$ 0.643 - - million). Under this sub-component, the following four activities are planned: 54 o Technical Assistancerelated to the DDF and the PDF, The DDF andPDFconstitute a new approach to carrying out infrastructure planning, and it i s expected that Khammouane Province will need extensive technical assistance, particularly during the early project implementation period. Given this, and as part o f provincial capacity building, technical assistance will be provided. The technical assistance would particularly assist the province in the process of: stakeholder consultation, investment prioritization, monitoring, and fiduciary management. During the first two years o f implementation, the technical assistance would also monitor the detailed implementation status o f the project to review fiduciary aspects, such as effective and economic use o fthe funds, compliance with the OperationalManual, use o f per diems and fuel allowance, and comparison o f unit prices with other districts as well as other provinces. Considering its extensive expertise, and its unique prior experience inLao PDR, this technical assistancewill beprovided byUNCDF on a sole source basis; o Technical Assistancefor PFM (Supportfor DOF). Further technical assistance will be made available to the province in order to strengthen core public expenditure and public financial management (PEMPFM). This will be linked to the DDFPDF but will also go beyond project operations to include local PFM in general in support o f the broader objectives o f the project to strengthen provincial systems. The first technical assistance activity would be a participatory capacity needs assessment o f the Department o f Finance, which would provide the basis for a series o f support and training activities addressing the institutional, organizational, and individual-level capacity gaps within the provincial PFM system. The needs assessment will be completed as part o f the project rather thanpre-appraisal inorder to ensure continuity between the assessment and the coordination o f technical assistance and training activities to meet the assessed needs - it is intended that the same consultants be responsible for coordinating the assessment and the response in order to avoid implementation problems. The needs assessment will address the current mandate o f the department, the institutional, organizational and individual level gaps in capacity to fulfill this mandate, suggest a broad five year program o f support to fill these gaps, andidentify annual monitoring indicators against which progress will bejudged. The needs assessment, and the annual programs and support and progress reports that will be based on it, will be discussed with the Ministry o f Finance, as well as with the Provincial Government. Throughout the life o f the project, funds will be available to finance support to and training o f provincial and district officials, as well as kum banhrepresentatives. Support will include both formal training, as well as on the job support for provincial and district level officials. For reasons o f sustainability and language, much o f the support will be through local consultants, who in turn will be supported by international technical assistance; o Technical Assistance for Strengthening Planning, Monitoring and Evaluation (Supportfor DPI). Inclose conjunction with the JICA-supported P O , the project will provide additional technical assistance and capacity building aimed at strengthening the core functions o f DPI, in particular those focused on local level planning, monitoring and evaluation. This will explicitly seek to strengthen the province's ability to align itself with NSEDP priorities and to monitor the outcomes o f its investment planning process. Moreover, the project - through the hands-on 55 experience that will be gained from DDF activities - will actively work with national policy makers (inMPIand MoF) indeveloping a planning, monitoring and evaluation framework that i s suitable for district level activities. This will involve interaction with JICA's PCAP, as the latter moves into the domain o f district level planning.The details o f this assistance will follow a similar logic to the DOF capacity development approach above: a needs assessment (identifying the mandate, gaps, program o f support, and indicators o f progress) will be followed by a five-year program o f support addressing not only the individual training needs o f DPI staff, but also the organizational and institutional issues that are vital for improved government performance. As the support will be aligned around the formal mandates o f DPIthat come from MPI nationally, MPI will also play a role in discussing the assessment, annual work plans, as well as monitoring progress; o TechnicalSupportfor Provincial Agriculture and Forestry Office (PAFO). As a way o f addressing extreme rural poverty, the Government has recently adopted the Lao Extension Approach (LEA). Through the LEA, district extension staff would be assigned to kum banhs to assist villages in developing respective village production groups and to provide them with technical support. As a complementary action to the Agriculture and Livelihood Grant (ALG) proposed under Component 1-1, this component would provide PAFEC with technical assistance, logistical support, and small civil works such as construction o f small demonstrationfacilities. e Sub-component1-2-3: ComponentManagement(US$0.396 millionintotal). Project implementation will be supported by a small provincial coordination section (PCS) within the Department o f Planningand Investment o f Khammouane Province. Although key personnel and office space would be provided by the Province, this component would finance incremental operational costs, such as logistics, utilities, consumable items, personnel costs, and necessary technical assistance. Component 2 - Support for Irrigation Development along NT2 Downstream Channeland Lower Xe BangFai (TotalEstimatedCost: US3.55 million). - 24. For the province, the water to be discharged by the NT2 hydropower station i s an opportunity for increasing agricultural production during the dry season, but also poses a risk o f increasing floods. Given this, the Government is very keen to develop so-called 'downstream irrigation', which utilizes discharge water from the NT2 hydropower station for irrigation development. Developing such downstream irrigation would make sound sense from a socio- economic point o f view. Firstly, it would materialize positive externalities o f the NT2 hydropower station's operations. Secondly, it would bring about concrete benefits to riparian villages close to the downstream channel, which do not necessary share the direct benefits o f the NT2 hydropower station. Lastly, developing downstream irrigation would reduce the risk o f floods and embankment erosion for villages located along lower Xe Bang Fai River. If successful, NT2 downstream irrigation would provide a replicable model for the country as a whole, where a number o f hydropower stations are planned inthe future. 56 25. The Government o f Lao PDR andKhammouane Province have therefore been discussing NT2 downstream irrigation with the NTPC as well as major development partners. InOctober 2006, a committee was been established jointly by the Government o f Lao PDR and Khammouane Province (chaired by the Governor) to promote downstream irrigation and flood mitigation inthe lower Xe BangFai. Inresponse, the NTPC has agreed to construct five outlets, including one siphon, along the downstream channel to enable irrigation development in the future. Further, the Do1has carried out a scoping study for downstream irrigation development with the assistance o f the NTPC and AFD. The scoping study has confirmed the technical feasibility o f developing 21,000 hectares o f downstream irrigation; but it has also raised concerns about economic viability andinstitutional capacities for operation andmanagement. 26. The objective o f this component is to follow up on the recommendation o f the scoping study and assist the GoL and Khammouane Province indeveloping a socially and economically feasible way to develop downstream irrigation. In addition, as an alternative to protecting livelihoods in the lower Xe Bang Fai from possible floods, this component would also support the rehabilitation o f small pump-based irrigation facilities. The following sub-components constitute Component 2; 27. Sub-component 2-1: Rehabilitation of the Existing Irrigation Facility in Tha Thot Village (Estimated Cost: US$O.884 million). This sub-component would first support the long over due rehabilitation o f the existing irrigation facility in Tha Thot village. The irrigation facility, comprising about 470 hectares, has deteriorated and the irrigation area has been reduced to one third o f the original design. While rehabilitation o f the scheme had originally been planned under the Bank-financed Agriculture Development Project (ADP), the plan was eventually cancelled as one o f the main canals o f the scheme and two o f the secondary canals were to be cut by the NT2downstreamchannel. 28. As part o f impact mitigation, the NTPC plans to restore the connection o f the main and a secondary canal through two siphons and the construction o f a secondary canal. The rehabilitation o f the facility has thus become a highpriority. As the ADP is nearing completion, and the rehabilitation works need close coordination with the NTPC, it has been agreed that the rehabilitationwould be carried out inthe context o f the downstream irrigation component o f this project. 29. This sub-component will include the rehabilitation o f the irrigation facilities (mainly re- sectioning and partial lining o f the main and secondary canals) and repairs to the headworks (weir and gates). Capacity building activities for water user groups (WUGs) will strengthen local irrigation administration, as well as off-and on-farm water management, to ensure the sustainability o f and adequate benefits from the rehabilitationworks. 30. Subcomponent 2-2: Development of Downstream Irrigation Facility in Tha Thot Area (Estimated Cost: US$O.989 million). This sub-component would finance the feasibility study, detailed design, and construction o f irrigation facilities utilizing discharge water from N T 2 for about 730 hectares around the existing irrigation facility in Tha Thot Village. The above- mentioned scoping study has identified the area as the highest priority; the area, located immediately located under the regulating reservoir o f the NT2, has been fully developed for rice 57 farming, and villages are keen to have irrigation to enable dry season crops. For the most part, the irrigation facilities would be gravity-based, and operations and maintenance costs would be reasonable. 31. NTPC plans to develop a pipeline from the regulating dam and an inverted siphon to cross the downstream channel to provide water to the area; this sub-component would support Khammouane province and the Government to take advantage o f the NTPC's investment (see Attachment 1for detailed information on the area).. 32. Under this sub-component, the following activities would be financed: (i) feasibility a study and detailed design for 730 hectares, (ii) construction for subscheme 2 (about 130 hectares around BanVillage) and (iii) a capacity building program. Feasibility studies would be carried out during the first year o f implementation, followed by detailed design during the second year. Civil works and capacity building would be started during the third year o f implementation. Additional funding is being identified which would finance the construction o f three sub- facilities (1,4, and 5 - covering a total o f 600 hectares), as described inthe Attachment 1. 33. Subcomponent 2-3: Strategic Plan for Irrigation Development along Downstream Channel. (Estimated Cost US$0.500million). The objective o f this sub-component i s to help the GoL to develop a strategic plan to utilize the NT2 hydropower station downstream channels fbrther downstream o f the Tha Thot area. The scoping study indicated that it would be technical feasible to develop four additional schemes (totaling approximately 20,000 hectares) along the downstream channel (see Table 1 below). However, the study also suggested that economic viability will need to be carefully examined on a scheme by scheme basis, with possible breakdown to the sub-scheme level, as the area in question i s quite heterogeneous in terms o f social, environmental, topographical (including soil) conditions, as well as in terms o f access to the market. The planwould support the GoL to develop: (i) scheme level pre-feasibility studies to identify priority development areas with basic canal layout, (ii) recommendations on the institutional arrangements for operations and maintenance and capacity building programs for the WUGs, and (iii) technical scoping study for additional sites and modes o f water storage to further utilize the discharge water. This sub-component would be financed by a co-financier to beidentified. Table 1: List of the Areas for PotentialDownstream Irrigation 2 Tha Thot, */ 1,200 3 3 Nasok 3,400 7 4 Mahaxay (gravity & pumping), **/ 8,000 16 5 NamPhit East 1,100 2 Total 21,200 43 Notes: *Iincluding the existing Tha Thot Scheme with a command area of 470 ha, which would not draw water from the downstreamchannel. Potential new area wouldbe about 730 ha. **Iapproximately3,000 hato be irrigatedthroughpumping. 58 34. Subcomponent 2-4: Rehabilitation and Institutional Strengthening of Small Pump Irrigation Facilities along Lower Xe Bang Fai (Estimated Cost: US$0.591 million). While the first three sub-components aim at supporting irrigation along the downstream channel o f the NT2 hydropower station, this sub-component would support the communities along lower Xe Bang Fai downstream to the point where the downstream channel discharges water to the Xe BangFai. While the discharge from the NT2 hydropower station may affect the flood risk, predicting the possible floods i s technically difficult and mitigating flood risks would be economically infeasible due to fact that the flood risks inthe lower Xe BangFai involve backwater floods from the mainstream Mekong River. Giventhis, improving access to water duringthe dry season is a practical alternative to support livelihoods in the concerned communities (see Attachment 2 for details). 35. The GoL has developed about 30 small pump-based irrigation facilities in the lower Xe Bang Fai in Khammouane province. An additional 30 irrigation facilities are also located in Savannaketh Province (left bank o f the Xe Bang Fai). Most o f these pumps are still operating; farmers (water user groups, WUGs) are responsible for operations, including payment for the electricity and operational costs. However, most of these schemes have experienced serious performance problems due to poor maintenance as WUGs does not have proper technical knowledge. The discharge water from the NT2 hydropower will result in an improved economic outlook for these pumpingstations, as it would increase the water level o f the Xe Bang Fai River by one to two meters. This would certainly improve the economic viability o f these pump facilities. This sub-component would finance the rehabilitation of pumping stations, including critical repairs (typically inexpensive deferred maintenance). In addition, technical training and institutional strengthening for WUGs and PAFO will be provided to restore the facilities' irrigation capacity and to re-establish management ina sustainable way. 36. Inaddition to the above-mentioned four sub-components, a small sub-component would be included to support the Ministry o f Agriculture and Food (MAF)to implement the component (Subcomponent 2-5, estimated cost US$0.591 million). 