Report and Recommendation of the President to the Board of Directors
Project Number: 44138 August 2013
Proposed Loan Lao People’s Democratic Republic: Greater Mekong Subregion East-West Economic Corridor Agriculture Infrastructure Sector Project
CURRENCY EQUIVALENTS (as of 12 August 2013)
Currency unit – kip (KN)
KN1.00 = $0.000128 $1.00 = KN7,800
ABBREVIATIONS ADB – Asian Development Bank DCO – district coordination office EWEC – East–West Economic Corridor GMS – Greater Mekong Subregion ha – hectare Lao PDR – Lao People’s Democratic Republic MAF – Ministry of Agriculture and Forestry NPMO – national project management office O&M – operation and maintenance PAFO – provincial agriculture and forestry office PAM – project administration manual PPMO – provincial project management office SDR – special drawing rights t – ton WUA – water users association WUG – water users group
NOTE
In this report, “$” refers to US dollars
Vice-President S. Groff, Operations 2 Director General J. Nugent, Southeast Asia Department (SERD)
Director J.H. Mir, Agriculture, Environment, and Natural Resources Division, SERD
Team leader D. Salter, Senior Natural Resources and Agriculture Specialist, SERD Team members S. Aman-Wooster, Senior Social Development Specialist, SERD
C. Bounnad, Associate Project Analyst, SERD P. Chanthirath, Senior Project Officer, SERD C. Garcia, Senior Project Officer, SERD B. Giap, Natural Resources and Agricultural Economist, SERD V. Harishchandra, Rural Development Economist, SERD S. Kawazu, Senior Counsel, Office of the General Counsel T. Miyao, Procurement Specialist, Operations Services and Financial Management Department A. Musa, Financial Management Specialist, SERD
S. Phanouvong, Senior Project Officer, SERD C. Ramiro, Senior Operations Assistant, SERD D. Tejada, Associate Operations Officer, SERD
Peer reviewer R. Khan, Senior Natural Resources and Agriculture Economist, South Asia Department
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS Page
PROJECT AT A GLANCE
I. THE PROPOSAL 1
II. THE PROJECT 1
A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Investment and Financing Plans 4 E. Implementation Arrangements 5
III. DUE DILIGENCE 6
A. Technical 6 B. Economic and Financial 7 C. Governance 7 D. Poverty and Social 8 E. Safeguards 8 F. Risks and Mitigating Measures 9
IV. ASSURANCES AND CONDITIONS 10
V. RECOMMENDATION 10
APPENDIXES
1. Design and Monitoring Framework 11
2. List of Linked Documents 14
PROJECT AT A GLANCE
1. Project Name: Greater Mekong Subregion East-West Economic Corridor Agriculture Infrastructure Sector Project (formerly Rural Access Improvement Project Along the EWEC)
2. Project Number: 44138-022
3. Country: Lao People's Democratic Republic
4. Department/Division: Southeast Asia Department/Environment, Natural Resources & Agriculture Division
5. Sector Classification: Sectors Primary Subsectors Agriculture and natural resources √ Irrigation, drainage, and flood protection Agriculture and rural sector development
6. Thematic Classification: Themes Primary Subthemes Economic growth √ Widening access to markets and
economic opportunities Knowledge, science, and technological
capacities Environmental sustainability Natural resources conservation
Regional cooperation and integration Trade and investments
Capacity development Organizational development
6a. Climate Change Impact Adaptation Medium Mitigation Low
6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) √ Some gender elements (SGE) No gender elements (NGE)
7. Targeting Classification:
General Intervention
Targeted Intervention Geographic
dimensions of inclusive growth
Millennium development
goals
Income poverty at household
level √
8. Location Impact: National Low Regional Medium Rural High Urban Low
9. Project Risk Categorization: Low
10. Safeguards Categorization: Environment B Involuntary resettlement B Indigenous peoples B
11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Sector loan Asian Development Fund 60.0
Total 60.0
12. Cofinancing: No Cofinancing available.
13. Counterpart Financing:
Source Amount ($ Million) Government .6
Total .6
14. Aid Effectiveness: Parallel project implementation unit No Program-based approach No
I. THE PROPOSAL
1. I submit for your approval the following report and recommendation on a proposed loan to the Lao People’s Democratic Republic (Lao PDR) for the Greater Mekong Subregion East–West Economic Corridor Agriculture Infrastructure Sector Project.1 2. The project2 will support the continuing transition of the East–West Economic Corridor (EWEC) into an inclusive economic growth corridor, in line with the Greater Mekong Subregion (GMS) Strategic Framework.3 It will be implemented in the two southern provinces of Savannakhet and Saravane, which are within the area of influence of the EWEC and have 20% of the country’s population. The project will target areas of good agricultural potential with existing irrigation schemes. It aims to regenerate, replace, and upgrade underdeveloped or outdated agriculture infrastructure, including irrigation and rural access infrastructure.4 This will enhance agriculture productivity (and incomes) in some of the country’s poorest districts. It will support capacity development, at the farm level, to manage and use the agriculture infrastructure efficiently and effectively to optimize agricultural outputs. It will stimulate rural development, sustainable agriculture practices, and trade.
