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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 86433-LA

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT PAPER

ON A

PROPOSED ADDITIONAL CREDIT

IN THE AMOUNT OF SDR 5.8 MILLION (US$8.9 MILLION EQUIVALENT)

AND A

PROPOSED GRANT IN THE AMOUNT OF SDR 5.8 MILLION

(US$8.9 MILLION EQUIVALENT)

TO THE

LAO PEOPLE’S DEMOCRATIC REPUBLIC

FOR A

TECHNICAL ASSISTANCE FOR CAPACITY BUILDING IN THE HYDROPOWER AND MINING SECTORS PROJECT

April 29, 2014

Southeast Asia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 31, 2014)

Currency Unit = SDR SDR1.54563 = US$10.64698US$ = SDR 1

FISCAL YEAR

October 1 – September 30

ABBREVIATIONS AND ACRONYMS

AF Additional Financing AusAID Australian Agency for International Development CA Concession Agreement DEB Department of Energy Business DEM Department of Energy Management DEPP Department of Energy Policy and Planning DFAT Australian Department of Foreign Affairs and Trade DGM Department of Geology and Minerals DOM Department of Mines DPO Department of Personnel and Organization DWR Department of Water Resource EIA Environment Impact Assessment ESSAD Environmental and Social Safeguard Activities Document EIs Educational Institutions GoL Government of Lao PDR HMTA Hydropower – Mining Technical Assistance IDA International Development Association IFC International Finance Corporation IPP Independent Power Producer JICA Japan International Cooperation Agency MEM Ministry of Energy and Mines MONRE Ministry of Natural Resources and Environment OP/BP Operational Policy/Bank Policy MOF Ministry of Finance MPI Ministry of Planning and Investment MTR Mid-Term Review NA National Assembly NPSH National Policy of Sustainable Hydropower PDO Project Development Objective PDEM Provincial Department of Energy and Mines PRSO Poverty Reduction Support Operations PSHD Policy on Sustainable Hydropower Development PSO Project Secretariat Office SDR Special Drawing Rights TA Technical Assistance US United States of America WB World Bank WBG World Bank Group

Vice President: Axel van Trotsenburg

Country Director: Ulrich Zachau Country Manager Keiko Miwa Sector Manager: Julia M. Fraser

Task Team Leader: Sombath Southivong

iii



CONTENTS

Project Paper Data Sheet

Project Paper

I. Introduction 1

II. Background and Rationale for Additional Financing 1

III. Proposed Changes 4

IV. Appraisal Summary 9

Annexes

1. Revised Results Framework and Monitoring Indicators 14

2. Operational Risk Assessment Framework 22

3. Revised Estimate of Project Costs 29

4. Financial Management and Disbursement Arrangement 31

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ADDITIONAL FINANCING DATA SHEET

Basic Information - Additional Financing (AF) Country Director: Ulrich ZachauSector Manager/Director: Julia M. Fraser/ John A. Roome Team Leader: Sombath Southivong Project ID:P148755 Expected Effectiveness Date: August 30, 2014 Lending Instrument: Investment Project Financing Additional Financing Type: Scale-Up

Sectors: Hydropower (37%); Other Mining and Extractive Industries (18%); Public administration- Energy and mining (33%); Tertiary education (12%) Themes: Environmental policies and institutions (38%); Land administration and management (16%); Education for the knowledge economy (35%); Other social protection and risk management (11%) Environmental category: B Expected Closing Date: September 30, 2018 Joint IFC: Yes Joint Level: Joint Project – involving co-financing with IFC (loan, equity, budget, other) or staffing

Basic Information - Original ProjectProject ID: P109736 Environmental category: B Project Name: TA for Capacity Building in the Hydropower and Mining Sectors

Expected Closing Date: September 30, 2015

Lending Instrument: Technical Assistance Loan

Joint IFC:Joint Level:

AF Project Financing Data[] Loan [X ] Credit [X] Grant [ ] Guarantee[ ] Other: Proposed terms:

AF Financing Plan (US$17.8m)Source Total Amount (US$m)Total Project Cost: Cofinancing: Borrower: Total Bank Financing (US$): IDA New Recommitted

17.80 0.00 0.00

17.80 17.80 17.80 0.00

Client InformationRecipient: Ministry of Finance23 Singha Road, Saysettha District, PO Box 46 Vientiane, Lao People’s Democratic Republic Responsible Agency: Ministry of Energy and Mines Contact Person: Mr. Chareune Inthavy, Project Director and Head of Project Secretariat, Deputy Director of the Cabinet Office, Ministry of Energy and Mines Telephone No.: 856-20 99801577 Fax No.: 856-21-415714 Email:[email protected]

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AF Estimated Disbursements (Bank FY/US$ million) FY 2015 2016 2017 2018 2019 Annual 2 5 5 5 0.8 Cumulative 2 7 12 17 17.8

Project Development Objective and Description Original project development objective: to increase human capacity and improve the performance of government oversight institutions for the hydropower and mining sectors Revised project development objective: (unchanged) Project description: There are four main components: Component 1: Joint Hydropower and Mining Learning Program Component 2: Hydropower Sector Development Component 3: Mining Sector Development Component 4: Project Administration and Management

Safeguard and Exception to PoliciesSafeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

[X]Yes [] No

[ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [X]Yes [] No

[ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No

Does the project require any waivers of Bank policies? Have these been endorsed or approved by Bank management?

[ ]Yes [X] No [ ]Yes [ ] No

Conditions and Legal Covenants:Financing Agreement

Reference Description of Condition/Covenant Date Due

Section I. A. 3 (c)

Section I. A. 5

Update the Project Implementation Manual and the Financial Management Manual, in a manner satisfactory to the Association.

Prepare and furnish to the Association for review and concurrence, a draft semi-annual training and workshops plan identifying activities and beneficiaries and proposed expenditures to be incurred.

By no later than three (3) months of the Effectiveness Date. Every six (6) months, starting one (1) month after the Effectiveness Date.

vi

SectionI.C.3Section II. A. 1

SectionII.B.2Section II. B. 3

The Recipient shall collect, compile and submit to the Association consolidated reports on the status of compliance with the Environmental and Social Safeguards Activities Document, giving details of:

(a) measures taken in accordance with the said instruments; (b) conditions, if any, which interfere or threaten to interfere with the implementation of the said measures; and (c) remedial measures taken or required to be taken to address such conditions. The Recipient shall monitor and evaluate the progress of the Project and prepare Project Reports in accordance with the provisions of Section 4.08 of the General Conditions [of the Financing Agreement] and on the basis of indicators agreed with the Association and set out in the Project Implementation Manual.

The Recipient shall prepare and furnish to the Association as part of the Project Report, interim unaudited financial reports for the Project covering the quarter, in form and substance satisfactory to the Association.

The Recipient shall have its Financial Statements audited in accordance with the provisions of Section 4.09(b) of the General Conditions. Each audit of the Financial Statements shall cover the period of one (1) fiscal year of the Recipient.

On a six (6) monthly basis (or such other frequency as may be agreed with the Association. Each Project Report shall cover the period of one (1) calendar quarter, and shall be furnished to the Association not later than forty-five (45) days after the end of the period covered by such report. Each quarter. The audited Financial Statements for each such period shall be furnished to the Association not later than six (6) months after the end of such period.

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I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide additional financing in an amount of SDR 11.6 million (US$17.8 million equivalent) for the Lao PDR Technical Assistance for Capacity Building in the Hydropower and Mining Sectors Project (HMTA) (P109736; Grant Number H539-LA). The additional financing consists of an additional IDA Credit of US$8.9 million equivalent and an IDA Grant of US$8.9 million equivalent. 2. The project. The purpose of the Additional Financing (AF) is to scale up and extend the impact of the institutional and human capacity development efforts that are being supported under the original HMTA project by: (i) promoting the operationalization of legal, policy, and regulatory frameworks and management tools along the value chain in both the hydropower and mining industries, including planning, awarding, management and monitoring of concession agreements as well as revenue management and inclusive growth; (ii) monitoring, evaluating, and fine-tuning these tools for optimum performance, appropriateness, and applicability to country context; and (iii) expanding support to capacity development activities at national and local levels, and further strengthening the capacity of educational institutes to produce a skilled workforce in the hydropower and mining sectors.

3. Partnership arrangements. No new co-financing is currently proposed for the activities under the AF. However, the AF has been designed in close cooperation with the International Finance Corporation (IFC), which through its Environmental and Social Standards in the Hydropower Sector program supports activities complementary to the project development objective (PDO). Under the AF, the Bank and IFC teams will continue to collaborate as one World Bank Group providing technical assistance to the agencies, especially in the hydropower sector. The Australian Department of Foreign Affairs and Trade (DFAT) - formerly AusAID - co-financed the original project and has confirmed support to IFC’s program. DFAT has expressed interest to support the activities under the AF and dialogue is ongoing. In the mining sector, German Geological Surveys (BGR) provides complementary support to the development of the mining sector with emphasis on provincial capacity building for geo-science management and inspection of technical, environmental, and social performance. Close collaboration with BGR will continue through joint work programming and aligned development objectives. Cooperation will continue with the Japan International Cooperation Agency (JICA), which assists MEM in drafting technical guidelines for feasibility studies and updating technical standards for hydropower. More importantly, development partners supporting the hydropower sector in Lao PDR have agreed to meet regularly to ensure donor coordination and enhance synergy among programs. II. Background and Rationale for Additional Financing (US$17.8 million)

4. The original project was approved by the Board of Executive Directors on January 12, 2010 and became effective on August 4, 2010. The project was restructured in May 2013. The current closing date is September 30, 2015. The project development objective (PDO) is to increase human capacity and improve the performance of government oversight institutions for the hydropower and mining sectors. The total original project cost is US$10.54 million financed through an IDA Grant of SDR 5.0 million (then equivalent to US$8.00 million) and an AusAID Grant of US$2.54 million. 5. The original project comprises four components. Component 1: Joint Hydropower and Mining Learning Program (US$2.34 million) aims to build critically needed capacity for MEM and Provincial Divisions of Energy and Mines (PDEMs), and to support the Faculty of Engineering at the National University of Laos (NUOL) and selected technical schools in developing the next generation of professionals and skilled labor force for both sectors. Component 2: Hydropower Sector Development (US$3.22 million) aims to build capacity for sustainable hydropower development in Lao PDR by providing technical assistance to both MEM and PDEMs in the areas of policy, planning, concession