59 Annex 5: ProjectCosts LAO PDR: KhammouanneDevelopmentProject Table 1: ProjectCost Summary LaoPDR Khammouane Rural LivelihoodProject Pro@ct Cost Summay cost (US$) Including % of Contlngencies Total A. Local Developmentand LhrellhocdsSupport 1. DistrictDevelopmentFund Basic Blodc Grant 2,857.9 27.4 Agricultureand LivelihoodGrant (ALG) 270.0 2.6 Subtotal Dkitrlct DevelopmentFund 3,127.9 30.0 2. Support for ProvincialCapacity Building ProvincialDevelopmentFund 1,060.0 10.2 ProvincialCapacity Building 2,035.8 19.5 Subtotal Support for Provlnclal Capacity Building 3.095.8 29.7 3. Supportfor Component 1 Management 643.1 6.2 Subtotal Local Developmentand LivelihoodsSupport 6,866.8 65.9 6.Support for lrrlgatlonDevelopmentfor NT2 downstreamand lowerXBF Rehabilitationof That Thot IrrigationScheme 883.9 8.5 Developmentof A Downstream IrrigationScheme inThat Thot Area 989.0 9.5 Rehabilitationof Small Pump Scheme in Lower XBG 591.3 5.7 Strategic investment planfor Downstream Irrigation Development 500.0 4.8 Component 2 Management Support 590.8 5.7 Subtotal Support for lrrlgatlon Developmentfor NT2 downstreamand lowerXBF 3,555.0 34.1 Total PROJECT COSTS 10,421.7 100.0 60 - P 2 N r6 N z N a, 0 0 N 03 0 0 N P h .. e4 a h Annex 6: ImplementationArrangements LAO PDR: KhammouaneDevelopmentProject A. Introduction 1. The main beneficiary o f the proposed project i s Khammouane province, and- given this -theprovincewouldbeinvolvedinimplementationofoverallprojectactivities-includingboth Components 1and 2. Inthis context, the province will assign the Director o f the Department o f Planningand Investment (DPI) a project director responsible for overall project implementation, including both Components 1 and 2. However, development o f the NT2 downstream irrigation is a matter o f national interest, and certain managerial responsibilities for implementing Component 2 would be entrusted to the Ministry o f Agriculture and Forestry (MAF). This section describes in detail the implementation arrangements for each Component, including execution andoversight responsibilities. B. ImplementationArrangementsfor Component1. 2. Overview. Inorder to foster the integration o f the project into the existing organizational structure o f the province, the overall responsibility for managing this Component o f the project would be delegated to a small section to be established within the provincial Department of Planning and Investment (DPI), named Project Coordination Section (PCS). In addition, the provincial Department o f Finance (DoF) would be entrusted with the management o f fund flows for the project. . As project activities would include many sectors both at the province and district levels, the implementation o f Component 1 would involve concerned districts and departments according to the following principles. 3. Subcomponent 1-1: District Development Fund. The province will establish the DDF, and assign DPIresponsible for oversight. DPIwill then delegate the implementation o f the Basic Block Grant (BBG) and Agriculture and Livelihood Grant (ALG) under the DDF to the district. Both BBG and ALG will be managed by the District Planning Team (DPT). Line departments will assist villages to prepare proposals for DDGfunded subprojects which will be assembled at the KumBanh level committee and reviewed and priorities agreed by the representatives elected from each village (one man and one woman) with facilitation from DPT staff. Priority subproject proposals will be forwarded by the Kum Banh committees to the district where the DPT will review the proposals for eligibility and provide any comments on technical feasibility, estimated budget, or other technical issues and forward these with the proposals to the District Planning Committee (DPC which includes representatives o f the Kum Banh selected from amongst the Kum Banh committees and district officials. The DPC reviews, discusses and agrees on the priority subprojects which constitute the District investment planwithin the limits o f the district BBG allocation and sends the proposed plan to DPI at the provincial level where the plans are reviewed and their eligibility and feasibility and compliance with safeguards and other provisions confirmed and recommended for approval or sent back to the DPC for revision with comments. Upon approval o f the district investment planby the Governor, BBG funds are transferred to the District account and the District is given approval to go ahead with any required procurement or contracting for subproject implementation. Procurement and 63 contracting are carried out by the District on behalf o f the villages but the procurement committee includes members o f the concerned village, and the contracts with winning bidders are signed between the contractor, the District and the village. Technical oversight o f works, goods or services under BBG is carried out by the competent line agency at the district level, drawing upon provincial support as needed. BBG subproject proposals and funding can include specific allocations to support per diems, fie1 costs and other incremental operating costs o f line departments for technical oversight and support services to villages for BBG subproject implementation. Table 1: Steps inDistrictDevelopmentBudgetExecution Actors Purpose 1.Finalizingpreparations DPT 0 finalize tender documents 2. Procurement & contracting As per GoL regulations andDistrict 0 select contractors for project Procurement Manual implementation 3. Preparationofproject DPT 0 ensure adequate organization o f implementation plan implementation 4. Technical and local oversight DPT 0 ensure quality o f works Technical units (technical departments, consultants) Local Oversight Committees (LOCS) Contractors 5. Payments District Head disbursementoffunds to contractors District Department o f Finance Technical units Contractors 6. Operations & maintenance DPT 0 ensure that investments are operated Local O&M management and maintained 4. There are several aspects o f the BBG budget execution process that need to be underlined: (a) Detailed design and costing o f works will be the responsibility o f the District Planning Team (DPT Where works are very simple, the DPT may itself ensure detailed design and costing But inthe case o f more complex investments, the DPT will be expected 4. , to either call intechnical support from the province or hire consultancy services; (b) Procurement o f goods, works and services will be governed by a set o f district procurement regulations4, based upon national procurement procedures and subject to IDA approval. Procurement will be the responsibility o f the district, with the DPT acting as procuring entity; (c) Technical supervision o f all works will be ensured either by line department staff (from either the district or province) or by private sector consultants. Technical Designtemplates and typical costingsfor standard infrastructureitemswill be developed (using experiencefrom PRF and Saravane)and made availableto DPTs. It is suggested that KDP use the District ProcurementManual(or a slightly revisedversion of it) that has already been developed and used in Saravane. 64 supervision will include oversight o f any environmental and social issues and ensure that foreseen mitigating measures are being taken; (d) Local monitoring o f works will be ensured by community representatives, organized into Local Oversight Committees (LOCs). LOCs will have the day-to-day responsibility for overseeing the quality o f contractors' work - and LOCs will be involved incertifying that works have been up to standard or that any goods delivered are o f the right quality; (e) Upon the completion o f works or delivery o f any goods, LOCs and technical supervisors will jointly ensure that environmental and social safeguards have been respected. 5. Inaddition to the regular BBGhnding, additionalcontingencies are includedinthe DDF component budget to finance clearance o f unexploded ordinance (UXO) as required for specific DDF subprojects. The UXO contingencyfbnding is intendedto ensurethat villages which suffer from UXO are not discriminated against in the Kum Banh or District level prioritization due to the additional cost o f implementing subprojects which require UXO clearance. Screening for U X O risk would be included as part o f safeguard screening for subproject proposals and would be the responsibility o f the DPT. Implementation o f any DDF subproject would be subject to confirmation that UXO clearance had been completed and certification o f clearance received and retained by the district. 6. Agriculture Extension Services. District Agriculture and Forestry Extension Offices (DAFOs) will be engaged inimplementing Agriculture and LivelihoodGrant (ALG) o f the DDF. DAFO have already appointed a DAFO staff member for each o f the 8 kum bans which cover the 27 target villages. These DAFOkum ban staffwill act as facilitators for preparinga proposal for livelihood improvement in the respective villages. They will be responsible for identifying the potential products for the target villages, assisting these villages in developing groups, and prepare intervention plans. Then the DAFO staff will present the intervention plans to the DPT for approval. During the first year o f implementation, livelihood extension training will be provided to these extension officers in order to equip them with knowledge and skills in conducting market and economic analysis andfacilitating interventions. The project will provide per diem, basic buildings and equipment for DAFO staff to station themselves at kumbanlevel so that they can interact with the target villages. 65 I r 1I 0 0 -r e 7. Subcomponent 1-2-1: Provincial Development Fund. The DPI will manage the PDF. Line departments will submit proposals for PDF subprojects to DPI. The PCS will be responsible for coordinating line departments inthe province as well as district governor offices and preparing for a proposal for the PDF investment plan. The planwill processed and approved through the regular planningprocess o f the province. 8. Subcomponent 1-2-2: Provincial Capacity Building. The DPI is responsible for overall management o f this subcomponent; however, DPI will delegate implementation to the Departmento f Finance and PAFO for activities related to the public financial management and livelihood support respectively. Procurement o f the consultants and civil works will be carried out jointly by a procurement committee, including the staff o f the PCS and the representatives o f the Departmento fFinance and the PAFO. 9. Subcomponent 1-2-3: Component Management. In order to facilitate the implementation of the project, a small team namedproject coordination section (PCS) would be established within the DPIto take care o f day-to-day management o f the project activities. The project director will then appoint a full time project manager, to lead the PCS and carry out routine management o f the project. In order to assure the ownership and sustainability o f the project, both the project director and the project manager are the staff o f the province. PCS, led by the project manager, would have the following four contracted staff: (i) assistant coordinator to assist the project manager in facilitating the coordination among districts as well as other departments in the provincial government, (ii) an accountant and deputy to help manage the financial transactions, and (iii)an assistant. These staff would be on a contract-term and financed by the Bank. PCS's main tasks would include the following: C. ImplementationArrangementfor Component2 10. Overview. The Province will delegate the day-to-day management o f this component to the Ministry o f Agriculture and Forestry, which will assign the Department o f Irrigation (DOI) and the Provincial Agriculture and Forestry Office (PAFO) as main entities to implement the component. Considering the fact that the project activities would largely take place in the province, a small unit named Downstream Irrigation Management Unit would be established within the Provincial Agriculture and Forestry Office (PAFO). The following is a summary o f the implementationarrangements for this Component; 0 DO1will assign a staff from the DO1as a Component Manager for Component 2. A financial assistant will also be recruited through the project, and posted in Thakek to maintainthe financial records for the Component; A small unit named the Downstream Irrigation Management Unit (DIMU) would be established within PAFO to carry out day-to-day Component management. PAFO will appoint a Component Coordinator (PAFO staff) to assist the Component Manager and coordinate the DIMU and oversee project implementation under the supervision o f the Component Manager in DOI. Under the Component Manager and the Component 67 Coordinator, the DIMU would also include the following staff in Thakhek: (a) Chief, Pump Scheme (PAFO staff); (b) Chief, Tha Thot Scheme (PAFO Staff); (c) WUG Support Staff (PAFO staff); and (d) assistant (contracted staff). DIMUwill also include one staff member for each o f the two districts (Gnomalat and Maxasay), assigned by DAFOto facilitate the implementationo fthe project. 11. Procurement for Component 2. A procurement committee would be established for Component 2 to carry out major procurement activities such as: selection o f consultants for major studies, feasibility study and designs, and civil works contracts. The composition o f the procurement committee for Component 2 would differ fkom that o f Component 1, as the activities would be mainly regarding irrigation, and specific technical knowledge would be required for the committee member. The committee would be established by the Project Steering Committee. 12. Financial Management for Component 2. As stated above, two financial specialists (one in Vientiane and the other in Thakek) will be recruited to manage the Component. The specialist located in Vientiane will be responsible for overall financial management (record keeping, withdrawal request, preparation for audits), whereas the second assistant accountant located inThakek will facilitate the transaction o f an impress account to finance small amount of logistics costs (per diems, fuels, office supplies). D. ProjectOversight 13. Project Oversight. An oversight committee would be established to monitor the overall progress o f the project across both components 1and 2. The Committee, namedProject Steering Committee (PSC) to be established in Thakek, would comprise the following members; (a) Deputy Governor o f Khammouane Province (Chair), (b) Director General o f the Department of Irrigation, Ministry o f Agriculture and Forestry (Deputy Chair), (c) Director, DPI, Khammouane Province, (d) Director, Department o f Finance, Khammouane Province, (e) Director, Department o f Education, Khammouane Province (f) Director, Department o f Personnel, Khammouane Province, (g) Director, Department o f Health, Khammouane Province, (h) Director, Department o f Tourism, Khammouane Province, (i)Director, Department o f Water Resources and Environment, (i) Representative o f Lao Women Union, Khammouane Province, (k) Director o f Provincial Agriculture and Forestry Office, (1) a representatives o f the MoF, and (m) two representatives o f the MPI. 14. Main task o f the PSC would include the following: (a) review and approve six months progress report and project plan, (b) review and endorse the annual financial audit report, (c) review, advice and approve major implementation issues such as: revision in the operation manual, key personnel appointment, liaison with other government institutions on policy and implementation matters. The PSC would be established prior to the effectiveness o f the proposed project. 68 Annex 7: FinancialManagementandDisbursementarrangements Lao PDR: KhammouaneDevelopmentProject Summaryof the FinancialManagementAssessment 1. A financial management capacity assessment o f the Khammouane Department o f Planning and Investment, Provincial Treasury, nine district treasuries and the Department o f Irrigation (DOI) inthe Ministryo f Agriculture Forestry (MAF)was undertakenbetween August to October 2007 andupdated duringappraisal inMarch 2008 to determine whether the respective institutions have adequate financial management systems and related capacity in place which satisfy the World Bank's Operational Policy/Bank Procedure 10.02 with respect to financial management. Under the policy, borrowers (recipients) and project implementation entities are supposed to have and maintain adequate financial management systems which include budgeting, accounting, internal controls, funds flow, financial reporting and auditing arrangements to ensure that they can readily provide accurate and timely information regarding project resources and expenditures. These arrangements are deemed acceptable if: (a) they are capable o f correctly and completely recording all financial transactions and balances relating to the project resources; (b) if they can facilitate the preparation o f regular, timely and reliable financial statements;(c) safeguard the project's assets; and (d) are subject to auditing arrangements acceptable to IDA. The assessment was conducted through discussions with the staff o f Department o f Planning and Investment, Provincial Treasury director and staff, finance staff from district Treasuries, finance staff from Department o f Irrigation and consultants from GPAR project financed by UNDP. The discussion was preceded by a financial management questionnaire which the respective parties filled infor discussion. 