Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-H1560) ON A A SERIES OF THREE CREDITS

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-H1560) ON A A SERIES OF THREE CREDITS IN THE AMOUNT OF SDR 18.9 MILLION (US$28.0 MILLION EQUIVALENT) TO THE LAO PEOPLE S DEMOCRATIC REPUBLIC FOR A Report No: ICR SERIES OF THREE POVERTY REDUCTION SUPPORT OPERATIONS EASPR EACLF East Asia and Pacific June, 2009

2 CURRENCY EQUIVALENTS (Exchange Rate Effective April 30, 2009) Currency Unit = US$ 1.00 = 8,537 Kip FISCAL YEAR October to September Vice President: James Adams Country Director: Annette Dixon Country Manager: Patchamuthu Illangovan Sector Manager: Mathew Verghis Alessandro Magnoli (PRSC1), Task Team Leader: Edward Mountfield (PRSO2), Ekaterina Vostroknutova (PRSO3) ICR Team Leader: Ekaterina Vostroknutova

3 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Services ADB Asian Development Bank AFTA Asian Free Trade Area BOL Bank of Laos CAS Country Assistance Strategy CC13 Construction Company 13 CFAA Country Financial Accountability Assessment CPI Committee of Planning and Investment CPIA Country Policy and Institutions Assessment COA Chart of Accounts DP Development Partner (of Lao PDR) EdL Electricité du Laos EC European Commission FDI Foreign Direct Investment FMAC Financial Management Adjustment Credit FMCBC Financial Management Capacity Building Credit GA Governance Agreements GDP Gross Domestic Product GFIS Government Financial Management Information System GNP Gross national Product GOL Government of the Lao PDR IAS International Accounting Standard IBA International Banking Adviser IDA International Development Association IFC International Finance Corporation IL Inclusion List IMF International Monetary Fund IPRS Interim Poverty Reduction Strategy JBIC Japan Bank for International Cooperation JSAN Joint Staff Advisory Note LA Lao Airlines LDB Lao Development Bank LDC Least Developed Country LDP Letter of Development Policy LECS Lao Expenditure & Consumption Survey LIC Low Income Country LICUS Low Income Country under Stress LSFC Lao State Fuel Company MAF Ministry of Agriculture and Forestry MCTPC Ministry of Construction, Transport, Posts and Communications MDGs Millennium Development Goals M&E Monitoring and Evaluation MEM Ministry of Energy and Mining MFI Micro Finance Institutions MOE Ministry of Education MOF Ministry of Finance MOFA Ministry of Foreign Affairs MOH MOIC MPDF Facility MTEF NBFIs NEM NGO NGPES NPEP NPL NPNL NPV NSC NSEDP NT2 PEM PEMSP PER PETS PFM PRGF PMO PrMO PRSO REF RMF ROC RTM SAC SAMD SBD SDT SIDA SME SMEPDO SOE SOCB STEA SUFORD TA TFSCB TIN VAT WTO Ministry of Health Ministry of Industry and Commerce Mekong Private Sector Development Medium-term Expenditure Framework Non-Bank Financial Institutions New Economic Mechanism Non-Governmental Organization National Growth and Poverty Eradication Strategy National Poverty Eradication Program Non-Performing Loan Nam Papa Lao Net Present Value National Statistical Center National Socio-Economic Development Plan Nam Theun 2 (hydroelectric project) Public Expenditure Management Public Expenditure Management Strengthening Program Public Expenditure Review Public Expenditure Tracking Survey Public Financial Management Poverty Reduction and Growth Facility Prime Minister Office Procurement Management Office Poverty Reduction Support Operation Rural Electrification Fund Road Maintenance Fund Regional Operations Committee Round Table Meeting Structural Adjustment Credit State Asset Management Department Standard Bidding Documents Special Drawing Rights Swedish International Development Agency Small and Medium Enterprise Small and Medium Enterprise Promotion and Development Office State-Owned Enterprise State-Owned Commercial Bank Science and Technology Agency Sustainable Forestry for Rural Development Technical Assistance Trust Fund for Statistical Capacity Building Tax Identification Number Value-Added Tax World Trade Organization i

4 LAO PEOPLE S DEMOCRATIC REPUBLIC POVERTY REDUCTION SUPPORT OPERATIONS 1,2,3 CONTENTS DATA SHEET... ii A. Basic Information... ii B. Key Dates... iii C. Ratings Summary... iii D. Sector and Theme Codes... v E. Bank Staff... vii F. Results Framework Analysis... vii G. Ratings of Program Performance in ISRs... xii H. Restructuring (if any)... xii 1. PROGRAM CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES ASSESSMENT OF OUTCOMES ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME ASSESSMENT OF BANK AND BORROWER PERFORMANCE LESSONS LEARNED COMMENTS ON ISSUES RAISED BY BORROWER/IMPLEMENTING AGENCIES/PARTNERS Annex 1 Bank Lending and Implementation Support/Supervision Processes Annex 2: Program Performance Against Actions and Triggers Annex 3. Comments of Co-financiers and Other Partners/Stakeholders MAP i

5 A. Basic Information Program 1 Country Lao People's Democratic Republic DATA SHEET Program Name Lao PDR First Poverty Reduction Support Credit Program ID P L/C/TF Number(s) IDA-40490,IDA-H1560 ICR Date 06/29/2007 ICR Type Core ICR Lending Instrument DPL Borrower LAO PDR Original Total Commitment XDR 6.6M Disbursed Amount XDR 6.6M Implementing Agencies Ministry of Finance Cofinanciers and Other External Partners none Program 2 Country Lao People's Democratic Republic Program Name Lao PDR Second Poverty Reduction Support Operation (PRSO2) Program ID P L/C/TF Number(s) IDA-H2170 ICR Date 06/29/2007 ICR Type Core ICR Lending Instrument DPL Borrower LAO PEOPLE'S DEMOCRATIC REPUBLIC Original Total Commitment XDR 5.6M Disbursed Amount XDR 5.6M Implementing Agencies Ministry of Finance Cofinanciers and Other External Partners Japan Program 3 Country Lao People's Democratic Republic Program Name Third Lao PDR Poverty Reduction Support Operation Grant Program ID P L/C/TF Number(s) IDA-H2990 ICR Date 06/29/2007 ICR Type Core ICR ii

6 Lending Instrument DPL Borrower LAO PEOPLE'S DEMOCRATIC REPUBLIC Original Total Commitment XDR 6.7M Disbursed Amount XDR 6.7M Implementing Agencies Ministry of Finance Cofinanciers and Other External Partners Japan, European Commission B. Key Dates Lao PDR First Poverty Reduction Support Credit - P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 12/16/2004 Effectiveness: 08/15/ /15/2005 Appraisal: 02/10/2005 Restructuring(s): - - Approval: 03/31/2005 Mid-term Review: - - Closing: 12/31/ /31/2005 Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 01/30/2006 Effectiveness: 07/26/ /26/2006 Appraisal: 02/24/2006 Restructuring(s): - - Approval: 04/27/2006 Mid-term Review: - - Closing: 02/28/ /28/2007 Third Lao PDR Poverty Reduction Support Operation Grant - P Process Date Process Original Date Revised / Actual Date(s) Concept Review: 02/28/2007 Effectiveness: 12/04/ /04/2007 Appraisal: 03/27/2007 Restructuring(s): - - Approval: 06/05/2007 Mid-term Review: - - Closing: 03/31/ /31/2008 C. Ratings Summary C.1 Performance Rating by ICR Lao PDR First Poverty Reduction Support Credit - P Outcomes Satisfactory Risk to Development Outcome Low iii

7 Bank Performance Borrower Performance Satisfactory Satisfactory Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P Outcomes Risk to Development Outcome Bank Performance Borrower Performance Satisfactory Low Satisfactory Satisfactory Third Lao PDR Poverty Reduction Support Operation Grant - P Outcomes Risk to Development Outcome Bank Performance Borrower Performance Satisfactory Low Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Lao PDR First Poverty Reduction Support Credit - P Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance Satisfactory Overall Borrower Performance Satisfactory Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance Satisfactory Overall Borrower Performance Satisfactory Third Lao PDR Poverty Reduction Support Operation Grant - P Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance Satisfactory Overall Borrower Performance Satisfactory iv

8 C.3 Quality at Entry and Implementation Performance Indicators Lao PDR First Poverty Reduction Support Credit - P Implementation QAG Assessments Indicators Performance (if any) Potential Problem Quality at Entry Program at any time No (QEA) (Yes/No): Problem Program at any Quality of No time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status None None Rating: Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P Implementation QAG Assessments Indicators Performance (if any) Rating: Potential Problem Quality at Entry Program at any time No (QEA) (Yes/No): None Problem Program at any Quality of No time (Yes/No): Supervision (QSA) None DO rating before Closing/Inactive status Satisfactory Third Lao PDR Poverty Reduction Support Operation Grant - P Implementation QAG Assessments Indicators Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status Rating: D. Sector and Theme Codes Lao PDR First Poverty Reduction Support Credit - P Original Actual Sector Code (as % of total Bank financing) Banking Forestry 4 4 General education sector General public administration sector Health v

9 Theme Code (Primary/Secondary) Administrative and civil service reform Secondary Secondary Health system performance Secondary Secondary Public expenditure, financial management and procurement Primary Primary Regulation and competition policy Secondary Secondary State enterprise/bank restructuring and privatization Primary Primary Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P Original Actual Sector Code (as % of total Bank financing) Central government administration General education sector Health Law and justice Power Theme Code (Primary/Secondary) Education for all Secondary Secondary Health system performance Secondary Secondary Legal institutions for a market economy Secondary Secondary Public expenditure, financial management and procurement Primary Primary State enterprise/bank restructuring and privatization Secondary Secondary Third Lao PDR Poverty Reduction Support Operation Grant - P Original Actual Sector Code (as % of total Bank financing) Banking Central government administration General education sector Health Power Theme Code (Primary/Secondary) Administrative and civil service reform Secondary Secondary Education for all Secondary Secondary vi

10 Health system performance Secondary Secondary Public expenditure, financial management and procurement Primary Primary Regulation and competition policy Secondary Secondary E. Bank Staff Lao PDR First Poverty Reduction Support Credit - P Positions At ICR At Approval Vice President: James Adams Jemal-ud-din Kassum Country Director: Annette Dixon Ian C. Porter Sector Manager: Mathew Verghis Indermit S. Gill Task Team Leader: Allessandro Magnoli Allessandro Magnoli ICR Team Leader: Ekaterina Vostroknutova ICR Primary Author: Ekaterina Vostroknutova Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P Positions At ICR At Approval Vice President: James Adams Jeffrey S. Gutman (Acting) Country Director: Annette Dixon Ian C. Porter Sector Manager: Mathew Verghis Indermit S. Gill Task Team Leader: Ekaterina Vostroknutova Edward Mountfield ICR Team Leader: Ekaterina Vostroknutova ICR Primary Author: Ekaterina Vostroknutova Third Lao PDR Poverty Reduction Support Operation Grant - P Positions At ICR At Approval Vice President: James Adams James W. Adams Country Director: Annette Dixon Ian C. Porter Sector Manager: Mathew Verghis Indermit S. Gill Task Team Leader: Ekaterina Vostroknutova Ekaterina Vostroknutnova ICR Team Leader: Ekaterina Vostroknutova ICR Primary Author: Ekaterina Vostroknutova F. Results Framework Analysis Program Development Objectives (from Program Document) PDO 1: Public Resource Management - Ensure efficient management of public sector resources PDO 2: Public expenditure management Increase the poverty reduction impact of public spending PDO 3: Sustainable growth An increase in available resources is necessary to achieve NGPES objectives vii

