Completion Report

Project Number: 31352 Loan Number: 1994-LAO December 2010

Lao People’s Democratic Republic: Small Towns Development Sector Project

CURRENCY EQUIVALENTS

Currency Unit – kip (KN)

At Appraisal At Project Completion 31 October 2002 31 December 2009

KN1.00 = $0.00007032 $0.0001177440 $1.00 = KN10,760.00 KN8,493.00

ABBREVIATIONS

ADB – Asian Development Bank EIRR – economic internal rate of return FIRR – financial internal rate of return IEE – initial environmental examination km – kilometer Lao PDR – Lao People’s Democratic Republic LWU – Lao Women’s Union MCTPC – Ministry of Communication, Transport, Posts, and Construction MFI – microfinance institution MOF – Ministry of Finance MPWT – Ministry of Public Works and Transport O&M – operation and maintenance PCR – project completion report PCU – project coordination unit PIU – project implementation unit PMO – Prime Minister’s Office PPFC – provincial project facilitating committee PPMS – project performance management system PSC – project steering committee SDR – special drawing rights SOE – statement of expenditure UDAA – urban development administration authority

NOTES

(i) The fiscal year of the Government of the Lao PDR ends on 30 September. (ii) In this report, "$" refers to US dollars unless otherwise stated.

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director J. Lynch, Transport and Urban Division, SERD Team leader E. Honda, Senior Urban Development Specialist, SERD Team members N. Bouaphim, Project Implementation Officer (Infrastructure), SERD

M. Ortega, Assistant Project Analyst, SERD P. Villanueva, Administrative Assistant, SERD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

MAP v

I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Consultant Recruitment and Procurement 8 I. Performance of Consultants, Contractors, and Suppliers 8 J. Performance of the Borrower and the Executing Agency 9 K. Performance of the Asian Development Bank 9

III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 10 E. Impact 11

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 12 C. Recommendations 12

APPENDIXES 1. Project Framework 14 2. Project Cost and Financing Breakdown 19 3. Breakdown of Total and Yearly Disbursements 22 4. Implementation Schedule 23 5. Status of Compliance with Loan Covenants 25 6. Summary of ADB-Financed Contracts 34 7. Economic and Financial Reevaluation 38

SUPPLEMENTARY APPENDIXES (available on request) A. Economic Internal Rate of Return B. Financial Internal Rate of Return

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan a. Original loan amount b. Net loan amount 7. Project Completion Report Number

Lao People’s Democratic Republic 1994 Small Towns Development Sector Project Lao People’s Democratic Republic Ministry of Communication, Transport, Posts and Construction SDR12,123,000 ($16.0 million equivalent) SDR12,024,945 ($18.4 million equivalent) PCR: LAO 1196

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity – Grace Period 8. Terms of Relending – Interest Rate – Maturity – Grace Period – Second-Step Borrower

1 July 2002 8 July 2002 21 October 2002 22 October 2002 28 January 2003 16 July 2003 14 October 2003 6 October 2003 none 31 July 2009 7 July 2010 1 1.0% per annum during the grace period, and 1.5% thereafter 32 years 8 years 6.7% 15 years 3 years Urban Development Administration Authority (Equipment and Vehicles)

9. Terms of Relending – Interest Rate – Maturity – Grace Period – Second-Step Borrower

1.5% per annum 10 years 3 years Lao Women’s Unions (Microfinance)

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10. Disbursements a. Dates Initial Disbursement

17 December 2003

Final Disbursement 7 July 2010

Time Interval 79 months

Effective Date

6 October 2003

Original Closing Date 31 July 2009

Time Interval 70 months

Actual Closing Date

7 July 2010

Time Interval 82 months

b. Amount

12,024,945 $18,416,942 (SDR) (US$ equivalent)

Category (1)

Original Allocationa

(2)

Partial Cancellations

(3 = 2 – 4)

Last Revised Allocation

(4)

Amount Disbursed

(5)

Undisbursed Balanceb (6 = 4 – 5)

01 Civil Works 6,645,000 (906,077) 7,551,077 7,551,077 0 02Training 144,000 (4,255) 148,255 148,255 0 03 Equipment and

Vehicles 1,750,000 390,097 1,359,903 1,359,903 0 04Credit Line 288,000 33,860 254,140 254,140 0 05 Consulting Services 2,174,000 322,051 1,851,949 1,851,949 0 06Incremental

Administration Costs 61,000 (512,901) 573,901 573,901 0 07 Interest Charge 303,000 17,280 285,720 285,720 0 08Unallocated 758,000 758,000 0 0 0 Total (SDR) 12,123,000 98,055 12,024,945 12,024,945 0 Total US$ Equivalent 16,000,000c 146,307d 18,416,942e 18,416,942f 0g a The difference between the original allocation and the revised total amount was due to the exchange rate variation

between the special drawing rights (SDR) and US dollar. b An undisbursed loan amount of SDR98,055 (equivalent to $146,307) was canceled at the loan account closing

date of 7 July 2010. c US dollar equivalent per report and recommendation of the President. d US dollar equivalent as of date of approving cancellation. e Total of d + e. f Actual US dollar equivalent. g US dollar equivalent as of report preparation. Source: Asian Development Bank Loan Financial Information System. 11. Local Costs (Financed) - Amount (US dollars) $17,975,638 - Percentage of Local Costs 64.77% - Percentage of Total Cost 63.94%

C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual Foreign Exchange Cost 9.70 10.75 Local Currency Cost 10.30 10.35

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Total 20.00 21.10 2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 3.80 2.51 ADB Financed 15.60 17.97 Community Beneficiaries 0.20 0.18 Total 19.60 20.66 IDC Costs Borrower Financed 0.00 0.00 ADB Financed 0.40 0.44 Total 20.00 21.10 ADB = Asian Development Bank, IDC = interest during construction.

3. Cost Breakdown by Project Component ($ millions)

Component

Appraisal Estimate Actual Foreign

Exchange Local

Currency Total Cost

Foreign Exchange

Local Currency

Total Cost

A. Urban Infrastructure and Environmental Improvements 1. Townwide Infrastructure and Amenities 4.90 4.90 9.80 5.57 5.57 11.15 2. Town Cleanliness and Environmental

Services 1.80 1.20 3.00 1.54 1.03 2.56 3. Village Upgrading and Livelihood

Promotion 0.50 2.40 2.90 0.36 1.70 2.07 Subtotal (Part A) 7.20 8.50 15.70 7.48 8.30 15.78 B. Project Implementation, Community Processes, and Capacity Building 1. Support for Project Management and

Implementation 1.60 1.20 2.80 2.69 1.95 4.63 2. Support for Civic Awareness,

Community Dialogue and Partnering 0.10 0.30 0.40 0.01 0.03 0.04 3. Capacity Building for UDAAs 0.40 0.30 0.70 0.13 0.07 0.20 Subtotal (Part B) 2.10 1.80 3.90 2.83 2.05 4.87 Interest during Construction 0.40 0.00 0.40 0.44 0.00 0.44 Total 9.70 10.30 20.00 10.75 10.35 21.10 UDAA = Urban Development Authorities Administration. Note: Numbers may not sum precisely because of rounding. 4. Project Schedule

Item Appraisal Estimate Actual

Dates of Contracts with Consultants 1. Original Contract Q1 2003 21 Nov 2003 2. Extension (local consultant only) 8 Oct–31 Dec 2009 Completion of Engineering Designs Q3 2006 1 Jul 2005 Civil Works Contract 1. Date of Award Q3 2004 9 Dec 2005 2. Completion of Work Q3 2008 31 Dec 2009 Equipment and Supplies Dates First Procurement Q1 2003 19 Mar 2004 Last Procurement Q3 2008 15 Dec 2009 Completion of Equipment Installation Q3 2008 31 Dec 2009 Start of Operations

iv

Item Appraisal Estimate Actual

Completion of Tests and Commissioning Q1 2003 30 Jan 2004 Beginning of Start-Up Q1 2003 21 Jan 2004 Other Milestones 1. Approval of Extension to 31 Dec 2009 4 Aug 2009 2. Closing of Loan Accounts 7 Jul 2010 3. Reallocation of Loan Proceeds

a. Increase in Incremental Cost and Credit Line 30 Jun 2009 b. Increase in Civil Works by SDR93,373.53 13 Jul 2009 c. Increase in Civil Works by SDR264,801 25 Sep 2009