2. The Financial Management assessment indicates that the project will be implemented in an inherently high risk environment. The current financial management systems at provincial level do not comply with the Bank's minimumrequirements intheir current status because they have inherent weaknesses in internal control systems, lack adequate staffing at provincial and district treasury levels to handle project financial management requirements. Such systems have not been audited by independent external auditors since their establishment except through provincial treasury officials and Ministry o f Finance staff. The audit reports issued by ministry o f finance on financial management systems o f the Provincial Treasury and districts reveal unreconciled cash accounts, undocumented and unliquidated advances; unreconciled physical count o f inventories and properties; unrecorded payables and in certain cases erroneous transaction entries. Some o f the districts still have arrears on water and power owing to inadequate resources made available to them from Ministry o f Finance through the National Treasury. 3. Inability to timely account for fuel advances and allowances also poses some risk to any resources made available to districts and province when it comes to timely reporting. With the annotated deficiencies in the provincial and district treasury financial management systems, weaknesses in capacity as well as increased perceived corruption in the country as discerned from the 2007 Transparency International Corruption Perception Index which ranks the country at 163 out o f 174, there is possibility for abusing some part o f the grant resources made available by IDA. Inview o f this, an action plan as outlined below has been designed to mitigate against 69 the envisaged risks. The action plan will be constantly updated during supervision missions to meet new perceived risks as the project is under implementation. The action plan includes development o f clear accountability mechanism at each implementation level starting at provincial level whose measures will be included in the project financial management manual and the project manual o f operations to ensure that the key risks are addressed during implementation. Once such measures are agreed upon, they will be implemented at district level. Systems audits will be undertaken for each district andprovince by the State Audit Organization (SAO) as part o f their capacity buildingon an annual basis which will help to deal with some o f the risks outlined inthe report. 4. In conclusion, the proposed financial management arrangements put in place by the Khammouane Province and the DO1meet Bank's minimum requirements for project financial management as per OPBP10.02, including following actions; AgreedActions Effect iveness Develop and adopt an operational manual which include: (a) financial management module to manage both Component 1and 2, and (b) a devoted section for the DDFandthe PDFto define detailed procedures. After effectiveness 0 Appoint an auditor o fthe project six months after project effectiveness; 0 Purchase and installation o fproject accounting software, six months after project effectiveness CountryIssues 5. Since 2003, the Government o f Lao PDR has been implementing robust Public Financial Management reforms financed by a number o f donors. The IDA, through the Financial Management Capacity BuildingProject has been financing such reforms which encompass three components. Component 1 covers (a) financial sector reform which focuses on improving data management, on and o f f site examination o f banking and other financial institutions. It also covers improvement o f credit information bureau o f Bank o f Lao PDR. The second component covers core PFMreforms such as (a) stabilization o f GFIS (b) strengthening o f debt management (c) support to procurement monitoring office (c) curriculum strengthening at government three PFM regional schools and upgrading training institutions. The third component covers SOE reform and business development which focuses on (a) development o f business strategy (b) SOE restructuring (c) monitoring and evaluation. Through the Additional Financing to the program, the following components have been included into the program which cover (a) developing a new inter-governmental fiscal framework (b) implementation o f revised chart o f accounts (c) providing support towards treasury centralization (d) strengthening external audit capacity. Such Public Financial Management reforms are anchored in the Public Expenditure Management Strengthening Program (PEMSP).This is a master document which guides key 70 PFMreforms in Lao PDR. It was adopted by the Government o f Lao PDR inNovember 2005, bythe approval o fthe Minister for Finance andthe Prime Minister's Office. 6. The PEMSP i s a multi-year medium-to-long term program which aims to improve policy consistency, efficiency, transparency and accountability in public expenditure management by strengthening institutional systems and capacity and making progress towards appropriate international financial management standards. It provides a framework for implementing Government policies and strategies laid out in the "Policy Paper on Governance", the National Growth and Poverty Eradication Strategy, and the National Socio Economic Guidelines 2006- 2010. The document is a response to some o f the key PFMweaknesses outlined inthe Country Financial Accountability Assessment (CFAA) o f 2002 which concluded that the overall fiduciary risk in Lao PDR was considered to be high, despite the fact that there are elaborate built-in controls within the government FMsystem. 7. The conclusions in the CFAA were anchored in insufficient transparency in public finances. The budget process was assessed as being not transparent and public access to government financial information as being limited. These weaknesses have been compounded by insufficient awareness o f modern practices o f internal control inthe public sector and by the government's ongoing decentralization initiative, which needs to be supported with a sufficiently robust institutional framework that clearly defines the new responsibilities at lower levels. Technical capacity of staff at these levels needs to be strengthened. The oversight functions and the State Audit Organization need enhanced capacity and improvement. Capacity at provincial and district level is weak. A recently completed Institutional Development Fund(IDF) grant to improve accountability in state owned enterprises and the private sector has helped develop the environment for the accounting and auditing professions and initiated amendments to accounting and auditing laws. An Integrated Fiduciary Assessment- Public Expenditure Review has been completed and disseminated whose findings go to support the weak accounting environment annotated above. 8. While the implementation o f the actions above have started to improve specific fiduciary issues, the country FM environment for externally-funded projects still remains weak as the effects o f some o f the measures being implemented are yet to impact the respective ministries and departments. 9. A financial transactions review undertaken in 2007 as pointed out above revealed a number o f project portfolio wide financial management weaknesses. A review o f management letters issued on previous projects implemented by a number o f project units in the province show a number of weaknesses ininternal control. 10. Owing to the weaknesses outlined above, this project intends to deal with them by having a proposed financial management systemwhich will have the following features: 0 The project shall be implemented through the Project Coordination Section (PCS) to be established within the Department o f Planning and Investment (DPI) for Component 1 and Downstream Irrigation Management Unit (DIMU) established within the PAFO and staffed jointly by PAFO and DO1for Component 2. The accounting for overall project implementation shall be done through the office o f Department o f Planning and 71 Investment where a senior project accountant will be recruited. The senior project accountant shall help with the accounting functions and consolidation o f reports and withdrawal applications for both components. The PCS will have the responsibility to manage the funds o f the project and be duly accountable on the same. The staff o f PCS and the project accountant through the provincial Treasury shall be responsible for disbursing funds to activities taking place at district and community level in Component 1o f the project and ensure their accountability andreporting on a monthly basis. It shall also be responsible for consolidating the financial reports from DIMU for Component 2 with those o fthe PCS for Component 1. The PCS senior project accountant shall also be responsible for consolidating accounting information necessary for preparing withdrawal applications for submission to the World Bank through the Ministryo f Finance; e The province and all involved districts shall endeavor to have adequate numbers o f staff inplace through the life ofthe project. The same shall bethe case at the DO1andPAFO inthe MinistryofAgriculture andForestry; The State Audit Organization shall be responsible for carrying out systems audits o f the nine participating districts; Increased capacity buildinggrant amount incentives shall also be given to each district to ensure that districts strive to keep their financial management ingood shape; Simple financial guidelines shall be issued by the province for all districts involved inthe project so that new staff can acquaint themselves o f the project's requirements; Clear accountability mechanisms for the DDF, PDF and BBG have been formulated in the Operational Manual and shall be disseminated prior to the effectiveness. The mechanisms include usage o f community accountability mechanisms through CDD principles andpublication o f grant amounts allocated and disbursedwhich shall be posted on primary school notice boards; Training and related capacity building activities and launch workshops shall help bring all staff on the same page interms o f understanding project procedures; Performance o f staff at the center and province shall be carefully monitored to check if they release funds on time and inform district staff o f allocations through development o f basic service standards; Technical consultants shall be hired through an additional 5 percent to be paid together with the BBGallocations to hire staff to supervise andbuildcapacity at district level; An advert will be runinpopular news paper in Lao informingthe public that ifanybody suspects corruption in the project, they should report to the State Inspection Authority (SIA) at district, provincial andnational level for further action. 72 RiskAnalysis 11. The detailed risks to project funds and related mitigating aspects are as analyzed and articulated inthe following table: InherentRisk Country level Fiscal High The weaknesses o f the national treasury Substantial environment:There i s and the generic PFM inadequacies are weak control being addressed through the FMCBP. environment with Some o f the core aspects in PFM reform weaknesses in such as establishing provincial internal National Treasury audit; bi-annual systems audits will be operations, especially implemented. A total o f five main PFM incashmanagement. reform items will be piloted through the There are inadequacies project at provincial level. These will inPFMaccounting include budgeting, accounting, application system, and weak o f Medium Expenditure Framework internal and external (MTEF) principles, internal audit and auditing capacity. robust district and provincial audit by independent external audit; annual audits o f districts through the State Audit Organization will help mitigate against some o f the risks. Government wide, Treasury management, commitment control and debt management. Annual public expenditure reviews will be undertaken at provincial level to check on the weaknesses noted amongst other things.T he FMCBPhas clear achievement indicators in reforming and addressing the weaknesses noted. A provincial PEFA exercise will be undertaken when the project is three years old to check on the selected areas o f Public Financial Management At provincial level, the financial management system will have mitigating financial management arrangements aimed at addressing some o f the key weaknesses observed above. The provincial and district level planning, budgeting and reporting on financial performance, by staff appointed by the province and district whose skills will be further enhanced by training in project FM and government wide PFM; one designated account o f the project finances will be opened inBank o f Laos. There will be annual external audits. 73 Owingto low salary Substantial ~ ~ ~~ Fuel and allowance rule compliance will Moderate level within Public be subject of review of every supervision service, fuel, training mission and will also be checked upon by /workshop costs external auditors. Appropriate payment /allowances and other principles will be written in the project soft expenditures have Financial Management Manual on soft become a means o f expenditures. It i s envisaged that FM livelihood and are guidelines will be issued to help staff likely subject of working on the project understand what i s abuse. required of them. Extensive training will be offered to accounting staff at Do1 and Provincial Treasury Inability to usefunds Substantial There shallbe enhancedaccounting and Moderate efficiently and reporting. Independent external auditors economicallyfor shall be engagedto conduct annual audits. purposes intended The Provincial Steering Committee to be chaired by the deputy governor will overseeproper usage o f funds. At DOI, the director general of Irrigation will review expenditures and fundusage every quarter upon productionof the sub component FMR.Activities o f each component shall be basedon an agreed budnet. Potential corruption High ICB shall apply for all contracts above a Substantial arisingfrom certain threshold and Bank procurement procurement rules shall apply. Such contracts are expected to be few and insignificant. A review of indicative red flags for collusion will be periodically conducted. Advertisement of the phone number of the SA1shall be put inthe paper every quarter inthe first eighteenmonths of the project's effectiveness for people to call the unit for any suspected cases of corruption so that the unit can investigate and bring culprits to book upon obtaining evidence o f malfeasance. Further, community accountability mechanisms will be established where the budget for each sub component during the year will be put on each school notice board and various committees responsible for holding the project accountable for proper utilization o f the budget shall be established and demand accountability at the end o f each month. District comparison o f costs shall be done to detect any that will fall out o f line so that further investigations on 74 possible collusion can be done. Inability to properly Substantial The project shall maintain an advances Moderate account for grants at register which shall be reviewedby village level, external auditors. Log books and fuel advances, fuel and registers shall also be maintainedby the allowances project. The respective books shall be reviewed eachmission. Simple books adoptingthe CDDprinciples incard form shall be maintainedat village level to allow for ease o f recording of transactions and usage o f funds advanced. Inability o fthe DPI, High Eachparticipating entity shall prepare an Substantial. the Provincial Steering annual budget which shall be strictly Committee to properly followed. There will be a launch workshop utilize the project for two days where all stakeholders will be resources and hold invited to be taught about the project and implementers how it ought to be managed. The first accountable. three supervision missions will have such capacity buildingventures imbedded in them. The internal audit to be established at provincial level before the project becomes effective will bringany common weaknesses incontrols to such workshops and ways o f dealing with them and also share them