11 Revised Program Development Objectives (as approved by original approving authority) No revisions (a) PDO Indicator(s) The Program Outcome Indicators did not change during the series and were monitored in all three operations. Only progress at ICR is presented here. Progress upon completion of each of the operations is presented in their respective ISRs. Third Lao PDR Poverty Reduction Support Operation Grant - P Lao PDR Second Poverty Reduction Support Operation - P Lao PDR First Poverty Reduction Support Credit - P Indicator 1 : Indicator Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Improve Public Resource Management: - Progress against HIPC Public Expenditure Management Indicators (number of indicators at benchmark level). 0 in Target value is to None of the have 13 out of 15 HIPC indicators at indicators benchmark levels were at by FY2009. benchmark - 11 in FY2008. levels. Date achieved 03/11/ /01/ /03/2009 Comments (incl. % achievement) The final target is not set to be fully achieved until FY2009. In FY2008 the target was nearly 85 percent achieved. Progress therefore is rated as Satisfactory. Improve Public Resource Management - Budget execution and Indicator 2 : financial reporting. Number of months after start of FY that detailed budget is finalized and published. Value (quantitative or Qualitative) In FY2003/04, Target is to reduce the budget the number of was months it takes to finalized 5 finalize and month after publish budget. By start of FY, FY2009, it should and be finalized at the published start of FY and 16 months published one after start month later. of FY. - In FY2007/08, detailed budget books were finalized 2 months after FY-end, and published 6 months after the end of the fiscal year. Date achieved 10/01/ /01/ /03/2009 Comments In 20007/08, the budget was published 10 month earlier than in (incl. % FY2003/04. Progress is rated as Satisfactory. achievement) viii

12 Indicator 3 : Value (quantitative or Qualitative) Improving Performance of SOEs - reduce number of SOEs and reduce losses. Number of loss-making SOEs percent of SOEs were lossmaking in Reduce the Only 10.2 % of 30 percent number of loss - central SOEs were in making SOEs below the baseline. loss-making in 2006, according to the SAMD assessment. Date achieved 01/01/ /01/ /03/2007 Comments (incl. % achievement) In 2006, only data on central SOEs was available; central SOEs represent more than 90 percent of total SOE revenues/losses. Progress is rated as Satisfactory. Indicator 4 : Improving performance of SOE: reduce number of SOEs and reduce losses. Combined annual losses made by SOEs. Value (quantitative or Qualitative) 200 billion Kip in Reduce combined losses made by SOEs below 200 billion Kip billion Kip in (Nominal Kip inflation was around 10 percent a year, thus the real decrease in combined losses is even larger). Date achieved 06/01/ /01/ /03/2007 The combined losses of SOEs was reduced to 8 billion under the Comments (incl. % achievement) target of 200 billion Kip. Target was therefore met and later maintained. Progress was maintained in 2006, when total losses of central SOEs (representing 90% of all SOEs) were at 39 billion kip. Progress is rated as Satisfactory. Indicator 5 : Financial Sustainability of Utilities: achieve cost recovery. Cost recovery in the electricity sector SOEs. Value (quantitative or Qualitative) 83 % in % by Positive net profits in Date achieved 01/01/ /01/ /12/2008 The EDL has achieved positive profits: net profit excluding Comments dividends was 83.7 Billion kip, and net profit including dividends (incl. % was Billion kip in Since the final target set to be fully achievement) achieved only in 2011, progress is rated as Highly Satisfactory. Align spending with pro-poor NGPES priorities. Improve Indicator 6 : Education Outcomes: Net primary school enrollment rates. ix

13 Value (quantitative or Qualitative) 83% in Increase net enrollment rates from the baseline. - 84% in 2005 according to the latest UNESCO/GOL data. Date achieved 09/01/ /01/ /03/2008 Comments (incl. % achievement) Primary school enrollment rates increased by 1 percent above the baseline between 2002 and Progress was rated as Satisfactory as the target was met. Indicator 7 : Align spending with pro-poor NGPES priorities. Percent of budget allocated to education and health. Value (quantitative or Qualitative) In 2003/04, Education 11.1%, and Health 4.3% summing up to Increase the percent of 15.4% (based on budget MOF definitions) allocated to Percent of budget priority sectors excluding donorfinanced expenditures baseline. relative to allocated to education 9.2% and health 3.0% in FY2002/03. - Education 14.5%. Health 2.8%. Summing up to 17.3 %. Data for FY 06/07, MOF definition. Excluding donorfinanced spending, Education 11.9%, Health 3.2 % in FY2006/07. Date achieved 10/01/ /01/ /03/2009 There was an increase in the percentage of the budget allocated to Education between 2003/04 and 2006/07, while there has been a decline in health. The combined percentage of budget allocated to both of these priority sectors relative to the baseline Comments (incl. % achievement) nevertheless increased. However, the decline in health sector is due almost entirely to the decline of donor-financed infrastructure, as government and donors shifted priorities to recurrent spending, based on the new AAA work. According to the IFS-consistent data, spending as percent of total spending (excluding donor funds) grew in education (from 9.2 to 11.9 percent) and health (from 3 to 3.2 percent) sectors. Progress was rated as Satisfactory. Indicator 8 : Align spending with pro-poor NGPES priorities. Infrastructure: Percent of rural population with access to electricity. Value (quantitative or Qualitative) 41.2% in Increase to 55% by % in Date achieved 01/01/ /01/ /12/2008 There was around 50 percent increase in the percentage of the rural Comments population with access to electricity between 2003 and The (incl. % final target is therefore over-achieved and rated as Highly achievement) Satisfactory. Align spending with pro-poor NGPES priorities. Improve Health Indicator 9 : Outcomes: Percent of birth deliveries attended by trained personnel. x

14 Value (quantitative or Qualitative) 17% in (Lao Increase the proportion of Reproducti deliveries attended ve Health by trained Survey, personnel above NSC/UNFP the baseline. A). - 23% in 2004/5. Data from MDG Status Report (UNDP/GOL). Date achieved 01/01/ /01/ /03/2008 The proportion of deliveries attended by trained personnel Comments increased to 23 percent between 2000 and 2005, according to the (incl. % official MDG report published in 2008 by UNDP. The target has achievement) therefore been met and rated Satisfactory. Sustainable Growth. Strengthening private sector development: Indicator 10 : Number of days to start up a business. Value (quantitative or Qualitative) 198 days in Reduce the (Doing number of days to Business start up a business. report, WB) days in (Doing Business 2008 report, WB). Date achieved 01/01/ /01/ /03/2008 The number of days to start up a business reduced significantly Comments (incl. % achievement) from 198 days in 2004 to 103 days in 2007 representing an overall reduction of 95 days. (Doing Business 2008 report, WB). This represented Highly Satisfactory progress and the target was met. Indicator 11 : Public Resource Management. Strengthening the banking sector: Percent of flow NPLs. Percent of NPLs from new risk activities. Value (quantitative or Qualitative) Flow NPLs 64% in 2003 Reduce (correction to percent of baseline due to flow NPLs new data, change and percent from 60%). NPLs NPLs from from new risk new risk activities 15% activities. baseline. - Flow NPLs 4.2% in 2007 (unaudited). NPLs from new risk activities 4.2% in 2007 (unaudited). Date achieved 01/01/ /01/ /03/2007 All NPLs before 2006 (called flow NPLs ) have been written off. Comments The percent of NPLs in new risk activities had been dramatically (incl. % reduced. The target therefore was met and rated Highly achievement) Satisfactory. Accelerating regional and global integration. Percent of Inclusion Indicator 12 : List products in the AFTA tariff ranges. xi

15 Value (quantitative or Qualitative) For the range of 0-20 percent, 98.2% in For the range 0-5 percent, 59.0% in For the range of 0-20 percent, 100% in For the range 0-5 percent, 100% in For the range of 0-20 percent, 100% in For the range 0-5 percent, 100% in Date achieved 01/01/ /01/ /03/2008 Comments (incl. % The final target has been achieved and rated Satisfactory. achievement) Indicator 13 : Improving resource/revenue management. Ratio of domestic revenues to GDP. Value 11% in 14.2% in FY07/08. (quantitative or FY03/04. Increase. - Qualitative) Date achieved 10/01/ /01/ /03/2009 Comments (incl. % achievement) G. Ratings of Program Performance in ISRs The ratio of domestic revenues to GDP increased by 3.2 percent of GDP between FY03/04 and FY07/08. Progress was rated as Highly Satisfactory and the target was met. Lao PDR First Poverty Reduction Support Credit - P No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 06/20/2005 Satisfactory Satisfactory /13/2007 Satisfactory Satisfactory 9.68 Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 08/30/2007 Satisfactory Satisfactory 8.28 Third Lao PDR Poverty Reduction Support Operation Grant - P Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 11/15/2007 Satisfactory Satisfactory H. Restructuring (if any) No restructuring xii

16 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. The Lao PDR is among the world s poorest countries, according to the Bank s Atlas estimates. It is a land-locked nation of 236,000 square km with a population of around 6 million (2008). With an estimated per capita income of US$740 in 2008, Lao PDR is one of the poorest countries in East Asia and is classified by the UN as a Least Developed Country (LDC). Based on the World Bank s new international poverty line of $1.25 a day in 2005 PPP terms, Lao poverty incidence was 44 percent in 2002/03. Despite being land-locked, Lao PDR has significant natural resources like forestry, minerals and hydro-electric power with enormous trade potentials. 2. The economy has been experiencing a surge in investment in resource industry (hydro and mining), following the successful launch of the NT2 project in However, agriculture remains a major sector of the economy, albeit with declining importance. It contributes around 33 percent of GDP (2008) and is employing nearly 70 percent of the labor force; the industry sector accounts for a little over 29 percent, and services for nearly 39 percent. In terms of value at 2008 prices, Lao PDR exports mostly minerals, while industrial goods account for almost three quarters of the total; other large exports are electricity, garments, agriculture goods, and wood and wood products. Most of the country s exports are destined for Thailand, Vietnam, China and Europe, as well as Australia and Taiwan. Imports consist mostly of industrial and capital products, petroleum, food and other consumer goods, coming for the most part from Thailand, followed by Vietnam, India, Japan, China, and South Korea. Poverty Reduction and Social Indicators 3. Lao PDR s performance in growth and poverty reduction has been strong over the last decade. Over the past ten years ( ), real GDP grew by an annual average rate of 6.4 percent - despite the sharp fall-off in growth during the regional crisis of Based on Lao PDR s national poverty line (based on minimum calorie intake), the incidence of poverty has fallen to around 33.5 percent in 2002/03 from 46 percent in 1992/93; or from 49 percent in 1997/98 to 44 percent in 2002/03 based on the World Bank s new international poverty line of $1.25 a day in 2005 PPP terms. The social indicators have been improving as well, however they still remain among the worst in the region, and the quality of measurements remains low. 4. While social indicators are gradually improving, they remain among the worst in the region. Overall, the Lao PDR s mixed record on social indicators reflects a difficult transition process in the 1990s, a low tax collection effort at less than percent of GDP until the last 2 years, and significant decentralization with lack of adequate central oversight. Available data suggest that the Lao PDR is off track on a number of the MDGs, including malnutrition, measles immunization, skilled birth attendance, and some dimensions of gender equality (girl s equal enrollment in tertiary education). Education is among the better performing sectors in Laos, at about the 1