II. THE PROJECT
A. Rationale
3. Investments in EWEC’s physical infrastructure, supported by Asian Development Bank (ADB) financed projects, are creating opportunities for trade and economic development.5 The GMS Regional Cooperation Strategy and Program focuses on connectivity, competitiveness, and community—both local and community of nations. In preparation for the Association of Southeast Asian Nations Economic Community in 2015, the Ayeyawady–Chao Phraya–Mekong Economic Cooperation Strategy has prioritized cooperation in rice production and food security, underpinned by improved infrastructure.6 At the Ayeyawady–Chao Phraya–Mekong Economic Cooperation Strategy summit in March 2013, the Lao PDR and Thailand agreed to reduce import–export tariffs for agriculture-related inputs and produce, and facilitate trade and contract farming for the Lao PDR.7 The Project will contribute to these GMS initiatives by improving access for all people in the project areas to EWEC markets and economic opportunities, including those of neighboring countries. The profitability of smallholder farming in
1 The design and monitoring framework is in Appendix 1.
2 The Asian Development Bank (ADB) provided project preparatory technical assistance. ADB. 2010. Technical
Assistance to the Lao People’s Democratic Republic for Preparing Rural Access Improvement Project along the East-West Economic Corridor Project. Manila. (TA 7728-LAO).
3 The EWEC is an important component of ADB’s commitment to, and involvement in, development of the GMS.
4 Agriculture infrastructure refers to irrigation (pumping stations, weirs, canals, water management, and control
structures) and access infrastructure (low volume rural roads and bridges). 5 ADB supported projects include: ADB. 2012. Report and Recommendation of the President to the Board of
Directors: Proposed Loans, Grant, and Technical Assistance to the Kingdom of Cambodia and Lao People’s Democratic Republic for Trade Facilitation: Improved Sanitary and Phytosanitary Handling in Greater Mekong Subregion Trade Project. Manila; ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan, Grant, and Administration of Grant to the Lao People’s Democratic Republic for the Greater Mekong Subregion East–West Economic Corridor Towns Development Project. Manila; ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Grant to the Lao People’s Democratic Republic and Loan to the Social Republic of Viet Nam for the Greater Mekong Subregion Sustainable Tourism Development Project. Manila; and ADB. 2012. Technical Assistance for Implementing the Greater Mekong Subregion Core Agriculture Support Project (Phase 2). Manila.
6 Members of the Ayeyawady–Chao Phraya–Mekong Economic Cooperation Strategy are Cambodia, the Lao PDR,
Myanmar, Thailand, and Viet Nam. ADB is providing assistance to the strategy. 7 A memorandum of understanding was signed by the Lao PDR and Thai Prime Ministers on 15 March 2013.
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project areas will be increased by enabling participating communities to respond to market pull from the EWEC by (i) increasing the intensity and diversity of agricultural production; (ii) providing quicker and safer access to markets, social services, and employment opportunities; and (iii) reducing the costs of agricultural inputs, marketing, and post-harvest losses. 4. The Lao PDR has had an annual rice deficit, estimated at 100,000 t in 2012. Reducing this deficit is a national priority and upgrading agriculture infrastructure will provide the foundation for doing so. Improved irrigation will enable increased yields in the rainy season as a result of supplementary irrigation and an expansion of dry season cultivation.8 Irrigation improvements will also help overcome long dry season droughts and overall foster climate change adaptation. Irrigation integrated with rural access improvements will lead to increases in income from both on- and off-farm employment; expand income generation opportunities, especially for women; improve access to markets, schools, and hospitals; and increase food availability. Associated capacity building measures will focus on water users groups (WUGs) and/or water users associations (WUAs) that are already established, with varying capacities, in most of the functioning irrigation schemes.9 They are responsible for operation and maintenance (O&M) of the existing irrigation schemes, and often are doing well keeping old, poorly designed and constructed schemes functioning. The project will assist WUGs and WUAs to manage the improved infrastructure and use it to realize market-based optimal agricultural production. 5. The provinces of Savannakhet and Saravane account for 33% of the total rice produced in the Lao PDR (917,000 tons [t]).10 They have a combined population of 1,150,000 with an average poverty rate of 36%. Savannakhet has the highest population of the five southern provinces, and the highest number of poor districts.11 They have a combined reported area of about 312,300 hectares (ha) under cultivation, but less than 10% of this area has irrigated dry season production. Crop yields are below potential, and farming generally remains at semi-subsistence levels with little diversification.12 Currently, poor quality and inadequate coverage of irrigation constrains agriculture production—especially in the dry season—resulting in limited areas being planted and low yields, a limited variety of produce, with high production, transport, and marketing costs, and hence lower farm incomes. 6. The project is consistent with the government’s sector development objectives as presented in its Seventh National Socio-Economic Development Plan, 2011–2015, Strategy for Agricultural Development 2020, and Agricultural Master Plan, 2011–2015, which promote the expansion of market-oriented agricultural production in an environmentally sensitive manner. It will be a key component in the government’s new Southern Rural Development Program.13 The project is in line with ADB’s GMS Regional Cooperation Strategy and Program, supporting the thrust to strengthen infrastructure and agriculture, as well as the priority to develop the EWEC. Project objectives are consistent with ADB’s country partnership strategy for the Lao PDR and its focus on agriculture infrastructure as a means of promoting pro-poor, sustainable growth
8 Supplementary irrigation reduces crop stress during dry periods of the rainy season.
9 WUGs are informal groupings of farmers within an irrigation scheme. WUAs are associations with legal standing
and status that can enter into contracts and undertake commercial activities. One of the institutional challenges within the project area is to convert WUGs to WUAs and to improve the functioning of existing WUAs.