with the Provincial Project Steering Committee. Overallinherent risk Substantial Controlrisk Budgeting Substantial Budgets will be prepared annually and Moderate revised bi-annually. Financialbudgets will be linked to physical outputs through the operating and procurement plans. The FMRs to be prepared will be used to monitor variance analysis with budget. The Communities, staff at district level will be trained on how to cost and prioritize project and district needs which then get consolidated at provincial level. Simple community budgeting manuals will be done for communities to be issued in Lao language by a consultant to be hired duringpreparationand should be ready by negotiation. These manuals will articulate the new state budget laws and how Kum Bans ought to do their budgets. Inability for theHigh The funds from IDA will flow directly to Substantial province to manage the designated account maintained at the IDA provincial Bank o f Laos for both components and treasury project subsequently transferred to two respective 75 account. Further such project accounts to be established at the funds may face province in a commercial bank o f the bottlenecks to reach projects choice and managed by the intendedbeneficiaries. Provincial Treasury and another in a commercial bank inVientiane managed by the DOI. Staff to manage such accounts will be exposed to foreign exchange management by attaching them to the MinistryofFinance for three monthsto see how external finance unit within the Ministry of Finance manages designated accounts. Misuse of Block High Clear rules of eligibility and accountability Substantial Grants, Agriculture will be written in simple English and Lao Livelihood Grants and language for use by recipients in the UXO contingencies. participating districts. Community Driven Driven (CDD) principles will be used for management o f such funds with committees for the management of such funds put in place, monthly meetings held and simple books of accounting maintained where invoices for each expenditure will be attached for accountability and audit purposes. Staffing-weak High .Province staffwill betrained inhandling substantial capacity WE3 funds and also exposethemto more training pertaining to government financial management. Attempt will be made to select such staff on meritocracywith experience and good qualifications. Similar principles will also be applicable inthe Lack of experience in Substantial Project staffwill be supported by a Moderate managingforeign consultant on FMand other areas initially exchange for a period o f eighteenmonths. The provincial and district staff shall be attached to the Ministryof Finance for periods of three months eachbefore the project starts and subsequently. Insecurity of cash High Since some districts don't have banks into Substantial transfers for project which to deposit project funds, cash for use implementation may be transported inbulk to the district for implementation. The governor shall establish a level (proposed $5,000-equivalent inKip) at which any cashtransfer ought to be accompanied by the police. External Audit Moderate Annual financial audit o f the project's Low financial statements by independent 76 auditors to be conducted. Since the project covers nine districts whose systems are very weak, bi-annual systems audits will also be done on a sample basis eachyear. Reportingand Substantial Clear timelines for submittingreports for Moderate Monitoring consolidationwill be agreedupon. Failure to adhere to such timelines will leadto punitivemeasures. A consultant will be hiredto work with provincial and district staffto design simple reporting formats. Such reports should make a serious attempt to link financial andphysicalprogress reDortswherever Dossible. Information Systems Moderate Attempts will bemade to buy software for Low the project duringproject preparation. Once government has bought its own PFM software, has done the horizontal roll out of the FMinformation systems, such software will bepiloted inKhammouane province into which project accounting will be subsumedand integrated. Overall control risk Substantial Overall Project Risk Substantial Rating Financial Management staffing 12. The Department o f Planning and Investment (DPI) will hire one project accountant to be supplemented and assisted by DPI accounting staff. The nine participating districts within the province have varied numbers o f staff whose capacity i s also low. The DO1does have core staff to kick start the activities o f the project although their financial management capacity i s low. It was agreed during appraisal that one more finance assistant for the DO1will be hiredand posted inKhammouane Province to help handlingthe financial management of the Component 2. The financial assistant staff shall have the requisite experience in managing foreign exchange and project related financing. 13. The organizational structure o f the finance function o f the Provincial Treasury who will be responsible for disbursing funds to districts is as designed by government o f Lao PDR. The old staff working in the unit has clear job titles and descriptions whilst those employed less than three years ago do not have fully written up job descriptions. In the DOI, job descriptions do exist for accounting staff though they do not include specific project related accounting functions. These have been clearly written out inthe project financial management manual. The transfer rate o f such staff out o f the ministry and province i s very minimal. Currently, there is no training policy for finance and accounting staff. It i s hoped that accounting staff working on this project shall benefit from capacity building efforts and a resultant capacity buildingplan o f the project to further their accounting skills. 77 AccountingPolicies,systems andprocedures 14. The project's key accounting policies and procedures have been written in a financial management section o f the operational manual. This manual will guide financial management staff working on the project inthe province, districts and PAFODOI. This manual i s part o f the project's operational manual. The DPUprovincial Treasury and DO1 accounting systems are currently manual. Whilst they have been runningwell for the purposes for which they were set so far, it takes staff quite sometime to produce the monthly reports. Their computerization will help produce timely reports. 15. All accounting and supporting documentation will be retained by the finance unit o f Khammouane Provincial Treasury department and the DO1on a permanent basis in a defined system that allows authorized users easy access and facilitate the conduct o f annual audits. Accountabilityfor DDFandImprovingPublicFinancialManagement 16. Clear rules for access and participation into the DDF and PDF i s being developed and written in a devoted section o f the Operational Manual. At community level, clear rules for accounting, reporting and keeping cash have been documented following principles o f Community Driven Development (CDD) and community reporting and accountability principles established by NAFES at community level. Communities will keep simple books o f account which allow them to record the funds they have received, how much they have spent and attaching to their books the supporting documentation and the remaining funds on hand meant for further implementation. Such rules and requisite accountability mechanisms were discussed duringappraisal andwere found acceptable. Budgeting. 17. The current government budgets as currently prepared do not lay down physical and financial targets. However, budgets are prepared for all significant activities in sufficient detail to provide a meaningful tool with which to monitor subsequent performance. Actual expenditures are normally compared to the budget every quarter and explanations obtained for significant variations from budget. Approvals for variations from budget are obtained in advance. Similar procedures will also be adopted for the project. The detailed budget procedures underthis project will be as follows: 18. At the start o f each fiscal year, districts participating in this project will have been informed o f the amount o f resources allocated for the various grants. Using a bottom up approach, the participating districts will develop and finalize their plans through District Planning Team articulating the activities they intend to implement in the fiscal year. All the detailed designs will be done through this DPIwhere the projects will be costed and prioritized. After prioritization, some projects will be dropped and others approved. Procurement for the approved subprojects will be governed by a set of district procurement regulations which are anchored in national procurement procedures and where some packages are above certain thresholds, they may be subject to IDA approval. 78 19. For PDF supported investments, each district will provide an indication o f three priority proposals for provincial level investments. A decision to prioritize will be made through the district planning committee, the district planning team and the district head. The district planning and investment staff will register district level proposals so far submitted and circulate them to relevant sector departments. For Health, Education, Transport and Agriculture which are priority areas, the planning team will look at the proposals and consider appraising them and match them with sector priorities. The staff o f the D P I will appraise sector development submissions and prepare a prioritized draft PDF plan. The draft PDF planwill be reviewed and finalized by the Project Steering Committee (PSC), and the finalized PDF plan will be fed into draft annual provincial investment planandbe integratedinto an annual budget submission. The approved provincial budgetwill thenbe incorporated into the nationalbudget. 20. Appraisal o f subprojects or investments to be financed annually out o f the PDF allocations o f the project will be subject to a social and environment assessment. Thus provincial departments will be responsible for the implementation o f sector investments funded out o f the annual PDF allocation. 21. For component 2 activities, the DO1 will formulate its project budget following government budget guidelines before discussing them with the Project Steering Committee for prioritization for inclusioninthe annual budget. Payments 22. Invoice processing was reviewed and considered less than adequate. This is because there is no comparison between actual goods received and the quantity for which an invoice has been issued by the supplier and the related order. In addition, there is no checking with warehouse or supplies on quantities received. For goods purchased, comparison o f invoice quantities, prices and terms with those indicated on the purchase order and with records o f goods actually received is not done. Checking o f calculations on such invoices is done though not authenticated. Invoices are not stamped "PAID", dated, reviewed and approved and clearly marked for account code assignment. These weaknesses have been addressed in the project financial management module o f the operational manual. Clear rules for paying for services, goods and works under the project have been articulatedinthe financial management manual. Policiesand Procedures. 23. Preparation o f financial statements i s supposed to be guidedby Lao accounting standards. Their applicability in government i s very limited if not non existence. To ensure a sound financial management at district and provincial level, a set o f financial management guidelines are contained in the project financial management manual to guide all stakeholders on financial management issues o f the project. Key policy features inthe draft financial management manual are: 0 The districts are encouraged to use bank accounts at the nearest bank branch for receipts and for the bulk o f expenditures. Currently, none o f the districts inthe province runand operate bank accounts; 79 A distinction has been made between authorizing officer and payments officer such that there is no overlap o f their fhctions as may have beenthe case previously; 0 Purchase requisitions, payment authorizations and payment vouchers to track expenditures and ensure accountability have been embedded in the project financial management manual andpolicies for enforcing them have been included too; A simple computerized accounts journal and software will be bought for each unit-DO1 andDPIto track andrecordall transactions; 0 Regular and timely, quarterly and annual financial management reporting, which will include bank reconciliations; failure to comply with such financial management reporting requirements will result inthe suspension o f hrther transfers; 0 Public disclosure o f DDF-related accounts, with quarterly financial reports being posted on the district and school notice boards and annual financial reports being posted on all KumBannoticeboards; 0 Regular auditing by Independent external auditors. 24. Conflict o f interest and related party transactions rules are not clearly catered for within the provincial guidelines and so are rules that provide safeguards to protect district and provincial assets. However, the projects project implementation manual o f procedures will be distributed to appropriate personnel and clearly articulate the issues o f conflict o f interest and who i s authorized to change codes and establish new accountingpolicy. CashandBank 25. For the current projects financed by the UNDP and treasury funds, there are adequate controls that exist for the collection, timely deposit, and recording o f receipts at each cash location. Cash andbank are reconciled on a monthly basis though not rigorously checked. There was no evidence to show that unusual items on the bank reconciliation are followed up after review and approval. A provincial project bank account with a float o f $400,000 will be opened inKhammouane into which transfers from the DAwill be made for activities under components 1. Another project bank account will be opened by DO1in a commercial bank o f its choice for activities under component 2. It will have a float amount o f $50,000 as most o f the payments will be made on direct payment to the suppliers and contractors. Informationsystems 26. Whilst the project's financial management system i s not yet in place, the existing Provincial Treasury does not have a computerized accounting system. As such, it is difficult to determine whether the processing system does help in safeguarding the confidentiality, integrity and availability o f data. However, simple software will be installed to take care o f transactions for this project at DPI in the province and at DO1in Vientiane. The system will be designed to give confidentiality andintegrity o fdata. 80 Safeguardover Assets 27. There are no explicit policies and procedures to safeguard and protect assets from fraud andwaste through recordingthem ina fixed assetregister. Periodic physicalverification o f such assets i s not regularly done. Assets are not insured. It will be necessary that the project maintains a fixed asset register and conducts period count o f its physical inventory. This will be specified inthe financial module o fthe operational manual. ReportingandMonitoring 28. The project financial statements will be prepared and consolidated by a senior financial accountant assigned in the PCS to be hired by the project-with input from the DIMU for its component and will follow the Lao Accounting standards. Every quarter, such financial statements will be prepared. Such reports will have to be prepared in timely fashion-forty five days after the end o f the quarter. The current system does not have the capacity to link the financial information with the project's physical progress. A separate system will be developed to gather and compile physical data and establish controls to reduce the risk that physical data may not synchronize with financial data. In view o f this suggestion, the draft financial management module will establish clear financial management responsibilities that specify what reports are to be produced, what they are supposed to contain and how they are to be used. The DPIand DO1staff will follow the manual and have to be inducted on how to use such reports. The reports to be produced will compare actual expenditures with budgeted and programmed allocations for the quarter, bi-annually and annually. Internalcontrol/Internal audit 29. There is no internal audit hnctionwithinthe Provincial FinancialManagement system as well as district treasury systems. M O F is planningto establish internal audit government wide soon. It has been agreed that it may benefit the province if as a pilot, an internal audit department was introduced at provincial level starting with Khammouane. The internal audit will therefore cover the review o f provincial and district treasury internal controls as well as project internal controls within its work program once inplace. The detailed terms o f reference for the internal audit department would be developed in conjunction with the Technical Assistance for PFMunder Subcomponent 1-2-2. ExternalAudit 30. All government ministries and departments are supposed to be audited by the Supreme Audit Office (SAO) by the new audit law. The S A 0 can only do compliance audits at the moment because its capacity is limited. As such, the project's annual financial statements will be audited in accordance with International Standards on Auditing by independent external auditors based on acceptable terms o f reference acceptable to IDA. The audited financial statements and audit reports will be submittedto the Bank six months after the end o f each fiscal year, and after the closing date o f the project. 