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management and support the implementation of the National Policy on Environmental and Social Sustainability for the Hydropower Sector (NPSH) adopted in 2005. Component 3: Mining Sector Development (US$2.55 million) aims to build the capacities of MEM and PDEMs to improve mining sector governance and enabling environment, and strengthen government oversight capacity. Component 4: Project Administration and Management (US$0.88 million) supports consultancy services for the Project Secretariat Office (PSO) established within MEM for coordination and management of project implementation, and administrative, logistics, equipment and operational support. 6. Progress towards PDO: The original project is progressing well towards achieving the PDO with the current rating of “Satisfactory”. Despite initial delays caused by a combination of limited absorptive capacity and experience with World Bank processes, and MEM’s reorganization during 2011-2012, the pace of project implementation has significantly accelerated following the Mid-Term Review (MTR) and project restructuring in January and May 2013, respectively. The restructuring consolidated activities and the results framework, and focused efforts on fewer priority areas. The project has provided technical assistance for developing policies, regulations and guidelines for better governance of the two sectors. Among others, standard forms for Concession Agreements (CA) for both sectors have been drafted, and MEM staff is being trained to better implement CA management and monitoring. Policy options for hydropower and mining fiscal regimes have been identified and are being reviewed by an inter-ministerial committee led by the Ministry of Finance (MOF). For hydropower, studies on hydropower avoided cost methodology and development of optimization models for three river basins (Nam Ou, Nam Ngum, and Sekong) are underway. With assistance from IFC, the National Policy on Sustainable Hydropower Development (NPSH) has been updated to cover technical, engineering, economic, and financial aspects, and it has been renamed “Policy on Sustainable Hydropower Development” (PSHD)1. For mining, the development of regulations for the implementation of the Mining Law and draft model agreements for: (i) exploration, (ii) feasibility study, and (iii) exploitation, are in progress. Moreover, existing mining licenses have been digitalized and projected on an up-to-date national map format in order to enhance management and oversight. Finally, guidelines and requirements for community development funds are in the drafting process. 7. The learning program has made good progress. The human resource capacity needs assessment for MEM and its offices in six provinces was completed; and staff at central and local levels received training on technical requirements relevant to the sectors’ planning and management. Some basic laboratory equipment, teaching aids, and learning facilities have been provided to the NUOL and the three technical schools. Progress has also been made enhancing cooperation and partnership between the private sector and educational institutes through the Trade Working Groups for hydropower and mining. This mechanism facilitates the placement of teachers and students for on-the-job training at companies; it also promotes dialogue on strategies and plans to improve professional standards. 8. The project has put in place important building blocks for the effective management of hydropower and mining development. However, the operationalization and institutionalization of the activities completed and recommendations made by the consultants remain challenging. The project has started to facilitate dialogue among the key agencies on technical, legal, financial, and institutional issues but more discussion is required in order to achieve greater impact. 9. The project is in compliance with all legal covenants, including audits. Safeguard policy activities has been integrated into the project activities and considered satisfactory given that environment and social safeguard requirements have been explicitly incorporated in the revised Mining Law (2011) and revised Electricity Law (2012).

1 Following MEM’s approval in 2014, the PSHD will be applied throughout the project development process for all hydropower projects larger than 15 MW.

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10. Rationale for Additional Financing. The hydropower and mining sectors are core drivers of growth for the Lao economy, together accounting for over 21% of government revenue in 2013. Hydropower in particular is growing rapidly, with the installed capacity increasing from 200MW in 1996 to 700MW in 2006; and over 2,500MW today (including Nam Theun operations, which started in 2010). This rapid pace of development is set to continue: 17 hydropower projects (5,300MW) are currently under construction and additional 56 (with potential installed capacity of 13,600MW) are under consideration. The mining sector has already experienced a period of tremendous growth from an annual production value of some US$10-15 million in 2003 to more than US$1.6 billion in 2012. Revenue collected by government from mine operations has seen a similar surge from less than 1% of government revenue in 2002 to around 16% in 2012. While the majority of the production can be ascribed to two operations, i.e. Lane Xang Minerals Ltd. and Phu Bia Mining, a large number of small-scale operators have emerged. As a result of these mostly unregulated operations, negative environmental and social impacts are reported to be on the rise. The fast pace of investments has raised questions about the government’s capacity to sustainably manage these sectors. Key among the challenges is the government’s ability to adopt a multi-sectoral approach to managing these two sectors. Accordingly, the demand for stronger sector governance is both greater and more complex than anticipated during the original project design. 11. The original project was designed to help the government strengthen its ability to address key challenges in these sectors through technical inputs and by creating platforms for inter-governmental cooperation. The project proceeds were small relative to financing needs due to IDA’s envelope constraints at the time of preparation. While acknowledging that this was insufficient to address the scale of the challenges, the government and the Bank agreed to start with the available resources. With budget constraints and limited absorption capacity, the scope of the original project was designed to address part of the sectors’ capacity gap. The original project’s resources are now fully committed with key studies and capacity building activities underway. Therefore, greater assistance to add value and enhance the positive impacts of the original project is required. Furthermore, the momentum among government partners is evident. 12. The original project has been designed to help MEM agencies put in place laws, regulations, and management tools such as standard CA documents for hydropower and mining concessions, fiscal policy options, hydropower management models, system-avoided costs methodology, and the policy on sustainable hydropower development. All of these studies and regulations have been coupled with capacity building. The Government of Lao PDR has asked for additional assistance moving towards the institutionalization and effective application of these efforts to enhance PDO impacts. Government wants to strengthen compliance monitoring of the CA process, safety aspects in hydropower and mining development, and capacity building on technical, environment and social safeguards. Government has also requested support to move forward power sector reform, positioning the country as significant power trader and connector with neighboring countries. In the mining sector, the administration has responded to the surge of unregulated small-scale operations by introducing a moratorium on issuance of new mining licenses from 2011 to 2015. The moratorium was intended to allow the authorities room for a comprehensive review of operators’ performance in order to correct and, if necessary, revoke non-compliant and inactive licenses. Unfortunately, the review has had little effect to date since inspection capacities remain weak and no clear framework for control and performance has been developed. In sum, the political will to improve management of the sector is hampered by weak enforcement capacities in line ministries, and government has requested additional support in this area. 13. The proposed AF would provide support to develop sector strategies through high-level policy dialogue. In order to support institutional sustainability the AF would finance sector management improvements through the operationalization of upstream work (legal, regulatory and technical aspects) while continue strengthening organizational as well as managerial and technical human capacities. The AF would deepen the work on fiscal regimes and financial flows to sectors, to ensure that agencies are

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able to carry their monitoring and oversight functions. The AF would also emphasize the strengthening of mechanisms to enhance inter-ministerial and sector coordination. The Government values the package of technical and financial support that the Bank can mobilize, and the AF is required to: (a) provide supplemental financial support to the original project; (b) facilitate inter-governmental coordination to enable effective implementation of the institutional framework and policy environment; (c) contribute to policy and institutional reform supported by the Bank’s Poverty Reduction Support Operation (PRSO) in the areas of fiscal policy development and revenue sharing in natural resource sectors; and (d) respond to government’s request for support on strategic sectors of the economy. 14. Alternative considered: Preparation of a new investment project was considered but rejected due to the time required for preparation and processing which could undermine the momentum gained during the original project. Additional financing is timely and the most cost-effective instrument given that the PDO, the design strategy, and approach remain relevant. 15. Alignment with the Corporate Twin Goals. The project is aligned with the corporate twin goals of ending extreme poverty and promoting shared prosperity. The hydropower and mining sectors are growing rapidly in a context of recently developed legal and regulatory frameworks and limited management capacity, especially on environmental and social aspects, which could negatively affect the rural poor, for example due to resettlement, environmental impact, or the forgone opportunity of utilizing natural resources. The project will assist the country to address these issues by operationalizing standardized terms and conditions of Concession Agreement (CA) and strengthening central and local capacity to monitor and enforce the CA. At the local level, the AF will address issues related to benefit sharing to improve the livelihoods of local communities, often in poor and remote rural areas, through developing capacities for the establishment of Community Development Funds (CDF). The approach to strengthening educational institutions will also contribute to increasing the number of skilled people to effectively work in these growing sectors. Furthermore, enhanced institutional capacity in planning, management, monitoring, and revenue management for the hydropower and mining sectors will help the country to optimize the use of natural resources by maximizing revenue to the state, minimizing environmental and social costs, improving efficiency and transparency in the sector development, and attracting high quality investments. 16. Consistency with Country Partnership Strategy. The HMTA and the AF are fully consistent with the Country Partnership Strategy for the period FY2012-2016 supporting the strategic objective 2 for the sustainable management of natural resources, and contributing specifically to outcome 2.1: Strengthened governance and management of hydropower and mining sectors, including sustained NT2 implementation. 17. Gender. Analysis from the joint 2012 World Bank/ADB Country Gender Assessment for Lao PDR indicates that women often bear the brunt of negative impacts when hydropower and mining projects disrupt local livelihoods. Similarly, experience indicates that women hold only a small percentage of jobs in large-scale mining and hydropower as traditional gender roles and education gaps between women and men, particularly in rural areas, can act as a barrier to equal access. The AF supports the Bank’s country gender strategy for equal access to resources and opportunities, decision-making, and rights. As in the original project, the AF addresses gender as part of safeguard mainstreaming efforts. Under the AF, the project will promote knowledge and awareness on gender issues, including support to develop strategies to mainstream gender in the hydropower and mining sectors. III. Proposed Changes:

18. PDO and Key Performance Indicators. The PDO will not change. The results framework and cumulative target values have been revised and indicators have been added in order to reflect the

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increased scope of activities, responsible agencies, and key outputs and/or to improve clarity and consistency. 19. Project Scope. The AF will finance consulting services, goods, training and workshop, operating cost, and minor office refurbishing. The activities will be implemented through the existing components as follows:

Component 1: Joint Hydropower and Mining Learning Program. Additional support of US$3.0 million (for a total of US$5.34 million) would be provided to the MEM to: (a) further strengthen the human resource capacity of the MEM2 and its provincial departments (PDEMs) by financing short-course training addressing immediate needs to improve core functions and long-term training courses in the form of scholarships for key personnel to pursue higher education in country and abroad in critical areas for both hydro and mining, and by strengthening the capacity of MEM’s Department of Personnel and Organization (DPO) to manage human resource development and training; (b) further support for the Faculty of Engineering at NUOL and technical schools through: (i) technical assistance to update curricula, (ii) teacher training, exchanges, and internships at regional universities/institutes, and industry (private sector), (iii) procuring educational laboratory equipment, library books, and teaching aids as needed for improving the quality of education; and (c) deepen the cooperation and partnership between industry and education institutes by strengthening the trade working groups established during the original project.