17 halfway point between the 1990 benchmark and the 2015 target date. The literacy rate for young adults (15 to 24 year-olds) is roughly on target (showing progress from the 71 percent in 1995 to 84 percent in 2005). Performance on health indicators is more mixed. The Reform Program 5. In 1986, the Government of Lao PDR (GOL) introduced the New Economic Mechanism to move from a centrally planned to a market-oriented economy. This involved removing price controls and the GOL s trade monopoly, unifying the exchange rate system, abandoning cooperative farming, reducing the number of State Owned Enterprises (SOEs) and allowing private firms. 6. The reform process has continued throughout the last 15 years. After the Soviet Union s collapse and resultant loss of financial support in 1991, the GOL reoriented the economy to Asian and western markets and implemented initial banking and SOE reforms. The Asian economic crisis led to a deceleration of reforms in the late 1990s, as Laos struggled with serious macroeconomic problems. A renewed focus from 2001 onwards has led to improvements in public financial management (PFM), SOEs and State Owned Commercial Banks (SOCBs), tariffs, pricing, trade and private sector development. Remarkable growth has also been achieved in exports, agricultural productivity, industry and services. PRSC1-3 made a significant contribution to this reform program (see Box 1). 7. The Government s medium-term strategy is to achieve rapid economic growth with the goal of graduating from the status of least-developed country (LDC) by This strategy has been articulated consistently in several national strategy documents, including the NGPES, 2004, and its successor, the NSEDP, The NSEDP envisages the reduction of poverty through a combination of broad-based economic growth and focused and policy interventions. The four strategic intervention areas of the plan are i) human development and private sector driven economic growth; ii) competitiveness, trade and regional integration; iii) social development and targeted poverty reduction interventions; and iv) good governance. Through these key priority intervention areas, the NSEDP enables the evolution of the Lao PDR s economy towards a private sector led system with modern governance, while keeping a strong focus on human and social development. The geographical targeting of NSEDP s interventions reflects the empirical evidence provided by the most recent household survey and the Lao PDR Poverty Assessment. The Poverty Reduction Strategy underpins both the Country Assistance Strategy (CAS) and the PRSO program. Box 1. Key policy reforms implemented under PRSC1-3 Progress has been made in the public financial management reform. Budget preparation has become more transparent and predictable. Additionally, the budget approval time has been brought forward from October to June. The Public Expenditure Management Strengthening Program (PEMSP) has gained momentum and is being implemented according to plan, including training and capacity building components. Coupling the PEMSP interventions with the new provisions on centralization in the Budget Law, makes for a very robust plan for improving public finance management in Lao PDR. Government also made significant efforts to improve the monitoring and evaluation framework through the Public Expenditures Review and Public Expenditures Tracking Survey. 2

18 The new revised Budget Law that has potential to strengthen public financial management, especially in its currently weakest part central-local fiscal relations has been drafted and approved by the National Assembly significantly ahead of schedule. The new Tax Law and VAT Law are also significant steps to improve revenue collection and broaden the revenue base. The VAT Law has several strong points, in particular a single rate and limited exemptions, and the Government is working on revisions to include centralized tax payer units and review of legal framework. Other efforts on revenue side include steady and regular increase in fuel levy, notwithstanding oil price increases that are not subsidized in Lao PDR. The Government has also strengthened oversight of the State-Owned Enterprises and made significant progress in bringing state-owned utilities to the cost recovery levels. Regular and onschedule electricity and water tariff increases took place during PRSC1-3, moving state-owned utilities to cost recovery levels. The Government is following the Power Sector Action Plan to ensure financial viability of the EdL, and established a Rural Electrification Fund and drafted new water supply law. It also introduced a forestry sector monitoring system, and Forestry Industry Restructuring plan. The international audits were undertaken by GOL for the largest loss-making SOEs and for the State-Owned Banks, and the largest SOEs have been restructured. The Government has also established regular monitoring of the progress against the restructuring plans of SOEs and against financial targets established for the SOCBs. Several steps were taken in the PRSP priority sectors (health, education, and infrastructure). During PRSC1-3 the Government improved monitoring and timeliness of payment of salaries to teachers and health workers. In addition, it launched pilots of school grants program and equity funds pilots for hospitals. In infrastructure, it increased financing of the road maintenance fund to near financial sustainability through fuel levy increases; and updated road preservation fund. A shift in approach to the private sector has taken place during PRSC1-3 that marks an important step in transition from a planned to a market economy. The new Enterprise Law approved last year is based on international best practice, and implementing decrees are being drafted. The Government presented a comprehensive strategy for private sector development and trade focusing on improving investment climate and including reduction in cumbersome regulations and procedures at and behind the border; it also hosted the first Lao Business Forum for private-public dialog, committed to an SME strategy encompassing reforms in many investment climate components, such as regulation of businesses, access to finance, enterprise taxation and accounting, and infrastructure. In financial sector, several laws and regulations have been drafted, in order to level the playing field and provide services for domestic and foreign, small and large businesses; these include Banking Law, Secure Transactions Law, and Decrees on precious metals and foreign exchange. The government has entered regional and international agreements that require increased transparency and specific economic policies from its members. Lao PDR entered ASEAN/AFTA, and committed to access to the WTO. It became a member of the World Customs Organization (WCO). Lao PDR undertook a Diagnostic Trade Integration Study to find main constraints to trade and is now working on reduction in trade regulations. Lao PDR is working on WTO accession and has made progress on its commitments to reduce tariffs and introduce single window and other reforms. 8. The sixth NSEDP and the Progress Report are viewed as a Poverty Reduction Strategy that fulfills the main criteria: poverty focus, broad participation, results orientation, and donor harmonization. The NSEDP integrates the NGPES and builds on its participatory approach, poverty focus and to some extent results orientation. It complies with the key features of a successful Poverty Reduction Strategy. In particular, it went through a transparent and accountable drafting process, and contained a small but functional monitoring and evaluation framework. It also addresses donor harmonization issues. International non-governmental organizations (NGOs) and donors active in the Lao PDR endorsed the final NSEDP at the 9th Round Table Meeting 3

19 (RTM) on November 28th, 2006, and reconfirmed their commitment at the two subsequent Round Table Implementation Meetings in November 2007 and The Economy 9. The Lao PDR economy grew steadily for more than a decade. Real GDP growth averaged more than 6 percent a year in the 1990s, and further accelerated to an average of 7.5 percent between 2005 and The contribution to this growth from nonresource sectors 1 of the economy averaged at around 5.5 percent during the same period, with the resource sector 2 contribution gradually increasing. 10. Macroeconomic conditions have been stable during and after implementation due to disciplined fiscal and monetary management in the aftermath of the Asian crisis. Single digit inflation was achieved in 2004 and since been maintained. Revenues have increased gradually throughout the 2000s, reflecting growing economy and gradual improvements in tax collection. In recent years budget deficits have been declining and the kip has performed steadily against the US Dollar and Thai Baht and withstood a significant appreciation as the government carefully managed the growing foreign capital inflows and increasing value of resource outflows. Development challenges 11. Being a small land-locked transition economy, Lao PDR is facing a number of development challenges. These include challenging geography with the poorest populations living in inaccessible highlands, high poverty levels (more than 70 percent of population are living on less than $2 a day), a mostly agrarian subsistence economy with unsophisticated industries and significant barriers to export, weak investment climate and entrepreneurship skills, constrained fiscal position of the Government that reduces its ability to reform and expand social sectors spending (among the lowest in the world), and high dependence on international aid. The PRSO series has attempted to tackle several of these challenges through a comprehensive program of public financial management strengthening, investment climate improvement reforms, and poverty reduction programs support (see Box 1 on page 2). Bank Rationale for a Poverty Reduction Support Credit (PRSC) in Lao PDR 12. The track record of adjustment lending in Lao PDR between 1989 and 2001 was uneven. Even though the WB team strongly disagreed, the World Bank Operations Evaluation Department (OED) rated as unsatisfactory the outcome of the first three World Bank Structural Adjustment Credits SAC I (approved in 1989), SAC II (approved in 1991) and SAC III (approved in 1996). According to OED s evaluation, the SACs did not perform well mainly due to weak Government commitment to the reform program and weak implementation capacity. OED recommended that future policy-based operations in Lao PDR should take on some key lessons. 1 Light manufacturing, agriculture and industrial forestry, tourism and retail, construction, and emerging food and nonfood processing industries. 2 Mining (copper, gold, and other subsoil assets) and hydro electric energy. 4

20 13. The Bank drew on the shortcomings of earlier budget support operations to ensure that inter-ministerial coordination, TA and capacity limitations were addressed. The Bank s increased confidence in the Government s commitment to the reform program was based on the full implementation of the FMAC, approved in June 2002, to which can now be added successful implementation of PRSO1-3, approved in March 2005, April 2006, and June Moreover, the PRSO program was based on the Government s own poverty reduction strategy rather than on an externally imposed framework. Fostering greater inter-ministerial coordination. The Government made a specific effort to ensure inter-ministerial coordination through the NGPES/NSEDP process and through the PRSO Steering Committee and Technical Secretariat, with representation from across Government. As part of the PRSO review process, Government has organized frequent inter-ministerial PRSO meetings, to align implementation strategies and discuss cross-cutting issues. Supporting the operation with adequate and appropriate technical assistance (TA). The Government continues to use FMCBC and other resources to support technical assistance, capacity enhancement and institutional development efforts. It is also making use of the PHRD grant TA attached to the PRSO3. Furthermore, the proposed MDTF for PEMSP will provide significant additional grant resources for technical assistance to effectively implement policies. Taking account of capacity limitations. To take account of capacity constraints, the PRSO program was designed as a programmatic series, recognizing the need to manage reform in a series of steps, but focused on medium-term outcomes and monitorable impacts. 14. The decision to initiate a PRSO series for Lao PDR was a risky one for one more reason. Prior to the Lao PDR PRSC1, all PRSC countries had had average CPIA ratings above 3.2, and no country which met the criteria for LICUS had been included among PRSC countries. Lao PDR CPIA ratings averaged 2.9 in 2004 and its track record of reform was mixed. For the success it would require Lao PDR to live up to the PRSC instrument s high standards in commitment and the speed of implementation of policy reforms, intended for well performing countries with a strong track record of reform. 15. The above risks notwithstanding, Lao PDR was considered suitable for a PRSC due to its recent good macroeconomic performance and progress on reforms and poverty reduction. This was specifically demonstrated by the GOL s commitment to: implementing a phased reform agenda across several sectors of the economy; improving its performance in adjustment lending programs, including satisfactory completion of Financial Management Adjustment Credit actions in 2004 and adoption of PRSC1 prior actions; sound economic management over the previous decade, resulting in sustained growth, stable macroeconomic conditions and significant poverty reduction; and 5