10 Food and Agriculture Organization of the United Nations/World Food Programme. 2011. Crop and Food Security
Assessment Mission to Lao People’s Democratic Republic. http://www.fao.org/docrep/013/al976e/ al976e00.htm 11
Savannakhet has 258,900 ha of arable land and a population of about 800,000. Saravane has 101,500 ha of arable land and a population of about 350,000. Government of the Lao PDR, Ministry of Agriculture and Forestry. 2012. Lao PDR Census of Agriculture 2010/11. Vientiane.
12 Representative subproject feasibility studies revealed that average annual rice yields are less than 3.0 t/ha, which is below the potential of more than 4.5 t/ha possible with improved agricultural infrastructure.
13 The program is under formulation and is expected to be approved in 2013.
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through private sector development, regional integration, and transforming agriculture from its subsistence orientation into a diversified and commercialized sector.14
7. The project design draws on the experience of ADB-financed rural development initiatives as well as those of the development partners.15 Relevant current projects16 include the Northern Rural Infrastructure Sector Project and the Sustainable Natural Resource Management and Productivity Enhancement Project, co-financed by ADB and the International Fund for Agricultural Development.17 Similar successfully completed projects include the Northern Community-Managed Irrigation Sector Project, the Decentralized Irrigation Development and Management Sector Project, and the Community-Managed Irrigation Sector Project.18 A major lesson from previous projects is the need for the full understanding and participation of project beneficiaries to manage and use the improved agriculture infrastructure. Operationally, with a consideration of capacity constraints, sufficient project duration is required for the execution of civil works at the beginning of the project and beneficiary training and capacity building to be undertaken thereafter. Other lessons include the need to (i) prescreen subprojects to identify viable ones with minimal safeguard issues; (ii) limit the geographic coverage to obtain a balance between capital investments and overhead costs, and contain implementation weaknesses to a manageable level; (iii) maintain a confined scope of activities to those that can be readily carried out within local capacities; (iv) carefully prepare the procurement plan to optimize the contract size, number, and methodology; and (v) take advance actions to ensure competent project staff are trained, and accelerate procurement and consultant recruitment.
8. In consultation with the Ministry of Agriculture and Forestry (MAF) and participating provinces, 27 candidate subprojects from the Provincial Socio-Economic Development Plans were screened for inclusion and were found to meet preliminary technical, financial, economic, environment, and social eligibility criteria.19 Subproject feasibility studies were carried out on three representative subprojects, with positive results, indicating substantial increases in farm incomes from higher production and increased employment.20 The remaining subprojects have been prioritized and will be subject to full feasibility studies during implementation. Available funding suggests that 25 subprojects will be implemented using ADB loan proceeds.
14
ADB. 2012. Country Partnership Strategy: Lao People’s Democratic Republic, 2012–2016. Manila. 15
Development Coordination (accessible from the list of linked documents in Appendix 2). 16
Current examples include ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Grant and Technical Assistance to the Lao People’s Democratic Republic for Sustainable Natural Resource Management and Productivity Enhancement Project. Manila; and ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Grant to the Lao People’s Democratic Republic for Northern Rural Infrastructure Sector Development Project, Manila.
17 The Sustainable Natural Resource Management and Productivity Enhancement Project is coordinated with the International Fund for Agricultural Development-financed Southern Laos Food and Nutrition Security and Market Linkages Project with expected approval in late 2013. It will target more remote and impoverished areas.
18 ADB. 2011. Completion Report: Northern Community-Managed Irrigation Sector Project in the Lao People’s Democratic Republic. Manila; ADB. 2010. Completion Report: Decentralized Irrigation Development and Management Sector Project in the Lao People’s Democratic Republic. Manila; ADB. 2006. Completion Report: Community-Managed Irrigation Sector Project in the Lao People’s Democratic Republic. Manila.
19 The criteria for applying a sector modality as per ADB. 2003. Sector Lending, Operations Manual. OM D3/BP.
Manila, are fully met. The Lao PDR has its Strategy for Agricultural Development to 2020 to meet the priority development needs of the sector. It has the institutional capacity to implement this sector development plan, following experience in five previous sector development projects financed by ADB. The policies applicable to the agriculture sector are appropriate and will be improved through the proposed project, in particular those relating to O&M of agriculture infrastructure by WUGs and WUAs.
20 The subprojects were Beungxe and Phanomxy in Savannakhet and Vapy Neau in Saravane.
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9. The project has two technical innovations that highlight ADB’s value addition to the sector by contributing to the ongoing sector policy dialogue on water resource management and irrigation sustainability: (i) an 8-year project duration in light of sector implementation constraints to enable intensive and extensive WUG and WUA capacity development after completion of civil works, and (ii) integration of soil and water conservation measures through bioengineering techniques into agriculture infrastructure design. This will improve the stability of the infrastructure, and soil quality, as many soils in the project area are depleted of nutrients and are easily erodible. An implementation innovation is the provision of start-up consultants to support project implementation activities while the loan implementation consultants are recruited, thus avoiding implementation delays.