Component 2: Hydropower Sector Development. Additional support of US$7.0 million (for a total of US$10.22 million) would be provided to MEM, PDEMs, National Assembly (NA) Ministry of Finance (MOF), Ministry of Natural Resources and Environment (MONRE), and Ministry of Planning and Investment (MPI), for technical assistance, training, study tours, workshops, needed equipment, and operating costs to: (a) operationalize the PSHD and the Independent Power Producer (IPP) process3 with a focus on: (i) effective management and monitoring of CA, including developing standard operation procedures for the implementation of the IPP process, (ii) technical and engineering capacity to address safety issues in hydropower development, (b) establish a hydropower fiscal mechanism to improve revenue collection and facilitate budget allocation to ministries involved in hydropower sector management; (c) apply the system avoided cost methodology and develop production costing model; and (d) prepare a hydropower sector strategy and road map for cross-border power trading (system-to-system power trade). This component is implemented in partnership with IFC.

Component 3: Mining Sector Development. Additional support of US$6.0 million (for a total of US$8.55 million) would be provided to MEM, PDEMs, MONRE, NA, MOF, and MPI through technical assistance, training, study tours, workshops, necessary equipment, minor office refurbishing, and operating costs to: (a) complete and operationalize the improved standard terms and conditions of CAs, in particular: (i) developing standard operation procedures for the mining concession process, (ii) strengthening staff capacities for negotiation, CAs management, inspection, monitoring, and project evaluation, (iii) building capacity for the development of

2 The Ministry is comprised of eight departments/office/institutes at central level i.e. Cabinet, Department of Personnel and Organization (DPO), Department of Inspection (DOI), Department of Energy and Planning (DEPP), Department of Energy Management (DEM), Department of Energy Business (DEB), Institute of Renewable Energy Promotion (IREP), and Department of Mines (DOM). PDEMs are responsible for MEM activities at provincial level. 3 The Independent Power Producer (IPP) comprises the following key steps: Memorandum of Understanding (MOU) signing, Project Development Agreement (PDA) signing, Concession Agreement (CA signing), Commercial Operation Date (COD), and Project Transfer.

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guidelines and regulations for the establishment of the community development funds4 and the finalization of mining regulations, (iv) establishing operation and maintenance arrangements for the mining cadaster system and extending it to link MPI, MONRE, MOF, and MEM, (v) developing geo-data collection capacity, and (vi) establishing a mineral fiscal mechanism and building capacity for revenue collection, and facilitating budget allocation to ministries involved in mining sector management; (b) develop a sector strategy focused on improving sector governance, including further strengthening the oversight capacity of the NA, and strategic environmental and social assessment capacity in collaboration with MONRE.

Component 4: Project Administration and Management. Additional support of US$1.8 million (for a total of US$2.18 million) would be used to finance consultancy services for the Project Secretariat Office (PSO) established within MEM for ensuring effective and timely implementation of project activities. Key functions of PSO include: coordination, financial management, procurement, safeguards, monitoring and evaluation, and reporting on project progress including maintaining all project records. In addition, the AF would finance consultancy services to develop: (i) an information technology (IT) platform to support business processes within MEM, (ii) the internal control system for the hydropower and mining sectors led by MEM’s Inspections Department, and (iii) support the implementation of the ministerial decree on gender advancement.

20. Lessons Learned from the original HMTA project. To ensure timely procurement and coordination the AF has been designed to: (i) reduce the number of TA procurement packages which is expected to speed up the process and promote synergies and consistency among consultancy outputs; (ii) delegate more responsibility for the procurement process to implementing agencies while promoting the oversight and quality control role of the PSO; and (iii) enhance inter-agency coordination through the mechanism of hydropower and mining working groups. 21. A lesson learned during the implementation of the original project is that in a context of low absorptive capacity, inputs from international consultants are of limited effectiveness, in particular when consultants’ recommendations require follow up consultations and training, not adequately included in the TORs and/or when the service duration is too short due to limited budget. Under the AF, the timely inputs from international consultants will be necessary to address complex issues during negotiation and monitoring of compliance. However, to address the issue of sustainability of capacity development efforts, the AF will make strategic use of national consultants which will provide long-term on-the-job coaching to Government staff, act as interface with international consultants, and will assist the Government to implement the recommendations from technical assistance packages. In addition, a system to trace actual use of knowledge acquired through training will be developed to improve monitoring of impacts. The findings of this tracer system will support monitoring and will be reflected in the results framework. 22. In line with delegation policies to provinces and local authorities it is necessary to extend technical assistance support to MEM staff at provincial and local levels as well as to facilitate agreement on operational policy and/or procedures between central and local agencies. Given low absorption, in addition to formal training, an on-the-job training approach will be applied for building capacity of MEM and PDEM staff. The AF has been designed to build stronger commitment and ownership of MEM staff and PDEM through involving all levels ranging from high-level management to technical level in the development process. This will require additional time.

4 The AF support is limited to the development of guidelines and regulations for the establishment of community development funds, and will not finance any activity related to the implementation of the funds on the ground.

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23. Project Implementation Arrangements. Based on lessons from the implementation of the original project, the implementation arrangements will be strengthened to improve inter-agency and inter-ministerial coordination, project monitoring, and procurement processing. Under the AF, MEM remains the main executing agency through the Cabinet Office, Department of Energy Business (DEB), the Department of Energy Policy and Planning (DEPP), the Department of Energy Management (DEM), Department of Mines (DOM), and Department of Personnel and Organization (DPO). The Project Secretariat Office (PSO) under the Cabinet remains responsible for overall project implementation, monitoring, reporting, and coordination. NUOL and the three selected education institutes are responsible for the implementation of sub-components under Component 1. The project steering committee (PSC) led by the Vice Minister of MEM and comprising representatives of the implementing agencies will continue to oversee project implementation and coordination among ministries concerned. In addition, under the AF:

a. Three new divisions of MEM are included for the implementation of the AF. The Division of Inspection (Inspection Department) will lead in the development of an internal control system; the Division for the Advancement of Women within the Cabinet, will lead activities to implement the decree on gender equality at the Ministry, and the Division of Statistics will lead the development of the IT system;

b. The Hydropower Working Group (HWG) will be established to enhance coordination and facilitate timely implementation of the activities under the hydropower sector development component. The HWG will be chaired by the Head of the PSO and comprise the Deputy Director General of DEPP, DEM, and DEB;

c. The Mining Working Group (MWG) will be established to strengthen coordination between

DOM at MEM and the Department of Geology and Mineral (DGM) at MONRE;

d. Three inter-ministerial committees were established to improve implementation following the project restructuring in 2013. In view of the positive results since, these committees will continue to guide activities under the AF, including the (i) fiscal regime committee lead by MOF; and (ii) the two committees for the development of concession agreement standards for hydropower and mining led by DEB and DOM, respectively;

e. Under the original project all procurement was completely carried out by PSO. Based on

experience, and to improve the procurement function under the AF the technical departments supported by national consultants will take the lead in the preparation of procurement packages, with the PSO assuming the role for quality assurance and procurement overview. The Cabinet office has assigned one full time staff to work with PSO on procurement. In addition, the PSO will ensure that all terms of reference will be reviewed to ensure that no activities related to mainstream dams are financed through the AF;

f. Monitoring and Evaluation (M&E). An M&E specialist has been mobilized and the M&E system

has been established at PSO. Under the AF the advisor will continue supporting M&E capacity development and will establish an M&E framework of reporting involving all of the project’s implementing agencies. With support of the national consultants placed within implementing agencies, PSO will monitor the implementation progress of each activity including procurement, financial management, and safeguards. PSO will submit the Monitoring and Progress Report of all activities semi-annually for the Bank’s review.

24. Closing date. The closing date for the Additional Financing is September 30, 2018.

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25. Outcome Indicators. The original outcome and intermediate indicators and cumulative target values were revised during the project restructuring in May 2013. The Results Framework has been further revised in light of the implementation progress of the original project and to reflect the increased scope of activities under AF. Table 1 below presents the proposed changes. Table 1: Outcome indicators under AF

Original indicator

Original target (2015) Changes with AF Revised target (2018)

1. Increased number of trained national human resources in the mining and hydropower sectors within the public sector and from higher and technical educational institutions (EIs)

a) At least 350 MEM and PDEMs staff received training

b)At least 3,456 teachers and students from NUOL and 3 technical schools have benefited from learning program

1. Percentage of trained GOL staff report medium to intensive use of knowledge and lessons learned from capacity building measures.

80%

2. Enhanced institutional capacity for the planning, management, and monitoring of hydropower plants.

Standard procedure for CA monitoring applied in 50% of current hydropower plants

2. Number of river basins where all hydropower projects are monitored for CA compliance

5 River Basins

3. Increased percentage of mining inspections performed through the use of improved systems and procedures.

30% exploration and 30% exploitation inspected.

3. Percentage of on-the-ground inspections of exploration/mining operations performed using improved systems and procedures in line with international practice.

50% of total licenses

26. Revised Financing Plan. The revised total project cost is estimated at US$28.34 million, of which IDA financing constitutes US$8.0 million equivalent of original allocation, additional AF budget of US$17.80 million, and DFAT financing was US$2.54 million. The revised project costs are summarized in Table 2 below. Summaries of the disbursement categories under original and additional financing are presented in Table 3 and 4, respectively.

Table 2: Cost by component

Component Original cost Changes with AF Revised cost 1: Joint Learning Program 2.34 3.0 5.34 2: Hydropower Development 3.22 7.0 10.223: Mining Development 2.55 6.0 8.55 4: Project Administration 0.88 1.8 2.18 Total 10.54 17.8 28.34

9

Table 3: Summary of disbursement category of the original project

Category Amount of the Original Financing Allocated (expressed in

SDR)

Percentage of Expenditures to be Financed

(inclusive of Taxes)

(1) Goods, Civil Works, Consultants’ Services, Training and Workshops, and Incremental Operating Costs.