5. Project Performance Report Ratings

Implementation Period

Ratings Development

Objectives Implementation

Progress From 1 January 2003 to 31 December 2003 Satisfactory Satisfactory From 1 January 2004 to 31 December 2004 Satisfactory Satisfactory From 1 January 2005 to 31 December 2005 Satisfactory Satisfactory From 1 January 2006 to 31 December 2006 Satisfactory Satisfactory From 1 January 2007 to 31 December 2007 Satisfactory Satisfactory From 1 January 2008 to 31 December 2008 Satisfactory Satisfactory From 1 January 2009 to 31 December 2009 Satisfactory Satisfactory From 1 January 2010 to 30 September 2010 Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Mission Date No. of

Persons No. of

Person-Days Specialization of Membersa

Loan fact-finding 23 Apr–10 May 2002 6 108 a, b, e, f, g, h Appraisal 1–8 Jul 2002 4 32 a, c, e, f Inception 9–13 Feb 2004 3 15 a, d, e Review 1 4–8 Apr 2005 1 5 a Review 2 4–8 Oct 2005 1 5 a Review 3 4–14 Jul 2006 2 22 a, e Midterm review 4–15 Dec 2006 2 24 a, d Review 4 4–13 Apr 2007 1 10 a Review 5 22–29 Oct 2007 2 16 a, d Review 6 19–23 May 2008 1 5 a Review 7 17–26 Nov 2008 2 22 a, d Review 8 2–9 Mar 2009 1 8 a Final review 14–20 Dec 2009 2 14 a, d Project completion review 29 Aug–7 Sep 2010 4 40 a, d, e, f a a = mission leader, b = urban development specialist, c = counsel, d = assistant project analyst, e = analyst

(resident mission), f = financial analyst (staff consultant), g = planner and engineer (technical assistance consultant), h = social expert (technical assistance consultant).

Phongsali

Louang-Namtha

Houayxay Beng

Houn

Xai Nambak

Xam-Nua

Kham

PekXaignabouli

Vangvieng

Pakxan

Khamkeut

Thakhek

Nongbok

Kaysone Phomvihane

Xepon

SaLavan

Khongxedon

Lao-Ngam Lamam

Pakxe

SamakkhixaiXaisettha

VIENTIANE

Mekong River

Mek

ong

River

PHONGSALI

HOUAPHAN

ATTAPEUCHAMPASAK

LOUANG-NAMTHA

BOKEOOUDOMXAI

LOUANGPHRABANG

XIANGKHOUANG

BOLIKHAMXAI

VIENTIANE

XAIGNABOULI

VIENTIANECAPITAL

KHAMMOUAN

SAVANNAKHET

SALAVAN XEKONG

PEOPLE'S REPUBLIC OF

CHINA

VIET NAM

THAILAND

MYA

NM

AR

CAMBODIA

Project Town

National Capital

Small Town (in the long list)

Secondary Town

National Road

Provincial Road

River

District Boundary

Provincial Boundary

International Boundary

Boundaries are not necessarily authoritative.

LAO PEOPLE'S DEMOCRATIC REPUBLIC

SMALL TOWNS DEVELOPMENT SECTOR PROJECT(as implemented)

500

Kilometers

100

N

10-3067 AV

106 00'Eo

106 00'Eo102 00'Eo

102 00'Eo

16 00'No 16 00'No

20 00'No 20 00'No

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

I. PROJECT DESCRIPTION

1. The Lao People’s Democratic Republic (Lao PDR) is essentially a rural country, and agriculture remains the largest contributor to the national economy. Nevertheless, the urban sector plays an increasingly important role in the country’s economic growth. Urban centers, currently comprise about 22% of the total population (up from 18% at appraisal) and are growing rapidly. The increasing rate of urbanization and urban infrastructure deficiencies place considerable burdens on the urban environment, undermine human development, and limit economic activities. The urban challenge is to meet the growing requirements for improved urban services in the face of limited capital investment in urban infrastructure and municipal services. Prior to the project, development priorities were accorded to large urban centers, including Vientiane and the secondary towns, in order to realize their full potential to support equitable and broad-based development. Quality of life and urban productivity in small towns, as well as their potential development role in relation to their rural hinterlands, are constrained by the grossly inadequate urban infrastructure and services. 2. Based on a feasibility study carried out under project preparatory technical assistance (TA) funded by Asian Development Bank (ADB),1 a loan of SDR12.123 million ($16.0 million equivalent at appraisal) was approved by ADB from its Special Funds resources on 28 January 2003.2

The loan agreement was signed on 16 July 2003 and the loan became effective on 6 October 2003. The loan closing date was extended by 5 months from 31 July 2009 and the loan was closed on 31 December 2009.

3. The project supported 12 small towns. Its goal was to improve the quality of life and to enhance productivity in selected small urban centers that play or have the potential to play important roles as market, services, and manufacturing centers supporting the rural hinterlands. The specific objectives were to (i) improve the living conditions of the small towns’ communities, especially those of the poor, through improved urban environment, increased access to essential urban infrastructure and services, and enhanced livelihoods; and (ii) support the establishment and development of decentralized and dedicated institutional and management frameworks for effective, responsive, and sustainable provision of urban infrastructure and services in small towns. Improvements in these towns are expected to have spin-off benefits for the rural populations and economies having symbiotic relationships with these towns. 4. The project components were grouped into two parts. Part A encompassed urban infrastructure and services improvements, while part B provided implementation support and capacity building. Part A was to include (i) townwide infrastructure and amenities comprising investments in major roads, drainage, public markets, and bus station environments; (ii) town cleanliness and environmental services (i.e., improving solid waste and sanitation management); and (iii) village upgrading and livelihood promotion while combining village infrastructure and services improvements with livelihood enhancement and following a demand-responsive, partnership approach whereby villages play a major role in the process. Part B provided for consulting services and other necessary inputs to support (i) implementation of infrastructure and services under part A, (ii) civic awareness and community dialogue processes to maximize the benefits from physical investments and ensure sustainability of the project impacts, and (iii) establishment of, and capacity building for, decentralized urban-focused entities in the project towns. Appendix 1 shows the project framework at appraisal and as implemented. 1 ADB. 2000. Technical Assistance to the Lao People’s Democratic Republic for Preparing the Small Towns

Development Project. Manila. 2 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao

People’s Democratic Republic for the Small Towns Development Sector Project. Manila.

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II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

5. The project design was relevant to the government’s development program and ADB’s country strategy at the time of appraisal and completion. The government’s National Socio-Economic Development Plan (NESDP) for 2001–2005 gave priority to planning and developing basic infrastructure and services in urban areas, including small towns. The poverty reduction partnership agreement, signed in September 2001 by ADB and the government, includes small towns development as one of the key operational priorities to enhance reciprocal linkages between urban and rural areas, more specifically, (i) integrating rural producers with urban markets, (ii) enabling urban entrepreneurs to trade with rural people, and (iii) facilitating access of the rural and urban populations to international markets. This view remained consistent with the NSEDP for 2006–2010, which has three strategic pillars: (i) economic growth with equity, (ii) sociocultural development, and (iii) sustainable environmental preservation. ADB’s country strategy for the Lao PDR was targeted at reducing poverty through sustainable economic growth, inclusive social development, and good governance. Operational priorities included strengthening rural and urban market linkages, sustainable environmental management, human resource development, private sector participation, and regional integration. Urban and small towns development, whereby (i) rural producers integrate with domestic and international markets, and (ii) demands on rural natural resources is relieved, was regarded as a priority sectors of the country strategy. 6. The project was prepared and implemented to support the government’s decentralization policy. Since the mid-1990s, the government has been exploring mechanisms to facilitate decentralized urban management. The government began creating urban development administrative authorities (UDAAs) in Vientiane and the four major secondary towns, 3 envisaging eventually to transform these UDAAs into autonomous municipalities. The Prime Minister’s Instruction 01/PM of March 2001, Prime Ministerial Decree 141/PM/2000 of May 2000, and Local Administration Law of 2003 support the decentralization of government functions and clarification of UDAAs’ responsibilities. ADB has assisted the government’s decentralization process through its loan and TA projects.4

However, unclear definition of UDAAs’ roles hindered their abilities even to maintain existing drains and provide solid waste management services. The government has slowed the decentralization process to review and identify the roles of provincial governments, especially the Departments of Public Works and Transport, proposed municipalities, UDAAs, and district governments.

7. The project’s design was sound and its formulation adequate. Stakeholders were consulted during planning, design, and implementation. The scope, cost estimates, and implementation arrangements prepared under the project preparatory TA were sound. Project 3 Louang Phrabang, Pakse, Savannakhet, and Thakhek. 4 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao

People’s Democratic Republic for the Vientiane Integrated Urban Development Project. Manila; ADB. 1997. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao People’s Democratic Republic for the Secondary Towns Urban Development Project. Manila; ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao People’s Democratic Republic for the Vientiane Urban Infrastructure and Services Project. Manila; ADB. 1995. Technical Assistance to the Lao People’s Democratic Republic for Establishing Municipal Administration Systems. Manila; ADB. 1997. Technical Assistance to the Lao People’s Democratic Republic for Support to Urban Development Administration Authorities. Manila; ADB. 1999. Technical Assistance for Capacity Building for Urban Development Administration Authorities. Manila.