21 a plan to further reduce poverty and improve social indicators, the fifth National Growth and Poverty Eradication Strategy (NGPES) for Two important reasons for using a programmatic PRSC instrument in Lao PDR were: the need to ensure stable progress of reforms, and the need to mitigate risks of the Bank s involvement in the Nam Theun 2 (NT2) hydro electric dam project. In order to mitigate the risks related to the project and to ensure that Lao PDR stays on track with the structural reforms necessary to ensure poverty-reducing use of the potential revenues, there was a need for a programmatic engagement in several policy areas, especially on public financial management and on the growth agenda. The PRSC1 and the program for PRSC1-3 were approved by the Bank s Board of Directors on the same day with the NT2 project. 17. The Bank also envisaged that the programmatic approach of a PRSC would greatly assist Lao PDR to sustain economic growth and deepen poverty reduction efforts. In particular, a PRSC would continue the momentum and reinforce GOL commitments to reforms. It would also encourage a cross-sectoral approach to implementing multiple reforms, translate growth into improved social indicators, ensure natural resource revenues contributed to poverty reduction and human development goals, build GOL capacity and help align donor assistance. 18. On this basis, the Bank approved an initial program of three Poverty Reduction Support Operations (PRSOs 1-3). Following completion of the three operations in 2005, 2006 and 2007 respectively the GOL received around $28 million over three years in budget support funding from the Bank. 19. Lao PDR has demonstrated that a PRSC instrument, coupled with strong technical assistance program, can have a significant positive impact on a LICUS country performance, and bring about a stable progress on policy reform. The commitment and ownership of the operation by the Government grew steadily over its course, and performance improved significantly. At ICR, Lao PDR s CPIA rating is at 3.3, and the country is firmly on path of reforms, stable macroeconomic conditions, and steadily improving outcomes. Contribution of the PRSC to higher level objectives 20. The PRSC was a key tool to implement the Bank s new Country Assistance Strategy (CAS) for Lao PDR. The CAS sought to sustain the GOL s recent development progress by selectively targeting NGPES priorities for further reform. The PRSC was designed to help the GOL to make measurable progress against the NGESP priorities identified in the CAS, including strengthening PFM, improving resource allocation to pro-poor development priorities and sustaining growth through better resource generation. It was also central to implementing CAS objectives of building GOL capacity, improving cross-sectoral reform dialogue and sharing analytical work. 6

22 1.2 Original Program Development Objectives (PDO) and Key Indicators 21. The PRSOs aimed to improve public resource use, increase social service spending and sustain economic growth. To achieve this, three ambitious PDOs were established: 1. Public resource management: ensure efficient management of public sector resources, by strengthening public expenditure management and maximizing the effectiveness of public resources to achieve development goals. Areas targeted for improvement included the allocation, execution and monitoring of central and provincial public expenditures; fiscal discipline; SOBs, SOEs and utilities. 2. Public Expenditure Policies: increase the poverty reduction impact of public spending to enhance access and quality of basic education and health services and improve roads, water supply and sanitation services for the poor. This supported NGPES pro-poor priorities and the MDG target to graduate from a Least Developed Country by Sustained Growth: an increase in available resources is necessary to achieve NGPES objectives by promoting a stronger private sector, greater trade volume and sustainable management of natural resources. 22. Key indicators were aligned to NGPES and CAS objectives, as well as AAA work. To meet the indicators, the GOL was required to: improve financial management capacity, align expenditure with medium term priorities and enhance budget execution and the procurement system; strengthen the banking sector by improving SOCBs management; reduce the number of SOEs and SOE losses and increase net profits; increase cost recovery in electricity and water utilities; increase: budget share to health and education; use of health services; school enrollments; electricity, water and road access; and timeliness of civil service pay; reduce import tariffs in line with AFTA and the barriers to establishing a business; and mobilize natural resource revenue and implement sustainable forest management. 1.3 Revised PDO and Key Indicators, and Reasons/Justification 23. The PDOs and key indicators did not change over the life of the series. However, actions and prior actions were refined during PRSOs 2 and 3 to better reflect the frontier of reform, and the findings of recent AAA work, in a way that is consistent with the PRSCs guidelines. 1.4 Original Policy Areas Supported by the Program 24. A cross sectoral approach was taken under PRSC1-3 to address multiple policy areas based on CAS and NGPES objectives. The policy areas selected for reform were: 7

23 strengthening public financial management and the banking sector; improving SOE performance and financial sustainability of utilities; aligning and monitoring pro-poor NGPES priorities; sustaining growth through private sector development; accelerating regional and global integration; and improving natural resource management. 25. The PRSOs supported the implementation of key GoL programs and development priorities, including: the Public Expenditure Management Strengthening Program (PEMSP) - which aims to improve PEM and work towards international financial standards. The PRSOs supported the PEMSP by providing technical assistance (TA) and setting actions related to its development and implementation; the Millennium Development Goals (MDGs) - increasing social spending as a result of the PRSOs assisted the GOL to meet MDGs, which demands extraordinary efforts to reduce poverty and improve the health and education status of the population by Revised Policy Areas 26. There were no revisions to the policy areas during the series. 1.6 Other significant changes 27. As confidence grew in the GOL s performance throughout the series, donor involvement intensified. PRSC1 was funded solely by the Bank, while the European Commission (EC) and Japan played consultative roles. In February 2007, after the GOL had completed PRSC1 and 2 prior actions, the Japan Bank for International Cooperation (JBIC) signed an agreement for a concessional loan of 500 million yen (around US$4.2 million) for PRSO2. The EC has also committed Euro 3 million to support PRSO3 implementation. Grant based TA to build capacity for the Public Expenditure Review (PER) and PEMSP was provided by Japan, the EC, the Asian Development Bank (ADB) and the Swedish International Development Cooperation Agency (SIDA) for PRSOs 2 and During PRSO2, the GOL finalized a new Poverty Reduction Strategy, the National Socio-Economic Development Plan (NSEDP) for The NSEDP integrates the NGPES and builds on its participatory approach and poverty focus. It was approved by donors and international NGOs in November The strategic intervention areas include: (i) human development and private sector driven economic growth (ii) competitiveness, trade and regional integration; (iii) social development and focused poverty reduction interventions (including geographic targeting of the 47 poorest districts); and (iv) good governance. These strategic areas were developed in consultation with the Bank and were generally consistent with the reforms being pursued under the PRSO series. 8

24 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 29. The implementation of PRSO program had to overcome significant challenges, through enforced dialog and parallel support. Lao PDR is a small low income country, with limited civil service and severe budget constraints. The capacity of the government to understand the instrument as well as implement complex reforms was extremely limited, exacerbated by poor intra-governmental coordination. At entry, Bank s knowledge of the country was based on missions from HQ, and the understanding of Government s priorities and constraints was relatively limited. Through a program of close monitoring, gradually building an in-country team and acquiring of the local knowledge through the presence on the ground and extensive AAA work, the team has achieved significant improvements in performance. One of the main factors to this was realization of importance of TA in implementing PRSCs in countries with severe capacity constraints (see also the next section). 30. As a result of above efforts, implementation progress was faster during PRSO3. Program performance improved with each operation, leading to all actions and triggers for all three operations having been met by the end of the series. The approval of PRSC1 was contingent on completion of 10 prior actions. Under PRSO2, one action was waived, and the progress on four other prior actions was delayed; but all 11 initial prior actions were subsequently achieved during PRSO3. In PRSO3, one trigger was met ahead of schedule and at a higher level than was originally expected. Due to this overachievement, another trigger (on financial information systems and budget reports) was substantially modified. A list of all completed prior actions is at Annex 2. Tranche # Amount Expected Actual Release Release Release Date Date PRSC1 US$ /25/ /15/2005 (1) Regular million PRSO2 US$8.0 million 08/31/ /26/2006 (2) Waiver of one prior action PRSO3 US$10.0 million 10/31/ /04/2007 (1) Regular 2.2 Major Factors Affecting Implementation 31. Efforts to mitigate the above shortcomings of the previous budget support operations have been successful during implementation of the PRSOs 1 to 3, especially on greater coordination and provision of TA. First, the inter-ministerial agency coordination has been improved through the PRSO process and related dialog; this resulted in a process that was comparatively more owned and efficient. Second, the impact of provision of technical assistance in selected areas has been clear in public financial management component: progress on this component has been faster and more profound in comparison to other areas that enjoyed less of such support (for example, banking reform). 9

25 32. However, the PRSO1-3 series had not fully taken into account the existing capacity limitations at entry. While the programmatic series has been more beneficial than a self-standing operation would have been, the Government s capacity to implement reforms may have been over-estimated during the design of the first programmatic series. Structural reforms during transition from planned to a market economy, such as SOE reform and Banking sector reform, need to be accompanied by several parallel processes before they can be successful. Such processes require building understanding of the meaning of these reforms, and building support within different parts of the Government. This suggests a sequence that needs to be followed: improved monitoring, setting targets and monitoring achievement of such targets, building incentives system to achieve targets within the public sector, and finally implementable actions. Building capacity to perform in such complex reforms during this sequence is key to success of these reforms. 33. The programmatic commitment and dialog resulted in enhanced interministerial coordination. Over the course of the series, the level of efficiency across the government improved, leading to the achievement of particularly good outcomes in trade liberalization, SOE performance and restructuring of utility tariffs. This coordination also demonstrated higher levels of government ownership of PRSO3. Nevertheless, there is still a need to support ministries in understanding the meaning of reforms and in building support within different parts of the government. On the whole, a programmatic series was more effective in this regard than separate stand alone operations would have been. Growing ownership of PRSO reforms supported the implementation process. The Ministry of Finance (MOF) demonstrated solid leadership and focus in chairing the PRSO Steering Committee, as well as a good vision to assist other ministries to implement reforms. To ensure dialogue across sectors, the PRSO Committee was supported by a Technical Secretariat with representation from a range of ministries. 34. The benefits of greater focus were recognized. The high number of actions and triggers was making it difficult for the GOL to concentrate on key reforms and effectively coordinate issues across ministries. With the consensus of the GOL, the Bank reduced the number of prior actions from 11 in PRSO1 and PRSO2, to 7 in PRSO3), allowing a clearer focus on results. PRSO instrument s embedded flexibility was used to refine actions and triggers to suit conditions on the ground. For example, a few actions were moved to subsequent operations where sufficient progress had not been achieved. This provided the opportunity to consider why progress was slower than anticipated and remedial action taken (including greater AAA work or TA support). It was noted that actions and prior actions could have been worded more flexibly and indicatively to support better outcomes rather than fulfilling the matrix to the letter. 35. A sound assessment of risks was undertaken during the design phase, and these were relatively well mitigated. The PRSO was originally assessed as a high risk program, given Lao PDR s past uneven adjustment lending track record, high fiduciary risks, the lack of accountability of provincial authorities to the centre, fiscal challenges, and severe civil service capacity constraints. Efforts to mitigate the shortcomings of previous adjustment credit operations were reasonably successful, especially improvements in ministerial coordination and TA provision. As a result, the GOL were 10