B. Impact and Outcome
10. The expected impact of the project will be increased household incomes in the project areas. The expected outcome will be increased agricultural productivity in the project areas.
C. Outputs
11. The project will have three outputs: (i) improved agriculture infrastructure, with activities carried out by implementing subprojects, including (a) civil works to improve irrigation infrastructure in 25 schemes, (b) constructing low volume rural roads that support the mobility and transport needs of the population in and around the irrigation schemes, and (c) generating employment during civil works that benefits local people including women and ethnic groups; (ii) increased capacity of farmers to manage and use agriculture infrastructure efficiently, with activities in all subprojects including (a) establishing and implementing agriculture infrastructure management and operation plans, (b) preparing and implementing WUG and WUA agricultural development plans, and (c) strengthening WUGs to graduate to WUAs; and (iii) efficient project management by meeting time lines for successfully (a) operating a national project management office (NPMO) and two provincial project management offices (PPMOs); (b) recruiting and fielding consultants for project start-up, implementation, benefit, and safeguard monitoring; and (c) completing subproject feasibility studies and construction works. All of the activities have specific gender targets.
D. Investment and Financing Plans
12. The project is estimated to cost $60.6 million (Table 1).
Table 1: Project Investment Plan ($ million) Item Amount
a
A. Base Costb
1. Improvement of Agriculture Infrastructure 39.93 2. Farmers’ Capacity Improvement 2.21 3. Project Management and Support 8.73 Subtotal (A) 50.87 B. Contingencies
c 6.66
C. Interest Charges During Implementation 3.07
Total (A+B+C) 60.60 a
Includes taxes and duties of $4.71 million, financed by the Asian Development Bank. b
In end of 2013 prices. c Physical contingencies computed at 0% for all goods and services. Price contingencies computed at 1.9% for
the 8 years of implementation on foreign exchange costs and 5.5% on local currency costs. Source: Asian Development Bank estimates.
13. The government has requested a loan in various currencies equivalent to SDR39.359 million ($60.0 million equivalent) from ADB’s Special Funds resources to help
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finance the project.21 The loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan agreement.
14. The financing plan is in Table 2.22
Table 2: Financing Plan
Source Amount ($ million) Share of Total (%)
Asian Development Bank 60.00 99.00 Government 0.60 1.00
Total 60.60 100.00
Source: Asian Development Bank estimates.
E. Implementation Arrangements
15. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM).23
Table 3: Implementation Arrangements Aspects Arrangements
Implementation period January 2014–December 2021
Estimated completion date 31 December 2021
Management
(i) Oversight body National Steering Committee
(ii) Executing agency Ministry of Agriculture and Forestry
(iii) Key implementing agencies Savannakhet and Saravane provincial governments
(iv) Implementation unit National project management office in Vientiane and provincial project management offices in the provincial capitals
Procurement (works) ICB Several contracts $27.00 million
NCB Several contracts $15.84 million
Shopping 43 contracts $0.85 million
Procurement (goods) NCB 1 contract $0.30 million
Shopping Several contracts $0.94 million
Consulting services QCBS (90:10) 1 contract $2.97 million
QCBS (80:20) 1 contract $1.33 million
FBS/CQS/ICS 7 contracts $0.98 million
Advance Action Contracting Consultant selection procedures for loan implementation consultants will be undertaken up to the short-listing stage prior to loan effectiveness.
Disbursement The loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.
ADB = Asian Development Bank, CQS = consultants qualification selection, FBS = fixed budget selection, ICB = international competitive bidding, ICS = individual consultant selection, NCB = national competitive bidding, QCBS = quality- and cost-based selection. Source: Asian Development Bank estimates
21
ADB will finance taxes and duties for the expenditure items it covers, land acquisition and resettlement costs, interest during implementation, operational costs (i.e., incremental project management costs but not include any salaries or remunerations other than travel costs and daily subsistence allowance for government officials who work for the project), transportation costs, and interest and bank charges related to the imprest account. The following principles were followed in determining taxes and duties to be financed by ADB: (i) the amount does not represent an excessive share of the project; (ii) the taxes and duties apply only to ADB-financed expenditures; (iii) the amount is within the thresholds identified during the CPS preparation process; and (iv) financing of taxes and duties is material and relevant to the success of the project. The resettlement and land acquisition expenditures are in compliance with the relevant requirements of ADB. 2012. Cost Sharing and Eligibility of Expenditures for ADB Financing, Operations Manual. OM H3/BP. Manila, and ADB’s Safeguard Policy Statement (2009).