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components were selected based on an assessment of alternatives, considering factors such as suitable technology, economic and financial viability and sustainability, institutional and capacity development needs, and environmental and resettlement impacts. 8. The sector lending approach was highly relevant at the time of appraisal and completion. The project was designed to be implemented in three overlapping phases with three batches of towns. The first phase involved four towns for which feasibility studies were conducted under the project preparatory TA while the second and third phases covered three towns each. Each phase was designed to follow a 4-year cycle of (i) institutional and community preparation, (ii) survey and design, (iii) bidding and letting of contracts and construction, and (iv) post-construction activities. 9. The project scope was revised during implementation to increase the number of project towns from 10 to 12. Following the selection criteria established at appraisal, the government selected 10 towns: Houayxay, Louang Namtha, Pakxan, Pek, Phongsali, Salavan, Vangvieng, Xai, Xaignabouli, and Xam Nua. At midterm review, the government proposed, and ADB agreed, to implement the project in the two additional towns of Lamam and Samakkhixai, utilizing savings from the exchange rate between the SDR and US dollar and time savings due to prompt project implementation. Thus, an additional, fourth phase was added to involve these two towns. The design and monitoring framework and its indicators were not revised to reflect this change in the project scope. B. Project Outputs

10. The project was implemented over 75 months from October 2003 to December 2009. Most project activities were completed and outputs were achieved as envisaged at appraisal. The project outputs are detailed below.

1. Part A: Urban Infrastructure and Services Improvements 11. Part A comprised three components: (i) townwide infrastructure and amenities, (ii) town cleanliness and environmental services, and (iii) village upgrading and livelihood promotion. Performance targets for part A at appraisal included (i) 30%–100% of primary and secondary roads improved, (ii) 30%–50% of primary and secondary drainage improved, (iii) 50%–100% of access roads improved, (iv) 50% of drains along access roads improved, (v) 60% of townspeople to come under coverage of solid waste and sanitation services, (vi) 50% of access roads and 30%–60% of drains improved, (vii) 1,500 poor people to have access to microfinance. These targets were found not very suitable for measuring the project outputs as the terms such as primary, secondary, access roads, and drainage were not clearly defined at appraisal. Unavailability of baseline data makes it even more difficult to judge the achievements against the targets. Achievements under part A include (i) 2%–81% of urban roads improved, (ii) 5%–93% of drainage improved, (iii) 17%–100% of townspeople served by solid waste services, (iv) 11%–81% of access roads and 10%–58% of drains improved, and (v) 1,544 poor people have access to microfinance. The achievements in some towns were much lower than targeted. The government explained that local governments built roads and drainage using their own funds, and therefore the level of the project’s contribution was relatively low. In the case of solid waste management, low achievements are due to population growth that was greater than expected. 12. The townwide infrastructure and amenities component constructed (i) 46.9 kilometers (km) of asphalt roads, (ii) 22.7 km of drainage , (iii) 82.3 km of roadside drains , (iv) 4.6 km of

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improved road shoulders, (v) 86,460 square meters of foot paths, (vi) 387 streetlight poles, and (vii) seven light arms on existing poles. 13. Under the town cleanliness and environmental services component, (i) a sanitary landfill site with gravel access road was constructed at each of the 12 project towns; and (ii) 15 dump trucks, 10 hydraulic trucks, 12 tractors, 10 sludge and wastewater containers, 20 pumps with hosepipe, and 60 garbage containers were procured. 14. The village upgrading subcomponent under the village upgrading and livelihood promotion component built (i) 72.5 km of village access roads, (ii) 57 village offices, (iii) two village meeting halls, (iv) three public toilets, (v) 26.0 km of electric power lines, and (vi) 4.3 km of water supply pipes. This subcomponent was not implemented in Lamam and Samakkhixai, which were in the fourth phase, due to time constraints. The livelihood promotion subcomponent was to include (i) social intermediation, (ii) capacity building support to sustainable and pro-poor microfinance institutions (MFIs), and (iii) a credit line for microfinance loans. Implementation of this subcomponent was delayed due to an absence of necessary government procedures and lack of suitable MFIs. The government proposed, and ADB agreed, that the provincial Lao Women’s Unions (LWUs) should act as MFIs and implement the livelihood promotion subcomponent. The Loan Agreement was amended accordingly on 21 May 2010. The project coordination unit (PCU) developed eligibility criteria and lending procedures for microfinance and provided training for the participating LWUs. LWUs and the village administration offices identified eligible borrowers – a total of 1,544 poor families. As of 6 September 2010, end-borrowers had already received loans in nine towns while loans will be disbursed shortly in the other three towns. 2. Part B: Implementation Support and Capacity Building 15. Part B consisted of three components: (i) project management and implementation support; (ii) civic awareness, community dialogue, and partnering; and (iii) UDAA capacity building. A team of consultants was engaged to implement part B. Performance targets set out at appraisal for part B include (i) increased community awareness of the linkage between sanitation and health and of the benefits to be delivered by the project; (ii) village committees proportionately representing the poor, women, ethnic people, and other vulnerable groups are actively involved in the process; (iii) social intermediation programs (training and orientation activities) are implemented; (iv) town residents are involved at each stage of project implementation, especially subproject selection; (v) town residents are aware of their roles and responsibilities for improved services and of cost implications; (vi) decrees are issued to establish UDAAs in small towns with urban functions and empower them to raise revenues from local sources and spend them for the delegated tasks; (vii) UDAAs are gradually equipped with staff and logistics, and core capacities and staff skills are developed to plan, finance, implement, operate and maintain urban infrastructure and services; (viii) greater transparency and accountability is ensured in UDAAs; and (ix) within 2 years of subproject appraisal, UDAAs generate revenues to meet 30%, within 4 years of subproject appraisal 65%, and within 6 years of subproject appraisal 100% of the operation and maintenance (O&M) cost of infrastructure and services. All targets were achieved except target (ix). 16. The project management and implementation support component assisted with administration and operations of the PCU and project implementation units (PIUs), equipment procurement, logistics, and implementation for part A. The PCU, assisted by the consultants, managed to implement the project in two additional towns. Consulting services contracted by the PCU were not fully utilized. While 79.03 person-months of international and 613.00 person-

5

months of national consulting were contracted, the inputs actually utilized were 71.50 person-months and 535.29 person-months, respectively. According to the PCU, these inputs were reduced because the project management and implementation were very efficiently undertaken. 17. The civic awareness, community dialogue, and partnering component was an umbrella program designed to be implemented by organizing communities through dialogue, orientation, public campaigns, and provision of equipment and promotional materials in all project towns. A community awareness team organized through on-the-job training in each UDAA connected with the urban residents and villagers in discussions on issues related to cost sharing, community contribution, revenue generation, sanitation, hygiene promotion, and O&M of village access roads. Sixty village working committees were established in the targeted villages. Village meetings were held to discuss the village upgrading, civic awareness, community dialogue, partnering activities, as well as general information sharing on the project. The meetings helped raise awareness as to the project’s importance and benefits. As a result, the total amount contributed by local communities for basic infrastructure expansion and improvement under the village upgrading and livelihood promotion component of part A reached $206,000, mainly in cash. This exceeded the estimation at appraisal of $200,000, mainly in kind. A sanitation and hygiene awareness campaign was conducted to help the project town residents to (i) have good understanding of sanitation and hygiene, as well as their implications for human health and the environment; and (ii) improve their habits in this area. 18. The UDAA capacity building component aimed to develop UDAAs’ core capacities, including project planning and design, project administration and management, O&M, and financial management. A UDAA network was formulated by (i) facilitating exchange of information and experience among the UDAAs; (ii) utilizing experience of UDAAs in Vientiane and four secondary towns; and (iii) creating an advocacy forum to accelerate UDAAs’ reforms. Training programs helped improve UDAAs’ capacities although they could not satisfy the immense capacity building needs. Nevertheless, the fundamental training and approach have been established that will provide future direction for continued capacity building. UDAAs have begun to raise revenues, including fees for (i) solid waste collection, (ii) building permit issuance, (iii) sludge removal, and (iv) street lighting. C. Project Costs