26 able to meet all actions and triggers and the level of some risks were downgraded. The main risks and their evolution are outlined in Box 2 below. Box 2: Main Risks to the first PRSO series The following risks were identified in the design phase: Risk 1: The GOL s commitment to past reforms has been uneven, resulting in poor policy implementation and weak accountability. Mitigation: Recent growing momentum and commitment to broad-based reforms; the wide NGPES participatory process and sustained GOL involvement in PRSO development; commitment to world trade integration. Risk 2: The weak PFM system leads to high fiduciary risk. Mitigation: GOL commitment to implement PEM reforms; satisfactory implementation of FMAC; the PEMSP work; commitment to an NT2 framework for social spending revenues. Risk 3: Provincial autonomy hinders implementation of national polices and equitable resource distribution. Mitigation: a review of the decentralization process and GOL commitment to PFM reforms. Risk 4: Short-term fiscal unsustainability could result in the diversion of PRSC funds (not earmarked) to cover losses from the budget, SOCBs and SOEs. Mitigation: GOL commitment to achieve budget sustainability; measures to improve budget oversight; restructuring and external audits of SOCBs. Risk 5: Severe civil service capacity constraints, due to the lack of qualified personnel and low pay and incentives, leads to weak administrative ability. Mitigation: Acknowledgement of this problem by the GOL in the NGPES; the explicit focus on capacity building in the CAS. REDEFINING THE RISKS IN PRSO3 As a result of additional efforts to build capacity and increase commitment, the risks at completion were somewhat different and re-prioritized, as government-related risks declined in probability and importance. As a result, after progress was made during the first two operations, the Bank reduced the seriousness of some risks. The order of the risks was revised as follows: Risk 1: Weak PFM and high fiduciary risk; Risk 2. Severe capacity constraints; Risk 3: Provincial autonomy and inadequate accountability/monitoring hinders equitable spending; Risk 4: Fiscal risks could result in diversion of PRSO funds; and Risk 5: Earlier uneven commitment to reforms could result in poor performance. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: 36. As is standard practice for PRSCs, the impact of the series was evaluated in accordance with an M&E framework. Performance was monitored with reference to the PRSO Program Matrix, which was updated annually to reflect progress against actions, macroeconomic developments and the pace of NGPES/NSEDP implementation. A comprehensive set of outcomes indicators also helped to measure GOL progress in meeting actions and triggers. 37. The explicit strategy of the PRSO series and accompanying analytical work has been to identify and fill key knowledge-gaps with an emphasis on joint work with other development agencies so that there is buy-in on the diagnosis. The results of this AAA process were used for building a consensus on policy reform, sector investments, and harmonization of donor assistance in key areas and are reflected in the NGPES and NSEDP as well as their implementation. The program included a Country 11

27 Procurement Assessment Review (2002), a Poverty Study (2002), a Country Financial Accountability Assessment (2002), a Public Expenditure Review (2002), a Poverty- Environment Nexus Study (2002), and more recently by the Country Economic Memorandum (2004), Lao Poverty Assessment, Public Expenditure Review, Poverty and Social Impact Analysis, the first Public Expenditure Tracking Survey; the Diagnostic Trade Integration Study; and an Investment Climate Assessment. These studies have been prepared by Bank staff in collaboration with Government. Several of the studies have been completed in collaboration with other donors including the IMF, ADB and EU. In 2004, the National Statistics Centre (NSC), ADB, SIDA and the Bank agreed on the Lao PDR Poverty Assessment (LAOPA), which provides analytical support to monitor NGPES/NSEDP implementation and assisted the Bank to review PRSO progress. 38. Monitoring and evaluation was sometimes impeded by data availability. There is a general lack of reliable data in Lao PDR. During the series, the Bank worked towards improving the standard of data, including a TFSCB project and a push for joint analytical projects with donors. The regular release of the Public Expenditure Tracking Survey (PETS) and Public Expenditure Review (PER) data starting from 2007 will improve the quality and availability of information in future. To mitigate this, PRSO objectives could have been more aligned with AAA work to help achieve and monitor actions and triggers. 39. The Bank and other donors monitored progress through continuous dialog and supervision missions. This helped to identify areas in which the GOL required additional support to achieve outcomes, harmonize donor priorities and ensure that research and analytical resources were used more efficiently. The IMF continued to conduct bi-annual macroeconomic assessments and regular discussions took place with donors through Round Table Meeting sub committees. 2.4 Expected Next Phase/Follow-up Operation 40. The Bank is currently implementing the second PRSC series, PRSOs 4-7. These operations will run between FY2007/8 and FY2010/11, with annual Bank financing of around US$10m. PRSO4-7 was presented to the Board for approval in May 2008 and is consistent with the NSEDP. PRSOs 4-7 was designed to reflect lessons learned in the first three operations. To increase the effectiveness of PRSO 4-7 triggers and actions are: structured in line with the four pillars of the NSEDP, but do not attempt to fully cover the whole plan, and instead help the GoL prioritize its reform agenda; accompanied by increased TA to build capacity; designed to lead to the achievement of monitorable outcomes and focus on a four year program of deliverables rather than year-on-year actions; and intended to have lasting effects in improving mechanisms and incentive systems. 12

28 41. PRSO4-7 builds on the achievements of the previous series, deepens structural reforms on public financial management, and expands the reforms on supporting the delivery of further benefits in two broad categories: (i) Investment Climate, Competitiveness, and Business Development; and (ii) Public Finance Management and Improving Service Delivery. 42. Donor involvement in developing the second series is strong. The EC, Japan and other donors are heavily engaged in the design of PRSO 4-7. The GoL has recently signed grant agreements with a range of donors to establish multi-donor trust funds to provide grant-based TA for the PEMSP and trade related reforms (these MDTFs are administered by the Bank). 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 43. The objectives of the first PRSO series were highly relevant to country priorities. The PRSO was designed to be aligned with the Lao PDR National Growth and Poverty Eradication Strategy (NGPES) which was discussed by the IDA Board of Directors as a Poverty Reduction Strategy Paper (PRSP) in March Over the course of the series, the GOL s development challenges did not change markedly. After the GOL incorporated the NGPES main principles into its medium-term strategy (NSEDP6), it became a new Poverty Reduction Strategy (NSEDP/PRS) in late 2006 (it was subsequently discussed by the IDA and IMF Boards of Directors in June 2008 together with the Annual Implementation Report). The GOL implemented the PRSO in close consultation with the Bank to ensure objectives remained appropriate and to allow for actions to be revised according to conditions on the ground. 44. PRSO objectives were also consistent with Lao PDR s global priorities. In particular, the PRSO supported steps towards regional and global integration as a means to achieve broad-based growth and alleviate poverty. This included assisting the GOL to make further progress towards WTO accession and reduce trade barriers. 3.2 Achievement of Program Development Objectives PDO 1: Public Resource Management - Ensure efficient management of public sector resources 45. Over the series, key building blocks needed for a robust PFM and governance framework were established. These included: more timely budget appropriations; streamlined budget preparation; more transparent budget papers; progress to a centralized Treasury, a modernized chart of accounts and improved procurement processes. A new Budget Law is expected to improve central-provincial fiscal relations and was approved by the National Assembly (NA) ahead of schedule. The new Tax Law and VAT Law are big steps towards improving centralized revenue collection. 46. Progress was made towards meeting HIPC indicators. PFM outcomes were not fully realized as measured by HIPC indicators, although all but two HIPC 13

29 benchmarks are expected to be met by end-2009 and further progress will be measured by PEFA indicators. Key areas of PFM requiring further development include effective budget classification, monitoring and execution systems and audit capacity. Fiduciary risks remain high and improving PFM will require significant and sustained capacity building over time. 47. Steps were taken to strengthen the fragile banking sector. Satisfactory achievements were made through an overall reduction of NPLs, implementation of international audits and basic central oversight mechanisms and engagement of international financial advisers to build capacity. Despite this progress, the overall outcome rating for banking reforms was downgraded to partially satisfactory as the new flow of NPLs for Lao Development Bank (LDB) exceeded the 15 per cent target set by the BOL. At ICR, NPLs are at 4.2 percent, partly due to the efforts under PRSO1-3. However, much higher level of TA support is necessary in the future if the capacity and performance of the banking sector is to be lifted and to attract higher levels of private investment. 48. The operations assisted the GOL to markedly improve oversight and performance of SOEs. Reforms implemented by the GOL resulted in higher revenues and net profits, decreases in loss making SOEs and restructuring of the four largest SOEs. Combined losses of the four SOEs targeted for restructuring in PRSC1 have decreased from 265 billion kip to 73 billion kip. 49. Financial sustainability outcomes of state owned electricity and water utilities progressed to a highly satisfactory level. This followed the introduction of tariff adjustments to help achieve cost recovery levels. As a result, cost recovery in utility increased from 83 percent to 90.5 percent and the proportion of water utilities operating at full cost recovery rose by 24 percent to 35 percent. The government is following the Power Sector Action Plan to increase financial viability of the EdL, established a Rural Electrification Fund and drafted a new water supply law. PDO 2: Public expenditure management Increase the poverty reduction impact of public spending 50. The performance orientation of the GOL improved, most notably through the introduction of new accounting systems to track spending in education and health. Taking 2006 and 2007 as a baseline, it will be possible to assess whether additional resources, including future NT2 revenues, are being aligned to priorities. A PER and a PETS will allow better measurement of the funding levels actually reaching front line service delivery units. 51. Solid progress was made towards increasing access to social services and infrastructure. The timeliness of salary payments to health workers and teachers improved and schools grants programs and hospital equity funds were piloted in some of the poorest districts. A fuel levy was increased to fund an updated road preservation fund and all routine road maintenance, resulting in a four percent increase in useable tarred roads. 14

