Environmental Protection Fund in Lao PDR

Transcription

1 Case Study Report: Environmental Protection Fund in Lao PDR A case study providing inputs to discussions in Asia-Pacific region on the design and management of National Climate Funds, jointly pepared by UNDP and the EPF.

2 Table of Contents Introduction... 3 The design of the EPF at a glance... 4 The role of the EPF in financing environmental protection in Lao PDR... 4 The legal status... 4 The EPF model... 4 Governing body and beneficiaries... 6 Fiduciary standard... 7 The establishment process of the EPF... 8 The management of the EPF... 8 Granting Program... 8 The monitoring and evaluation Social and environment safeguard Lessons learned Different types of funds Meeting standards in financial integrity and social environment safeguard Reaching local beneficiaries Case Study Report: Lao Environmental Protection Fund

3 Introduction This paper aims to enrich knowledge sharing about the establishment and management of national climate funds (NCFs), which is organized by the Asia-Pacific Community of Practice on Climate Finance. To provide a technical input to the knowledge sharing, UNDP commissioned seven case studies on existing national funds in the fields of environment, conservation, energy, climate change and development. Thispaper reports the lessons learned extracted from the establishment and management of the Lao Environmental Protection Fund (EPF), which is one of seven national funds across the Asia-Pacific region selected as a case study. 1 The EPF is selected to provide an interesting case for countries in Asia-Pacific due to the following characteristics: 1. The existing structure of the EPF that managesboth endowment and sinking funds. The EPF received a US$ 5.7 million loan from the Asian Development Bank (ADB), which is then invested as an endowment fund to generate interests to finance the operation costs of the EPF. The World Bank also provided US$ 7 million for a grantproject that is managed as a sinking fund, where the entire amount of the grant will be disbursed to intended beneficiaries within a certain period of time. The existing structure of the fund allows the EPF to receive and manage different types of financial resources (both in the form of an endowment and a sinking fund) for environmental protection in Laos. 2. The capacity to meet international standards in financial integrity and social environment safeguards.having the experience to manage a grant project financed by the World Bank, the EPF has proven its capacity to meet the World Bank s standards in financial integrity and social environment safeguards. With the established system and the capacity of staff to administer a fund according to theinternational standards, the EPF can serve as an intermediary to channel financial resources provided by development partners to intended beneficiaries in Lao PDR. 3. The provision of reaching local beneficiaries to provide financial support in environmental protection. Specific windowswere created under the EPF where priorities of granting programs are set, including providing financial assistance to beneficiaries at the local level. The uptake of grants provided for local beneficiaries (including NGOs and local governments) hasbeen significantdue to continuous support provided by the EPF for beneficiaries to access grants through training, assistance in developing project proposal and simplification of reporting mechanisms. This report provides the summary of the overall design of the EPF and ashort description about the process of the establishment and the management of the EPF. A brief analysis of the lessons-learned from the establishment and management of the EPF are then presented.the case study analysis involved: literature review to set the scope of the study and in-depth interviews with relevant stakeholders: 1) the Fund Manager and Staff from the EPF; 2) board members: the Ministry of Finance (Deputy Director General, International Cooperation), and the Ministry of Natural Resources and Environment (Director General, Department of Environmental Quality and Pollution Control); 3) development partners: ADB and the World Bank; and 4) beneficiaries: representatives from National University of Lao, Khammuane Province, Wildlife Conservation Society, and the Biodiversity Association. Prior to finalization, the report has been reviewed by the EPF team and the UNDP Lao Country Office. 1 National funds selected for the case study analysis are: Bhutan Trust Fund for Environmental Conservation, China CMD Fund, Cambodia Climate Change Alliance Trust Fund, Thailand Energy Conservation Promotion Fund, Lao Environmental Protection Fund, Micronesian Conservation Trust and Tuvalu Trust Fund: 3 Case Study Report: Lao Environmental Protection Fund