4,852,360

100%

(2) Refund of Preparation Advance

147,640

Amount payable pursuant to Section 2.07 of the General Conditions

TOTAL AMOUNT 5,000,000

Table 4: Summary of the disbursement category of the Additional Financing

Category Amount of the Credit Allocated (expressed in

SDR

Amount of the Grant Allocated (expressed

in SDR)

Percentage of Expenditures to be

Financed (inclusive of Taxes)

(1) Goods, Works, non-consulting services, Consultants’ Services, Incremental Operating Costs, and Training for the Project.

5,800,000 5,800,000 100%

TOTAL AMOUNT 5,800,000 5,800,000

27. Additional Conditions for the Financing Agreement. No additional conditions are envisaged under the AF.

IV. Appraisal Summary:

28. Economic and Financial Analysis. Similar to the original project, the AF is a technical assistance project that does not finance investments which generate clearly separate cash flows; thus it does not lend itself to traditional measurement of net present value or economic rate of return and the project is justified on the basis of the cost-effective achievement of development objectives5. For the mining sector, export sales have doubled from some US$800 million in 2009 to around US$1.6 billion in 2012 while government revenue has increased three-fold from US$80 million to US$265 million over the same period. For hydropower, the government of Lao PDR has signed agreements for the development of more than 77

5 The original project indicated that similar projects in other countries have demonstrated that the cost of improving governance of the sectors, increasing the capacity for sector oversight, and strengthening government institutions significantly improves the use, distribution, and management of benefit streams.

10

hydropower plants to be developed over the next 10 years potentially generating about US$3 billion in revenue. Nonetheless, it is expected that only a fraction will realistically materialize in this timeframe. The AF will strengthen government’s planning and management capacity in the hydropower and mining sectors that are important for the country to optimize the use of natural resources by maximizing revenue to the state, minimizing environmental and social costs, improving efficiency and transparency in the sector development, and attracting high quality investments. 29. Technical Aspects: A technical review of the hydropower sector suggests that investment through the IPP process with inadequate review, monitoring, and inspection by qualified staff could increase: (i) the risks of sub-optimal use of the country’s natural resource; (ii) long term technical risks such as reservoir sedimentation, concrete degradation, climate change impact on hydrology; (iii) safety risks, including but not limited to dam safety; (iv) social and environmental risks; and (v) risk of the country’s forgone revenues since an overestimated project cost at the time of CA negotiations may reduce significantly the country’s revenues during the whole concession period. To reduce these risks, it is necessary for the agencies to effectively perform their tasks at all stages of project development process. The original project started on the right foundation; however, the available resources are far below what is needed to minimize the risks in the sector. MEM has already taken a number of steps to be in a position to carry out some of the above tasks; however, additional resources and time would be necessary to bring down the risks to a satisfactory level. Critical tasks for which urgent progress is needed include CA monitoring, standard operation procedures for the IPP process, implementing the PSHD, development of a strategy for system-to-system power trade. The absence of a GOL engineer on most projects under construction is a critical concern. DEM is responsible for performing GOL’s engineering function. However, the capacity of DEM has to be urgently strengthened to ensure that the appropriate regulations and technical guidelines are updated and practical, and that the capacity of staff is adequate to ensure effective implementation during the design, construction, and operation phases. Given their limited capacity at present, a more appropriate model would be to have monitoring of construction performed for the whole project portfolio by a group of representatives from the various ministries and governmental institutions involved, supported as needed by a limited number of foreign and domestic consultants, and coordinated by MEM agencies. This model would facilitate the gradual building up of capacity domestically (in the government and/or in Lao consulting firms), eventually resulting in the reduced need for foreign consultants. Building up of monitoring capacity through actual ground work will help better identify the capacity gaps, training needs, etc. It will also pave the way towards a national technical authority in charge of overseeing dam owner/operator’s compliance with dam safety regulations during the whole concession period. 30. The proposed activities to be carried out under the mining sector component rest on comprehensive analyses and advisory services carried out during the original Grant. The cadaster management system is designed in line with international principles of transparent award of licenses and objective evaluation and performance criteria. Digital data management allows coherent and real-time processing of information, which should ensure a level playing field for all operators. The fiscal and financial modelling has been developed after a comprehensive review and comparison of international practices and benchmarks. This means that all policy choices can be made after considering a variety of options which have been implemented in peer countries. Likewise, the development and implementation of Community Development Funds has been informed by a review of more than 60 CDF models from around the world. Finally, the planned expansion of the geological and geo-physical data repository will be based on targeted analysis and surveys which will rely on remote sensing to identify the most prospective areas which will be surveyed and analyzed in greater detail.

31. Social and Environmental: Similar to the original project, all of the AF activities will involve technical assistance (TA), training, and capacity building activities, many with positive impacts on safeguard capacity building for the hydropower and mining sectors. The AF activities will not involve infrastructure investment, feasibility studies, nor will they create any direct environmental or social

11

negative impacts, and no potential large scale, significant, and/or irreversible impacts are anticipated. Implementation experience during the original project indicates that the project involved only minor office renovations, with no significant environmental and social impacts. The support to PSHD implementation and the mining sector strategy which are planned as part of the AF will focus on institutional capacity building, and will not promote investments in project development or in infrastructure. The risk of not improving regulations and/or building capacity of key agencies will be high given limited financial and institutional capacity of key agencies and provinces. However, given the rapid development of hydropower and mining in Lao PDR and the limited safeguards capacity of key agencies, the AF is classified as Category B and OP/BP 4.01 and OP/BP 4.10 are triggered. The Environmental Assessment policy is triggered to ensure that the TA and capacity building activities of the AF provide due consideration to strengthen the safeguard knowledge and capacity of key agencies. The policy on Indigenous Peoples is triggered to guarantee that consultations financed by the AF on the development and operationalization of policy, legal and regulatory framework for both hydropower and mining involve the full participation of ethnic minorities that could be affected by hydropower and mining investments, and to ensure that their views and interests are incorporated in the discussions. 32. Disclosure. The ESSAD was sent to the Bank before appraisal and found to be satisfactory. In line with the Bank’s public disclosure policy, a public consultation on the AF and ESSAD was carried out on March 4, 2014, and the ESSAD was disclosed in English and Lao languages on March 19, 2014. These documents are also available for public access at the World Bank Vientiane Office and the PSO office in Vientiane. 33. Financial Management. A financial management (FM) capacity assessment of the Project Secretariat (the implementing agency) was undertaken in December 2013 to determine the implementing agency’s capacity to meet the minimum OP/BP 10.00 requirements on Investment Project Financing. Based on the assessment, the Project Secretariat will continue to be the implementing agency for HMTA and will assume the financial management functions of the project. The current financial management arrangements are deemed acceptable. The current project accounting system is capable of producing timely and accurate financial statements, accounting policies and procedures are in place, audit arrangements are acceptable to the Bank and an acceptable financial management manual is available to guide the project staff in their day-to-day work. The audit reports have been submitted to the Bank within the required timeframe and there are no outstanding audit reports under the original grant. The Designated Account established for the original project will continue to be used for the AF. The overall financial management risk is Moderate. 34. Fund use sequence and control systems. TF 99572 (DFAT financing to the original project) has been fully disbursed and was closed on March 1, 2014. To the extent practical, funds under H539 will be utilized before AF funds are used. Under AF, MoF has requested that the IDA grant funds be utilized prior accessing IDA credit proceeds. Under the original project, H539 and TF99572 were combined into one account. Similarly, under the AF funds will be combined into one project account. The project computerized accounting system has been developed to ensure appropriate booking and control of expenditures. 35. Procurement. The institutional arrangements established during the original project are considered acceptable and remain unchanged. Procurement for the AF will be carried out in accordance with the “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits” dated January 2011; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated January 2011, and the provisions stipulated in the Financing Agreement. The Project Secretariat Office at MEM has gained experience during the original project, and is now familiar with these Guidelines.

12

36. Based on the experience from the current HMTA project, it is expected that the following key issues concerning procurement may arise during project implementation. Measures for mitigation have been agreed with MEM, as follows.

(a) Delays in implementation progress, and concerns on sustainability and capacity building in MEM. Experience under HMTA shows that delays occurred as the procurement activities were mainly handled by one International Procurement Consultant with minimum contribution from the assigned government procurement officer. In the proposed AF, the MEM agreed to assign a full-time staff working closely with the Procurement Consultant. This arrangement will be stipulated in the Project Operation Manual.

(b) Coordination among Implementing Departments (IDs) and PSO. Experience under the original project shows that delays were partly caused by a lack of coordination among the departments concerned and with the PSO. In the proposed AF, it was agreed that more proactive coordination of the MEM Secretariat staff with the IDs, e.g. joint coordination meeting on regular basis. In addition, PSO will use the procurement tracking form to monitor the actual procurement progress from the approved procurement plan so as to identify any slippage from the plan and coordinate with IDs.

37. Based on the above analysis, the initial risk assessment for project procurement is Substantial, and with the agreed mitigations, the procurement risk is also rated as Moderate. 38. Procurement Plan. A Procurement Plan for the HMTA-AF was prepared by MEM and agreed with the World Bank team during project appraisal, and will be available in the project’s files. Once the project is approved, it will be made available to the public on the HMTA and World Bank external websites. This Procurement Plan will be updated in agreement with the World Bank at least annually or as required to reflect actual project implementation. 39. Implementation support and supervision plan. Based on the capacity of the project implementing agencies it is recommended that integrated technical and fiduciary implementation support missions will continue to take place twice a year and post review will be conducted annually. 40. Governance. Both hydro and mining involve substantial political risks, including the risk not to optimize the use of natural resources as a result of weak institutional and human capacity, incomplete legal and regulatory framework, lack of management tools, and the absence of a system of checks and balances. The HMTA project has helped establishing foundations supporting good governance in both sectors through the development of national policies, the drafting of regulation, and capacity building of executive and legislative bodies for improved oversight. Under the AF, the project will scale up support for oversight and compliance monitoring by: (i) building capacities for monitoring compliance to CA’s in line with international practice; (ii) strengthening the monitoring capacity of the Inspection Department at MEM and establishing an internal control system within the ministry; (iii) establishing a stronger framework of support to and collaboration with the National Assembly (NA) for improved oversight of the sectors, participation in the assessment of fiscal regime options, and implementation of the Extractive Industries Transparency Initiative (EITI); and (iv) facilitating dialogue with the private sector in policy development processes.