81 31. There will be one audit report and one set o f financial statements on which the auditors will issue a single opinion covering project accounts, the usage o f funds, and the management o f the project's designated account. Inaddition, a management letter outlining any internal control weaknesses o f the implementing office and other agencies at various implementation points will also be issued by the external auditor together with the audit reports. The DPI/Provincial Treasury will be responsible for engaging and managing the audit contract to cover the funds managed byKhammouane Province for component 1andthe DO1for component 11. The auditor for the project will be appointed six months after effectiveness. The cost o f the audit will be financed from project proceeds. Emphasis will be placed on assessment o f proper use and accountability o f funds, and procurement. Bi-annual systems audits will also be done for each and every participating district bythe State Audit Organization(SAO). SupervisionPlan 32. As the Financial Management inherent risk is assessed as substantial, supervision o f 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 o f designated accounts, evaluating quality o f budgets, project financial management reports, assessing relevance o f financial management manual, statements o f expenditures, internal controls, reporting and follow up o f audit and mission findings. The review will also conduct random reviews o f financial statements concentrating on per diems, training and workshop costs, fuel and accommodation expenses and compliance with covenants. It will also involve visits to various implementation sites and physical verification o f assets bought and ones created by the project. The financial management supervision will be conducted by IDA'S financial management specialist staff and at times assisted by consultants. At each time o f supervision, the project's financial management risks o f the project will be assessed and influence the frequency o f supervision. Fundsflow andDisbursementsArrangements 33. The funds from the project will be drawn from the World Bank and be deposited in one Designated Account (DA) to be managed by the Ministry o f Finance. The DA will therefore be opened by the Ministry o f Finance at the Bank o f Laos inVientiane on behalf o f both the DPI for Khammouane Province and the DOL The Ministryo f Finance will periodically make transfers to two respective component accounts- one for the.DO1component 2 and another for the DPI at Khammouane for component 1to be opened ina commercial bank o f each implementing agent's choice. The Ministry o f Finance administers such a DA and has overall responsibility o f signatories in conjunction with senior officials from the Khammouane Province. DA shall have signatories from Ministryo f Finance and the Project Director (who i s the Director o f the DPI) in the province. Periodic transfers will be made from the Designated Account into the respective project accounts for implementation. The province will make its 10%matching contribution for DDFandPDFinvestment (civil works) ina separate account maintainedat the provincial level. 34. Funds for Designated account will be used for implementing activities o f the project. Whilst it will be managed by the Ministry o f Finance, day to day management and submission o f withdrawal applications will be done by the PCS including expenditures incurred by both Component 1and 2. 82 35. Insummary, IDA funds for the project will be deposited into one DesignatedAccount at the Bank o f Lao. Two respective project accounts will be opened for, the Khammouaneprovince component 1and for the DO1inMinistryo f Agriculture, Forestry andFisheries for component 2: (a) The Designated Account (DA) will be used for disbursements related to Components 1 and 2 o f the project, and will be managed by MOF whilst one o f its operating accounts at provincial level will operated and managed by the PSC in Khammouane through the Provincial Treasury unit for DPI. Withdrawal applications for the project will be submitted to the World Bank by the PSC through the Ministry o f Finance. This will incorporate transactions and documentation submitted by DIMU through the province. Direct payments for procurement pertaining to DIMU component will be done through the province who will eventually submit such requests to Ministry o f Finance before sendingsuch requests to the World Bank; (b) DIMU will submit all its expenditure documentation to the PCS at the DPI o f Khammouane province which shall be consolidated with expenditures incurred by the province before a withdrawal application can be submitted to the Ministry o f Finance before finally sending them to the World Bank; 36. For both component 1 and 2, h d s from DA will flow to the respective project treasury accounts in Khammouane and DO1in Vientiane. For Component 1, from the project Treasury account, the PSC will authorize the following set o f disbursements: To the project's own imprest account (to be opened ina commercial bank inThakek o f Khammouane province), the ceiling for which will be set at the Kip equivalent o f US$ 5,000. The project's imprest account will be used to handle small transactions for project implementation; In addition, the project imprest account will be used to make 15-day advances to PAFESDAFO in order to cover costs associated with extension activities (per diems, fuel, sundries, etc.) linked to the ALGDDF. Any such advances will be cleared within 15 days; failure to clear such advances within this period will result inthe withholding o f any further advances; Directly to any contractors/suppliers/consultants engaged in the provision o f goods, works and services for Component 1 and to the bank accounts o f village-based producer groups; To the province's PDF Treasury account, which will be operated by DPI and used to make payments to any contractors/suppliers/consultants engaged in the provision o f goods, works and services for provincial level investment expenditures financed out o f annual PDF allocations? Transfers to the PDF Treasury account from the project's main Treasury account will be made intwo six-monthly installments; To the districts' DDF Treasury accounts, which will be operated by district administrations and used to make payments to any contractors/suppliers/consultants 83 engaged in the provision o f goods, works and services for district level investment expenditures financed out o f annual DDF allocations. Transfers to the districts' DDF Treasury accounts from the project's main Treasury account will be made intwo six- monthly installments; 37. For Component 2 o f the project, funds from DA will be disbursed inaccordance with Do1 authorization to project account. Disbursements from the project account will take one o f two forms: (a) Directly to any contractors/suppliers/consultants engaged in the provision o f goods, works and services for project's irrigation activities; (b) To the DIMU own project imprest account (to be opened in a commercial bank), the ceiling for which will be set at the Kip equivalent o f US$ 5,000. The DIMUproject imprest account will be used to handle small transactions and to make 15-day advances to PAFES for extension-related activities associated with Component 2. Any such advances will be cleared within 15 days; failure to clear such advances within this periodwill result inthe withholding o f any further advances. DisbursementArrangements 38. IDA will establish disbursement arrangements for the project inconsultation with GOL- specifically Ministries o f Finance, on the basis o f a financial management capacity assessment o f the projects financial management arrangements, and the projected cash flow needs o f the project. The Bank's LOA department will specify these arrangements in a Disbursement Letter to the Government o f Lao PDR. The L O A may disburse proceeds from the grant account to designated account for the project usingone or more o f the following disbursement mechanisms: Reimbursement:GOL would be reimbursed for eligible expenditures pre-financed from their own resources; 0 Advance: grant proceeds are advanced into designated accounts to finance eligible expenditures as they are incurred. 39. Prior to the withdrawal o f any grant proceeds from the grant account, the GOL will furnish the World Bank's Country lawyer for Lao PDRwith the names o f the officials authorized to sign applications for withdrawal applications and their authenticated specimen signatures. 40. Withdrawal applications must be: Authorized by a representative o f the recipient; Accompanied with evidence in support o f the application as the World Bank may reasonably request. 84 Allocation of Project Proceeds (1) Sub-grants under the District Development Fund: (a) Basic Block Grants 1,590,000 90% (b) Agriculture andLivelihood Grants 170,000 I 100% (2) Sub-grants under the Provincial 600,000 Development Fund 90% (3) Goods, works, consultants' services 1,040,000 and Incremental Operating Costs for 100% Parts A.2 (a) and (b), and A.3, o f the Project (4) Goods, works, consultants' services 1,150,000 100% and Incremental Operating Costs for Parts B.l, and B.2of the Project (5) Goods, works, consultants' services 1,050,000 and Incremental Operating Costs for 100% Parts B.3, B.4 and B.5 o f the Project TOTAL AMOUNT 5,600,000 85 Annex 8: ProcurementArrangements LAO PDR: KhammouaneDevelopmentProject A. General 1. Procurement for the proposedproject would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated M a y 2004, and the provisions stipulated inthe 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, 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, Ministryo fFinance, will beusedfor procurementofgoods andworks underNCB andShopping, subject to IDA's prior concurrence. For International Competitive Bidding (ICB), IDA's Standard BiddingDocuments 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 ina format agreed with IDA. The general descriptions o f various items under different expenditure category are described below. 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 Bank project team inthe Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. ProcurementofWorks 2. Works procured under this project, would include: rehabilitation o f irrigation system, development o f additional irrigation system, rehabilitation andconstruction o f small irrigation schemes, office renovation, small scale o f infrastructure for District Development Fund(DDF) and Provincial Development Fund(PDF). Contracts for these works costing US$300,000 or more each would be procured through InternationalCompetitive Bidding(ICB) method. Works estimated to'cost less than US$ 300,000 per contract may be procuredthrough National Competitive Bidding(NCB) method. Works estimated to cost less thanUS$ 30,000 per contract may be procured through Shopping method. 3. Works under Activities for Agriculture and Livelihood Grant (ALG) for the DDF include small-value contracts for infrastructure and non-consulting services will be carried out through community participation in procurement method as stipulated in the Bank's Procurement Guidelines. Such contracts estimated to cost less than US$ 5,000 per contract may be procured inaccordance withtheprocurementprocedures set forth inthe OperationManual. 86 Procurementof Goods 4. Goods procured under this project would include: pumps repairs, office equipment, vehicles, computer, furniture and some equipment/materials to support the service delivery investments o f DDFand PDF. Goods estimated to cost less than US$ 100,000 per contract may be procured through N C B method. . Goods estimated to cost less thanUS$ 30,000 per contract may be procured through Shopping method. Spare parts for repair o f existing pumps may be procured through Direct Contracting method subject to IDA'Sprior concurrence. 5. Goods under Activities for Agriculture and Livelihood Grant (ALG) for the DD will be carried out through community participation inprocurement method as stipulated in the Bank's Procurement Guidelines. Such contracts estimated to cost less than US$ 5,000 per contract may beprocured inaccordance with the procurement procedures set forth inthe Operation Manual. Selectionof Consultants. 6. Consultant services are expected inthe following areas: feasibility study, detailed design, design and supervision, financial audits, environment and social assessment and project staff support. These services would be procured mostly through various selection methods including Quality and Cost Based Selection, Least Cost Selection, Selection Based on Consultant Qualifications, Single Source Selection and Individual Consultant depending on the value, nature and complexity o f the consultant assignments. The use o f the method i.e. Single Source Selection for specific assignments would be subject to prior review and clearance with the Bank in the Procurement Plan. However, Quality and Cost Based Selection would generally be the applicable method for each contract estimated to cost more than USD 100,000 equivalent. For DDF and PDF sub-components, the United Nations Capital Development Fund (UNCDF) will provide the technical support for district/province implementation and training as consultant services. 7. Individual Consultants may be selected inaccordance with the provisions o fparagraphs 5.1 to 5.4 o fthe Consultants Guidelines. Under the circumstances described inparagraph 5.4 o f the Consultant Guidelines, such contract maybe awarded to individual consultant on a sole- source basis, subject to the prior approval o f the Bank. B. Assessmentof the Agency's Capacityto Implement Procurement 8. An IDA procurement accredited staff carried out a procurement capacity assessment duringthe project pre-appraisal inNovember, 2007, and follow-on discussion continued through appraisal. Assessment has been carried for the following project implementing agencies; 0 A project preparation section for Component 1established as apreludeto the Project Coordination Section (PCS) inthe Department o f Planningand Investment (DPI) to be established for Khammouane province for implementing Component 1; 0 All 9 District Offices who will carry out the procurement for annual Basic Block Grants o fDistrict Development Fund(DDF) for Component 1; 87 0 A project preparation section for Component 2 established within the Provincial Agriculture and Forestry Office (PAFO) as a prelude to the Downstream Irrigation Management Unit (DIMU), which will conduct the procurement for Irrigation Rehabilitation andDevelopment under Component 2. 9. The procurement issues and risks for implementation o f the proposed project are mainly related to: (i)inadequate procurement knowledge and experience o f the project implementing agencies; and (ii)the risks o f weak governance, in the procurement process, due to the decentralized implementation. 