19. At appraisal, the total project cost was estimated at $20.00 million equivalent, comprising $9.70 million in foreign exchange (including interest during construction of $0.40 million) and $10.30 million equivalent in local currency. It was proposed that ADB provide $16.00 million and the remaining $4.00 million was to be financed by the government ($3.80 million) and beneficiaries ($0.20 million, mostly through labor contribution). The cost estimates included approximately $0.92 million for taxes and duties. The cost for part A was estimated at $13.30 million, including (i) $8.40 million for townwide infrastructure and amenities; (ii) $2.80 million for town cleanliness and environmental services; and (iii) $2.30 million for village upgrading and livelihood promotion. Part B was estimated to cost $3.60 million, including (i) $2.60 million to support project management and implementation; (ii) $0.40 million for civic awareness, community dialogue, and partnering; and (iii) $0.60 million for capacity building of UDAAs. 20. There were no cost overruns during implementation. Rather, depreciation of the US dollar against the SDR generated savings of about $1.90 million, which enabled implementation of the project in two additional towns. The actual project cost was $21.10 million equivalent ($10.75 million in foreign exchange and $10.35 equivalent in local currency), including $0.44 million in interest during construction. The project expenditures were $15.75 million for part A

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($11.15 million for townwide infrastructure and amenities, $2.60 million for town cleanliness and environmental services, and $2.00 million for village upgrading and livelihood promotion) and $4.84 million for part B ($4.60 million to support project management and implementation; $0.04 million for civic awareness, community dialogue, and partnering; and $0.20 million for capacity building of UDAAs). The cost breakdown by project component is provided in Appendix 2. D. Disbursements

21. Loan proceeds were disbursed in accordance with ADB’s Loan Disbursement Handbook (2001, as amended from time to time). An imprest fund was set up for the PCU with an initial deposit of $3.00 million. It took some time for the PCU to prepare and introduce the implementation guidelines to PIUs under the newly created UDAAs. Although the decentralized approach slowed project implementation in the first couple years, construction proceeded quickly once the detailed engineering designs were finalized. Subproject implementation became smoother when implemented in the later phases. In general, the imprest account and statement of expenditures procedures were effective in speeding up disbursements. As of the 7 July 2010 closing date, SDR12,024,945.20 ($18,416,942.41 equivalent) of the loan amount had been disbursed. The undisbursed portion was SDR98,054.80 ($146,306.59, or 0.8% of the total loan amount). Disbursements were generally on track and toward midterm made up for the delays at the inception. At project completion, the government disbursement record indicated that a total of KN24,636.05 million or $2.68 million equivalent had been disbursed by the government and KN2,051.80 million, or $0.21 million equivalent, had been contributed by the beneficiaries in cash. Beneficiaries’ contributions exceeded the cost estimates at appraisal of $0.20 million. A breakdown of total and yearly disbursements is in Appendix 3. E. Project Schedule

22. The loan was approved on 28 January 2003 and became effective on 6 October 2003, eight days earlier than the envisaged loan effective date of 14 October 2003. At appraisal, project implementation was scheduled to be completed by 31 January 2009, and the loan account was expected to close by 31 July 2009. Project implementation was slow until around midterm because PIUs were not familiar with ADB’s procurement and disbursement procedures. Once the procedures were understood, the project implementation was expedited and subproject implementation was quicker in the later phases. The loan closing date was extended from 31 July 2009 to 7 July 2010. The total implementation period was 82 months, from October 2003 to July 2010. Although the number of project towns had been increased from 10 to 12 to utilize savings gained from depreciation of the US dollar against the SDR, the project was completed almost within the original time frame. The implementation schedule envisaged at appraisal and the actual implementation schedule are in Appendix 4. F. Implementation Arrangements

23. The project was implemented in line with the arrangements envisaged at appraisal. The executing agency was the Ministry of Communication, Transport, Posts, and Construction (MCTPC) until it was handed over to the Ministry of Public Works and Transport (MPWT) in October 2007 as a result of the government’s reorganization. The project steering committee (PSC) was responsible for overseeing project implementation, facilitating cooperation and coordination among concerned agencies, and ensuring timely implementation of the urban policy and institutional reform agenda. The PSC was headed by the vice minister of MCTPC or MPWT and included representatives from the concerned central and provincial government agencies. UDAAs were established in the project towns to perform as implementing agencies

7

responsible for all aspects of project implementation. A provincial project facilitating committee (PPFC) was formed in each project town to be responsible for interagency coordination at local level. The PPFC was headed by the vice provincial governor and included representatives from UDAA and relevant provincial and district government agencies. A PCU was set up in MCTPC or MPWT while PIUs were established in UDAAs in all project towns. At appraisal, suitably qualified MFIs were to be identified to implement the livelihood promotion subcomponent under the village upgrading and livelihood promotion component of part A. The implementation arrangement was changed, however, and this subcomponent was implemented through provincial LWUs, as during project implementation a regulatory framework applying to the operation of private MFIs in government-funded projects in Lao PDR had not been developed. 24. A decentralized decision-making approach was introduced during implementation to expedite progress. Under this approach, approval authority was delegated to provincial level in relation to (i) selection and appraisal of subproject proposals, (ii) bid evaluation, and (iii) overall implementation of the village upgrading and livelihood improvement. As a result, project progress of only 24% against the elapsed time of 40% as of December 2005 substantially improved to 97% progress against the elapsed time of 81% as of November 2008. G. Conditions and Covenants

25. In general, compliance with loan covenants was satisfactory. Major loan covenants concerning sector reform, environmental and social safeguards, financial, economic, and others were complied with. However, UDAAs faced difficulties in achieving the following covenants. Compliance with loan covenants is detailed in Appendix 5.

1. Financial Covenants

(i) UDAAs are currently receiving part of the Road Maintenance Funds and found it inadequate for maintenance of urban roads (Loan Agreement, Schedule 5, para. 11 [d]).

(ii) UDAAs found that it is difficult to generate revenues to cover (a) 30% of the O&M cost of infrastructure and services within 2 years of subproject appraisal, (b) 65% within 4 years of subproject appraisal, and (c) 100% within 6 years of subproject appraisal (Loan Agreement, Schedule 5, para. 12).

(iii) It is a challenge for the government to introduce a property-related tax in small towns at this stage. This is a completely new and innovative concept and the government needs time to digest the idea and make necessary arrangements to introduce such a tax (Loan Agreement, Schedule 5, para. 14).

2. Economic Covenants

(iv) To support monitoring and evaluation of project activities, a project performance monitoring system (PPMS) was developed under the project. However, it was complicated and difficult for data entry and processing. The PCU, supported by project management and implementation consultants, produced a simplified PPMS with reduced project monitoring indicators using the Microsoft Excel program to enable UDAAs to utilize the PPMS as a planning and management tool. However, the simplified PPMS has yet to be fully utilized by UDAAs in project towns (Loan Agreement, Schedule 5, para. 26).

8

3. Other Covenants

(v) The subsidiary loans from Ministry of Finance (MOF) to UDAAs which involve procurement of equipment and vehicles for solid waste and septic management, was to carry an interest rate of 6.7% per annum, with a maturity of 15 years after subproject completion, including a grace period of 3 years., UDAAs have indicated that they are facing difficulty in repaying the subsidiary loans to MOF. MOF is following up closely with UDAAs on this matter (Loan Agreement, Schedule 5, para. 10 [b]).

H. Consultant Recruitment and Procurement

26. Consultants were selected and hired in a fair and transparent manner in accordance with ADB’s Guidelines on the Use of Consultants (2002, as amended from time to time) using the quality- and cost-based selection method and full technical proposal procedures. The total cost of the consulting services was $3,017,928.61. Fieldwork commenced on 21 January 2004 and services were completed on 31 July 2009. The consultants helped the PCU and PIUs in (i) overall project management and implementation; (ii) implementing the activities for civic awareness, community dialogue, and partnering; and (iii) capacity building of UDAAs. In total, 79.03 person-months of international and 613.00 person-months of national consulting services were contracted, as envisaged at appraisal. Actual inputs, however, were 71.50 person-months of international and 535.29 person-months of national consulting services. This underutilization occurred because the consultants managed to provide their services in a very efficient manner. During the extension period, a national firm was recruited to implement the remaining civil works and monitor the livelihood promotion subcomponent through a single-source selection method. Those consultants commenced services in October 2009 and completed them by 31 December 2009. That contract, totaling $33,574, was for expertise including only (i) one project team leader and engineer, (ii) one construction engineer, (iii) one site inspector, and (iv) a secretary. 27. Goods and services were procured from loan funds in accordance with ADB’s Procurement Guidelines (2002, as amended from time to time). Modes for procuring civil works, equipment, and material supplies were largely as appraised, and the two additional project towns followed the same procurement modes as those used in the initial 10 project towns. Procurement of 128 civil works contracts used local competitive bidding. Of 22 equipment contracts, 4 used international shopping and 18 used direct purchase and/or shopping. The ADB-financed contracts are summarized in Appendix 6. I. Performance of Consultants, Contractors, and Suppliers

28. Overall performance of consultants was satisfactory. The executing agency evaluated their performance and that evaluation was included in the project completion report prepared by the government and submitted to ADB. Consultants’ tasks were augmented to implement an additional phase to cover two additional towns. The dispersed location of the project towns plus restricted and limited travel to the towns constrained the consultants in effectively producing the required outputs. The team leader was replaced three times (four team leaders were involved in the project) due to personal matters, and the consulting firm was challenged to assign qualified replacements without delay. When a team leader was unavailable, the deputy team leader had to perform the work of team leader. Intermittent inputs from the team leader during project implementation hindered effective delivery of the project outputs. Despite such difficulties, the consultants helped the PCU and PIUs ensure quality of the civil works, implement community processes, and build UDAAs’ capacity according to the terms of reference.