41. Risks. Overall, project risk is considered to be substantial. The rating is based on the current weak absorption capacity and large capacity gap to manage the rapidly growing hydropower and mining sectors. The project benefits from management structures and implementation teams already in place. Mitigation measures to address absorption capacity have been identified and incorporated in the AF design, including strategic technical and operational support for the agencies, and recruitment of a full-time procurement specialist. In order to mitigate risks related to the capacity of government to

13

institutionalize TA recommendations and to enforce the regulations, systems, and tools developed through the project, the AF will provide adequate technical support and will work closely with the Project Steering Committee led by the Vice-Minister of MEM to ensure political commitment from all levels as well as close monitoring of project progress. A moderate risk of coordination among agencies would be addressed through the established working groups for mining and hydro. An updated Operational Risk Assessment Framework (ORAF) is included in Annex 2.

42. A potential substantial stakeholder risk also needs to be anticipated resulting from the decision of Government to proceed with dams on the Mekong mainstream. As with the original project, the AF will ensure that: (a) activities are focused on the broader policy and regulatory upstream work, human resource development, and operationalization of management tools not related to any specific investment project on the mainstream; (b) all terms of reference will be reviewed to ensure that no activities related to mainstream dams are financed through the AF; and (c) a communication strategy will be develop for the project.

43. Implementation Readiness. The MEM is ready to implement the AF. Budget, procurement, training and work plans have been prepared. Terms of reference are under preparation for: (a) the development of the hydropower and mining sector strategies, (b) the operationalization of CA, and (c) fiscal regime for both sectors. Systems and processes are in place and counterparts are ready to commence implementation upon AF effectiveness. Fiduciary and administrative systems would continue to be strengthened throughout the AF.

14

Annex 1: Results Framework and Monitoring

LAO PDR: Technical Assistance for Capacity Building in the Hydropower and Mining Sectors Project Results Framework

Revisions to the Results Framework Revisions to the Results Framework Comments/Rationale for ChangePDO PDO

Original Proposed changed for AF* Increase human capacity and improve the performance of government oversight institutions for the hydropower and mining sectors

No changes are proposed.

The current PDO is relevant and achievable.

PDO indicators PDO indicators Original Proposed changed for AF* PDO Indicator One: Increased number of trained national human resources in the mining and hydropower sectors within the public sector and from higher and technical educational institutions (EIs).

PDO Indicator One: Revised to: Percentage of trained GOL staff report medium to intensive use of knowledge and lessons learned from capacity building measures.

Revised to reflect qualitative results of training support provided through the project.

PDO Indicator Two: Enhanced institutional capacity for the planning, management, and monitoring of hydropower plants.

PDO Indicator Two: Revised to: Number of River Basins, where all hydropower projects are monitored for CA compliance.

Revised to reflect direct impacts of CA operationalization activities.

PDO Indicator Three: Increased percentage of mining inspections performed through the use of improved systems and procedures.

PDO Indicator Three: Revised to: Percentage of on-the-ground inspections of exploration/mining operations performed using improved systems and procedures in line with international practice.

Revised with more precise wording.

15

Intermediate Outcomes

Intermediate Outcomes Intermediate Results Indicators Intermediate Results Indicators

Original Proposed changed for AF* Original Proposed changed for AF* Comments/ Rationale for Change

Joint Learning Program (Component 1)




Outcome One: Improved knowledge and skills of GOL personnel in hydropower and mining sector related subjects, resulting in improved work performance.

Outcome One: Revised to: Increased number of GOL personnel benefit from training on technical and cross-cutting areas in the hydropower and mining sectors.

Result Indicator One: Number of GoL personnel trained and applying the acquired knowledge and skills in cross-cutting areas such as contract management, financial analysis and accounting, environmental and social management.

Result Indicator 1.1: Revised to: Number of GoL female and male personnel trained on technical aspects, such as contract management, financial analysis, accounting, environmental and social management.

Revised to avoid duplication with the PDO indicator 1 and to capture disaggregated data on male and female trainees.

Result Indicator 1.2 (new): Completed and operationalized the performance evaluation (KPI) system for MEM and PDEMs

Added to monitor progress of system developed to capture the impact of capacity building activities.

Outcome Two: Increased capacity of national university and technical schools to develop national human resources in the mining and hydropower sectors

Outcome Two: No change

Result Indicator Two: Number of teachers and students benefiting from educational courses supported through curriculum update/development, teacher training, technical/lab equipment and library materials.

Result Indicator 2.1: No change

Result Indicator 2.2 (new): Direct project beneficiaries (number), of which female (percentage)

Core Sector Indicator

Hydropower Sector Development (Component 2)




Outcome Three: Enhanced planning capacity

Outcome Three: No change

Results Indicator Three: Percentage of Hydropower Power Purchasing Agreement (PPA) that

Results Indicator 3.1: No change

16

for hydropower development are subject to the avoided costs methodology Results Indicator 3.2 (new):

Completed power trade strategy and action plan

Added to reflect scale-up.

Outcome Four: Improved institutional processes and procedures for CA monitoring and management

Outcome Four: No change

Results Indicator Four: Application of internal requirements and standard procedures for CA monitoring and proficiency of staff to manage contracts.

Results Indicator 4.1: Revised to: Percentage of new hydropower IPP applying the standard CA requirements.

Proficiency of staff to manage contracts is measured under PDO indicator 1 and by measuring functionality of the established systems. Result Indicator 4.2 (new):

Applied Standard Operation Procedures (SOP) for IPP process.

Outcome Five: Adoption of improved processes including update of the NPSH and action plan for its compliance.

Outcome Five (revised): Revised to: Improved performance of hydropower development through the implementation of the PSHD.

Result Indicator Five: Updated NPSH and approved action plan and procedures for its implementation.

Result Indicator 5: Revised to: Annual report on the implementation of the PSHD.

Revised to better reflect (i) the implementation progress of the updated NPSH, (ii) the change of scope and name from NPSH to PSHD, and (iii) the impact of project extension and additional budget.

Mining Sector Development (Component 3)




Outcome Six: Improved Governance of the Mining Sector

Outcome Six: No change

Result Indicator: Adoption of standardized terms and conditions for mine investment agreement

Result Indicator 6.1: Revised to: Applied model contracts to new mining concession.

Revised for clarity. There are changes in Intermediate Result Indicators and target value to reflect the impact of project extension and additional budget.

17

*Indicate if the indicator is Dropped, Continued, New, Revised, or if there is a change in the end of project target value

Result Indicator: Number of mining regulations drafted and approved

Result Indicator 6.2: Applied mining regulations.

Revised to capture the impact of project extension and additional budget

Result Indicator 6.3 (new): Completed sector strategy and action plan.

Added to reflect priority of effective management of mining operation and the impact of project extension and additional budget for mining sector

Outcome Seven: Improved Government Oversight of the Sector

Outcome Seven: No change

Result Indicator: Number of annual inspections of exploration and mine activities using improved inspection system

Result Indicator : Dropped

Dropped results indicator to avoid duplication with PDO three

Result Indicator: Prospecting/exploration and mining development licenses located in a developed cadastral system

Result Indicator 7.1: Revised to: Applied Standard Operation Procedures (SOP) for mining concession process.

Revised for clarity. There are changes in Intermediate Result Indicators and target values to reflect the impact of project extension and additional budget.

18

PROJECT RESULTS FRAMEWORK


Project Development Objective (PDO): Increase human capacity and improve the performance of government oversight institutions for the hydropower and mining sectors

Project Development Objective (AF): The PDO does not change. The PDO indicators were revised. There are changes and addition of outcomes, results indicators, target values, and other related aspects to improve clarity and consistency and impacts of project extension and additional budget under AF

PDO Level Results Indicators* C

ore

D=Dropped C=Continue N= New

R=Revised

Unit of Measure

Baseline (original project 2010)

Progress to Date (2013)

Cumulative Target Values**

Frequenc

y

Data Source

/ Methodology

Responsibility

for Data

Collection

2014

2015 2016 2017 2018

Indicator One: Percentage of trained GOL staff report medium to intensive use of knowledge and lessons learned from capacity building measures.

R Percent None Tracer system not

in place

System developed

50 60 70 80 Quarterly

Tracer Studies

PSO

Indicator Two: Number of River Basins, where all Hydropower Projects are monitored for CA compliance.

R

Number 0 0 1 2 3 5 Annually

Reports by

respective

Departments

DEB, DEM, DEPP, DESIA, DFRM

Indicator Three: Percentage of on-the-ground inspections of exploration/mining operations performed using improved systems and procedures in line with international practice.

R Percent 0 0 10 20

30

40

50

Quarterly

Inspection

monitoring

DOM and

DGM

19

INTERMEDIATE RESULTS

Intermediate Outcome (Component One) (Original): (i) Improved knowledge and skills of GoL personnel in hydropower and mining sector related subjects, resulting in improved work performance; (ii) Increased capacity of national university and technical schools to develop national human resources in the mining and hydropower sectors. Revised Intermediate Outcome (Component One) (AF): (i) Increased number of GOL personnel benefit from training on technical and cross-cutting areas in the hydropower and mining sectors; (ii) Increased capacity of national university and technical schools to develop national human resources in the mining and hydropower sectors. Unit Baseline 2013 2014 2015 2016 2017 2018 Intermediate Result indicator 1.1: Number of GoL female and male personnel trained on technical aspects, such as contract management, financial analysis, accounting, environmental and social management.