10. An Action Planfor strengthening theprocurement capacity o fthe project implementing agencies has been agreed. The following i s the summary o f the proposal; 0 A qualified individual consultant wouldbe engagedbyPCS as part time Procurement Consultant for the project inensuring the compliance inprocurement process with the Bank's Guidelines andto serve as the focal point for coordination, consultation and follow-up o fprocurement activities betweenthe districts, lineprovincial departments. PCS DIMUandthe Bank; A detailed Procurement Plan for the first 18 months o f project implementation to the Bankhas beenprepared and agreedwith; For strengthening transparency and accountability in procurement process, the action plan for strengthening transparency for the project has been agreed. The action planwill include the following elements: (i) the format o f bidding document, request for using quotations and evaluation report issued by Procurement Monitoring Office (PrMO), Ministry of Finance (MOF) for National Competitive Bidding (NCB) and Shopping procedures; (ii)enhanced disclosure o f procurement information i.e. annual procurement plan and quarterly summary o f the contract award information, advising the right o f public to inspect all relevant documents free o f charge; (iii) involvement o f stakeholders in verifying service delivery upon completion of the contracts, (iv) establishing procurement complaint handling mechanism including integrity pacts based on the Government ProcurementRules & Regulations o f PrMO, MOF; PCS will organize a procurement training workshop for the project implementing agencies with assistance from the Procurement Monitoring Office (PrMO), Ministry o f Finance within one month after the project effectiveness, and periodically during the life o fthe project; PCS, District Offices and DIMU will adopt a project procurement record and filing system acceptable to IDA; It is proposedthat the MOFprocurementmanual will beused for DDF andPDF. 11. Project operation manual will be prepared and finalized before project effectiveness. This manual will cover the procurement and contracting for goods and works less than U S D 5,000 per contract under the Agriculture and Livelihood Grant (ALG) for DDF to be done 88 through Community Participationmethod andbe provided the detailedprocedures o f community participation inprocurement, subject to the Bank's concurrence. Inwhich it will describe steps for the village group to follow including the requirement for record keeping for the Bank's post reviews and audit. 12. With incorporation o f the capacity strengthening measures and extensive requirements for improving governance and increasing transparency and accountability in the procurement process, the residual procurement risk under the Project i s Moderate. C.ProcurementPlan 13. For project implementation, a detailed procurement plan has been prepared for the first 18 months, which is going to provide the basis for the selected procurement procedures. The Procurement Plan will be updated in agreement with the Task Team (at least annually) as requiredto reflect the actual project implementationneeds andimprovement. D.The Bank's ProcurementReview Requirements 14. The following contracts shall be subject to the World Bank's prior review inaccordance with the Guidelines or Consultant Guidelines. 0 The first NCB and first Shopping contract for procurement o f goods by each implementingagency in each year and all subsequent contracts exceeding US$ 100,000 equivalent per contract; The first NCB and Shopping contract for procurement o f works by each implementing agency in each year and all subsequent contracts exceeding US$ 300,000 equivalent per contract; All contracts for goods andworks procuredthrough direct contracting; 0 The first contract for hiring o f consulting firms and the first contract for hiring o f individuals from each implementing agency regardless o f value, and all subsequent consulting services contracts exceeding US$100,000 equivalent for firms and US$$50,000 equivalent for individuals per contract respectively; 0 All contracts for hiringo f firms andindividuals procured through single source selection; All other contracts shall be subject to ex-post review by IDA, andwill also include checks for transparency inthe procurement process andverification o f end-use deliveries, inadditionto verification ofcompliancewiththe agreedprocurementprocedures. The percentage to apply to the sample for ex-post review will be 30%. 89 E. Frequencyof Supervision. 15. In addition to the prior review, the assessment of the capacity of the Project Implementing Agencies recommended, that procurement supervision mission including post review will be conducted at least twice per year. F. Detailsof the ProcurementArrangementFinancedby IDA duringthe first 18 months Works & Goods List o f ICB contract Package which will beprocuredduringthe first 18 months o f the project. - None ConsultingServices (a) List o f Consulting Assignments with short-list o f international firms; Selectionfor (b) Consultancy services estimated to cost above $100,000 for firms and $50,000 for individuals per contract, and all Single Source Selection o f consultants (firms and individuals) will be subject to prior review by the Bank; (c) Short lists composed entirely o f national consultants: short lists o f consultants for services estimated to cost less than $100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. 90 Annex 9: EconomicandFinancialAnalysis LAO PDR: KhammouaneRuralLivelihoodsProject Economic and financial analysis has been carried out for investment proposed under the project. Inparticular, under Component 1Local Development and Provincial Capacity Development, investmentfor small scale infrastructure and service delivery is planned, whereas Component 2 would support the various irrigation activities. A. PublicinvestmentsfundedthroughDDF/BBGandPDFunderComponent1 1. It is not possible to calculate ex ante Economic Rates o f Return for the public investments to be financed through the DDF/BBGand PDF facilities, largely because the project will beproviding discretionary annual allocations to the province anddistricts, which would then prioritize investments through consultations with and participation o f local stakeholders. It i s thus not possible, in advance, to know exactly what kinds o f investment will be financed out of DDF/BBG and PDF allocations. However, the investments are likely to be relatively small scale, each costing less than US$ 50,000. Judging from the experience of a similar project in Saravane Province (fundedby UNDP, UNCDF, and the EC). Most o f the BBG-funded, district- level, investments would cost between US$ 5,000 and US$ 20,000. As in Saravane, the investments are also likely to cover a wide range o f sectors (education, health, water and sanitation, roads, etc.). 2. In general, BBG-funded, district-level, investments will probably be economically sensible, mainly because they would be determined through consultations with the concerned stakeholders at the local and community levels. Although there is no immediately comparable data from Lao PDR itself to assess how such efficiencies resulting from better resource allocation translate into economic rates o f return, evidence from a similar Bank-funded project in Bangladesh suggests that public investments made by local governments (following a participatory planning process) achieve productive efficiency gains ranging from 23 to 37 percent in terms o f better utilization o f resources measured by economic rate o f return o f the investment compared to investment funded by the conventional process. Assuming these savings accrue at a similar rate for the DDF block grants that will be allocated by the proposed project then the project can expect to yield absolute gains inproductive efficiency in an amount ranging from about USD $ 0.6 million to $ 1.2 million over the project implementationperiod alone. DDFproposed under the project i s thus expected to generate substantial benefits interms o f allocative and productive efficiency, as well as a large number o f infrastructure-related but unquantifiable benefits. 3. Evidence from the PRF also confirms that where investments in local public goods and services are made on the basis o f significant levels o f participation and community engagement, then costs are likely to be lower than those incurred through other mechanisms. Table 1below indicates unit costs for typical PRF-financed investments and shows that they are commonly lower than those incurred by other types o f project. Although the PRF approach i s not identical 91 to DDF/BBG, the similarities are considerable - and thus PRF cost outcomes are likely to be partlyreproducedbythe DDF/BBGapproach. Inaddition, it should also be noted that under the DDF/BBG, the incremental operation cost would be lower thanthe PRF, because the DDF/BBG relies on the existing administration structure unlike PRF, which includes substantial project facilitation andmanagement costs. 4. Similar to DDF, economic analysis for the PDF-financed investments cannot be carried out ex-ante, as the investment would be identified through stakeholder consultation. However, the consultative process through which such investments will be decided upon would imply that they are likely to be real priorities. Robust scrutiny and appraisal process required for PDF will ensure that design and costing o f PDF investments are appropriate. There is every reason to suppose that PDF-financed investments will be more cost-effective than similar public investments - and little reason to expect them to be any less cost-effective. B. IrrigationDevelopmentproposedunder Component2 5. Under Component 2, three types o f irrigation activities are planned: (a) rehabilitation o f the Tha Thot Irrigation Scheme, (b) new construction o f a downstream irrigation scheme, and (c) rehabilitation o f small pump schemes inlower XBF. Economic Analysis has been carried out for these three activities. This annex sets out o fthe summary o f the analysis, and detailed results are available inthe project file. 6. GeneralAssumptions. The following assumptions havebeenused: 0 Commodity prices are derived through the World Bank publication; 0 Standard conversion factor o f 0.9 has been applied to estimate the economic cost; 0 Inestimatingthe benefits ofthe investment, itis assumed: (a) fullbenefitswould be reached in5 years, and (b) economic life o f the project i s 20 years. EconomicCost 0 Economic farmgate prices o f rice and imported chemical fertilizers such as urea, triple super phosphate andmuriate o fpotashwere calculated as summarized inTable 1below. Table 1: FarmgatePrices of Rice and Fertilizer I 2. Fertilizer. 1/ I I I - Urea ...... 7,205 ........................ 7,232 ~ 5,409 5,435 - Muriate o fPotash ................................................................................. " " ................................................................................................................................................... 4,562 4,588 0 Rehabilitationof the ExistingIrrigationFacilityinTha Thot Village (Sub-Component 2-1). The feasibility study was conductedduringthe pre-appraisal o fthe Project inorder to 92 update andincrease the scope o fthe detailed design carried out in2004. Table 2 presents the summary o f investment cost andO&M cost (Financial and Economic) for the proposed rehabilitationworks. Table2: Summary of TotalCost for Sub-component2-1 I. InvestmentCost ........................................................................................................................... 1) Headworks 71,725 64,553 " ....................................... " ................................................................................................................................................................................................................................................................4 ................................................................................................................................................................................................................................................................s 2) Canals andRelatedStructures 438,814 394,933 " .................................................................. ................................................................................................................................................................................................................................................................Ü 3) VillageAccess Road 9,894 8,905 ................................................................ Works for Siphon-2, etc. 4) Additional " ................................................................................................................................................................................................................................................................M 87,740 0 ResponsibleofNTPC, 21 ...................................................................... 5) PhysicalContingency(10%) " 60,817 0 ,2/ Sub-totalof (I) 668,990 468,391 11.Annual O&M Cost (1% of Investment Cost) 6,690 4,684 111.Replacement Cost ................................................................................................................................................................................................................................................................Ú 1) Gates of canals 45,830 41,247 Every 15 years 2) Pumps and Gates (additional works) 60,000 0 Every 15 years by NTPC, 21 Sub-totalof (111) 105,830 41,247 0 Pilot DownstreamIrrigation Development in Tha Thot Area (Sub-component2-2). A pre-feasibility study has been prepared by a team o f French consultants hired by the NTPC, and a preliminary economic rate o f return for the entire downstream area (approximately 15,400 hectares) has been estimated at 11.9 percent, based on the assumption o f US$4,166 per hectare investment cost. During the preparation, more detailed assessment has been carried out for the areas to be covered under Sub- component 2-2. It has been found that per hectare investment cost would be reduced to US$2,200, considering that the area does not need extensive network o f distribution camels. Further, the scenarios on the crop production in the pre-feasibility study have beenrevised so as to be more conservative. Table 3 presents the summary o f investment cost and O&M cost (Financial and Economic) for Sub-component 2-2. However, it should be noted that detailed feasibility study and economic analysis would be conducted duringproject implementation. 93 Table 3: Summary of Total Cost for Sub-component 2-2 I. Investment Cost Note: 11Estimatedby the appraisalteam 21 Pre-feasibilityStudyReportbyNT2, November2007 3/ Economicopportunity cost =4,531,597 Kipha/ 95,OO Kip/$ x 10hax 7 years = $33,390 41Excludingphysicalcontingency for economic cost Rehabilitation and Institutional Strengthening of Small Pump Irrigation Facilities along Lower XBF (Sub-component 2-4). Inorder to estimate the costs for Sub-component 2-4, the inventory survey for selected eight (8) sample small irrigation scheme was conducted, the results o f the surveyo f which are summarized inTable 4 below. Table 4: Summary of Inventory Survey of Selected 8 Small Pump Schemes 50 damaged.AAer 1year, nextpump will havethe same problem. 2 Hadsayphong 120 3 NangBone 80 4 Somseat 120 5 Hadkhahieng 130 6 Nathan 100 7 Phovathai 76 8 Phovanua 85 Total 761 94 7. As for the annual operation and maintenance cost for sub-component 2-4, a 3 % o f the total investmentcost i s applied including minor repairing costs o f pump facilities. Inaddition, a $20/ha o f pump operation cost i s applied based on the feasibility study on the rehabilitation o f Tha Thot irrigation scheme. Further, the same amount o f the rehabilitation cost o f $24,120 i s considered to be allocated in every 10 years as a periodical rehabilitation cost. The estimated total cost for sub-component 2-4 i s summarized inTable 5 below. Table 5: Summary of TotalCost for Sub-component2-4 I I.InvestmentCost for 342 ha I I ICurrent =210 ha, I Additional = 132ha, 11 ................................................................................................................................................................................................................................................................Å 1) Rehabilitation ofPumpFacilities 24,120 21,708 ,11 3) PhysicalContingency(10%) 2,412 0 ,2/ Sub-totalof (I) 26,532 21,708 11.Annual O&M Cost 1) AnnualMaintenance 7,960 7,164 Includingminor repairing ................................................................................................................................................................................................................................................................