22 The government counterpart contribution will finance full-time permanent staff deputed to the project.
23 Project Administration Manual (accessible from the list of linked documents in Appendix 2).
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16. The implementing arrangements will follow established precedents from other ADB-financed projects in the sector. MAF will be the executing agency with responsibility for overall project coordination and management. MAF will establish an NPMO, which will be responsible for overall coordination and project delivery, including reporting on project progress to the executing agency and ADB, and technical support for subproject design and approval. The technical support will include preparation of subproject investment reports and detailed designs, recruitment of consultants, procurement of civil works, and subproject implementation, including construction supervision. The provincial governments of Savannakhet and Saravane will be the project implementing agencies, with one vice-governor responsible for implementation coordination in each province. Each provincial government will delegate responsibility for provincial level project implementation activities to the respective Provincial Agriculture and Forestry Office (PAFO). The PAFOs will be responsible for reporting to the provincial vice-governor and the NPMO. Each PAFO will establish a PPMO. The PPMOs will provide day-to-day project support for implementation of the subprojects. They will facilitate input from relevant provincial line departments for the subproject design and implementation. The PPMOs will be managed by a provincial project manager from the PAFO and one full-time deputy manager.
17. Subproject implementation support will be provided by the PPMO with the assistance of the district coordination office (DCO), which will ensure that during subproject preparation consultation actions are carried out with provincial and district stakeholder agencies and village authorities. Meetings will be arranged with male and female farmers, village leaders, poor households, WUGs, and private small-scale traders and buyers, to identify their constraints and capacity and to understand irrigation and mobility and transport issues. During implementation, DCOs will ensure communication and awareness to enable participation and access to project benefits, including capacity building and training, access to employment opportunities, and community participation at village level in agriculture infrastructure planning and development.
18. Capacity building activities aimed at improved O&M and agriculture practices will begin during the feasibility study period, with strong input from the PAFOs and DCOs. Subprojects found feasible will be prepared to detailed design level and, after bidding, constructed under the supervision of the NPMO, the PPMO, and the DCO. Subprojects will be implemented in three phases: (i) implementation of the three representative subprojects prepared during the project preparatory technical assistance, (ii) the next 10 priority subprojects, and (iii) about 12 subprojects subject to remaining funds. This is to ensure that sufficient funds will be available for the top priorities in case of cost overruns. Loan implementation consultants will carry out subproject feasibility studies and social and economic safeguards studies. The loan implementation consultants will assist the NPMO to ensure that appropriate technical standards are incorporated in the design, the costs reflect realistic market estimates, and the social and environmental safeguards requirements of ADB and the government are met.
III. DUE DILIGENCE
A. Technical
19. The technology involved for most subprojects is straightforward and within the capacities of engineers and contractors available in the Lao PDR. Works will entail mainly upgrading and repair of existing structures and facilities. The irrigation systems to be upgraded are mainly pumped irrigation schemes, but also include a few small to medium-sized reservoirs and run-of-river diversion weirs. For the pumped schemes, improvement will primarily entail the replacement of worn out pumping systems and the improvement and repair of canals. For gravity systems, repair or replacement of the headworks will usually be necessary, as well as canal improvements. Access roads will be constructed of concrete to provide all-weather service
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and reduced maintenance costs. This technology is labor-intensive and will increase employment opportunities during construction. It is also appropriate since many areas flood during the rainy season and concrete can withstand submergence for extended periods. The project will strengthen the WUGs and WUAs to ensure that upgraded systems continue to be operational and produce profitable crops. Experience under completed projects indicates that enhanced operational funding and guidance from specialized consultants can significantly improve O&M as well as cropping patterns. Capacity building technical assistance for Supporting Decentralized Rural Infrastructure Development will also contribute to strengthening the WUGs and WUAs.24 B. Economic and Financial
20. A number of direct and indirect benefits will accrue from the project. Some of the direct benefits are improved rice and vegetable crop yields together with increased cropping intensities, reduced transit time, off-season and off-farm employment opportunities (particularly for women), access to markets and market information, strengthening and promotion of WUGs. These benefits will translate into an overall improvement in the standard of living. In addition, increased access to health care services, nutrition, and children’s education are some indirect benefits that will accrue from the project. Investment costs associated with these benefits include agriculture infrastructure, extension services, capacity building, and project management. The distributional analysis confirms significant benefits to the poor. Analysis of the representative subprojects indicates that the productivity of both wet and dry season rice and vegetable crops will improve significantly. Average rice yields are expected to increase from 3.0 t/ha to 4.5 t/ha while annual cropping intensity is expected to increase from 140% to 180%. This will significantly contribute to reducing the national annual deficit by approximately 38,000 t. The estimated average annual income per household will increase from $1,375 to $3,030. The financial analysis indicates that the O&M costs of the improved assets are affordable. The estimated economic internal rates of return for the representative subprojects are 16%–24% based on quantifiable benefits. The sensitivity analyses are attractive and robust as none of the risk factors appear to place the investments in immediate jeopardy. These economic returns are used as a proxy to assess the overall economic viability of the project.25 Subprojects with an economic internal rate of return above 12%, as indicated in feasibility studies, will be eligible for project financing. C. Governance
21. The main governance issues are expected to arise during procurement and with
management of the project’s finances. MAF has considerable experience in procuring civil works and goods and services under ADB projects. All procurement and recruitment of consultants to be financed by the loan will be carried out in accordance with ADB’s Procurement Guidelines (2013, as amended from time to time) and Guidelines on the Use of Consultants (2013, as amended from time to time). A financial management assessment indicates that MAF is capable of undertaking financial management of the project.26 MAF will ensure that the NPMO and PPMOs maintain adequate financial records. Consolidated project financial statements should be prepared and audited annually by independent auditors acceptable to ADB. A national financial management specialist has been included in the project as an individual loan
24
ADB. 2012. Technical Assistance to the Lao People’s Democratic Republic for Supporting Decentralized Rural Infrastructure Development. Manila.