R Number of staff

None 0 60 women 150 men

135 women 315 men

200 women 450 men

250 women 560 men

310 women 720 men

Quarterly

Activity Reports of Capacity Building Measures

DOP

Intermediate Result indicator 1.2: Completed and operationalized the performance evaluation (KPI) system for MEM and PDEMs

N Text No KPI system in

place

A HRD system is

being developed

Mobilized additional consultant

Tested and trained on

the application

of KPI system

Approved the system by MEM

Operational ized the system

Assessment of

overall results

Semi-annual

and completi

on report

Project reports, Training Records (disaggregated

by gender) Survey

of Trainees

DOP

Intermediate Result indicator 2.1: Number of teachers and students benefiting from educational courses supported through curriculum update/development, teacher training, technical/lab equipment and library materials

R Number

0

4,000

4,100

4,200

4,300

4,400

4,500

Annually

Project reports, Training Records (disaggregated

by gender), Survey

of Trainees

EIs

20

Intermediate Result indicator 2.2: Direct project beneficiaries (number), of which female (percentage)

N Number Percent

0 300 25%

460 25%

700 25%

900 25%

1,060 25%

1,280 25%

Quarterly

Report PSO

Intermediate Outcome (Component Two) (Original): i) Enhanced planning capacity for hydropower development; (ii) Improved institutional processes and procedures for CA monitoring; (iii) Adoption of improved processes including update of the NPSH and action plan for its compliance Revised Intermediate Outcome (Component Two) (AF): i) Enhanced planning capacity for hydropower development; (ii) Improved institutional processes and procedures for CA monitoring; (iii) Improved transparency and performance of hydropower development through the implementation of PSHD. Unit Baseline 2013 2014 2015 2016 2017 2018 Intermediate Result Indicator 3.1: Percentage of Hydropower Power Purchasing Agreement (PPA) that are subject to the avoided costs methodology

R Percent 0

0 0

10

20

30

50

Quarterly

Activity/Quarter

ly Reports

DEPP

Intermediate Result Indicator 3.2: Completed power trade strategy and action plan.

N Text No power trade strategy and action plan

No power trade strategy and action plan

Consultant mobilized

Round table consultation and draft strategy and action plan

Final Draft Quarterly

Activity/Quarter

ly Reports

DEPP/ EDL/ EDL Gen

Intermediate Result Indicator 4.1: Percentage of new hydropower IPP applying the standard CA requirements.

R Percentage 0 0 0 20 50 80 100 Quarterly

check contract structure

DEB

Intermediate Result Indicator 4.2: Applied Standard Operation Procedures (SOP) for IPP process.

N Text No SOP No SOP Consultant mobilized

Draft SOP Final SOP SOP Applied

SOP Applied

Quarterly

Activity/Quarter

ly Reports

DEB

Intermediate Result Indicator 5: Annual report on the implementation of the PSHD.

R Text Original NPSH in place

Updated NPSH – name changed to PSHD

PSHD approved by MEM

Annual Report

Annual Report

Annual Report

Annual Report

Annually

Annual Report

DEPP, DESIA, DFRM

21

Intermediate Outcome (Component Three) (Original): (i) Improved Governance of the Mining Sector; (ii) Improved Government Oversight of the Sector.

No change

Unit Baseline 2013 2014 2015 2016 2017 2018

Intermediate Results Indicator 6.1: Applied model contracts to new mining concession.

R Text Non-standardize terms and conditions for mining concession

Draft model contract completed

Final draft of model contract

Moratorium on new mining concession still in place

Applied model contract to new mining concession



Quarterly

Activity/Quarterly Reports

DOM, DOI, DGM

Intermediate Result Indicator 6.2: Number of approved mining regulations.

R Number 0 0 4 6 8 10 12 Quarterly

Publication by MEM

DOM

Intermediate Result Indicator 6.3: Completed sector strategy and action plan.

N Text No strategy and plan for mining sector

No strategy and plan for mining sector

Mobilized consultant

Draft strategy

Final Draft Quarterly


DOM

Intermediate Result Indicator 7.1: Applied Standard Operation Procedures (SOP) for mining concession process

N Text No SOP No SOP Consultant mobilized

Draft SOP Final SOP SOP Applied

SOP Applied

Quarterly


DOM

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Annex 2: Operational Risk Assessment Framework (ORAF)

LAO PDR: HYDROPOWER AND MINING TECHNICAL ASSISTANCE - ADITIONAL FINANCING PROJECT

Project Stakeholder Risks

Stakeholder Risk Rating Substantial

Risk Description: Hydropower: hydropower projects are usually controversial and closely monitored by NGOs. The project is being implemented at a time when Governments in the lower Mekong river are discussing the issues related to the development of the lower Mekong mainstream, especially Xayaburi dam in Lao PDR. This situation significantly increases the stakes and level of international interest. Key risks could include NGOs attempt to link the TA project with decisions about controversial dams. Given rapid development of hydropower in Lao PDR, there are concerns from some local community, local authority, agencies, and other stakeholder on the potential negative impacts of hydropower projects on the ground, inadequate coordination and consultation, and the lack of budget for the local authorities and agencies to carry out their responsibilities. There are also concerns on rapid development of hydropower projects by many developers mostly from other countries and the lack of clarity and transparency on the process. There may be some high expectation on the outcome and impacts of the project. Mining: There are issues related to negative impacts of mining activities both on land and in the water courses, including some complaints raised by local people. The project has supported the development of legal and regulatory framework and to build government capacity to monitor and inspect as well as improve

Risk Management:

For hydropower sector, the original project has provided support to the sector on institutional strengthening, human resources development, further development of regulatory framework and sector policy, development of management tools for planning, concession agreement and monitoring, which are not related to any specific investment project. Under the original project, the Bank has reviewed all terms of reference of the consultancy services and ensured that the consulting services do not link to any particular mainstream dam. The Bank has also ensured that the project has engaged a wide range of stakeholders in the consultation process of the policy and regulatory framework development. The task team has conducted implementation support mission twice a year. In addition, task team has attended regular meetings with the project to follow up the progress and issues that the project may face during the implementation. Under the AF these mitigation measures will continue. All terms of reference will be reviewed to ensure that no activities related to mainstream dams are financed through the AF. The project will deepen the support to institutional development of government institutions managing the hydro power sector to help shape government policy in a more efficient and sustainable manner. A communication strategy will be developed for the AF. The WB task team will continuously monitor the risks related to stakeholders’ perception during the implementation of AF.

Resp: Both

Stage: Implementation

Recurrent:

Due Date: Frequency: Continuous

Status: In Progress

Risk Management:

For mining sector, similar to the hydropower sector, the project has provided support to mining sector on policy and regulatory framework for the mining sector development,

23

governance and transparency. Mining development is one of the sectors with weak governance and lack of transparency. There may be some high expectation on the outcome and impacts of the project.

which includes assisting MEM to prepare the implementation decree for mineral law, standard investment agreement, environmental regulations, fiscal regime, cadastral design and management, community development fund, mine inspection and human resources development. The efforts will help strengthen government institution managing the mining sector development including its governance system. The consultation process promoted by the project has provided opportunities for all stakeholders including private and public sector at both central and local levels to express their view and concerns on the sector development. These mitigation measures will continue to apply under AF and the WB task team will closely monitor the potential stakeholder risk during the implementation of AF.

Resp: Both


Recurrent:


Status: In Progress

Implementing Agency (IA) Risks (including Fiduciary Risks)

Capacity Rating Substantial

Risk Description: Risk Management:

Rapid hydropower and mining development continues to outstrip the pace of capacity development. Inadequate resources (staffing, skills, equipment, business processes, incentives, and operation budget) for the agencies remain to be the key challenges for the sector development. Currently there is no effective and sustainable mechanism in place for addressing these issues. Although all the implementing agencies have some experience with WB operation, the individuals involved in implementing the project will continue to encounter multiple demands on their times in addition to implementing the project. MEM Secretariat staff has gained experience on Bank’s procurement procedures from the knowledge transferred and hands-on training from the International Procurement Specialist of the original Project. However, the assigned Procurement Officer had limited time from his regular works to contribute to

The project approach with regard to the capacity development is not only to provide training to individuals but to put in place the core systems and institution that will enable government to develop its own capacity over time. The project has involved Personnel Department in leading the human resource development and other sector departments in development of regulatory framework and system for planning and monitoring, and business process for departments concerned. The project has tried to strike a balance for the human resource development plan and training plan between the need for basic knowledge and technical knowledge required for core functions and also between short term and long term training need. In addition, the project has also extended its support to education institutes including improvement of curricula, teaching aid, laboratory equipment, ICT equipment as well as provision of teacher training. Finally the project is supporting a partnership among education sector, hydropower and mining industry and government, aiming at improved education quality of workforces serving hydropower and mining sector by linking private sector demands, government needs and the supply of quality of educational services. Under the AF, these activities will be continued and strengthened to enhance capacity of the

24

the Project. Therefore, the in-house procurement capacity is inadequate to carry out the expected large volume of procurement activities, especially the international competition packages.

agencies. In particular, scholarships have been included under the AF to ensure that key personnel have in-depth training in critical technical areas. To address the issues related to limited number and time of the qualified staff additional support from consultants (national, regional, and/or international) will be strategically provided to ensure effective and timely implementation of the AF activities. MEM will assign a full-time procurement officer to oversee project procurement. Fiduciary and administrative capacity building support will be provided throughout AF implementation.

Resp: Both


Recurrent:


Status: In Progress

Governance Rating Substantial


Technical progress is important but also requires political support to fully implement the upstream work. The original project has received strong support from MEM high-level decision makers. However, limited capacity of the agencies remains an issue mainly due to the routine workload and limited number of qualified staff. An incomplete legal and regulatory framework combined with limited capacity within the agencies managing the sectors opens up opportunities for rent seeking jeopardizing the optimization of natural resources. In addition, ownership risk of mining sector remains high given the lack of sector vision, rapid shifts in the priority of technical departments due to changes in policy, ownership is less predictable.

The AF will address governance risks by: (i) Building capacities for monitoring compliance to CA’s in line with international practice;(ii) strengthening the monitoring capacity of the Inspection Department at MEM and establishing an internal control system within the ministry; (iii) deepen the collaboration with and support to the National Assembly (NA) for improved oversight of the sectors, and promote its participation in the assessment of fiscal regime options, and implementation of the Extractive Industries Transparency Initiative (EITI); and (iv) facilitating dialogue with the private sector in policy development processes. At the project level, under AF the task team will continue to provide technical support the Project Steering Committee (PSC), to ensure close monitoring of project activities.