9

29. Performance of contractors and suppliers was generally satisfactory. Contractors engaged under the first phase encountered difficulties in understanding tender documents and contracts prepared in English. For phases 2, 3, and 4, tender documents and contracts were prepared in Laotian. That greatly helped local contractors prepare bids and implement their contracts. Some contractors’ performances were below average in terms of the firms’ financial status, number of qualified staff, and site management. There were no significant delays in implementing civil works and supply contracts. J. Performance of the Borrower and the Executing Agency

30. Performance of the borrower (MOF) and executing agency (MCTPC or MPWT) was highly satisfactory. MCTPC and MPWT provided the critical leadership and support required for successful project completion. The executing agency and its PCU introduced a consultative style of management that enabled UDAAs and PIUs to learn from one another’s experiences and increased their ownership. The PSC and PPFCs displayed strong leadership in facilitating cooperation and coordination among concerned agencies at the central and provincial levels, respectively. K. Performance of the Asian Development Bank

31. The performance of ADB was highly satisfactory. ADB fielded a total of 12 project review missions for a total of 186 staff days to monitor project implementation progress and resolve implementation issues. ADB worked closely with the various stakeholders to overcome issues and problems in a timely manner. ADB was flexible in accommodating a number of minor changes in project scope and implementation arrangements. ADB provided training for PCU and PIU staff on ADB’s requirements and procedures for project administration and implementation. ADB undertook, in a timely manner, review of tender documents, adjustments in project activities, and loan disbursement arrangements.

III. EVALUATION OF PERFORMANCE

A. Relevance

32. The project is rated relevant. The project was formulated in line with the government’s priority for planning and developing basic infrastructure and services in urban areas and with ADB’s country strategy for the Lao PDR. The project was instrumental in establishing and institutionalizing, in small towns, UDAAs with dedicated urban functions and their own sources of revenues and budgets. However, the institutional and policy reforms, initiated by the government with ADB assistance, to develop the financial independence of UDAAs and eventually transform them into autonomous municipalities have proven ambitious. The government is currently reviewing the organization and roles of agencies involved in urban management and service provision in order to establish a clear hierarchy of planning authorities. B. Effectiveness in Achieving Outcome

33. The project was effective in achieving its planned outcome. It was highly effective in improving the urban environment and living conditions in small towns through upgrading the town and village infrastructure and services including roads, drainage, streetlights, foot paths, village office buildings, village meeting halls, public toilets, electric power lines, water supply pipelines, sanitary landfill sites, and solid waste management equipment and vehicles. Although

10

the livelihood promotion component started only in the final stage of project implementation, microfinance loans made available to poor households are helping expand their businesses. Part B: implementation support and capacity building effectively supported the implementation of infrastructure improvements, civic awareness, community dialogue and partnering processes, and building UDAAs’ capacity. However, the project was less effective in supporting the establishment and development of decentralized and dedicated institutional management frameworks for effective, responsive, and sustainable provision of urban infrastructure and services in small towns. UDAAs’ core capacities were substantially strengthened, and especially in the areas of financial management, engineering designs, construction supervision, and O&M. Various revenue sources were identified and the drafts developed to provide the legal basis for fee collection and redistribution. However, UDAAs need further capacity building and were not, at the time of project completion, ready to become fully autonomous municipal governments. C. Efficiency in Achieving Outcome and Outputs

34. The project is economically highly efficient and financially efficient. At appraisal, quantitative economic and financial analysis was carried out for four pilot towns comprising Pakxan, Pek, Vangvieng, and Xam Nua. This estimated economic internal rates of return (EIRRs) for the townwide infrastructure and amenities component under part A and financial internal rates of return (FIRRs) for the revenue-generating solid waste management subcomponent of the town cleanliness and environmental services component under part B. Economic and financial reevaluation was made for three of the four pilot towns: Pakxan, Vangvieng, and Xam Nua. Pek was omitted because only insufficient details could be recovered concerning the assumptions and analysis methodology used at appraisal. The economic reevaluation of the townwide infrastructure and amenities components demonstrated substantially higher EIRRs compared to estimates made at appraisal. The reestimated EIRRs are 35.1% for Pakxan, 42.7% for Vangvieng, and 67.1% for Xam Nua, and thus all are well above the 12% minimum acceptable EIRR for an ADB-financed project. These EIRRs illustrate how an exceptionally high economic efficiency can be achieved in investing to improve urban infrastructure and amenities in small towns. The reevaluated FIRRs for the solid waste management subcomponents were 10.0% for Pakxan, 6.1% for Vangvieng, and 7.3% for Xam Nua. These rates are similar to those estimated at appraisal and exceed the 4.3% weighted average cost of capital, demonstrating the subprojects’ financial viability. 35. The project implementation was highly efficient. It successfully accommodated an additional two project towns for subproject implementation. The project was implemented in four overlapping phases. The first phase involved four towns, the second and third covered three towns each, and the fourth involved two towns. Each phase followed a 4-year implementation cycle covering (i) institutional and community preparation, (ii) survey and design, (iii) bidding and letting of contracts and construction, and (iv) post-construction activities. This arrangement was highly efficient in utilizing project resources, including PCU staff, project management consultants, and equipment. D. Preliminary Assessment of Sustainability

36. The investment is rated less likely to be sustainable. This rating reflects initial operation of project facilities and measures taken by UDAAs for transition from construction to operation. While UDAAs are now generally recovering their operating and recurrent maintenance costs, they are seriously challenged to increase revenue collection, whether from current main sources, such as solid waste management fee and urban obligation charge, or from such less-established sources as the wastewater and street lighting surcharge on utility billings. This

11

raises serious questions about their ability to recover, through their own-source revenues, the capital cost of their urban infrastructure and services, beginning with the initial investment through to future major maintenance, and finally the replacement capital spending. Already the great majority of the equipment subsidiary loans appear likely to require restructuring. 37. This project completion report and those for two earlier ADB-financed projects for urban development in the Lao PDR have reported high to exceptionally high project net social benefits and EIRRs but weak performance in project financial cost recovery, which is key to sustainable provision of urban services and other improvements. A significant lesson to be learned is that the same revenue model used in all three projects carries issues of effectiveness and efficiency, and with implications for sustainability. Appendix 7 discusses in some detail this scheme of UDAA revenue generation. E. Impact

38. The project had a major impact on expanding road networks and improving road conditions. It increased accessibility and reduced travel time. In general, vehicle and pedestrian flows have improved. Visual and aesthetic improvements included streetlights, road shoulder improvements, and roadside drains. The drainage improvements have greatly mitigated perennial flooding and led to better environmental sanitation and community health. The risk of incurring infectious diseases through exposure to contaminated surface water was decreased drastically by reducing stagnant water and flooding frequency. Health risk and public nuisance due to mosquitoes and flies have been decreased by reducing suitable breeding areas for infectious disease. Air quality and public safety were enhanced by improving streets and the construction of minor access roads. 39. A total of $0.38 million of microcredit loans was provided to 1,544 poor households (KN1 million–KN3 million per household) in the project towns. Beneficiaries were identified by village administration offices with support from LWUs. The major purposes for microcredit loans were to expand a current business or start a new one in such areas as animal husbandry, growing vegetables, small vendor businesses, weaving, tailoring, and bicycle and motorcycle repair. Although the livelihood promotion subcomponent started only at the final stage of project implementation, beneficiaries indicated that loans have been greatly contributing to expanding businesses and increasing incomes. 40. An initial environmental examination was prepared and submitted with a subproject proposal for each project town. The project had a substantial positive environmental impact and an insignificant negative impact on the physical and natural environment. Adverse environmental impacts were mainly associated with the construction phase, due to noise, vibration, air pollution, runoff, safety hazards, disposal of construction debris, and localized traffic congestion. An environmental management plan prepared as part of the initial environmental examination identified appropriate mitigation measures to minimize these effects, and such measures were incorporated into the detailed engineering designs and contract documents of the construction contracts. 41. There was no resettlement involved in project implementation. While at appraisal some resettlement was expected for bridge construction, this was cancelled and replaced by road improvements that required no resettlement. Improvement of existing roads and drainage did not require land acquisition. Sanitary landfill sites were constructed on lands owned by the government.