25 Economic and Financial Analysis (accessible from the list of linked documents in Appendix 2).
26 Financial Management Assessment (accessible from the list of linked documents in Appendix 2).
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implementation consultant with responsibility for developing and strengthening the capacities of NPMO and PPMO staff in financial management procedures to facilitate efficient operation of imprest and sub-accounts, and reporting of financial performance to the government and ADB. The project will establish a website to disclose implementation progress and bid notifications and their results, and provide a grievance mechanism for corrupt practices.
22. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and MAF. The specific policy requirements and supplementary measures are described in the PAM.
D. Poverty and Social
23. Analysis of declines in poverty rates since 1998 show that the greatest gains have been made where there are improved links to markets, with poverty persisting in more remote rural areas without road access. Combined provincial average poverty rates are 36%, and 10%–20% in the representative subprojects, with women generally poorer than men. Agriculture contributes 70%–90% to rural household incomes. Investments in irrigation rehabilitation will improve the incomes and food security of households and, through associated investments, provide opportunities for women and men to access relevant capacity building activities. The civil works will generate at least $8 million in labor wages and thereafter households in the representative subprojects are predicted to gain an average of 57–83 days of employment annually from increased farm labor demand.27 24. The impact for women is potentially greater than for men, considering the significantly greater labor inputs they provide in cropping, water collection, and marketing of agricultural produce. The project’s gender classification is effective gender mainstreaming (category 2). To ensure that benefits accrue to women, a gender action plan has been prepared for the project.28 Women, including women’s groups and the Lao Women’s Union, as well as PAFO and DAFO Subcommittee for the Advancement of Women members, will be consulted on agriculture infrastructure design. This will include separate meetings for women, held at appropriate times and using language and cultural sensitivity that allow women to participate. Contractors will be encouraged to employ women in civil works, and men and women will receive equal pay for work of equal type. Participation of women in WUGs will be promoted. To improve safety along roads to be upgraded, funds have been provided for road safety information campaigns. In addition, awareness campaigns on HIV/AIDS will be carried out in the subproject areas. The safety campaigns and systems will be developed to ensure the needs of vulnerable groups (including children and women) are addressed. E. Safeguards
25. Environment (category B). Subprojects are mainly limited to the rehabilitation of existing infrastructure, and the screening process has eliminated subprojects with potentially significant negative environmental impacts. This was confirmed during detailed analyses of the three representative subprojects. However, some minor negative environmental effects may occur during the construction process. To strengthen MAF’s capacity, additional training for NPMO safeguard staff and PPMOs is included in the project costs. The environmental assessment and review framework and the list of responsibilities for environmental management are included in the PAM to guide the government to carry out an appropriate level of environmental assessment and to take corresponding measures to deal with potential
27
Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2). 28
Gender Action Plan (accessible from the list of linked documents in Appendix 2).
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environmental impacts.29 The paving of roads will reduce dust, which has negative impacts on human and livestock health, crops, and safety. Measures to improve climate change resilience include stabilizing local environments by integrating soil and water conservation measures into subproject design. Improved irrigation efficiency and sustainable agricultural practices will reduce stresses on water and land resources. 26. Involuntary resettlement (category B). No significant resettlement impacts are expected because the majority of agriculture infrastructure will be improved along existing rights-of-way and will at most require the provision of compensation for roadside trees, crops and/or small structures, with possibly a small amount of land acquisition. Category A subprojects were eliminated during screening. It will be necessary to document the land acquisition and resettlement status of each subproject during the preparation of feasibility studies. The government and ADB have agreed on a resettlement framework along with procedures, resources, and responsibilities for preparing resettlement plans outlined in the PAM for potential category B subprojects.30 Resettlement plans were prepared for the three representative subprojects with no land acquisition needed. Any required resettlement plans will be submitted and approved by ADB before the selected subprojects are implemented. Compensation, allowances, operation, and administration costs, surveys, monitoring, and reporting will be financed from loan proceeds. An adequate budget for resettlement plan preparation and implementation will be allocated accordingly as well as provision of resettlement specialists. 27. Ethnic groups (category B): The population in the project area is predominantly Lao-Thai, with Mon-Khmer groups generally found in the uplands of Saravane. Project activities will not cause involuntary changes in the ethnic groups’ farming and livelihoods system or their cultural practice and ancestral domains.31 Any possible negative impact, such as loss of temporary crops and livelihoods, will be avoided if possible or will be compensated accordingly. Impacts on ethnic groups in these areas are expected to be overwhelmingly positive since the subprojects will be aimed at overall economic and social improvement of the total population. Specific measures to deal with potential negative impacts and to encourage participation and contribution of ethnic groups based on their unique social and cultural characteristics require customized approaches and interventions. In the general design of some subprojects, there may be opportunities for ethnic groups to participate in and/or benefit from the subproject activities. An ethnic group planning framework agreed upon by the government and ADB has been prepared to address this situation.32 It will guide the preparation of an ethnic group plan for potential category B subprojects based on ADB’s Safeguard Policy Statement (2009). ADB will approve the ethnic group plans before the subproject is implemented.