4 The design of the EPF at a glance The role of the EPF in financing environmental protection in Lao PDR The assessment of the role of the EPF in overall environmental finance in Lao PDR has been constrained by lack of quantitative data on government spending in environment protection.it is therefore problematic to understand the magnitude of financial resources managed by the EPF compared to the overall spending on environmental protection in the country. The latest available data on the spending in environment in 2005 showed that the annual public environment expenditure was LAK 19 billion (approximately US$ 2.4 million). As a comparison, the total grants provided to beneficiaries by the EPF in were US$ 3.4 million.this comparison, however, should be conducted with caution as the figure of total public environment expenditure may have changed in the recent years. During interviews with the stakeholders, it was mentioned that the government budget has mainly been used to finance government administrative costs including civil service wages. This means that the investment and capital spending in environment are mainly financed by external sources. The role of the EPF is very specific and unique as it provides direct financial assistance to local stakeholders, including local governments, NGOs, universities, and local communities, in biodiversity conservation, pollution control, water resources management and sustainable land resources management. Throughout the interviews with stakeholder in Lao PDR, this specific role has been highly appreciated as the EPF s main contribution to environmental management in the country. The legal status The EPF has been established as an autonomous organization, both financially and administratively, operating under the laws in Lao PDR. The EPF was established through the issuance of Prime Ministers Decree 146 in2005 aiming at strengthening environmental protection, sustainable natural resources management, biodiversity conservation and community development in Lao PDR. Under the existing legal status, the EPF can absorb all kinds of contributions from donors and the private sector, although it cannot access a direct fiscal transfer from line ministries due to its off-budget nature.the EPF is also not under the government monitoring system and procedures. The rules and standards of the EPF s fund management are regulated by the EPF Charter and its Operations Manual. The fund is currently housed within the Prime MinisterOffice. The Deputy Prime Minister, who is the Chairman of the Board of Directors (BoD), takes lead of the overall fund, while the Director of the Executive Office (EO) has the authority to sign-off for all expenditure items for which the Chairman of the BoDhas approved. All expenditures are made in line with the Operations Manual and audit requirements. Regular sixmonthly plans and reports are submitted to the BoD for records and approval (See the Governing Body and Beneficiaries section for details on the roles of the BoDand the Director of the EO). The EPF model According to the EPF Decree, the five main sources of income for the EPF are: national and international endowment funds; national taxes or levies from environment and natural resources; contributions by development projects; contributions by business and private sector and interests generated by EPF capital. The EPF is also authorized to receive transfers from revenues that may be generated from environmental and natural resources fees, such as wastewater discharge fees, pollution fees, and eco-tourism surcharges.as of today, the main sources of EPF income are contributions from development partners and businesses as well as the interests generated from the endowment fund.income sources of the EPF are shown in Table 1. 4 Case Study Report: Lao Environmental Protection Fund

5 Table 1 EPF income Sources of income US$ LAK (million) 2 Grant 7,023,000 56,184 World Bank sinking fund 7,000,000 56,000 UNESCO sinking fund 23, ADB endowment fund 5,798,194 46,386 Contributions from businesses 265,878 2,127 Interest from the capital 896,756 7,174 Total 13,983, ,871 The EPF is currently managing two different types of funds: endowment and sinking funds. The endowment fund, which is financed by the capital provided by an ADB loan of US$ 5.7 million, providesa return to cover the operational costs of the EPF. According to the Operations Manual, the Board should develop investment guidelines to minimize risk of the investment of the EPF capital, while ensuring a sustainable return for financing administration and operation of the EPF. The EPF capital can be investment both within and outside Lao PDR to maximize investment returns at minimal risks. The Board can also hire a professional asset manager such as a firm or commercial bank to manage and invest the capital of the EPF according to the investment guidelines developed by the Board. Currently the endowment fund is deposited in a bank and generates around 6 percent of interests. The EPF has not hired a fund manager due to the limited value of the endowment fund. Only when the endowment fund exceeds US$ 10 million,it is regarded justified for the EPF to hire a fund manager so that the minimum return can offset the overhead costs of hiring the manager. The EPF currently manages a sinking fund, which is funded by a US$ 7 million grant from the World Bank Environment and Social (LENS) Project. The grant should be channeled to intended beneficiaries, including government agencies, NGOs and communities, for:mainstreaming environmental and social safeguards in infrastructure development, strengthening biodiversity conservation in Central Laos, and increasing the publics knowledge of and support for environmental management. To manage this grant project, the EPF created two specific windows to channel the grants to intended beneficiaries, which will be discussed in detail below. Three possible instruments that can be used by the EPF to providefinancial support in the field of environmental protection in Lao PDR are non-refundable grants, loans with low interest for environment management (i.e. wastewater treatment, recycling process) and subsidies.as of now, the EPF has only channelled financial resources through grants underfive windows that were created to set the scope of priorities areas to be financed. The windows are: Window 1: Policy implementation and capacity enhancement (PICE). Window 2: Biodiversity and community investment (CBI). Window 3: Pollution Control. Window 4: Water Resources Management. Window 5: Sustainable Land Resources Management. The first two windows (PICE and CBI) were created to channel the World Bank grant to intended beneficiaries, while the other three windows are financed by the interests generated from the endowment fund (Figure 1). In , projects implemented under the 2 Note: US$ 1 = LAK 8,000 5 Case Study Report: Lao Environmental Protection Fund