Resp: Both


Recurrent:

Due Date: Frequency: Quarterly

Status: In Progress

Project Risks

Design Rating Moderate


Delay on procurement and financial management. The original In order to avoid delays in procurement the AF design has included the use of consultants

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project is the first WB project provided directly to MEM and there are many implementing agencies involved in which most of them have limited experience with WB operations and requirements, including the Project Management Office (PSO) and the project steering committee. Although most of the delays on procurement and financial management have been addressed the risks on these aspects remain high. Moreover, most MEM implementation agencies have limited number of qualified staff to ensure effective and timely implementation of the activities. Lengthy internal bureaucratic process in making decision as well as limited operating budget of the agencies may continue to cause further delay in the project implementation. Broad PDO: Given a large legal, institutional, and technical gaps and interconnection among the activities in light of rapid development in hydropower and mining sectors, it is considered necessary to build capacity of these two sectors at the same time and also address the entire project development cycle (value chain). The original project was therefore designed with a broad objective which may be difficult to verify the direct impacts of the project especially when the project involves many agencies and with very limited financial resources. However, at this stage the strategic direction is much clearer and specific intermediate outcome and results framework could be identified in closed consultation with the implementing agencies. Key lessons learnt from the design and implementation of the original project is that ownership has to be built through the improved understanding and trust and “on-the-job training” or “learning by doing” with appropriate technical and management supports are necessary for successful implementation of the project.

(national and international) to strategically support implementation capacity among key departments. In addition, the AF favours larger procurement packages to avoid too many fragmented consulting services. PDO level indicators have been revised in the Results Framework to ensure direct project results are measurable and can be evaluated.

Resp: Client


Recurrent:


Status: Completed

Social and Environmental Rating Moderate


The original project was not expected to involve any activities For hydropower sector, recent development of the Policy on Sustainable Hydropower

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that could create adverse impacts. However, given that the nature of hydropower and mining development would create significant environment and social impacts, category B was assigned to ensure that priority will also be given to build capacity to reduce potential negative impacts. Implementation experience during the original project suggested that the project has involved only minor office renovations, and there are no significant environmental and social impacts. However, there are needs for PSO and the implementing agencies to ensure that safeguard consideration is fully integrated into the training and other aspects of the project activities to enhance potential positive impacts of the project on safeguard. Moreover, the project has been supporting cooperation among MEM and MONRE agencies through the implementation of the national policy on environment and social sustainability (NPSH) while DESIA and DFRM of MONRE are among the key beneficiaries of the project. For mining, capacity building under the original project will enhance capacity of DOM and provinces to reduce potential negative impacts of mining project on the ground.

(PSHD) and the establishment of the inter-ministerial committee (PSHDC) to oversee the implementation of the PSHD will help ensuring effective cooperation and coordination among key agencies during the hydropower project development cycle. Through this mechanism, the environmental and social aspects will be addressed in a more systematically way. The AF will focus on the operationalization of the PSHD and strengthen the PSHDC. For mining sector, implementation of AF will be positive. The environmental guidelines for mining development are under development and it will be incorporated into the investment agreement. The technical working group, comprised MEM, MONRE, MOF, and MPI, has been established to work with the development of investment agreement. Monitoring system is under development.

Resp: Client


Recurrent:


Status: In Progress

Program and Donor Rating Moderate


There are a couple of development partners working in regulatory framework and institutional strengthening in the hydro and mining sector. There is a risk of overlap on some areas, if no coordination has taken place.

Task team has close collaboration with IFC, DFAT, JICA, and Germany on the implementation of the project. In consultation workshops for project activities, many development partners have been invited. In many cases, the coordination has led to enhancing synergy of support provided by different development partners. The Bank team and IFC team has been working closely under the original project. Similar effort will be made under the AF. Support will be provided so that the project steering committee could also play a key role in promoting effective coordination and cooperation among donors.

Resp: Bank


Recurrent:

Due Date: Frequency: Yearly

Status: In Progress

Delivery Monitoring and Sustainability Rating Moderate

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Risk Description: As the project is complex and has a long list of outputs to be delivered by many departments and education institutes. There is a risk of poor data collection for monitoring. Institutionalization of technical assistance work into the government’s business process and policy requires time for the government to digest and absorb, therefore there is a risk that many recommendations may not fully be implemented.

Risk Management:

The project has hired a monitoring and evaluation consultant to assist the project to put in place M&E system. The consultant will also provide training to project secretariat and department concerned on data collection and implement the M&E system.

Resp: Client


Recurrent:


Status: In Progress

Risk Management:

Task team has often engaged in dialog with MEM, MONRE, Education Institutes, and MOF on the challenges faced in implementation.

Resp: Bank


Recurrent:


Status: In Progress

Other (Optional) Rating

Description: Risk Management:

Resp: Stage: Recurrent

:

Due Date: Frequency: Status:

Other (Optional) Rating

Description: Risk Management:

Resp: Stage: Recurrent

:

Due Date: Frequency: Status:

Overall Risk

Implementation Risk Rating: Substantial

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Preparation Risk Rating: Moderate Implementation Risk Rating: Substantial

Risk Description Project preparation has been rapid due to the urgency to fill in the project budget gap while GOL would like to take an opportunity to use the remaining budget available under IDA 16. There a risk related to the project cost which could be under estimated due to the requirement for international consultants to pay local taxes according to the revised tax law effective in July 2012 and the currency exchange risk.

Risk Description Given that the sector issues the AF will address are complex and involved many stakeholders across ministries at central and local levels as well as the private sector, and absorption capacity is still weak, the project may involve an implementation risk. However, the risk could be reduced through improved implementation arrangements and coordination mechanisms. These include mining and hydro working groups, improved arrangements for procurement and system for monitoring and evaluation (M&E) and strengthened PSO capacity. There are risks related to the project cost and the delay of payment and disbursement due to the need to clarify details on local taxes which have to be paid according to the new tax law. The project has allocated some budget for contingency purposes.

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Annex 3: Detailed Project Cost

IDA TA Works Goods IOC Training U/C TOTAL

C1. Joint Learning Program 3.00 0.24 0.00 0.96 0.12 1.58 0.10 3.00

1.A Learning Program for Sector Professionals 1.80 0.22 0.00 0.10 0.09 1.29 0.10 1.80

1.A.1 Implementation of HR System Development 0.20 0.11 0.09 0.20

1.A.2 Learning/Training WS including Study Tour 0.95 0.05 0.90 0.95

1.A.3 Long Term Training (Master Degree) 0.30 0.30 0.30

1.A.4 MEM Training Center Facility 0.25 0.11 0.10 0.04 0.25

Contingency 0.10 0.10 0.10

1.B Education Sector Support 1.20 0.02 0.00 0.86 0.03 0.29 0.00 1.20

1.B.1 NUOL (Lab Equipment + Training) 0.50 0.40 0.10 0.50

1.B.2 PTC (Lab Equipment + Training) 0.30 0.20 0.10 0.30

1.B.3 LGTC (Lab Equipment + Training) 0.25 0.20 0.05 0.25

1.B.4 LPBTV (Training) 0.10 0.06 0.04 0.10

1.B.5 TWG 0.05 0.02 0.03 0.05

Contingency 0.00

C2. Hydropower Development 7.00 4.02 0.00 0.16 0.99 1.42 0.40 7.00

2.A Hydropower Policy Planning 1.54 1.00 0.00 0.12 0.25 0.17 0.00 1.54

2.A.1 Power Trade/Hydropower Strategy 0.36 0.34 0.024 0.36

2.A.2 System Avoided-Cost Policy and Plan 0..25 0.20 0.045 0.25

2.A.3 Fiscal Policy Regime (MOF) 0.50 0.25 0.1 0.05 0.10 0.50

2.A.4 Hydropower Modeling 2.A.5 Capacity Building for DEPP 0.43 0.21 0.02 0.20 0.43

2.B Hydropower CA Management 3.15 2.34 0.00 0.02 0.30 0.49 0.00 3.15

2.B.1 Management and Monitoring Support (TA support management and monitoring including technical engineering, environment and social safeguards and CA compliance)

2.20 2.20 2.20

2.B.2 Capacity Building (including DEB of MEM, MPI, NA, MONRE)

0.95 0.14 0.02 0.30 0.49 0.95

2.C Hydropower Management 0.61 0.27 0.00 0.005 0.13 0.20 0.00 0.61

2.C.1 Update the Technical Guideline - Pure engineering

0.15 0.15 0.15

2.C.2 DEM Capacity Building 0.46 0.12 0.005 0.13 0.20 0.46

2.D Support to the implementation of PSHD 1.30 0.41 0.00 0.018 0.31 0.56 0.00 1.30

2.D.1 PSHD Implementation - Development of guidelines

0.29 0.29 0.29

2.D.2 M&E on PSHD implementation 1.01 0.12 0.018 0.31 0.56 1.01

Contingency for Hydro Component 0.40 0.40 0.40

C3. Mining Development 6.00 3.76 0.03 0.28 0.67 0.76 0.50 6.0

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3.A Improvement of Sector Governance 1.76 1.13 0.00 0.18 0.23 0.22 0.00 1.76

3.A.1 Legal Support 0.13 0.1 0.03 0.13

3.A.2 Technical Support 0.28 0.28 0.28

3.A.2 Fiscal Regime 0.60 0.3 0.18 0.05 0.07 0.60

3.A.3 Sector Strategy 0.15 0.1 0.05 0.15

3.A.4 Community Development Fund 0.15 0.07 0.03 0.05 0.15

3.A.5 EITI Consultation (Study Tour & Training) 0.05 0.05 0.05

3.A.6 Strategic Environmental and Social Assessment

0.25 0.23 0.02 0.25

3.A.7 Strengthen Oversight Capacity of NA (National Assembly)

0.15 0.05 0.05 0.05 0.15

3.B Oversight 3.74 2.63 0.03 0.10 0.44 0.54 0.00 3.74

3.B.1 Inspection and Project Evaluation (incl. Equipment)

1.04 0.41 0.03 0.10 0.20 0.30 1.04

3.B.2 Implementation of Cadastre Management System - 4 regional offices

0.30 0.22 0.04 0.04 0.30

3.B.3 Geological Infrastructure Development (Mapping)

0.70 0.50 0.10 0.10 0.70

3.B.4 Geophysical Infrastructure Development (Air Born)

1.70 1.50 0.10 0.10 1.70

Contingency for Mining Component 0.50 0.50 0.50

C4. Project Administration 1.80 1.01 0.01 0.15 0.22 0.12 0.30 1.80

4.1 Operational Support 1.00 0.72 0.08 0.15 0.05 1.00

4.2 ICT Development 0.28 0.16 0.01 0.07 0.02 0.02 0.28

4.3 Internal Control System Development 0.15 0.09 0.03 0.03 0.15

4.4 Gender Mainstreaming Support 0.07 0.04 0.015 0.015 0.07

Contingency for PSO 0.30 0.30 0.30

TOTAL PROJECT COSTS 17.80 9.03 0.04 1.56 2.00 3.87 1.30 17.80

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Annex 4: Financial Management and Disbursement Arrangements LAO PDR: HYDROPOWER AND MINING TECHNICAL ASSISTANCE PROJECT (HMTA) –