30 52. However, further work is needed to improve social outcomes for the poor. Despite these actions, overall progress in decreasing the gap in service delivery to poor and non-poor has been uneven. While performance was good against infrastructure indicators and budget allocations to health and education slightly exceeded PRSO baseline indicators, it is still a major concern that spending on basic education and health remains low and heavily reliant on external financing. PDO 3: Sustainable growth An increase in available resources is necessary to achieve NGPES objectives 53. The government performed particularly well in this area, with highly satisfactory progress towards regional and global integration. New enterprise and customs laws based on international best practice in business regulation are being implemented. Integration is progressing well with momentum towards WTO accession, commitments to introduce an ASEAN single window and ratification of AFTA tariff reductions by the NA (with full transit to new tariff schemes by 2009). 54. Positive reforms were developed to better manage natural resources and GOL revenue targets were exceeded for the first time. Reforms included a forest industry restructuring plan to rationalize industrial capacity and resource supply. This plan helped government revenues to exceed projections for the first time up from 11 percent in 2003/04 to 12.1 percent in 2005/06. Revenue projections for are set at 13.2 percent which is significantly higher than the target of 12.4 percent. 55. Measures to promote a sustainable forest industry exceeded PRSO targets. Coverage of sustainable forest management increased from 100,000 hectares in 2001 to around 635,000 hectares in 2006 this is well in excess of the PRSO target of 528,000 hectares in It is important that the GOL enforces this policy to prevent encroachment into protected areas. 56. Important breakthroughs were achieved to improve private sector development and extend Lao PDR s transition from planned to market economy. The GOL finalized a comprehensive private sector development and trade strategy to improve the investment climate, has committed to a SME strategy and drafted laws and regulations to level the playing field and provide services for domestic and foreign, small and large businesses. Other important first steps include the increased share of banks credits to private sector and a large reduction in the time required to start a business from 198 days in 2004 to 103 days in Further work is needed beyond this series to remove other major barriers to private sector investment, such as high operating costs and regulatory burdens. 3.3 Justification of Overall Outcome Rating Ratings: Satisfactory 15

31 57. The overall satisfactory rating is a sizeable achievement considering the high risks identified by the Bank at the beginning of the series. The rating is based on GOL performance against the 40 indicators of which: 5 were rated as highly satisfactory, 23 were satisfactory and 12 were partially satisfactory. No indicators were rated as unsatisfactory. See Table 1 for a summary of the ratings for each policy area. Table 1: Summary of policy area ratings Policy area Policy sub-areas Indicators targets COMPONENT 1: PUBLIC RESOURCE MANAGEMENT Strengthening Public Expenditure Management Strengthening the banking sector Improving the performance of State- Owned Enterprises Financial sustainability of utilities Expenditure planning and budgeting; Budget execution and final reporting; Provinces State-Owned banks Enterprise restructuring Tariff utilities COMPONENT 2: PUBLIC EXPENDITURE POLICIES Aligning spending with pro-poor NGPES/NSEDP priorities Monitoring the alignment of spending with pro-poor NGPES priorities Health; Education; Infrastructure; Pay Reform Tracking Public Spending; Poverty Data COMPONENT 3: SUSTAINABLE GROWTH Strengthening Private Sector Development Accelerating regional and global integration Business environment; Financial sector Improve management capacity; align expenditure allocations with medium-term priorities; speed up budget preparation process; enhance budget execution and procurement system Improve credit quality; reduce concentration of top accounts Reduce SOE losses, including reduction in number of SOEs and increase in net profits Increase cost recovery in electricity and water utilities Share of budget allocated to health and education; utilization of health centers and services; school enrolment; access to electricity and safe water; roads; civil servants salary Completion of PER and PETS Business environment and financial sector health Performance Assessment at PRSO3 approval* 3 S S S Performance Assessment at ICR S S S S+ S+ Trade AFTA tariffs S+ S+ S S S S S S *1. The partially satisfactory rating for sub-component 1.1 (at PRSO3 approval) was mainly on account of the delay in revision of the chart of accounts due to which the subsequent outcomes did not materialize. COA is now being implemented by rolling out from pilot stage and is proceeding as planned. As a result, several HIPIC indicators had been completed and achieved their targets at ICR (see indicators section the datasheet). 16

32 3.3. Improving Resource Management Revenue management; Forest management Improved mobilization of Domestic revenue; sustainable forest management S+ S+ * Note: Highly satisfactory (S+), Satisfactory (S), Partially Satisfactory (S ), Unsatisfactory (U). 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 58. The poor have benefited most from economic and social developments. Results of recent AAA work conducted by the Lao PDR country team shows that the poor have benefited most from economic growth and social and infrastructure improvements, and poverty has reduced most in the poorest districts. This work also reveals that while ethnic minorities are still the most disadvantaged, they gained more on average than other groups. 59. The number of poor people has decreased and key social indicators have improved. The number of poor people in 2005 had declined by 870,000 people due to rising living standards since 1992/93. The number of child and maternal deaths also decreased over this time. Projections suggest that the overall poverty headcount will fall from 33 percent in 2002/03 to 31 percent in 2005, and the proportion of the population living on $1 a day or less is projected to fall from 23 per cent in 2003 to 14.4 per cent in Qualitative data shows that the gap in access to education and health facilities between priority and non-priority districts seems to be reducing. Road and health coverage is improving in these areas, but more needs to be done to the assist the poor to meet health and education costs and to access land (source Participatory Poverty Assessment II 2006). Overall progress has been made in increasing school enrolment rates for girls, but more progress has been achieved in for the majority ethnic group. 61. The 2007 Poverty and Social Impact Assessment was developed to improve understanding of the impact of poverty reduction strategies on local communities and ethnic groups. It concludes that reforms are needed to allow for greater flexibility at the local level to respond to communities needs and to reduce the negative impacts of economic development on vulnerable areas (including land rights, planning and budgeting and environmental protection). PSIA also found that there is an ongoing need to gather and disseminate evidence on poverty trends and the impact of poverty reduction programs. (b) Institutional Change/Strengthening 62. The PRSO process has enhanced the GOL s capacity to implement cross-sectoral reforms and to coordinate issues across ministries. The provision of TA has resulted in basic strengthening of organizational capacity in some sectors, such as financial management. Another positive impact is increased GOL engagement in the development agenda and improved policy dialogue and coordination on poverty reduction issues between the government and donors. In effect, these changes have 17

33 strengthened the GOL s overall capacity to develop and implement reforms. This is one of the major strengths of this type of support mechanism - stand alone, sector specific programs are generally unable to achieve these types of organizational changes. (c) Other Unintended Outcomes and Impacts 63. The operations produced a number of positive, unintended impacts that will inform future reform programs in Lao PDR. First, the GOL gained a better understanding of the usefulness of taking a strategic approach to reforms. For example, the ministries that adopted a sector strategy were able to progress their reform agendas more quickly and effectively. As a result, sector strategies are now being developed and adopted more widely across ministries. Second, the Bank is now more aware of the true extent of GOL capacity needs, which has highlighted the importance of capacity building to the quality and speed of reform. As a result, future operations will be supported by greater levels of TA from the Bank and other donors. Third, greater insight was gained into the existing political constraints and the impact this can have on the pace of reforms. In particular, it became clearer as to which reform areas the GOL is most committed. 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 64. Stakeholder workshops led to the development of Partnership Principles to strengthen and harmonize donor support for future operations. Two stakeholder workshops (involving the Bank, GOL and donors) were held in 2007 to discuss lessons learned from the implementation of the PRSC1-3 (these are discussed more fully in Section 6 on Lessons Learned ) and ways forward for PRSO4-7. A significant outcome was the development of Partnership Principles to improve the coherence, consistency and predictability of Development Partner (DP) support to the GOL (see Box 3 for more detail on the Partnership Principles). This will enhance the effectiveness of DP support to the NSEDP and PRSO4-7, as envisaged in the Vientiane Declaration on Aid Effectiveness. The DPs committing to these principles are Japan, the EC, Australia, and the Bank. Box 3. Partnership Principles The aim of the Partnership is to: Assist the GOL to design and achieve triggers, actions and outcome indicators by strengthening and harmonizing DP support; Focus on implementation performance, particularly direction and pace of reforms; Achieve consensus among DPs on the design of successive annual operations; and Improve dialog with stakeholders via an agreed work plan, involving coordinated missions, regular DP meetings and progress report to the GOL led Roundtable. The Partnership will be driven by the following principles: Ownership: The DPs recognize that the PRSO program is led by the Government and is based on its reform agenda elaborated in the NSEDP. The DPs play a supporting role as partners to GOL in providing financial and technical support to advance its reform agenda and implement the NSEDP; Coherence: The design of triggers and actions of successive annual Policy Action Matrices should be driven by the GOL. DPs will strive to ensure final triggers and actions take into account the steadiness of the direction of reforms, capacity to implement, and ability to provide timely TA. The Policy Matrix will be the common framework for monitoring and assessing progress. 18

34 Consistency: There should be one Policy Action Matrix with accepted triggers and monitoring indicators that will: Enjoy GOL ownership, be aligned with NSEDP, and represent a shared intention of a multi-year program; Represent a key element of the multi-year program and contribute significantly to the expected outcomes; Allocate resources and WB/DP experts to supervise implementation during annual preparatory missions; Have technical assistance provided for actions and triggers; Give priority to cross-sectoral issues. Criticality: DPs share common recognition on triggers critical for each tranche release (disbursements). The actions in a Policy Action Matrix aim to complement triggers and move the reform agenda forward. Predictability: Provision of predictable budget support to GOL each year is important. While budget support levels depend on GOL performance in meeting triggers in the Policy Action Matrix, DPs acknowledge that the PRSO series is an ambitious reform agenda which requires flexibility to ensure program stability. Timeline: PRSO4-7 are annual operations to provide budget support to GOL in line with its financial calendar. Support: PRSO support will be in the context of DP s country strategy or bilateral cooperation program. DPs can provide three kinds of support: (a) financing budget support through transfers to government account either directly or via a trust fund arrangement with the WB; (b) providing technical assistance to GOL to achieve annual triggers and actions either directly or through multi-donor trust funds; and (c) other forms of assistance provided by DPs to influence achievement of triggers/actions. Communication: DPs will speak with one voice to GOL and take a consistent approach to communication ie regular meetings, joint missions and timely briefings. The WB Task Team Leader will lead joint missions and consult DPs as appropriate. DPs will inform partners of bilateral PRSO-related discussions with GOL. Measuring Results: Monitoring of results will occur at the following points in the PRSO program: prior to confirming the tranche release, triggers and actions will be monitored. Besides these fixed tranches, some DPs may consider additional disbursements based on indicators; after the tranche release, an evaluation, given information available, will be undertaken to assess progress towards outcomes (via Implementation Status Report); after program completion, an evaluation of lessons learned and progress on outcomes will be conducted based on program experience and success (via an Implementation Completion Report). 4. Assessment of Risk to Development Outcome Ratings: Low 65. The progress achieved on development outcomes is expected to be sustained. The GOL is committed to a strategy to ensure development outcomes stay on track, as explicitly set out in the NSEDP for The GOL is fully engaged in processes to build on existing reforms, including the development of PRSO 4-7. The GOL is also well aware of the economic and social risks if fiscal discipline and commitment to reforms were to weaken. 66. At the time of the ICR it is clear that the progress on outcomes accelerated and continued after PRSO1-3 implementation. However, due to its reliance on the natural resource sector, the Lao PDR economy is susceptible to external shocks. Falling prices for commodities, particularly copper and gold which account for more than half of total exports, will have a significant impact on fiscal policy and potentially on social sector spending. Declining global demand for Lao exports could further reduce revenues and exacerbate this impact. Greater donor support for fiscal gaps may be necessary to keep reforms on track and address real sector impacts. These risks are being addressed in the currently ongoing PRSO5 operation and within the context of the global financial crisis. 19