Ã costs ofpump facilities, 31 2) PumpOperationCost 9,500 8,550 $20iha is applied, 41 Sub-totalof (11) 17,460 15,714 I11Periodical Maintenance 24,120 21,708 Every 10years, 31 Derivationof Benefits 8. Inthis economic analysis, only the direct andquantifiable benefits are considered. These benefits were taken from the difference between the "without project" condition and the "with the project" condition. The derivation o f incremental benefits was calculated based on the crop budget o f dry season rice. The crop budget o f dry season rice (Economic) per H a i s presented in Table 6. Table 6: Crop Budgetof Dry SeasonRice per Ha-(Economic at constant 2007 Prices) Source: Modified bythe FS team based on the recommended crop budgetby DAFO, Gnommalat, Khammouane Drovince. Note: I/ World Bank Estimate as of April 21,2007 95 AgricultureDevelopmentScenario andDerivationof IncrementalBenefit Rehabilitation of Irrigation Scheme in Tha Thot. Based on a monthly water balance assessment for Nam Gnom Tha Thot weir, the out flow is enough to provide sufficient irrigation water for 250 ha (57% o f entire command area) dry season rice cultivation. For practical considerations, given labor availability andpresent farming and cultural practices, it is recommended that a total o f 250 ha should be cultivated inthe dry season with a cropping intensity o f 157%. Rice would be cultivated during the wet season primarily to satisfy the consumption requirement o f the villagers as well as during the dry season; some o f surplus would be sold as one o f cash crops. Modest area would be cultivated with soybeadpeanut, yellow corn and cabbage/watermelon duringthe dry season to increase the income o fthe farmers. These crops are expected to be cultivated once the farmers acquire the basic technologies that would be introduced through the agricultural extension activities by the Project. Therefore, the dry season crops inthe 250 ha o f the development plan should be stage-wised, namely 250 ha o f rice in the first stage followed by the 2ndstage with 200 ha o f rice, and 50 ha o f some diversifiedcrops accordingly. However, as many irrigation projects have been experienced, it would take some time to newly introduce such diversified crops, and proper technical extension support by DAFOPAFO is also needed. Therefore, in this economic evaluation, the annual project benefit for sub-component 2-1 was calculated based on the net income with and without project conditions inthe dry season only. Since the full agricultural development i s assumed to be reached on the 6thyear, the incremental benefit o f $94,724 will be derived inYear 6 as presented inTable 7 below. Table 7: IncrementalBenefit of Sub-component 2-1 Year 6 1,745,944 150 261,891,600 4,906,663 250 1,226,665,750 964,774,150 101,555 0 Developmentof DownstreamIrrigation. Itis assumed that a total o f 104ha should be cultivated inthe dry seasonwith a cropping intensity o f 180%. Annual project benefit for sub-component 2-2 was also calculated based on the net income with andwithout project conditions inthe dry season only. The incremental benefit o f $54,5 19 will be derived inYear 6 as presented inTable 8 below. Table 8: IncrementalBenefit of Sub-component 2-2 96 Rehabilitationof SmallPump Schemes. Table 9 below summarizes the estimated benefits resulting from the pump irrigation schemes. It has been assumed that the agricultural benefits would be materialized after one year o frehabilitation. Table 9: IncrementalBenefitof Sub-ComDonent2-4 IYear 6 I 1,745,944 I 210 I366,648,240 I 4,906,663 I 342 I1,678,078,746 I1,311,430,506 1138,045 I EconomicInternal Rate of Returnand SensitivityAnalysis 9. Benefits stream was compared to the costs stream to determine their economic viability using the Economic internal Rate o f Return. The resulting EIRR i s 12.56% for Rehabilitation o f Tha Thot Scheme, 12.71% for new construction o f downstream irrigation, and 88.37% for rehabilitation o f pump schemes respectively, thus confirming the economic viability o f the proposedirrigation activities under Component 2. Very highEIRRo f pump rehabilitation is due to the nature o f the repair works, which is rather very small deferred maintenance. Sensitivity analysis was further carried out to determine at what assumptions or conditions should be satisfied in order to achieve or surpass the 12 % hurdle rate. For this purpose, the following sensitivity tests were made. Casel: reduce benefit by lo%, investment cost constant increase investment cost by lo%, benefitconstant Case2: Case3: one (1) year delay o fbenefits in agriculturalproduction 10. The results o f the sensitivity test are summarized inTable 10 below. It has been revealed that the ERR is relatively insensitive to either increase in increased investment cost or reduced benefit; however, the sensitive analysis showed that the delay in agriculture, implying that capacity buildingprogram plannedunder Component 2 would provide the farmers with technical guidance to ensure proper operation immediately after irrigation works and enable quick benefits from resumed irrigation. Table 10: Summary of the SensitivityTest (EIRR) (YO) I Sub-com~onent2-1 I 12.56 I 11.07 I 10.85 I 10.56 I Sub-component 2-2 12.71 11.23 11.04 10.74 Sub-component 2-4 88.37 84.81 82.30 62.47 FarmModel 11. To quantify the impact o f the Project from the farmer's viewpoint, a typical farm model was developed for the three activities. Typical farm sizes o f which range from 1.2 per household to 2.0 hectare. 12. For the small pump irrigation schemes along lower Xe Bang Fai, it i s estimated that a 50% o f the paddy fields would be damaged by flood inthe wet season based on the information 97 obtained from PAFO. Through the rapid appraisal with the beneficiary farmers o f eight (8) pump schemes, it was also confirmed that the current irrigated area was only about 30% of the planned irrigation command area. For the project impact analysis, it is estimated that the irrigation area will be increasedby 60% byrehabilitation ofpump facilities by the Project. 13. The annual farm income in rice production is calculated as presented in Table 11. The table clear indicates the substantial farming income to be accrued from the rehabilitationhepair or newly development o f irrigation facilities. With-project net income takes account o f payment for nominal water payment (200 kg paddyha, equivalent to 427,400 Kipha) per WUG member per hectare, which should be more than able for the farmers to fully share the contribution to the provision o f irrigation water. The return to labor i s more than 50,000 kip per day, which is almost double to the typical daily wage o funskilled labor (about 100 Thai Bahtor 28,000 Kip). Table 11: Summaryof AnnualFarmIncomeinRice Production Rehabilitation of Wet Season 3,656,682 1,376,682 I ' 114 1 32,076 6,205,466 3,685,466 114 i 49,250 IExisting Tha Thot Dry Season 1,300,718 521,718 39 33,352 4,114,214 2,686,214 71 57,622 Irrigation FacilityI(Total) I 4,957,400i11 1,898,400 I 153i1 32,401I10,319,680 1 6,371,608 1 186i1 55,482I Pilot Irrigation Development in Tha Thot Area along L.XBF Annual (Total) 4,950,724 1,910,724 , 152 32,570 12,431,599 I 7,811599 231 1 53,816 ~ ~ (farmsize 2.0 ha) I i j I 14. The table above indicates that the rehabilitation o f irrigation facilities would modestly increase the field work requirement. However, the with-project situation requires less than 240 person days per year at the maximum (for sub-component 2-4), which i s well within the working capacity of an average family (450 person days = 1.5 persodavailable labor per household x 25 daydmonth x 12months). 98 Annex 10: SafeguardPolicyIssues LAO PDR: KhammouaneDevelopmentProject A. Environmentand Social Background 1. Khuammouane Province (16,3 15 km2) i s located inthe central part o f Loa PDR and the area can be divided into mountainous zone (35%), plateau zone (19%), and flat area (46%) o f which the latter has fertile soils and good for agriculture production. The area i s under the influence o f a tropical monsoon with distinct wet and dry seasons andwith an average rainfall o f about 2,600 d y e a r . The province is also rich in biodiversity and consists o f 3 National Biodiversity Conservation Areas: Nakai-Nam-Theun, Hin Nam N o and Phon Hin Poune NBCAs. The Prime Ministerial Decree 193 o f 1993 established a series o f corridors to connect these three protected areas to enable wildlife migration between them. The forested area is 812,600 hectares (ha), covering 47% o f the total area o f the Province. Shifting cultivation i s the main issue that decreases forest and soil fertility as rotations occur frequently. Apart from that, there are other constraints such as weeds, pests, animals and drought that force people to expand their shifting cultivation areas to meet their demand. NamThuen and Xe BangFai are the two major river systems flowing from the rugged Annamite Mountain Range along the Lao- Vietnamese border to the Mekong River. The Annamite Mountains that form the border between Lao PDR and Vietnam are recognized as an area of global significance in terms o f biodiversity. The Nam Theun 2 (NT2) power station i s located at the base o f the escarpment beneath the Nakai Plateauwhile the downstream channel (27 km long) cut across the flat plain o f the GnomalathDistrict. 2. The Province consists o f 804 villages, 57,012 families; its total population is about 313,917 persons (of whom 159,873 are women). Population is increasing at a rate o f about 2.0% per year. There are 7 ethnic groups: Lao Loum, Phou Thai, Broo, Krie, Saek, Ngouam, and Hmong. Population density i s about 19 personshq km. The total number o f poor families i s reported to be about 11,185 or about 19.50%. If compared with the data surveyed according to order number 010/PM o f the Prime Minister, the number o f poor families has decreased by 1,920. There are 353 villages considered to be poor or about 43.91% o f the Province's total villages. In general, the investments in the Province that generate most income rely on exploitation of natural resources. The growth o f the economy is steady, although Khammouane remains a poor province. Major economic sectors are crops, animal husbandry, fishery, forestry and hydropower. 3. The population o f Khammouane Province is ethnically heterogeneous, with almost 40% o f the total population being made up o f ethnic minorities. For the most part, ethnic minority populations inhabit the uplandand eastern parts o f the province, whilst the Lao Loum population is generally located in the Mekong valley and immediately adjacent areas. Ethnic minority groups live inBoulapha, Gnomalath, and along some stretches o f the Xe BangFai River. 4. The proposed project (Project) activities will take place in a variety o f ago-ecological settings - ranging from riverside areas o f the Mekong valley (Gnomalath and Xe Bang Fai) to 99 uplands in the mountains bordering Vietnam (Boulapha). The major form o f land use in Gnomalath i s paddy field and town development (including NT2 major camps) while that along Xe BangFaiis paddy field andvillages, including Buddhist temples. A small Tha Thot reservoir provides water to the existing Tha Thot irrigation scheme (470 ha). The area is divided into two partsby the NT2 downstream channel and 4-5 water outlets for irrigation have been included in the design o f the downstream channel. It i s anticipated that more water supply from the N T 2 operations will be available for construction o f new irrigation schemes around the existing Tha Thot, as well as increasing the water quantityfor the Tha Thot scheme itself. B. Project Description (see Details inAnnex 4) 5. Project activities relatedto safeguard are highlighted as follows: Small civil works (roads, water supply, schools, etc.) undertaken under the District Development Fund (DDF) and the Provincial Development Fund (PDF) o f the Component 1(Support for Local Development andProvincial Capacity Building), and: Rehabilitation o f existing Tha Thot irrigation system (470 ha); Development o f small new irrigation areas (710 ha) in Gnomalath, including construction o f a small area (130 ha) and training on operation and maintenance; Development o f a strategic plan for irrigation development along downstream channel; and Rehabilitation and institutional strengthening o f small pump irrigation schemes along lower Xe Bang Fai of the Component 2 - Support for Irrigation Development along NT2 Downstream Channel and Lower Xe Bang Fai. C.Social Issues and ProposedMitigations 6. Social study: Socio-economic surveys, interviews and social analyses were carried out to identify both possible beneficial and adverse impacts o f the Project in three districts, namely: Gnommalat; Mahaxay and Bhoulapha. The surveys included obtaining information on, household incomes and expenditures, ownership o f assets, education, health conditions, housing conditions, sanitation, migration and other livelihood related issues. Among others, methods involve the conduct o f focus groups or semi-structured interviews with village leaders, committee members and target beneficiaries. The study concluded that implementation o f the Project will result in overall social benefit to local people both in short and medium term. Provision o f community roads, water supply, and small infrastructure to be carried out under the DDF and PDF subcomponents will enhance social conditions and improve access to markets as well as health and education services. Rehabilitation o f the Tha Thot irrigation and the irrigation schemes downstream o f Xe Bang Fai will provide opportunity for livelihoods development. The interventions being proposed in the target areas are expected to impact on the agricultural practices o f the community. For instance, irrigation may lead to increased crop production, which would ultimately leadto increases inthe income o f farmers. This intervention and process will ultimately leadto improved livelihoods o fthe rural communities inKhammouane. 7. Potential negative impacts: Construction o f infrastructure to be funded by the Project may require small land acquisition and/or create negative impacts to ethnic minority groups however adverse negative impacts are not anticipated. As a preventive measure, a safeguard framework (see ESSF below) and the policy frameworks on land acquisition and indigenous 100 peoples have been developed and they will be applied to all the project activities involve civil works. Land acquisition experience inthe Gnomalath District for NT2 project suggests that (a) effective communication and meaningful consultation with the affected population will have to be conducted as soon as possible and (b) details on the compensation policy and procedures, including payment method and schedule, have to be provided and explained to ensure common understanding among the project staff and the affected population. A technical guideline for consultation has been included in the Safeguard Manual. This i s to ensure that their voices and concerns are listened to and incorporated into the project development and that the beneficiaries especially the vulnerable groups are actively engaged inimplementing and sustaining the project. D.EnvironmentalIssues andProposedMitigations 8. GOL approval. Discussion with DOE suggested that an EIA certificate will be required therefore the IEE was prepared in line with GoL's requirements for an IEE format. The study was carried out through meetings with concerned agencies, field visit to the potential project sites, and review o f the concerned studies carried out under NT2 project, especially those related to pest management policy and the proposedpest management plan. 9. Potential impacts (construction and operation): The IEE study concluded that construction o f small civil works and rehabilitation and development o f the proposed irrigation schemes will not create adverse impacts on the local environment and local people. However, good engineering practices will have to be applied during the execution o f the works with close supervision andmonitoring o f contractor performance. This will include proper treatment andor disposal o f dredging o f spoil from Tha Thot reservoir in close consultation with local communities. The impact during operation will be limited to the potential increase on chemicals andpesticide uses. Review o fthe baseline study and the pest management planprepared for NT2 (in2004) suggestedthat the proposed pest management plancan also be appliedto this project if needed. However, given the small scale o f the project, the potential for increased use o f pesticides and fertilizers by the project would be small and mitigation would take place through applying a "chemical prohibition list" and traininghncreasing knowledge o f local officials and farmers on pesticides, Integrated Pest Management (IPM) and organic farming are considered adequate. The IPMprogram developed for the NT2 project will be used as a starting point for development o f the training materials. The project will not procure any pesticides, and this condition has been included in the Safeguard Manual. The Safeguard Manual also provides the technical guidelines on Code o f Practice and other aspects for mitigation o f potential environmental impacts. For the new irrigation development in Tha Thot and nearby area, the ESSF and Safeguard Manual will be considered during the feasibility study and detailed designed. 