6 CBI and PICE windows were 105 and 47 projects respectively with the total amount of approximately US$ 3 million,representing per cent of the total grant. The remaining three windows made up for the remaining per cent (approximately US$ 380,000). Figure 1. EPF Special Financing Windows Governing body and beneficiaries The management of the EPF consists of the Board of Directors (BoD), and the Executive Office (EO). The EPF BoDis responsible to establish EPF s policies, strategies and priorities and to provide guidance to and monitor the Executivee Office in performing its duties and functions. Other roles and responsibilities of the BoD include: 1) direct the Executive Office to prepare five strategic program, manuals, action plans and annual reports and to submit them for approval; 2) select and appoint the Director of the EPF Executive Office; 3) approve or reject funding requests submitted to the EPF, following the appraisal by the Executive Office and the recommendation by the Director; and 4) mobilize additional contributions to the EPF from all eligible providers of such contributions.the BoD, which is chaired by the Deputy Prime Minister and co-chaired by the Minister of Ministry of Finance,consists of seven other members from the Ministry of Natural Resources & Environment (MONRE), the Ministry of Energy and Mining(MEM), National Council for Science and Technology, Lao Women Union, Bolikhamxay Provincial Administration and the Chamber of Commerce and Industry. The Executive Office(EO)wasestablishedbythePrime MinisterDecreeto support the BoD in the administration of the EPF. An Executive Director appointed by the EPF Board will lead the management of the EO. In the beginning of the operation, the EO consists of four units (financial and administrative unit, sub-projects operations unit, public information unit, and monitoring and evaluation unit) and recently restructured in two units (finance and administrative Unit, and technical Unit).The roles and responsibilities of the EOinclude: 1) implement all daily operations, management and administration of the EPF according to the Charter and Manuals; 2) prepare the Five-Year Strategic Program, Annual Plans and Manuals, rules and other manuals for approval by the Board; 3)prepare quarterly and annual reports, annual plans of Revenue and Expenditure for approval by the Board; and 4) formulate management and administration procedures, manuals and other operational document of EPF for approval by the Board. The selection of grant projects up to LAK 500million (or US$ 60,000) are be made directly by the EPF Executive Director, with guidance and advice from the EO Technical staff. The Executive Office, under the responsibility of the Executive Director, will complete a standard evaluation form for each small proposal, including a matrix scoring appropriateness of the proposal to the fund objectives and selection criteria. A brief justification of the decision will be required whether the proposal is accepted or rejected by the EO. 6 Case Study Report: Lao Environmental Protection Fund