F. Risks and Mitigating Measures
28. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.33
29
Environmental Assessment and Review Framework (accessible from the list of linked documents in Appendix 2). 30
Resettlement Framework (accessible from the list of linked documents in Appendix 2). 31
“Ethnic group” is the government’s preferred term for indigenous people, Constitution of The Lao People's Democratic Republic, 2003, article 8.
32 Indigenous Peoples Planning Framework: Ethnic Group Planning Framework (accessible from the list of linked documents in Appendix 2).
33 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).
10
Table 4: Summary of Risks and Mitigating Measures
Risks Mitigating Measures Financial and Economic:
Fluctuations in commodity prices may affect the financial and economic viability of investments.
Significant investments in agricultural extension support at farm level will enable diversification of cropping patterns and optimize yields. With increased yields and diversification to higher value crops, the financial impact on individual households is strongly positive.
Sustainability: Insufficient O&M
leading to premature asset deterioration.
A component has been included in the project aimed directly at upgrading farmers’ technical knowledge and improving crop production and cropping patterns so that financial returns are at a level sufficient to fund O&M costs. Financial analyses indicate that, with more farmers growing more and higher value crops, funding O&M will be within their financial capacity. Provision has been made for the O&M funding to be gradually transferred to WUG or WUA.
Climate: Severe weather events
affecting implementation and damaging completed agriculture infrastructure.
Implementation schedules will be timed according to seasonal considerations. Infrastructure to be upgraded or provided will be robustly designed expressly to survive flooding and long-term submergence. Soil and water conservation measures are included in the design.
Governance: Weak financial
management and procurement capacity is an endemic problem in the civil service, resulting from limited number of skilled staff and rapid turnover.
The project will provide the full-time input of national financial and procurement consultants. They will provide training to project staff; oversee financial management, disbursement, and procurement activities; and ensure adequate reporting to ADB. To discourage corrupt practices, implementation procedures encourage maximum transparency—including consultation with and monitoring by intended beneficiaries
Technical Capacity: Limited
implementation capacities at the provincial level to meet all ADB and project requirements.
Implementation functions will only be devolved to provincial and district levels where capacity exists. Loan implementation consultants will be provided to assist with and guide implementation activities. The implementation will be phased, rewarding better-performing provinces in the third phase.
ADB = Asian Development Bank, O&M = operation and maintenance, WUA = water users association, WUG = water users group. Sources: Asian Development Bank estimates.
IV. ASSURANCES AND CONDITIONS
29. The government and the MAF have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents.
30. The government and the MAF have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement.
V. RECOMMENDATION
31. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan in various currencies equivalent to SDR39.359 million to the Lao People’s Democratic Republic for the Greater Mekong Subregion East-West Economic Corridor Agriculture Infrastructure Sector Project, from ADB’s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.
Takehiko Nakao President
23 August 2013
Appendix 1 11
DESIGN AND MONITORING FRAMEWORK
Design Summary
Performance Targets and Indicators
with Baselines
Data Sources and Reporting Mechanisms
Assumptions
and Risks
Impact Increased household incomes in the project areas
By 2023: Average annual household income in the subproject areas increases to KN24 million (baseline KN11 million in 2013)
MAF and PAFO statistics PCR
Assumptions GMS demand for Lao PDR agricultural outputs remains strong
Progressive adoption of sustainable agriculture practices
Rice prices remain remunerative to farmers
Risk Catastrophic climatic events lead to premature deterioration of agriculture infrastructure
Outcome Increased agricultural productivity in the project areas
By December 2021: Annual rice yield increased from 3.0 tons/ha in 2013 to 4.5 tons/ha
Intensity of rice cultivations rises from 140% in 2013 to 180%
About 72,000 people have access to improved agriculture infrastructure
PPMS Annual crop production statistical reports from MAF and PAFO PCR
Assumption GMS trading regulations and procedures are progressively improved
Risk Extreme climatic events disrupt subproject implementation or damage agriculture infrastructure
Outputs 1. Improved agriculture infrastructure
By June 2019:
Improvements to the irrigation infrastructure in 25 schemes for 12,000 ha of wet season and 9,000 ha for dry season crops (baseline in 2013: 12,000
a ha wet season and 4,800 ha
dry season)
75 kilometers of low volume rural roads improved or rehabilitated
$8 million in local wages generated from the project construction activities, with 30% of the wages for women under equal pay conditions
PPMS Subproject completion reports
Assumption Relevant engineering and construction capabilities exist in Lao PDR
2. Increased capacity of farmers to manage and use agriculture infrastructure efficiently
Agriculture infrastructure management and operation plans established and under implementation in all subprojects by June 2019
PPMS
Training completion reports
Assumptions Sufficient capacities in WUGs and WUAs to absorb training