101 E.ESSF 10. To mitigate the potential negative impacts due to unidentified activities, an Environment and Social Safeguard Framework (ESSF) has been developed and details are given in the Safeguard Manual. The ESSF i s designed to provide the overall procedures and technical guidelines during the planning and implementation o f the Project activities. The ESSF's key procedures include (a) conducting an initial eligibility screening using a `negative list'; (b) conducting the technical safeguard screening to identify potential safeguard issues, including the required mitigation measures and the need for preparation o f safeguard documents (IEE, EMP); and (c) preparation o f the required safeguard documents and secure approval and/or clearances as required by the Government and/or World Bank. The technical guidelines include (a) List o f Prohibited Activities, (b) EA Policy Framework, (c) Policy Framework for Integrated Pest Management (IPM), (d) Ethnic Group Policy Framework --Indigenous Peoples Development Framework (PDF), and (e) Compensation and Resettlement Policy Framework (CRPF). The ESSF will be applied to all Project activities that have not been identified. The activities require full EIAwill not be eligible for fundingunderthe Project. F.ImplementationArrangementandCapacity 11. Environmental Management Plan (EMP): An EMP has been developed comprising mitigation measures to be carried out by the implementing agencies during the planning, construction, and operationphases as follows: (a) Planningand design stage: 0 For each proposed subprojects involve civil works, carry out ESSF in line with the safeguard manual, including submit the report into the project progress report and/or the annual work planreport; 0 For Tha Thot rehabilitation, include (a) the Code o f Practice into the bidding document, including ensuring that the potential contractors are well aware o f this obligation and (b) the responsibility for safeguard supervision and monitoring into the TOR o fthe supervision engineer; For the new irrigation development in Tha Thot, during the feasibility study, conduct as quick assessment and/or checklist in line with the guidelines provided in the Safeguard Manual; For Xe Bang Fai irrigation, ensure that the design o f irrigation gates will not affect fishmigration and cause adverse impacts onthe naturalhabitats. (b) Construction stage: 0 Supervision, monitoring, and reporting: The implementing agency through its field engineers or, if needed, to-be-hired independent consultant(s) will closely supervise and monitor the contractor's performance with respect to safeguards in consultation with local communities. Monitoring results and/or actions taken should be properly recorded and summarized in the project progress report. World Bank supervision 102 will review and supervise implementation, including providing training to key staff as needed. (c) Operation phase: Training and knowledge sharing on various options to avoid using chemical and pesticides will be provided as part of the Extension Service Training program. This would enhance capacity o f the agencies and the farmers to address the issue relatedto chemical uses. Given that there are other planned activities on developing Lao-Thai partnership, the effort to promote cross border organic fanning and self sufficiency agriculture will be considered separately. 12. Implementation arrangement: The Project will be implemented by two agencies. The Khammouane Province through the Department o f Planning and Investment (DPI) will be responsible for Component 1. A Provincial Coordination Section (PCS) will be established (headed by its director as the provincial program director) to be responsible for the overall implementation while the day-to-day management o f activities will be assigned to relevant provincial line departments and to districts - particularly with regard to DDFBDF-related activities. The Ministryo f Agriculture and Forestry (MAF)through the Department o f Irrigation (DoI) and the Provincial Agriculture and Forestry Office (PAFO) will be responsible for Component 2. Do1 will be responsible for the overall implementation while the day-to-day management o f all activities would be delegated to PAFO. PAFO will establish a small `Downstream Irrigation Management Unit' to manage the following activities: the preparation o f technical reports (feasibility, detailed design), procurement o f civil works, carrying out capacity building, as well as developing a master plan. The PCS and Do1 will assign Safeguards Coordinators, who will be the central resource person for all safeguards issues. 13, Implementation capacity: During the planning and implementation o f the NT2 project, MAF, the Kharnmouane Province, and the local offices/communities directly affected by the NT2 project have some experience with the planning and implementation o f the safeguard measures to mitigate the potential negative impacts on the local environment and local people. However, DoI, DPI, PAFO, and the local offices to be responsible for the Project are new to the World Bank operations. Therefore a series o f safeguard training to the Project staff will be necessary to build their capacity to carry out the proposed mitigation measures (safeguard screening, mitigation o f impacts, supervision, monitoring, and reporting). Special training to PAFO staff on IPM, safe use o f chemicals, and organic farming will also be conducted. Safeguard training will beprovided at least one time per year. 14. Training: A budget o f US$50,000 has been allocated for safeguard trainings and a TOR for the training program will be prepared in consultation with the Bank. The World Bank will provide the first training (Train-The-Trainer) to (a) ensure that the project staff has a clear understanding on the World Bank's safeguard policy and operation procedures and (b) assist them in the translation o f the proposed measures into actions. It is anticipated that through the Train-the-Trainer program, PCS and Do1 could create a safeguard team (2-3 staff) who could provide safeguard training to other Project staff and farmers and ensure safeguard compliance. A tentative actionplanis providedbelow. 103 Table 1: Tentative action plan for safeguard training Schedule (1) July-August Train-The-Trainer IIObjectives by WB Participants are key staff from the 1IRemarks 2008 safeguard team provinces and DO1who are willing to bethe safemard trainers v (2) Ql-Q2 2009 Ensure clear understanding o f The Project safeguard trainer will (3) Q3-Q4 2009 the safeguard measures and provide training. Participants are key (4) Q3-Q42010 process staff, farmers, and other stakeholders. (5) Q3-Q42011 (6) 03-04 2012 104 Annex 11: ProjectPreparationandSupervision LAO PDR: KhammouaneDevelopmentProject Appraisal 03/05/2008 h'egotiations 05/09/2008 Board Approval 0611712008 PlannedDate for Effectiveness 09/01/2008 PlannedDate of Mid-TermReview 09/01/2011 Key Institutionsresponsiblefor preparationof the projectinclude: Khammouane Province Ministry o f Agriculture and Forestry (Department o f Irrigation, Provincial Agriculture and Forestry Office, Khammouane Province), GOL 0 Ministry o f Finance, GOL Bank staff and consultantswho workedon the projectincluded I Christian Delvoie I Sector Director I EASSD Rahul Raturi Sector Manager EASRE Masood Ahmed Peer Reviewer SASDE IIDenis Robitaille Peer Reviewer LASDE Steven Schonberner I Co-Team Leader I EASRE ToruKonishi 1Co-Team Leader I EASRE Viengkeo Petnavongxay Natural Resources Specialist EASRE Syboun Phandanouvong Social Development Specialist EASSO I Manida UnkulvasaDaul Environmental SDecialist EASRE Vilawanh Phonemaseuth I Promam Assistant I EACLF 105 Bank funds extended to date on project preparation: Note that preparation costs included assistance for development o f the Khammouane Development Report and Strategy as the basic document to inform project design and focus but which has a broader use in guiding overall provincial investment planning. 1. BankResources US$ 461,974 2. Trust Funds (PHRD andJapan CTF) US$ 614,000 3. FAO/CP Resources US$ 53,900 Total US$1,129,874 EstimatedSupervisionCosts: US$75,000 per year 106 Annex 12: Documentsinthe ProjectFile LAO PDR: KhammouaneDevelopmentProject RecipientDocumentation 1. Project Operation Manual Draft April 1,2008 (a) Component 1 (b) Component 2 (c) FinancialManagement Manual 2. Environmental and Social Safeguards Framework dated 3. Khammouane Development Report draft dated 7 December 7 4. KhammouaneDevelopment Strategy draft dated 7 December 7 5. Feasibility Study on Rehabilitation Works of Existing ThaThot Irrigation Scheme (December 2007) BankStaffAssessment 1. Appraisal Mission Aide-Memoire o f Khammouane Development Project, March 2008 2. Consultant's Report on Pump Irrigation inXe BangFai, February2008 107 Annex 13: Statementof LoansandCredit LAO PDR: KhammouaneDevelopmentProject ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Ong. Frm. Rev'd P105331 2007 LA GMS Power Trade Project - 0.00 15.00 0.00 0.00 0.00 15.67 0.00 0.00 P100081 2006 LA-Avian and Human InfluenzaControl 0.00 4.00 0.00 0.00 0.00 3.28 0.42 0.00 IIIIIPO75531 2006 LA-RuralElectrificationPhase I 0.00 10.00 0.00 0.00 0.00 4.61 -2.45 -4.97 PO74027 2006 LA-Health Services ImprovementProject 0.00 15.00 0.00 0.00 0.00 12.94 2.83 0.00 PO90693 2005 Lao Environment and SocialProject 0.00 4.00 0.00 0.00 0.00 3.12 0.70 0.00 PO78113 2004 LA-Second EducationDevelopment 0.00 13.00 0.00 0.00 0.00 5.68 -0.01 0.00 PO83543 IIIII2004IIIIILA-ROADMAINTAPLZ IIIII 0.00 IIIII 22.65 IIIII 0.00 IIII1 0.00 IIIII 0.00 IIIII 1.56 IIIII -4.71 III1I 0.00 IIIII PO75006 2003 LA Second Land Titling Project - 0.00 14.82 0.00 0.00 0.00 5.25 1.58 0.00 PO64886 2003 LA-SUSTAINABLE FORESTRYFOR 0.00 9.90 0.00 0.00 0.00 2.05 0.68 0.00 RURAL DEV. Management CapacityBuilding I 0.00 I 8.50 1 0.00 I 0.00 I 0.00 I 9.64 I 3.80 I -o.68 I PO77326 2002 LA-PovertyReductionFundProject 0.00 19.34 0.00 0.00 0.00 1.46 -2.71 0.00 PO65973 2001 LA-AgriculturalDevelopmentProject 0.00 16.69 0.00 0.00 0.00 0.32 -2.53 -2.53 Total: 0.00 152.90 0.00 0.00 0.00 65.58 - 2.40 - 8.18 STATEMENT OF IFC's Held andDisbursedPortfolio InMillions ofUSDollars IFC IFC FY Approval Company Loan I Equity I Quasi Partic. Loan I Equity I Quasi Partic. 2005 Millicom Lao 4.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 II1998 SEFSettha 0.47 0.00 0.00 0.00 0.47 0.00 0.00 0.00 2000 IISEFSettha II0.09 II 0.00 II 0.00 II 0.00 II 0.09 II 0.00 1I 0.00 1I 0.00 II 2001 I SEFVilla Santi 1.06 0.00 0.00 0.00 1.06 0.00 0.00 0.00 FY Approval Company Loan Equity Quasi Partic. Total pendingcommitment: 0.00 0.00 0.00 0.00 108 Annex 14: Country at a Glance LAO PDR:KhammouaneDevelopmentProject East POVERTY and SOCIAL Lao Asla L Low- PDR Pacific Income Development dlamond. 2006 Population, mid-year(millions) 5.8 1900 2,403 GNipercapita (Atlasmethod, US$) 500 1863 650 Life expectancy GNI(At1as method, US$ billions) 2.9 3.539 1562 Average annual growth, 2000-06 Population(s$l 18 0.9 19 Laborforce (%) 2.2 t3 2.3 Gross ::I pnmw Most recent estlmate (latest year avallable, 2000. 5 ) capita enrollment Poverty(%of population belownatlonalpovertyllne) Urbanpopulation (%of totelpopulation) 21 42 30 Lifeexpectancyat birth (years) 56 71 59 Infantmortallty (per /OOO livebirths) 82 26 75 Childmalnutrition(%ofchiidrenunder5) 40 15 Access to improvedwatersource Access to animprovedwatersource (%ofpopulation) 51 79 75 Literacy(%ofpopulation age rSij 89 91 81 Gross primaryenroliment (%of school-agepopulatlon) 115 I W a 2 -Lao PDR Male P3 I15 08 -Lowincornegroup Female 08 113 96 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 1996 2006 2006 GOP (US$ billions) 18 19 2.9 3.4 Gross capitalfonationIGOP 6 9 32.6 32.5 worts of goods andseNices1GDP 3 8 227 27.1 36.0 Gross domestic savingsIGOP 28 8.8 28.2 Gross nationalsavingsIGOP 31 159 P.4 8.2 Current account balanceIGOP -4.3 -P.O -202 -13.3 Interest paynentsIGOP 0.1 0.3 3.1 Total debtIGOP 48.9 90.8 932 Total debt servicelexports 0.1 6.7 8 4 Presentvalueof debt1GDP 508 Presentvalue of debtlemorls 155.7 IB86.BB 19B6-06 2005 2006 2006.10 (averageannualgrowh) GOP 6.1 8.2 7.1 7.8 GOP percapita 3.1 4.3 5.4 5.7 Exports of goods andsewices .. -23.4 V.7 28.6 STRUCTURE of the ECONOMY 109 (%of GDP) 2006 2o06 Growth o f capltal and GDP (Oh) Agriculture Industry Manufacturing .. 15.9 20.6 20.9 Services .. 25.6 25.7 25.5 < T * . r - I Householdfinel consumption expenditure 86.5 .. 72.7 64.5 01 02 03 W 05 OB Generalgov't final consumption expenditure 8.6 6.5 9,3 Imports of goods andservlces 7.7 411 30.9 42.3 -GCF -GDP 1s6646 2o06 (averageannualgmHth) /Growtho f exports and Imports (Oh) I Agriculture 4.2 3.9 Industry P.5 a.Q Manufacturing 14.1 9.6 Services 5.4 6.4 Householdfinal consumption expenditure .. 2.9 4.3 4.6 Generalgov't final consumption expenditure Gross capitalfornation .. 0.8 Imports of goods andservices .. -24.0 Note:2006 data are preliminaryeslimates. This table!&as producedfrom the Development Economics LDB database. 'Thediamonds showfourkeyindicaton inthecountry(1n bold)comparedwithits income-groupaverage. fdataaremissing,thediamondwiiI Lao PDR PRICES andGOVERNMENT FINANCE bLl2Y 1966 1996 2005 2006 Domestlc prlces lnflatlon (Oh) (%change) Consumer prices 8.0 7.2 6.6 ImplicitGDP deflator 512 8.7 8.0 4.7 Government flnance (%ofGDP,includescumnt grants) 01 02 03 W 05 OB Current revenue 15.6 P.7 14.3 Current budgetbalance 6.0 4.5 5.3 Overallsurplus/deficit 4.3 -5.3 4.3 -3.6 1 -GDPdeflator -0-CPI I TRADE 1966 1996 2005 2006 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 45 321 646 9Q6 Electricity 1.500I 30 a 7 0 7 Mining 203 525 Manufactures 32 Q g 1,wo Totel imports (cif) 8 3 6QO 1206 1384 Food 70 a 2 500 Fueland energy 66 8 3 226 ! Capitalgoods 325 615 728 0 Export price index(20OO=xIO) 00 01 02 03 W Import priceindex(2000-UO) rn Exports Inports Terns of trade (2000=XlO) 110 Annex 15: Maps LAO PDR: KhammouaneDevelopmentProject 111 IBRD 36101 100° E 102° E 104° E 106° E 108° E This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. C H I N A LAO P.D.R. To Lincang To Gejiu To Daluo Gnot-OuGnot-Ou 22° N Ou 22° N PhongsalyPhongsaly Boun-Nua Boun-Nua PHONGSAL PHONGSALY MYANMARMYANMAR VIETNAMVIETNAM LUANGLUANG NAMTHANAMTHA Muang Muang LuangLuang Khoa Khoa To NamthaNamtha Hanoi Meung Meung MuangMuang XiangkhoXiangkho MekongBOKEO BOKEO Xai Xai Nambak Nambak Ou Sam-Neva Sam-Neva BanBan Ta Beng LUANGLUANG Viangxai Viangxai HuaisaiHuaisai OUDOMSAIOUDOMSAI PHRABANGPHRABANG HOUAPHANHOUAPHAN Rai 20° N Pakbeng Pakbeng LuangLuang ChiangoT PhrabangPhrabang SA ABOUR SAYABOURY Kham Kham Nan Nan Phokhoun Phokhoun XiangXiang KhoangKhoang XIANGXIANG Sayaboury Sayaboury KasiKasi KHOANG KHOANG Gulf of VangviangVangviang Ban Nalé Ban Nalé Xaisomboun Xaisomboun Tonkin VIENTIANEVIENTIANE Nam Ngum Reservoir Pone Pone BOLIKHAMSAIBOLIKHAMSAI PaksanePaksane Khamkeut Khamkeut Paklay Paklay Mekong Hong Hong Mekong 18° N Xanakham Xanakham VIENTIANEVIENTIANE Kading 18° N PREFECTURE OF PREFECTURE OF VIENTIANE MUN. VIENTIANE MUN. KHAMMOUANEKHAMMOUANE Ban Na Phan Ban Na Phan ThakhekThakhek To Vinh To Khon Kaen Noy XeBangfai To Khon Kaen Xebangfai Xebangfai 0 50 100 Kilometers SAVANNAKHETSA ANNAKHET XénoXéno XeponXepon 0 25 50 75 100 Miles THAILANDTHAILAND SavannakhetSavannakhet PhinPhin To Qui Nhon LAO PEOPLE'S Se Banghiong Samouay Samouay DEMOCRATIC REPUBLIC 16° N 16° N KHAMMOUANE SARAVANESARA ANE Don SaravaneSaravane DEVELOPMENT PROJECT Khongxedon Khongxedon SEKONGSEKONG SekongSekong PROJECT PROVINCE Pakxong Pakxong To Ubon SELECTED CITIES AND TOWNS Ratchathani CHAMPASSAK CHAMPASSAK PROVINCE CAPITALS ChampassakChampassak AttapeuAttapeu Sanamxai Sanamxai NATIONAL CAPITAL ATTAPEU APEU RIVERS MAIN ROADS Khong Khong RAILROADS 14 N 14° N PROVINCE BOUNDARIES INTERNATIONAL BOUNDARIES CAMBODIACAMBODIA 104° E 106° E MAY 2008