7 Proposals for grant projects larger than LAK 500million (or US$ 60,000) will have to be reviewed and decided by the BoD. Apeerreviewwill be conducted to allow for a more extensive proposal evaluation.after receiving peer reviewers recommendations, the Executive Director would decide to accept, reject or suggest amendments to each proposal and then submit the proposal evaluation to the EPF Board of Directors for approval. If the Director s decision would be overturned by the EPF Board of Directors, a short justification of this reversal would be required. Particularly for grants provided by donors, the allocation of grants to beneficiaries is according to the plan agreed between the donors and the EPF and the plan agreed between the EPF and the recipients. For instance, for the windows funded by the World Bank, a steering committee willalso oversee the proposal screening process. Fiduciary standard Three main elements of the fiduciary standards set by the EPF Operations Manual are discussed below,including those related to financial management, procurement and audit. Financial management - The EO applies a basic computerized accounting system with chart of accounts to provide sufficient financial information for managing and monitoring project activities by windows, projects or components, procurement categories and clients. The accounting system is in compliant with government structures but also capable to produce financial monitoring reports, annual financial statements and statutory requirements in a format agreed and acceptable to the Board of Directors and respective donors. Procurement -the procurement guidelines and procedures included in the Operations Manualare customized from the government procurement regulations and were tailored to fit both Government Procedures and Donor requirements. The following standards and procedures applied for the EPF procurement: EPF-level Procurement: All procurement for the operation and management of the Executive Office of the EPF follows standard Government procurement procedures to be conducted by the Procurement Officer of the Executive Office. Project Level Procurement: All principal procurement for all projects is conducted by the Executive Office. If considered appropriate, procurement activities are delegated to implementing partners according to the project agreement. Community Participation in Procurement: Based on the proposals and budgets prepared with the assistance by the EPF staff and local governments, the most efficient procurement process is determined considering the capacity and capability of the villagers. Procurement under Specialized Financing Windows: If requested by a donor agencysupporting a special financing window, different procurement methods haveto be agreed between the EPF and the donor agency. The procedures will be formulated in a separate document to be approved by the EPF BoD. Audit the EPF has to go through an annual independent financial auditof the finances, financial administration, and operations of the EPF. The Executive Office ishiring an independent external auditing firm to prepare the audit, in accordance with generally accepted international auditing practices and standards. The audit includes a review of all EPF bank accounts, a review of the internal accounting and operations of the specialized financing windows administered by the Executive Office, a review of the investment activities undertaken by the asset manager of the EPF and others. 7 Case Study Report: Lao Environmental Protection Fund

8 The establishment process of the EPF The establishment of the EPF was initiated as one of the conditions of the ADB Environment and Social Program (ESP) program loan (US$ 20 million) to the Government of Lao PDR. The program loan, which waswasapproved in 2001, aimed to support the policy reform agenda of the Government of Lao PDR for improved environmental management and social safeguards in the energy and transport sectors. Twenty conditions were set for the release of the loan tranches, including: strengthening national policy and the regulation framework for environmental and social safeguards and enhancing policy implementation measures and capacity of the provinces and sectors in environmental management. The condition for the third (final) tranche included the establishment of a national environment fund, which should materializeafter 36 months of the loan utilization. The government was required to establish the fund through the issuance of the prime minister s decree, the appointment of members of board of directors and the director of the executive office, and the approval of fund charter (including the authorization to set up bank accounts locally and overseas and the authorization to invest the funds by the BoD). In June 2005, the EPF was established by the issuance of Prime Ministers Decree 146. In November 2005, the Prime Minister issued the Decree 72/PM appointing the EPF board of directors, whilein January 2006 the EPF board adopted and approved the EPF charter.the establishment of the EPF was considered very prompt due to the government s commitment in meeting the conditions set by the development partners. From the development of the idea to the operations of the EPF, it took around 5-6 years. The management of the EPF Granting Program In , the EPF has received more than 400 proposals and provided grants to 202 proposals submitted by the central and local agencies, the mass organizations and civil society, community based organizations and others. The grants were provided under the five windows,amounting of US$ 3.4 million with the average total value of around US$ 28,000 per project. The allocation of grants under the EPF is guided by Five-Year Strategic Programs, which provide direction, focus, and priority to the allocation of the resources of the EPF. The Five-Year Strategic Program identifies key priority activities in the fields of: environmental protection, natural resources and biodiversity conservation, and pollution control. The Executive Director, with support of the BoD and the EO staff,is responsible for the preparation of the Five-Year Strategic Program. The program should also support key priorities identified in the National Strategy on Environment to the Years 2020 and Action Plan for the Years , the National Biodiversity Strategy and Action Plan, the Forestry Strategy and Action Plan, and other strategic programs. Moreover, annual planning documents also provide a direction for the allocation of the financial resources. The annual plan of action,which details the Five-Year Strategic Program,is approved by the BoD on an annual basis for each calendar year. Project proposals submitted by local governments should be developed based on provincial priorities and also aligned with the objectives of the EPF. The proposal can only be prepared following the approval of the concept note by local authorities. All project applications can be submitted to the Executive Office anytime.prior to the submission of project applications, an initial discussion is usually conducted with all potential applicants, and the EPF will provide assistance in developing a proposal particularly when the capacity is found lacking. Small project proposals of up to LAK500million (or US$ 60,000) can be submitted in Lao with a standard application form, which is around five to six pages in length.upon the submission of proposals, the Executive Director will reviewand decideupon within one month. Projects larger than LAK500million (or US$ 60,000) would require a more extensive proposal to be submitted in English.The Executive Office will follow a defined and transparent process for evaluating and selecting proposals using a standard formof proposal evaluation and assessment. See Figure 2 for the project selection process. 8 Case Study Report: Lao Environmental Protection Fund