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IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

42. Overall, the project is rated successful. It was relevant, effective, highly efficient, and less sustainable. It had positive impact on environmental improvement and poverty reduction. B. Lessons

43. Preliminary assessment of the project yielded the following important lessons: (i) The community’s involvement in various project activities and its interactions with

the government and project staff greatly enhanced the sense of ownership. Community participation and contribution was the key to successfully completing the village upgrading subcomponent. This was evidenced by the fact that the actual community contribution of $206,000, mainly in cash, exceeded the estimated amount of $200,000 expected at appraisal to be mainly as labor. The success of the village upgrading subcomponent indicates the importance of stakeholder consultation throughout the planning, design, and implementation stages.

(ii) Given the limited time and resources under the project, capacity building for UDAAs focused on construction management and supervision, O&M of infrastructure and of sanitary landfills, and exchange of lessons among UDAAs. Various workshops were organized on these topics for managerial staff, accountants, and engineers of UDAAs. By strengthening core capacities, the project created momentum for continued support of long-term capacity building to enable UDAAs to provide quality public services.

(iii) The project’s geographical coverage posed a major challenge to monitor subproject implementation in 12 project towns located all over the country from the northern tip (Phongsali) to the south (Samakkhixai). Particularly during rainy season, it was time-consuming for PCU staff and consultants to travel to the project towns, as well as for personnel from UDAAs and PIUs to attend meetings and workshops. Due to its underestimation at appraisal, insufficient travel budget hindered effective monitoring of subproject implementation in the project towns.

(iv) The decentralized approach introduced during implementation contributed to strengthening the capacity of PIUs and speeded up project progress. PIUs demonstrated their abilities in implementing, supervising, and monitoring physical activities, as well as in managing civil works contracts. As a result, the project implementation was expedited at around midterm and caught up to schedule despite the delays in early stages of project implementation.

C. Recommendations

1. Project Related

44. Based on the above assessment, the mission offers the following project-related recommendations:

(i) Implementation of the livelihood promotion subcomponent started at the very last stage of project implementation due to changes in implementation arrangements. Provincial LWUs and village administration offices have identified appropriate end-borrowers following the guidelines prepared by PCU. Initial assessment of this subcomponent was positive. It is recommended that UDAAs and LWUs keep

13

detailed lending records until LWUs complete repayments to UDAAs, as well as that MPWT and ADB make necessary arrangements for monitoring and evaluating the viability of the approach piloted under the project for income generation for poor households.

(ii) Sanitary landfill sites and some main drains lack appropriate O&M. The UDAAs concerned are strongly requested to take necessary actions as soon as possible to improve the situation in order to ensure sustainability of the project facilities.

(iii) Based on experiences in implementing the previous ADB-financed projects in urban development, it is apparent that capacity building for the local government agencies is a long process that cannot be achieved under a single project. It is recommended that capacity building be continued and efficient personnel management be implemented for UDAAs.

(iv) PPMS developed under the project can be an effective tool to monitor provision of urban services and O&M of project facilities, as well as to evaluate impacts of improved urban infrastructure and services. Utilization of PPMS by UDAAs is strongly recommended in order to institutionalize monitoring of the UDAAs’ assets and evaluating the quality of public services provided by UDAAs.

2. General

45. The mission has the following general recommendations: (i) The experience gained under the project indicates that active community

participation and decentralized decision making are key to enhancing ownership and strengthening capacity of communities and local government agencies. This approach could be replicated and expanded in demand-driven development activities under future urban development projects.

(ii) Regarding decentralization and institutional reform, the pressing issue for the government is to clarify the roles of provincial government, and particularly the Departments of Public Works and Transport, UDAAs, district governments, and the proposed municipalities. It is recommended that the government continue, and ADB support, the efforts to review the organization and roles of the agencies involved in urban management and service provision, as well as to revise the Local Administration Law in order to create a basis for administrative restructuring, and particularly for developing municipalities. Overlapping and ambiguous responsibilities should be resolved prior to further ADB investments into the urban development sector.

(iii) ADB-financed urban development projects in the Lao PDR, including this project, have been characterized by simultaneously high to exceptionally high net social benefits and EIRRs with a weak performance in project financial cost recovery that threatens sustainability. A significant lesson to be learned from the cumulative experience is that, as a strategy to deliver sustained and adequate funding to urban development, the scheme of UDAA revenue generation that centers on user charges and local levies, and which features in all ADB-financed projects, raises issues of effectiveness and efficiency. It is recommended that this revenue model be reviewed and that alternatives be investigated.

14 Appendix 1

PROJECT FRAMEWORK

Project Summary Performance Targets Project

Achievements Project Monitoring

Mechanisms Risks/

Assumptions Goals

Sustainable improvements to the quality of life

Improved urban environment, increased access by small towns residents to essential infrastructure and services, enhanced livelihoods and incomes

The Project contributed to improving quality of life and urban productivity in all of the provincial capitals in Lao PDR.

Reports issued by international and national health, education, and welfare organizations, multilateral and bilateral agencies (e.g., UNDP, UNICEF, UNESCO, WHO, World Bank, and ADB)

The Government’s continued commitment to urban and small towns development and poverty reduction

Urban productivity in small towns

Improved public health and decreased poverty incidence

Increased local economic output

Official Government reports and statistics

Purpose

Improve the urban environment; increase the access of communities to essential urban infrastructure and services; and enhance income-earning potentials of townspeople especially the poor

Improved mobility of townspeople due to road improvements; reduced flood damage as a result of improved storm water drainage and flood protection; decreased frequency of illness and better productivity due to sanitation and solid waste management improvements and village upgrading; improved incomes and volume of economic activity due to livelihood promotion and overall improvements

Improvements in physical infrastructure benefited the total of about 170,000 people live in the project towns and helped improve people’s mobility, reduce flood damages, and decrease frequency of illness.

Quarterly/biannual project progress reports (technical, financial, and administrative) Annual review missions (including beneficiary consultations) Project survey reports Benefit monitoring and evaluation reports

The Government’s commitment to urban and small towns development and poverty reduction

Develop decentralized urban governance

Efficient, sustainable, and responsive urban management and provision of infrastructure and services in small towns

UDAAs were established in 12 project towns and their capacity building helped improve municipal service provision.

Official Government reports and statistics and reports of other bilateral and multilateral agencies

Continued Government’s commitment to reforms Local administration bill enacted to provide an encompassing legal framework for decentralized urban governance

Appendix 1 15

Project Summary Performance Targets Project

Achievements Project Monitoring

Mechanisms Risks/

Assumptions Outputs

Improved and sustained urban infrastructure and amenities

Upon Project completion: 30%–100% of primary/secondary roads, 30%–60% of primary/secondary drainage, 50%–100% of access roads, and 50% of drains along access roads improved

2%–81% of primary/ secondary roads, 5%–93% of primary/ secondary drainage improved. (Low achievements are due to smaller investments in additional two towns.)

Annual review missions Semiannual and annual interviews with communities Benefit monitoring and evaluation reports

Sense of ownership and participation of townspeople at each stage of project implementation Land acquisition and resettlement activities will be carried out in time.

Improved and sustained solid waste management and sanitation desludging services

Upon Project completion, about 60% of townspeople will have been covered by solid waste and sanitation services.

17%–100% of population served by solid waste collection service.

Project completion report UDAA annual reports

Improved environmental hygiene and sanitation practices

Increased community awareness of the linkage between sanitation and health and the benefits to be derived from the Project

About 5,600 residents participated in sanitation and hygiene awareness campaign.

Review missions; monitoring and evaluation reports; interviews with residents; third party evaluation; financial reports; PCR

Participation of community leaders, village authorities, women, and the poor.

Improved village environment and enhanced community capacities to take active role in village planning and improvement

Upon project completion about 50% of the access roads and 30-60% of the drains improved; village committees proportionately representing the poor, women, ethnic people, and other vulnerable groups are actively involved in the process

11%–81% of access roads and 10%–58% of drains improved. 60 village committees were established and involved in civic awareness, community dialogue, and partnering process.

Review missions; monitoring and evaluation reports; interviews with residents; third party evaluation; financial reports; PCR

Communities are willing to participate and contribute. UDAAs have the capacity and are committed to implement participatory project preparation and implementation.