ADDITIONAL FINANCING Summary of the Financial Management Assessment A financial management (FM) capacity assessment of the Project Secretariat (the implementing agency) was undertaken in December 2013 to determine whether the implementing agency has adequate financial management systems and related capacity in place to meet the minimum requirements of the World Bank’s Operational Policy / Bank procedure 10.00 on Investment Project Financing. The assessment was based on the Concept Memorandum, the Project Paper, reviews of documents and discussions with the finance staff of the Project Secretariat. The Project Secretariat will continue to be the implementing agency for HMTA and will assume the financial management functions of the project. Based on the FM review, the current financial management arrangements are deemed acceptable. The current project accounting system is capable of producing timely and accurate financial statements, accounting policies and procedures are in place, audit arrangements are acceptable to the Bank and an acceptable financial management manual is also available to guide the project staff in their day-to-day work. The overall financial management risk is Moderate. Organization and staffing. The same two staff plus two additional civil servants who are recently appointed and on board at the beginning of November 2013, will be working for the Finance Unit of the Project Secretariat. Staffing is considered adequate for additional financing. The roles and responsibilities for all staff are documented in the project Financial Management Manual (FMM). The FMM will need to be revised in light of the change for term of references of the two new staff. Budgeting and planning. The Project Secretariat is required to prepare an annual work plan and the budgets each year within the framework agreed within the Financing Agreement. The annual work plan and budget will be approved by the project director and Project Steering Committee. Then the annual work plan and budgets are submitted to the Bank for approval/endorsement. The annual work plan and budget will then be broken down into quarters and review and revised bi-annually and whenever there are major changes or variations in the annual work plans or overall project plans. The World Bank’s no objection is required for variations or revision of the annual work plans or budgets. Actual expenditures are compared to the budget every quarter and explanations on significant variances will be outlined in the project quarterly IFR. The budgeting procedures/guidelines are documented in detail in the FMM. The project will continue to apply the Ministry of Finance Ministerial Decision no. 0008/MoF on Public Administrative Budget Expenditure Norms in budgeting for in-country and out-country training/workshop and study visits. Other related notifications by the World Bank or by Ministry of Finance on the use of official development assistance are also to be followed. Fund flows. The funds from the additional financing 50/50 IDA Grant and Credit will be pooled with the funds from original grants and deposited in a Designated Account (DA) managed by the National Treasury. To facilitate implementation, Project Secretariat has opened an operating account in US dollars in a commercial bank (BCEL) with a ceiling amount of US$50,000. The project will continue to use to use the operating account under the Additional Financing. The project bank account will be replenished monthly from the DA. Payments in cash will be limited to petty cash transactions only. Direct payment to suppliers and consultants will be encouraged. Disbursements to each sector agency will be made in form of an advance on an activity basis. Advances will be liquidated no later than 10 business days after completion of an activity; further advances will not be made unless the previous advance is cleared. Detailed funds flow arrangements and withdrawals procedures for HMTA are documented in the FMM. Bank reconciliation for the DA at the Bank of Lao PDR and the Operating Account at a local commercial Bank are performed on a monthly basis. A diagram of the flow of funds is shown below.

32

Accounting policies, procedures and information systems. The procedures described in the FMM are used as guidelines for project staff working on the project. The FMM describes the budgeting, flow of funds, disbursement, accounting policy and procedures including internal controls, recording, financial reporting, and auditing the project will follow cash basis of accounting. All accounting and supporting documentation are retained by the Finance Unit of the Project Secretariat in a system that allows authorized users easy access. The current accounting software K-PACC was determined by the PIU as adequate for use. Hence, the project will continue using K-PACC to record and report on receipts and expenditure. Internal controls. (Segregation of duties, payments and safeguarding of assets). Project Secretariat staff has clearly defined job descriptions and responsibilities. No single person can initiate, verify and authorize individual payment transactions. Payments in cash will be minimized. A petty cash float of US$ 1,000 has been set up to facilitate the payment of small transactions. A Fixed Asset Register is used to record the project fixed assets and is regularly updated by the Project Secretariat. The fixed asset register is then reconciled with the accounting record periodically. A physical count of all assets is also performed once a year by the project to verify the existence and check the status of the fixed assets. Internal controls on payments authorization, cheque signing, safeguarding and use of assets, reconciliations and segregation of duties have been outlined in the current FMM and will continue to be relevant under HMTA (AF). Financial Reporting. The project’s financial report/statements will be prepared by the Finance Unit of the Project Secretariat. Quarterly Unaudited Interim Financial Report shall be prepared on a cash basis and submit to the World Bank no later than 45 days after each quarter end. The current format of the IFR

World Bank Grant Account

Pooled Designated Account (BOL)

IDA H539 – US$500,000 IDA Grant – US$500,000 IDA Credit – US$500,000 TF 99572 – US$200,000

IDA Grant Replenishment Application

Operating Account (BCEL) US$50,000

Petty Cash (Project Secretariat)US$1,000

33

needs minor amendments to present a separate column for additional financing and variances between actual and budgeted figures by quarter, year to date and cumulative to date for additional financing. Variance analysis should be included in the IFR each quarter. The project fiscal year for the purpose of financial reporting is from January 1 to December 31. Any other financial reporting requirements by project management and/or Ministry of Finance shall also be included in the Financial Management Manual. Financial Management Manual. A few areas of the FMM need to be revised. The areas requiring revision include: 1) insert an organization chart for Finance Unit of the Project Secretariat and TOR of the two new accountant assistants; 2) amend audit arrangements to include the mechanism for disclosure of audit reports in accordance with the new World Bank policy on Access to Information effective from July 1, 2010; and 3) add timelines for audit field work and deadlines for audit submissions to World Bank under additional financing. These actions are to be completed no later than three months following AF effectiveness. Audit arrangements. The project will be subject to annual audit by an independent qualified auditor with terms of references acceptable to the World Bank. The Project Secretariat currently has an audit contract with PwC as the project auditor. The contract is for the period of four years. The final audit period is FY2013-2014. Hence, the Project Secretariat should appoint auditors for the project after this audit contract ends. Amendment should be made to the existing auditor contract for last year audit (ie: FY 2013-2014) to cover the expenditure paid from additional financing in FY 14. One audit report and management letter covering all sources of financing, including the AF, shall be submitted to the World Bank within 6 months of the end of each fiscal year. The audited financial statements and the audit report shall be made available to the public in accordance with the World Bank’s Policy on Access to Information. The mechanism used by the Project to disclose the audited financial statements is through its own website on www.mem.gov.la Implementation Support and Supervision Plan. FM implementation support and supervision will be carried out once a year as the FM risk is assessed as moderate after mitigation. The supervision is intended to be extensive and integrated with task team and procurement team where possible. The supervision will review the continued adequacy of the financial management arrangements, follow up on audit and mission findings, evaluating the quality of budgets and project financial management reports, reviews of a random sample of transactions, assessing compliance with the financial covenants and FM Manual and integrated fiduciary review with procurement on goods and services contracts and field visits where necessary. Disbursement arrangements. HMTA is currently financed by an original IDA grant of SDR 5 million and AusAID grant of US$2.542 million. The proposed additional financing is for US$17.8 million equivalent. The Project Secretariat will utilize the current DA to receive funds from the World Bank (i.e.: pooled DA). The ceiling approximates a quarter’s expenditure less expected direct payments. The combined DA ceiling for individual AF will be US$1,000,000 (IDA Grant US$500,000 and IDA Credit US$500,000). The Minimum Value of Applications for direct payment is 20% (or US$200,000) of the outstanding balance in the Designated Accounts. The ceiling may be adjusted from time to time with reasonable justification. The main disbursement methods are advance and direct payment. Reimbursements will also be made available. A disbursement grace period shall be equivalent to four months after the project closing date. To the extent possible, proceeds under original grants IDA H539 and TF 99572 will be fully utilized before funds from the IDA Additional Financing are used. For additional financing, IDA Grant funds will be utilized before IDA Credit proceeds are accessed.

34

The budget and work plans have been prepared for the entire project activities. Original grants IDA H539 and TF 99572 are pooled into one source. Similarly, the AF will also be pooled into one source. Supporting documentation required for documenting expenditures paid from the DA are Statement of Expenditure (SOE) and Summary Sheet (SS) with Records. Reporting of eligible expenditure paid out of the DA shall be made monthly. Withdrawal applications reporting on eligible expenditures for reimbursement will be submitted to the WB Loan Department with the same documentation as required for reporting of eligible expenditures paid from the Designated Account. Application for direct payment shall be accompanied by documentation such as purchase records evidencing eligible expenditures (e.g. copies of contracts, purchase orders, supplier’s invoices and receipts). Disbursement shall be made 100 percent (inclusive of taxes) against the following expenditure category:

(1) Goods, Works, Consultants’ Services, Training and Workshops, and Incremental Operating Costs.

All documentation for expenditure submitted for disbursements will be retained at the Project Secretariat and made available to the external auditors for their annual audits, and to the World Bank and its representatives if requested. Incremental Operating Costs. Refers to reasonable cost of goods and non-consulting services required for the day-to-day implementation of the Project, incurred by the Recipient (which expenditures would not have been incurred absent the Project), including consumable materials and supplies, communications services (postage, telephone and internet), media and printing services, translation and interpretation services, office space rental and utilities, leasing and/or routine repair and maintenance of vehicles, equipment, facilities and office premises, fuel costs, bank and insurance charges required for the Project, administrative support staff, and Project staff travel, lodging and per diems, but excluding salaries (including bonuses, fees and honoraria or equivalent payments) of officials of the Recipient’s civil service. Financial Management Action Plan

Actions Responsible party Target Completion

1 FMM needs to be updated

The FMM will need to be revised in light of the changes for term of references of the two new staff, audit extension and disclosure requirement and the fund flow section for DA ceiling of AF

Project Secretariat (PS)

No later than three months following AF effectiveness

2 IFR needs to be separate between original grant and additional financing.


June 30, 2014

3 Accounting software should be updated to include the new requirement in the IFR


June 30, 2014

4 Amend auditor’s contract in the final year FY14 to cover expenditure paid from additional financing


June 30, 2014

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