35 67. Capacity building in the macroeconomic management of non-natural resource sectors will be necessary to ensure sustainable development and poverty reduction. Preparation is necessary to counter potentially adverse effects on inflation, the real effective exchange rate and growth of the rest of the economy. In this context, the NSEDP appropriately proposes to strengthen the framework of monetary management at the Bank of the Lao PDR (BoL). It would be advisable that the instruments provided to the BoL be market-based and that extensive technical assistance be sought. 68. The GOL is conscious of the risks to the environment posed by rapid growth. The government has committed to further natural resource management reforms under PRSOs 4-7 and a framework for managing the impact of the NT2 hydropower project. Given Lao PDR s significant natural resources and under-developed non-natural resource sectors, managing the trade-off between growth and environmental protection will be a significant challenge. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Ratings: Satisfactory 69. A high level of Bank scrutiny was applied to ensure Quality at Entry. A formal Quality at Entry Assessment was not conducted during the first PRSO series. However, the country conditions (including results of AAA work) and risks were highly scrutinized by the Bank prior to PRSC approval to ensure the environment was suited to commencement of the first series. 70. The Bank concluded that a PRSC in Lao PDR was ambitious and high risk, but the potential returns were high. The potential returns were considered to justify the risks, including sustained poverty reduction, economic growth and achievement of MDGs (see Box 1 for more detail on the risks). Post-implementation it is evident that taking these risks was not only justified but also highly beneficial for speeding up reform progress, increasing commitment to reforms, building inter-governmental linkages, and enhancing donor coordination. 71. A comprehensive risk assessment and mitigation strategy was established. Given the fiduciary risks, macroeconomic conditions were carefully considered using IMF assessments and PFM was identified as a major reform area in the operations. Capacity constraints were taken into account by selecting Lao PDR as a pilot country for a Capacity Enhancing Strategy, also devoting a CAS pillar to Capacity Building. Dedicated accounts and additional reporting requirements put in place to ensure Bank funds were used by the GOL for their intended purpose. 20

36 72. The objectives of the first PRSO series were highly relevant to country priorities. The PRSO was designed to be aligned with the Lao PDR National Growth and Poverty Eradication Strategy (NGPES) which was discussed by the IDA Board of Directors as a Poverty Reduction Strategy Paper (PRSP) in March Over the course of the series, the GOL s development challenges did not change markedly. After the GOL incorporated the NGPES main principles into its medium-term strategy (NSEDP6), it became a new Poverty Reduction Strategy (NSEDP/PRS) in late 2006 (it was subsequently discussed by the IDA and IMF Boards of Directors in June 2008 together with the Annual Implementation Report). The GOL implemented the PRSO in close consultation with the Bank to ensure objectives remained appropriate and to allow for actions to be revised according to conditions on the ground. (b) Quality of Supervision Ratings: Satisfactory 73. A key strength of the operations was the effective dialogue between the Bank and the GOL. By building strong relationships and engaging in regular communication, the Bank ensured that the program stayed focused on the reform agenda and could access support when necessary to implement actions. The satisfactory completion of the first PRSO series could not have been achieved without the major efforts Bank staff put into the dialogue. 74. Effective Bank oversight helped the GOL to mitigate risks and produce results. As the Bank was well aware of the high risks involved, it ensured that regular progress monitoring was undertaken, including through frequent missions to identify concerns and develop workable solutions. After realizing the importance of local engagement, the Bank moved the TTL to the field, who combined a smaller and more effective team from the neighboring country offices (and eventually Vientiane office). This meant that lagging performance in some areas was recognized early, allowing for the application of corrective measures. This support greatly assisted the GOL to meet all actions and triggers and over-achieve against some PRSO3 triggers. 75. Efforts to improve dialogue resulted in greater donor involvement and harmonization of resources. The steps taken to enhance communication with DPs helped to reduce overlap and inconsistencies between other development programs and PRSO objectives. This is reflected by the involvement of co-financiers in PRSO2 and PRSO3, commitments to further harmonize donor strategies and involvement of a wider range of donors in the design of the second PRSO series. 76. The Bank s supervisory role was supported by sound M&E arrangements. Existing and ongoing AAA work aided the Bank to monitor and evaluate progress against outcome indicators. Efforts were made throughout the series to improve the range and quality of data to monitor PRSO outcomes, including the implementation of public expenditure tracking surveys, implementation reports from ministries and SOE and SOCB audit reports. 21

37 (c) Justification of Rating for Overall Bank Performance Ratings: Satisfactory 77. The Bank s satisfactory performance resulted in the completion of an ambitious reform program. Assisting the GOL to achieve a satisfactory end-of-series performance rating is a significant achievement, considering the ambitious range of reforms, the high risks and capacity constraints of the GOL. It is also based on satisfactory ratings for program supervision and assessing quality at entry. 5.2 Borrower Performance Justification of Rating for Overall Borrower Performance Ratings: Satisfactory 78. The GOL also completed the series to a satisfactory standard. This assessment is based on the completion of all actions and triggers and the achievement of a satisfactory end-of-series outcome rating. This performance is to be commended, given the complex nature of reforms and the capacity constraints faced by the GOL. 79. Strong GOL commitment helped to build momentum and lift performance across the government. The program would not have succeeded without GOL ownership of the reform program, empowerment of ministries and engagement in dialog about priorities and progress with the Bank and other donors. The high level of commitment shown, led to the Bank lowering the level of risk posed by the GOL s past uneven reform performance from the highest risk in PRSC1 to the lowest in PRSO3 (see Box 1). 80. The MOF demonstrated solid leadership in chairing the PRSO Steering Committee and building ministerial understanding of reforms. The PRSO Secretariat played a key role in the day-to-day coordination and cooperation between ministries. Ministries were also assisted to articulate sector strategies to better understand the meaning of reforms and to implement them more efficiently. Performance by individual ministries improved markedly throughout the series, as evidenced by the greater speed and quality of reforms in PRSO Key development milestones were achieved by the GOL during the series. These include progress towards a stronger public financial system and better management of resources leading to higher budget revenues and more efficient SOEs and utilities. Key steps needed to unlock the investment climate reforms were also taken. Combined with improved government coordination mechanisms and increased confidence of donors, the GOL in a good position to tackle further reforms. 6. Lessons Learned 82. The Government and development partners teams have taken stock of the lessons learned from implementation of the first programmatic series of operations in Lao PDR, PRSO1-3. The discussions of lessons learned took place during the dialog on PRSO1-3, as well as during retreat that took place in Houayxay of Bokeo province 22

38 (see Box 1), the administrative capital of Bokeo province in the Lao PDR. Some of the lessons learned are: Recognizing the benefits of greater focus. The second PRSO series need to be focused in only two or three policy areas, and have less triggers and actions. The PRSO1-3 teams perception is that the coverage of the PRSOs was too ambitious for a government in a Low Income Country Under Stress (LICUS) county, with small public sector, severe capacity constraints and low level of inter-agency coordination; Identifying and addressing the critical capacity constraints. Take into account the small size of the Lao PDR program and opportunity costs of the WB team in pursuing an overambitious budget support operation. In addition, every action or trigger should be accompanied with TA or other WB program in order to achieve outcomes. Fostering ownership by aligning with national development objectives. The reform areas to which the Government has not fully committed or that do not have enough capacity or champions in the Government that are able to lead reforms should not be included, while the dialog in these areas should continue through other instruments, such as AAAs and capacity building activities; Shifting the focus to outcomes. The emphasis should be shifted from actions and triggers to outcomes and indicators, leading to a more streamlined policy matrix of maximum 6 triggers and 12 actions. Relying on outcomes will also allow to focus on achieving outcomes through a coherent and welltimed program, rather than focus on having an action in each sub-sector every year; Maintaining flexibility in order to achieve these outcomes. Triggers and actions should be worded more flexibly and indicatively, to allow for adjustments along the way that would lead to better outcomes rather than fulfilling the matrix to the letter. The Government should also get credit for reforms that lead to the outcomes, even if these were not initially envisioned in the matrix; Aligning AAA work with PRSO objectives will help achieve actions and triggers and lead to a more meaningful dialog on many issues. 83. These lessons, combined with the multi-donor PRSO team views, have laid the basis for criteria to be used for the next series of operations in deciding which triggers and areas of interventions to include. In PRSO 4-7, triggers do not attempt to fully cover the whole NSEDP agenda, but help GOL prioritize the reform agenda. They are flexibly formulated and focus more on a four-year program deliverables rather than on particular year-by-year actions. They are critical to the achievement of the series 23

39 outcomes-- namely growth, poverty reduction, and macro stability --and are all accompanied by TA. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies 84. Lessons learned were discussed by the GOL, the Bank and the participating donors at a stakeholder workshop in mid The GOL team took an active part in discussions and had clear views on the successes and failures of the first PRSO series. The government s main concerns related to the feasibility and costs of implementing a broad reform agenda as opposed to concentrating on several priority areas. Specifically: Sector coverage was too wide. In countries with small IDA programs, sectoral coverage should be limited to reflect government capacity and WB staffing constraints. Future operations should focus on priority sectors from PRS/NSEDP, and prioritize within sectors based on analytical work (such as the recent PER); The number of triggers and actions was too high (42 under PRSO2, reduced to 38 in PRSO3). Future operations will reduce the number of actions to concentrate on the most critical actions with the clearest government ownership. In addition, the focus will be deepening current reforms in priority areas rather than trying to do too many things in too short a time; There needs to be flexibility in formulating actions and triggers. For true government ownership, the sequencing and timing of specific policy actions should be contingent on steady progress in the broad policy areas central to the PRS rather than to strict adherence to particular phraseology. Actions and triggers should drive towards the main goals of the PRS/NSEDP (growth, poverty reduction, and macroeconomic stability), and should not cover the government s core day-to-day business. Instead, the program should help the GOL to build country systems needed to improve the market economy; and Technical assistance has an enormous impact on the quality and depth of reforms. The TA that underpinned the PFM reforms was critical to their success. In other areas, the lack of such assistance combined with capacity constraints hampered progress. In future, TA should accompany each action along with a principle of mutual accountability that encourages the Bank to provide TA and, if such support is not provided, to take it into account in evaluating the country s performance on the PRSO. 85. In addition, the GOL also expressed the following views on the PRSC1-3: Detailed prior sector dialog is essential for designing programmatic series of PRSC operations. The efforts to make the next series of PRSOs fully aligned with 6 th NSEDP have been noticed and are appreciated. Capacity of GOL officials working on PRSO, and high level of their rotation made it more difficult to implement PRSC1-3, and thus the Bank team needs to pay special attention to capacity when discussing triggers and actions, as well as to help Government build necessary capacity to implement policy reform. 24