Enhanced livelihoods for the poor; increased community knowledge and skills in accessing and the productive use of microfinance; and strong, viable and sustainable MFI with greater outreach

1,500 poor people have access to microfinance; social intermediation programs (training and orientation activities) will have been implemented. Selected MFI is operating robustly in the town as planned.

1,544 poor households benefited from microfinance. Social intermediation programs implemented. LWUs acted as MFIs and

Review mission’s reports on funds received and disbursed, outstanding loans, impact and outreach, economic and technical performance of loans, financial strength, efficiency and portfolio

Eligible MFIs are willing to participate in the Project, and will be able to operate viably and profitably in the next 10 years. Community is willing to participate and

16 Appendix 1

Project Summary Performance Targets Project

Achievements Project Monitoring

Mechanisms Risks/

Assumptions implemented

microfinance. performance of new branches; beneficiary interviews Project completion report

contribute to operation and maintenance of project assets; villagers are willing to contribute (cash/ in kind) to the capital cost of improvements and take charge for O&M.

Continuous community dialogue

Town residents involved at each stage of project implementation especially subproject selection. They are aware of their roles and responsibilities for improved services, and cost implications.

60 village committees were established and involved in civic awareness, community dialogue, and partnering process.

Decentralized and urban focused administrations in place and evolving in small towns

Decrees issued to establish UDAAs in small towns, with urban functions and power to raise revenues from local sources and to spend them for the delegated tasks.

UDAAs established in all project towns.

Interviews with communities; review missions; process mapping

Firm support from central, provincial, and district governments to UDAAs

UDAAs gradually equipped with staff and logistics UDAA core capacities and staff skills to plan, finance, implement, operate and maintain urban infrastructure and services being developed

Training programs helped improve UDAAs’ core capacities.

Review missions, consultations with central, provincial and district governments, and UDAAs

Decentralized project implementation arrangements enabling the project process to be used as a process for transfer of knowledge are in place.

Greater transparency and accountability

Fundamental training improved UDAA transparency and accountability.

UDAA annual reports

Adequate internal control mechanism in place

Increased local resource mobilization

UDAAs within 2 years of subproject appraisal will generate revenues to meet 30%, within 4 years of subproject appraisal 65%, and within 6 years of project appraisal 100% of the cost of O&M of infrastructure and

UDAAs raising revenues, including solid waste collection fees, issuance of building permits, sludge removals, and street-lighting fees.

Review missions’ reports; UDAA financial reports Review of the progress of UDAAs as per the UDAA operational and revenue mobilization plans

Firm commitment and support from provincial government to UDAA UDAA capacities for effective levy and collection of user charges and

Appendix 1 17

Project Summary Performance Targets Project

Achievements Project Monitoring

Mechanisms Risks/

Assumptions services fees were

enhanced. Residents are willing to pay for services.

Activities Institutional Preparation/Civic Awareness

First batch of 4 towns: Jan–Dec 2003 Second batch of 3 towns: Jan–Dec 2004 Third batch of 3 towns: Jan–Dec 2005

Apr 2003–Sep 2008 Apr 2003–Sep 2008 Apr 2003–Sep 2008

Consultations with central, provincial authorities and UDAAs, semiannual and quarterly progress reports, review missions, PCR and interviews with communities

UDAAs are established on time. Sufficient number of counterpart staff in PCU and PIUs are in place. Good quality consultants are recruited on time.

Community Dialogue/ Partnering

Jan 2003–Jan 2009 Apr 2003–Sep 2008

Interviews with communities, third party evaluation, review missions

Qualified consultants are recruited on time.

UDAA Capacity Building

Jan 2003–Jul 2009 Apr 2003–Sep 2008

Project preparation and implementation capacity building

Jan 2003–Jan 2005 Jan 2004–Nov 2009

Consultation with UDAAs, semiannual and quarterly progress reports, review missions, PCR

UDAAs with adequate number of staff are established on time; PIUs are in place on time.

Operation/ maintenance and financial management/ revenue generation capacity building

Jan 2004–Jan 2009 Jan 2004–Dec 2009

Consultation with UDAAs, semiannual and quarterly progress reports, review missions, PCR

Central and provincial governments take timely actions to empower UDAAs and support them with necessary logistics.

Subproject identification; preparation of feasibility and detailed design, and contract documents; bid evaluation and contract awarding; and construction

First batch: Jan 2003–2006 Second batch: Jan 2004–2007 Third batch: Jan 2005–2008

Jan 2004–Nov 2007 Jan 2005–Nov 2008 Dec 2005–Nov 2009

Subproject appraisal reports and detailed designs submitted for ADB’s review Implementation scheduled and work plans ADB’s disbursement of loan funds

Good cooperation between central, provincial and UDAA levels; PIUs are supported technically by provincial departments and PCU; Initial training of PIU staff is conducted in a timely manner; Qualified

18 Appendix 1

Project Summary Performance Targets Project

Achievements Project Monitoring

Mechanisms Risks/

Assumptions contractors are employed.

Inputs ($ million) ADB

$16.00 $18.41 Disbursement of ADB loan funds

Government of Lao PDR

$3.80 equivalent $2.51

Beneficiaries

$0.20 equivalent $0.18 (In kind or cash)

Total $20.00 $21.10 Sub-appraisal report

Urban Infrastructure and Environmental Improvement

$15.70 $15.78 Mission reviews Semiannual progress reports of PCU Quarterly progress reports of PCU Subproject appraisal reports Disbursements of ADB loan funds

Project Implementation, Community Processes and Capacity Building

$3.90 $4.87

Interest during construction

$0.40 $0.44

Total Project Cost $20.00 $21.10 ADB = Asian Development Bank, LWUs = Lao Women’s Union, MFI = microfinance institution, O&M = operation and maintenance, PCR = project completion report, PCU = project coordination unit, PIU = project implementation unit, UDAA = urban development administration authority, UNDP = United Nations Development Programme, UNESCO = United Nations Educational, Scientific and Cultural Organization, UNICEF = United Nations Children’s Fund, WHO = World Health Organization. Source: Asian Development Bank.

Appendix 2 19

PROJECT COST AND FINANCING BREAKDOWN

Table A2.1: Project Costs ($ million)

Component

Appraisal estimate Actual Foreign

exchange Local

currency Total cost

Foreign exchange

Local currency

Total cost

A. Urban Infrastructure and Environmental Improvements 1. Townwide infrastructure and amenities 4.90 4.90 9.80 5.57 5.57 11.15 2. Town cleanliness and environmental services 1.80 1.20 3.00 1.54 1.03 2.56 3. Village upgrading and livelihood promotion 0.50 2.40 2.90 0.36 1.70 2.07 Subtotal (A) 7.20 8.50 15.70 7.48 8.30 15.78 B. Project Implementation, Community Processes, and Capacity Building 1. Support for project management and implementation 1.60 1.20 2.80 2.69 1.95 4.63 2. Support for civic awareness, community dialogue, and partnering 0.10 0.30 0.40 0.01 0.03 0.04 3. Capacity building for UDAAs 0.40 0.30 0.70 0.13 0.07 0.20 Subtotal (B) 2.10 1.80 3.90 2.83 2.05 4.87 Interest during construction 0.40 0.00 0.40 0.44 0.00 0.44 Total 9.70 10.30 20.00 10.75 10.35 21.10 UDAA = urban development administration authority. Note: Numbers may not sum precisely because of rounding. Source: Asian Development Bank estimates.

20 A

ppendix 2

Table A2.2: Project Cost by Component and Town

Actual by town

Item Pakxan Vang- Vieng Xam Nua Pek Xai

Louang Namtha

Phon- sali

Xaigna-bouli Houayxay Salavan Lamam

Samak-khixai

Total ($ m)

A. Urban Infrastructure and Environmental Improvements Townwide Infrastructure and Amenities

1,186.40 1,055.13 1,008.88 1,162.63 1,122.74 1,042.01 932.42 844.42 912.12 903.67 448.06 530.66 11.1

Town Cleanliness and Environmental Services

236.74 228.15 193.62 278.04 256.06 242.08 179.73 243.19 214.49 221.45 137.86 136.57 2.6

Village Upgrading and Livelihood Promotion

234.89 183.28 211.57 260.62 221.59 194.39 91.58 251.35 177.15 177.67 31.60 31.60 2.1

Subtotal (Part A) 1,658.03 1,466.57 1,414.06 1,701.30 1,600.39 1,478.48 1,203.74 1,338.95 1,303.76 1,302.79 617.52 698.83 15.8 B. Project Implementation, Community Processes, and Capacity Building

Project Management and Implementation Support

460.05 442.99 410.60 506.02 464.67 442.19 365.78 394.98 363.47 363.40 195.49 224.87 4.6

Support for Civic Awareness, Community Dialogue and Partnering

4.18 2.25 0.40 7.48 2.29 3.09 4.86 2.32 3.86 5.79 0.62 0.90 0.0

Capacity Building for UDAAs 17.52 16.12 16.71 19.75 20.24 21.76 20.19 18.98 16.17 19.55 9.69 8.62 0.2 Subtotal (Part B) 481.75 461.36 427.71 533.24 487.20 467.04 390.83 416.28 383.50 388.74 205.80 234.39 4.9 Interest during Construction 46.58 41.78 40.25 50.60 43.12 40.61 31.78 38.74 35.67 35.44 16.85 19.88 0.4 Total 2,186.35 1,969.70 1,882.03 2,285.14 2,130.71 1,986.14 1,626.36 1,793.97 1,722.94 1,726.97 840.18 953.10 21.1 UDAA = urban development administration authority. Source: Asian Development Bank estimates.