12 Appendix 1
Design Summary
Performance Targets and Indicators
with Baselines
Data Sources and Reporting Mechanisms
Assumptions
and Risks
Full recovery of routine O&M costs in all subprojects by June 2021
30% women are members of WUG and WUA management committees by December 2015
WUG and WUA agricultural development plans prepared and under implementation in all subprojects by June 2019
15 WUGs graduate to become WUAs by June 2021
Current market oriented agriculture and trade policies continue to be progressively pursued
3. Efficient project management
NPMO staffed by December 2013 (30% women)
All subproject baseline surveys completed by June 2015
Feasibility studies completed and approved in three phases: June 2014, September 2014, and June 2015
Construction works completed in three phases: December 2016, June 2017, and January 2019
PPMS
NPMO’s quarterly reports
Risk Shortage of qualified government staff
Activities with Milestones 1. Improved agriculture infrastructure 1.1 Phase 1 construction works – three representative subprojects 1.1.1 Prepare and approve feasibility study by NPMO by June
2014 1.1.2 Prepare and approve detailed design by NPMO by
December 2014 1.1.3 Procurement of civil works by March 2015 1.1.4 Construction activities completed by December 2016 1.2 Phase 2 construction works – 10 top priority subprojects
(over and above three representative subprojects) 1.2.1 Prepare and approve feasibility study by NPMO by
September 2014 1.2.2 Prepare and approve detailed design by NPMO by March
2015 1.2.3 Procurement of civil works by August 2015 1.2.4 Construction activities completed by June 2017 1.3 Phase 3 construction works – Remaining subprojects
depending on funding availability (about 12) 1.3.1 Prepare and approve feasibility study by NPMO by June
2015 1.3.2 Prepare and approve detailed design by NPMO by
December 2016 1.3.3 Procurement of civil works by February 2017 1.3.4 Construction activities completed by January 2019 1.4 Commissioning and O&M under way by November 2019
Inputs
ADB ADF: $60.0 million
Government: $0.6 million
Appendix 1 13
2. Increased capacity of farmers to manage and use agriculture infrastructure efficiently 2.1 On-the-job training of the NPMO and PPMOs in ADB
procedures, including as appropriate consultant recruitment, feasibility study evaluation, tender document preparation, construction supervision, and financial accounting and reporting in accordance with ADB requirements by international and national start-up consultants by June 2014
2.2 Specific staff training for NPMO and PPMO staff (35% female participation) by qualified training institutions by December 2016
2.3 Safeguard training for NPMO, PPMO, and district coordination office staff by June 2016
2.4 Intermittent study tours (35% female participation). Visits to ongoing rural development projects in Lao PDR. Later study tours to be decided in conjunction with project implementation consultants by December 2015.
2.5 Establishment of monitoring and evaluation system and training in its use by June 2015
2.6 Strengthening of WUGs and WUAs in subproject areas through community organization and training in technical, financial, and management aspects of field level irrigation scheme management by June 2021
3. Efficient project management 3.1 Vehicles, equipment, and office space for NPMO and
PPMOs procured by September 2014 3.2 Incremental staff recruited for NPMO and PPMOs by March
2014 3.3 NPMO and PPMO set up and fully functional by June 2014 3.4 International start-up advisor (intermittent) and national start-
up consultant (full time) recruited by April 2014 3.5 Project implementation consultants recruited and fielded by
July 2015 3.6 Implementation monitoring consultants recruited and fielded
by October 2014 3.7 Safeguard monitoring consultants recruited and fielded by
October 2014 3.8 Gender action plan implementation arrangements are in
place and functional by January 2015 3.9 Prepare progress reports and submit to ADB on a regular
basis ADB = Asian Development Bank, ADF = Asian Development Fund, GMS = Greater Mekong Subregion, ha = hectare, Lao PDR = Lao People’s Democratic Republic, MAF = Ministry of Agriculture and Forestry, NPMO = national project management office, O&M = operation and maintenance, PAFO = Provincial Agriculture and Forestry Office, PCR = project completion report, PPMS = project performance management system, PPMO = provincial project management office, WUA = water users association, WUG = water users group. a The wet season benefit of the improved irrigation infrastructure will be much higher efficiency in irrigation water
delivery to the current command areas. Sources: Asian Development Bank estimates.
14 Appendix 2
LIST OF LINKED DOCUMENTS (http://www.adb.org/Documents/RRPs/?id=44138-022-3)
1. Loan Agreement
2. Sector Assessment (Summary): Agriculture and Natural Resources
3. Project Administration Manual
4. Contribution to the ADB Results Framework
5. Development Coordination
6. Economic and Financial Analysis
7. Country Economic Indicators
8. Summary Poverty Reduction and Social Strategy
9. Gender Action Plan
10. Environmental Assessment and Review Framework
11. Resettlement Plan: Bung Xe Productive Rural Infrastructure Subproject
12. Resettlement Plan: Phanomxay Productive Rural Infrastructure Subproject
13. Resettlement Plan: Vapy Neua Productive Rural Infrastructure Subproject
14. Resettlement Framework
15. Indigenous Peoples Planning Framework: Ethnic Group Planning Framework
16. Risk Assessment and Risk Management Plan
Supplementary Documents 17. Financial Management Assessment
18. Financial and Economic Analysis for Bung Xe Subproject
19. Financial and Economic Analysis for Phanomxay Subproject
20. Financial and Economic Analysis for Vapy Neua Subproject