9 There has been no public-wide call for all proposals (including for grants financed by the World Bank), instead potential applicants are invited to submit project proposals depending on the availability of fund for a specific window. The reason of no public advertisement or call for proposal is due to the limitation of financial resources available to provide grants, particularly under the windows financed by the interests of the endowment fund. In practice, fund awarding is based on the proposal s expected outputs. However in 2012 the Director has decided to distribute equally the total fund allocated for the current fiscal year, which is decided by the BoD, to all provinces in Lao PDR. Provinces will implement the project for one year and then the EPF will assess the outcome of the projects. This approach is pursued with the intention to invest in developing the capacity of provincial governments in managing projects in the field of environmental protection. This approach focuses on assessing the results of project implementation, where the subsequent allocation of resources can be based on the performance of the provinces. Figure 2. The Sub-Project Application Process Source: EPF, Case Study Report: Lao Environmental Protection Fund

10 The monitoring and evaluation EPF has developed its own information and database system to monitor the technical and financial implementation of all its funded projects and activities. Details on the M&E procedures are well defined in the Operations Manual. The Executive Office should prepare quarterly reports(within 30 days of the end of the quarter) and an annual financial report(within 3 months of the end of the period). The financial year of the EPF begins on October 1 t and ends on September 30 of the following year All reports should be approved by the Board prior to the submission to the government, donor organizations and other stakeholders. The annual report will include at least: the status and activities of the EPF, the list of all projects and activities that have received EPF financial support, the financial status of the EPF. This report should be made available in the press media, the electronic media (radio and television), and in the Environment Newsletter of the Science, Technology and Environment Agency. Due to limited capacity of beneficiaries particularly at the local level, the EPF has simplified the monitoring and reporting system. Since the capacity to write a progress report is still low amongst local stakeholders, the EPF arranges a stakeholder meeting periodically at the provincial level, where all beneficiaries receiving funds from the EPF will be invited. In the meeting, which is usually chaired by the Vice Governor, all beneficiaries will verbally report the progress of their projects. A representative from the EPF will then prepare a minutes of meeting where details of the verbal discussion will be noted down. Following the meeting, the minutes will be circulatedto all beneficiaries for them to agree on what is written, including the progress of the projects and their future action plans. Based on the agreed minutes, the EPF will conduct regular monitoring of project implementation. The EPF also has a number of facilitators working at the provincial level to oversee the technical progress of project implementation. Social and environment safeguard In the Operations Manual of the EPF, social and environment safeguard has been elaborated thoroughly. Procedures to ensure compliance with environmental and social safeguards regulations have been described in the EPF Environmental and Social Safeguard Framework (ESSF), which will be applied to all projects.the objective of the ESSF is to ensure that projects are designed to be beneficial to the environment and that negative environmental and social effects are minimized or avoided. The ESSF will also identify any negative effects and appropriate mitigation measures to be implemented as part of the project.in the case that possible environmental and social impacts are expected, a proper assessment will be conducted, according to the EPF Safeguard Framework and Lao PDR regulations. Lessons learned Different types of funds The case of the EPF has proven that it is beneficial to create a structure of a national fundthat can accommodate different types of funds. Due to its reliance on external support, the structure of the EPF allows it to serve as an institution that provides financial service particularly for donor agencies to delivertheir financial assistance to support environmental protection in Lao PDR. Many donors would prefer to channel their financial assistance in the form of a sinking fund, where the amount of resources should be spent entirely at the end of the project. Under the existing structure, the EPF can directly receive the financial assistance by a creating of a specific window under which the money can be managed according to rules and standards required by donors. 10 Case Study Report: Lao Environmental Protection Fund