40 Technical assistance for PFM has had an enormous impact on the quality and depth of reforms, in other areas the lack of assistance has hampered progress. TA should be provided for each action by the Bank or donors. Where TA is not provided, this should be taken into account when performance is evaluated. Coordination between the PRSO Secretariat and the sectoral ministries has improved significantly over the course of the implementation. 86. Bank comments: The Bank took into account the lessons from PRSO1-3 in terms of the required depth of the sectoral dialogue in designing the second programmatic series of PRSO4-7. The Bank further notes that during the course of the implementation, the PRSP process gained more momentum in the country, resulting in NSEDP being a good practice PRS (as acknowledged by the JSAN discussed by the WB Board in June 2008). Current PRSO4-7 preparations are more inclusive and are allowing for greater GOL ownership in the design; as a result, during supervision missions of PRSO4 and PRSO5, the Government has acknowledged that the series is fully aligned with the new NSEDP6/PRS. The Partnership Principles (Box 3 and paragraph 64) have already improved communication between DPs and the GOL during the second programmatic series. As lack of capacity impeded PRSC1-3 progress, there is a much stronger emphasis on TA provision in PRSO4-7, including by encouraging other donors to provide support. The Bank agrees that inter-ministerial coordination improved markedly over the course of the series, reflected in increased progress in PRSO3. By the end, all sectors were operating much more effectively, but further support may be necessary in future. Continued efforts by the MOF to improve collaboration between ministries are encouraged. 87. (b) Co-financiers EC provided comments (refer to Annex 3). Australia and Japan reviewed the ICR, welcomed the ICR process, but did not provide specific comments. 25

41 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members P Lao PDR First Poverty Reduction Support Credit Names Title Unit Responsibility/ Specialty Alessandro Magnoli Senior Economist EASPR TTL Jennifer K. Thomson Sr Financial Management Specialist EAPCO Fiduciary Kazi Mahbub-Al Main Lead Economist EASPR Quality assurance Tanatat Phuttasuwan Sr PSD Specialist EASPR PSD, SOE Amanda Carlier Sr PSD Specialist EASPR PSD, SOE Jeffrey Waite Sr Education Spec. EASHD Education dialog Zhanar Abdilidina Economist OPCCE P Lao PDR Second Poverty Reduction Support Names Title Unit Responsibility/ Specialty Edward Mountfield Sr Economist EASPR TTL Ahsan Ali Sr Procurement Spec. EAPCO Fiduciary, procurement dialog Morten Larsen Consultant EASTE Mining and hydro William B. Magrath Lead Natural Resource Economist EASOP Forestry dialog Thomas Rupert Meadley Consultant ETWEA Water dialog Ekaterina Vostroknutova Economist Macro, PSD, trade, PRMED SOE dialog Minh Van Nguyen Senior Economist EASPR PFM dialog Toomas Palu Sr Health Spec. EASHD Health dialog Thomas A. Rose Adviser EASFP Financial and Banking sector dialog Jennifer K. Thomson Sr Financial Management Specialist EAPCO PFM dialog Jeffrey Waite Sr Education Spec. EASHD Education dialog Kazi Mahbub-Al Main Lead Economist EASPR Quality assurance Mohinder P. Gulati Country Sector Coordinator ECSSD Energy Roland White Sr Institutional Dev. Spec. SASES (De)centralization PFM dialog P Lao PDR Third Poverty Reduction Support Names Title Unit Responsibility/ Specialty Ekaterina Vostroknutova Senior Economist EASPR TTL Kazi Mahbub-Al Main Lead Economist EASPR Quality assurance Mohinder P. Gulati Country Sector Coordinator ECSSD Energy Toomas Palu Lead Health Specialist EASHD Health Jeffrey Waite Lead Education Specialist EASHD Education Peter Jipp Sr. Natural Resources Mgmt. Spec EASRE Forestry Donald Herring Mphande Sr. Financial Management Specialist AFTFM Fiduciary, audit Saiyed Shabih Ali Mohib Economist EASPR PFM dialog 26

42 Anita Nitaya Financial Sector Spec EASFP Financial sector Ahsan Ali Sr Procurement Spec. EAPCO Fiduciary, procurement dialog (b) Staff Time and Cost P Lao PDR First Poverty Reduction Support Credit Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY FY Total: Supervision Total: 0.00 P Lao PDR Second Poverty Reduction Support Operation (PRSO2) Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY Total: Supervision FY FY Total: 4.30 P Third Lao PDR Poverty Reduction Support Operation Grant Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY Total: Supervision Total:

43 Annex 2: Program Performance Against Actions and Triggers Lao PDR First Poverty Reduction Support Credit - P List prior actions from Legal Agreement/ Program Document Status MOF approves PEMSP annual implementation plan for FY , capacity building plan and procurement plan. MOF prepares budget with: i) administrative classification; ii) priority expenditure programs; iii) summary data on statutory funds; MOF approves revised GFS compatible chart of accounts and strategy for implementation starting from FY budget; Treasury prepares and monitors i) monthly cash plans for central administration and four provinces; ii) register of all accounts payable each quarter; and iii) weekly reports on consolidated treasury balances; MOF, BOL, BCEL, and LDB comply with the Govemance Agreements and guidelines on autonomy, risk activities, NPLs, and concentration; Government completes independent extemal audits of financial accounts for FY04 for Lao Airlines (LA), Nam Papa Lao (NPNL), Pharmaceutical Factory 3(PH3), and Bolisat Pattana Khet Poudoi (BPKP). Government completes independent extemal audits of financial accounts for FY04 for Lao Airlines (LA), Nam Papa Lao (NPNL), Pharmaceutical Factory 3 (PH3), and Bolisat Pattana Khet Poudoi (BPKP); Government implements actions specified in 2003 SAMD assessment for 1/3 of the 14 non-performing SOEs identified in 2003 assessment; Government adopts action plan for financial sustainability of the power sector, to ensure continued financial viability of Electricitk du Laos; MOH pays salaries of health care workers with no more than one month delay. MOE pays salaries of teachers with no more than one month delay. National Assembly enacts amendments to 1995 Business Law. Lao PDR Second Poverty Reduction Support Operation (PRSO2) - P List prior actions from Legal Agreement/ Program Document Status MOF approves an updated PEMSP based on 2005/6 PER analysis and demonstrates ongoing progress with implementation and capacity building. MOF prepares FY budget with (i) administrative classification; (ii) priority expenditure sectors/programs; and (iii) summary data on statutory funds, publishing a summary within the first quarter of the fiscal year. MOF drafts and issues for consultation an appropriately revised Budget Law, Treasury Decree and other implementing regulations and guidelines. MOF approves revised GFS compatible chart of accounts, budget nomenclature and implementation strategy, following consultations with key stakeholders. MOF (i) approves a reporting format for quarterly consolidated budget execution reports; (ii) develops a tool for extracting the necessary data from the GFIS; and (iii) pilots quarterly consolidated budget execution reports. Bank Restructuring Implementation Committee (BRIC) submits to MOF a Waived, met in PRSO3 28

44 quarterly evaluation of BCEL and LDB performance against operational and financial targets and MOF and BOL take corrective actions for targets off track. BPO carries out quarterly monitoring and evaluation and submits to PMO a semiannual evaluation of progress against approved restructuring plans for SOEs; and PMO takes corrective action for SOEs off track. Government and Electricite du Laos implement succeeding phases of the power sector action plan. Government improves the timeliness of payment of salaries to teachers and health workers. Government makes progress with new Enterprise Law implementation. Government prepares a Forest Industry Restructuring Plan to rationalize industrial capacity and resource supply. Lao PDR Third Poverty Reduction Support Operation (PRSO3) - P List prior actions from Legal Agreement/ Program Document Status MOF approves an updated PEMSP based on 2005/6 PER analysis and demonstrates ongoing progress with implementation and capacity building MOF prepares FY budget with (i) administrative classification; (ii) priority expenditure sectors/programs; and (iii) summary data on statutory funds, publishing a summary within the first quarter of the fiscal year MOF drafts and issues for consultation an appropriately revised Budget Law, Treasury Decree and other implementing regulations and guidelines MOF approves revised GFS compatible chart of accounts, budget nomenclature and implementation strategy, following consultations with key stakeholders MOF (i) approves a reporting format for quarterly consolidated budget execution reports; (ii) develops a tool for extracting the necessary data from the GFIS; and (iii) pilots quarterly consolidated budget execution reports Bank Restructuring Implementation Committee (BRIC) submits to MOF a quarterly evaluation of BCEL and LDB performance against operational and financial targets and MOF and BOL take corrective actions for targets off track BPO carries out quarterly monitoring and evaluation and submits to PMO a semiannual evaluation of progress against approved restructuring plans for SOEs; and PMO takes corrective action for SOEs off track Government and Electricité du Laos implement succeeding phases of the power sector action plan Government improves the timeliness of payment of salaries to teachers and health workers Government makes progress with new Enterprise Law implementation Government prepares a Forest Industry Restructuring Plan to rationalize industrial capacity and resource supply 29

45 Annex 3. Comments of Co-financiers and Other Partners/Stakeholders EC's comments to the March 2009 Implementation Completion Report, Vientiane, 18 th May 2009 The European Commission (EC) started providing general budget support to the Government of Lao PDR (GOL) with a EUR 3 million tranche disbursed in 2008, following the joint assessment of the Third PRSO. Although our focus in the Third PRSO was on public finance management, private sector development, trade and health, the decision of the disbursement was based on in our opinion overall satisfactory progress of the Government in completing the triggers and actions of the operation, beyond the sectors mentioned. The following comments to the ICR report on the series of three PRSO concern only the Third PRSO. The achievements of the Third PRSO are well captured in the ICR, specifically in Box 1 pages 2 and 3. Concrete results achieved during PRSO 3 include the reduction of fiscal deficit, the revision of the Budget Law, the strengthened oversight of the State-Owned Enterprises and the adoption of a new Enterprise Law, an important step in continuing the shift from a planned to a market economy. Those achievements combined with the Government's commitment to the reforms were very encouraging for us and resulted in a further four-year commitment to support the implementation of PRSO 4 to 7. The EC sees performance and results as the core of a budget support operation. Hence, the progress on the Programme Development Objectives presented in the ICR is of particular interest to us. We concur with the assessment presented on the basis of the established indicator system. However, we would like to flag limitations in the formulation of some of these indicators which must be taken into account for the interpretation of the current assessment. This is particularly important for the health sector for which there seem to be persistent difficulties for example regarding the relative increase of the sector budget or the percentage of birth deliveries attended by trained personnel: despite nominal progress, both still remain at low levels. The EC gives special attention to the social sectors in the PRSO. Our budget support is meant to help GOL efforts towards increasing service delivery in the social sectors. In line with this approach, the EC has chosen a set of performance indicators for the disbursement of a variable tranche on top of a fixed tranche, starting from PRSO-5. The EC hopes that this performance-based approach will be more widely accepted within the PRSO, by GOL and the other partners, reflecting a shift from processes and outputs to the results and outcomes of the operation. The EC agrees with the points raised by GOL especially on ensuring greater alignment of the PRSO with the NSEDP and limiting the coverage of the PRSO to priority sectors. Conscious of existing capacity constraints within GOL when undertaking the major reforms proposed under PRSO, the EC provides complementary technical support. This is specifically the case for Public Finance Management, Trade, Private Sector, Health and 30

46 Education. However, the EC has also noted that some specific actions have been brought on the way by GOL without major external support, e.g. the initial work on the budget norms, and we take this as a positive sign that GOL has started building up capacities and setting priorities. In this light, we look forward to continuing our support to this programme with increased GOL ownership and leadership, and with a clear focus on results. 31

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