11 An endowment fund was created to ensure sustainable income to finance the operations of the EPF, which is crucial particularly when a sustainable source of capital has not been identified. The sense of sustainability for a national fund, beyond and above a particular project duration, is imperative to reduce the turn over rate of staff (particularly those who are non civil servants) and also to increase confidence of donor agencies in providing contributions to the fund. The sense of sustainability will also allow for capacity building as it requires time for a fund to be mature and well-functioning. Specifically in the case of the EPF, the EO and the BoD need to identify a sustainable source of revenue to ensure, otherwise it is crucial to increase the total amount of the endowment fund to generate sufficient interests to finance the operation costs and providing grants for environmental related projects. Meeting standards in financial integrity and social environment safeguard The EPF has established the necessary institutional structure and developed the capacity of human resources to manage a fund according to international standardsin financial integrity as well as social and environment safeguard.institutionally, the inclusion of detailed procedures of financial management and social environment safeguard both in the EPF Charter and in the Operations Manual has provided a strong basis for effective management and implementation of the fund.particularly for grants financed by the World Bank, the EPF manages the fund according to the Bank s standards, while government standardsare applied to other windows currently financed by the interests from the endowment fund. However, given the portion of the World Bank grant is currently around 90 per cent, most of the grants have therefore been managed by the EPF according to the World Bank s standards. Since all these procedures have been established in the Manual, staff are therefore obliged to implement them in their day-to-day project management activities. The capacity of the staff has been developed over time to implement these standards. However, there has been a concern about the high turn over rate of staff in the Executive Office of the EPF, which will eventually affect the capacity of the office to manage the fund. However, with the established system in place, building the capacity of human resources would be faster compared to the process of establishing a system from scratch. Reaching local beneficiaries The EPF has received acknowledgement by stakeholders interviewed in this study for its success to channel financial assistance for local stakeholders in the field of environmental protection. The success of the inclusion of local stakeholders to access grants provided by the EPF is due to a continuous support provided by the EO in the form of training, assistance in developing project proposals and simplification of the reporting mechanism. A number of clauses in the Operations Manual have also provided specific attention favoring local communities. For community grants, training on procurement procedures will be provided to communities and the procurement process will be determined considering the capacity and capability of the villagers. In the implementation of grant projects, the community will be the owner of the project and will make any decision related to the projects. In order to simplify the reporting mechanism for projects at the community level, the community will discuss the completion and closure through a community accountability meeting. Furthermore, a community account can also be opened at a district bank where the payment for expenses will be disbursed.the EPF can also support local communities in setting up the necessary accounting and financial management procedures for handling grants received from the EPF. 11 Case Study Report: Lao Environmental Protection Fund

12 Authors: Silvia Irawan, Soukata Vichit, Bounphama Phothisane, Douang Lopaying, Singha Ounniyom, Alex Heikens Cover Photo: Lien Heikens. Acknowledgements: the authors would like to express their gratitude to representatives from government, development partners and grantees of the fund sharing their views and experiences with the Lao EPF. Disclaimer: The views expressed in this publication are those of the authors and do not necessarily represent those of the United Nations, including UNDP, or its member states. Citation: Irawan et al. (2012) Case Study Report: Environmental Protection Fund in Lao PDR. A UNDP/EPF working paper Case Study Report: Lao Environmental Protection Fund