Appendix 2

21

Table A2.3: Financing Plan by Source

Item At Appraisal Actual

Cost Share (%) Cost Share (%) Implementation Costs ADB 15.60 79.60 17.90 87.00 Government of Lao PDR 3.80 19.40 2.50 12.10 Beneficiaries 0.20 1.00 0.20 0.90

TOTAL 19.60 100.00 20.60 100.00

Interest During Construction ADB 0.40 0.40 Borrower 0.00 0.00

TOTAL 20.00 21.10

Table A2.4: Financing Plan by Town

Actual Actual by town (%)

Item $

million Share of total (%) Pakxan

Vang- Vieng

Xam Nua Pek Xai

Louang Namtha

Phon- sali

Xaigna-bouli

Houay-xay Salavan Lamam

Samak-khixai

Implementation Costs ADB 17.90 87.00 85.80 86.60 87.60 90.50 85.20 84.70 85.30 92.10 86.00 86.20 89.60 90.10 Government of Lao PDR 2.50 12.10 13.40 12.80 11.50 9.20 14.30 14.80 12.90 7.10 9.80 13.00 10.40 9.90 Beneficiaries 0.20 0.90 0.80 0.60 1.00 0.30 0.50 0.50 1.80 0.80 4.20 0.90 0.00 0.00

Total 20.60 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Interest during Construction ADB 0.40 Government of Lao PDR 0.00

Total 21.10 Source: Asian Development Bank estimates.

22 Appendix 3

BREAKDOWN OF TOTAL AND YEARLY DISBURSEMENTS ($ million)

Year Quarter ADB Counterpart funds

Total Amount Cumulative Amount Cumulative 2002 I 0.000 0.000

II 0.000 0.000 III 0.000 0.000 IV 0.000 0.000

2003 I 0.000 0.000 II 0.000 0.000 III 0.000 0.000 IV 0.300 0.300 0.005 0.005 0.305

2004 I 0.431 0.731 0.010 0.012 0.441 II 0.034 0.765 0.010 0.020 0.044 III 0.285 1.050 0.010 0.025 0.295 IV 0.148 1.198 0.030 0.055 0.178

2005 I 0.248 1.446 0.020 0.075 0.268 II 0.168 1.614 0.020 0.097 0.188 III 0.207 1.821 0.020 0.118 0.227 IV 0.600 2.421 0.010 0.130 0.610

2006 I 0.209 2.630 0.010 0.145 0.219 II 1.057 3.687 0.020 0.162 1.077 III 1.224 4.911 0.360 0.521 1.584 IV 0.864 5.775 0.080 0.600 0.944

2007 I 1.069 6.844 0.070 0.669 1.139 II 0.356 7.200 0.100 0.772 0.456 III 1.715 8.915 0.320 1.094 2.035 IV 2.066 10.981 0.320 1.411 2.386

2008 I 1.796 12.777 0.230 1.638 2.026 II 2.110 14.887 0.180 1.822 2.290 III 0.599 15.486 0.100 1.924 0.699 IV 0.505 15.991 0.340 2.269 0.845

2009 I 0.668 16.659 0.050 2.316 0.718 II 0.444 17.103 0.210 2.527 0.654 III 0.288 17.391 0.040 2.570 0.328 IV 0.665 18.056 0.120 2.686 0.785

2010 I (0.020) 18.036 2.686 (0.020) II 0.00 18.036 2.686 III 0.379 18.415 2.686 0.379 IV 0.00 18.415 2.686

Total 18.415 2.686 21.100 Sources: Asian Development Bank Loan Financial and Information System and project coordination unit.

Appendix 4 23

IMPLEMENTATION SCHEDULE (Appraisal and Actual)

Description Town 2003 2004 2005 2006 2007 2008 2009 Group Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Part A: Urban Infrastructure and Environmental Improvements (i) Townwide infrastructure and Amenities Land 1st

2nd

3rd

Civil works 1st

2nd

3rd

4th

(ii) Town Cleanliness and Environmental Services 1st

2nd

3rd

4th

(iii) Village Upgrading and Livelihood Promotion Village upgrading works 1st

2nd

3rd

Part B : Project Implementation, Community Processes, and Capacity Building (i) Support for Project Management and Implementation Engagement of consultants

Subproject preparation 1st

2nd

3rd

4th

24 Appendix 4

Description Town 2003 2004 2005 2006 2007 2008 2009 Group Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Survey and design 1st

2nd

3rd

4th

Contracts 1st

2nd

3rd

4th

Post-construction activities 1st

2nd

3rd

(ii) Civic Awareness, Community Dialogue, and Partnering

(iii) Capacity Building for Urban Development Administration Authorities

Appraisal Actual

Appendix 5 25

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference in the Loan Agreement Status of Compliance

Implementation Arrangements A. Executing Agency 1 MCTPC as Project Executing Agency shall be

responsible for overall technical supervision, strategic guidance, coordination and execution of the Project. MCTPC shall also be responsible for dissemination of information on the Project to the Provincial Governments and UDAAs, including information on the procedures for inclusion of, and eligibility criteria for, subprojects under the Project.

LA, Schedule 5, para. 1

Complied with. MCTPC, or MPWT after the Government reorganization, undertook overall technical supervision, strategic guidance, and coordination and execution of the Project, as well as dissemination of information on the Project.

B. Project Steering Committee 2 The Project Steering Committee (PSC), chaired by Vice

Minister MCTPC, and composed of representatives from the MOF, PMO’s Department of Public Administration and Civil Service, CPC, BOL, UDAAs, and the vice governors from the Provincial Governments, shall meet semiannually or upon request by any of its members to oversee Project implementation, facilitate the cooperation and coordination of concerned agencies, and ensure timely implementation of the Urban Policy and Institutional Reform Agenda.

LA, Schedule 5, para. 2

Complied with. PSC was established and held semiannual meetings.

C. Project Coordination Unit 3 The Project Coordination Unit (PCU) established in the

Department of Housing and Urban Planning of MCTPC, shall be headed by a National Project Director acceptable to the Bank, and shall: (a) be responsible for overall execution of the Project implementation, programming, budgeting and financial planning and accounting’ (b) undertake recruitment of Project consultants; (c) confirm the selection of further Project towns based on agreed criteria; (d) appraise Subproject proposals prepared by PIUs, and forward to the Bank for approval, those proposals being recommended by the PCU; (e) provide administrative and technical support to UDAAs as implementing agencies; (f) be responsible for overall execution of capacity building component under Part B of Schedule 1 hereto; (g) advise on procurement by UDAAs; (h) be responsible for periodic progress reports and the Project completion report; (i) organize the Project performance monitoring system; and (j) be responsible for supervising the administration by PIUs of the town level imprest accounts, accounting operations, use of the imprest fund, consolidating the expenditure reports, and supporting documentation for SOEs, and withdrawal applications.

LA, Schedule 5, para. 3

Complied with. PCU was established and guided overall project implementation.

D. Implementing Agencies and Project Implementation Units (PIUs) 4 UDAAs shall be established in each Project town and

shall be responsible for Project implementation as implementing agencies. PIUs shall be established in

LA, Schedule 5, para. 4

Complied with. UDAAs were established

26 Appendix 5

Covenant Reference in the Loan Agreement Status of Compliance

each UDAA and shall be responsible for: (a) the Subproject selection and preparations; (b) detailed design; (c) procurement of goods and services under local competitive bidding; (d) planning and implementation of village upgrading component; and (e) implementing civic awareness, community dialogue and partnering activities. To use the Project implementation as a process for transfer knowledge and skills to the new established UDAAs and to maximize on-the-job training opportunities for UDAAs, the Borrower shall ensure that the Project management and implementation activities shall, as much as possible, be delegated to PIUs with the majority of the consultants and counterpart staff being located in PIUs, and with PCU maintaining a core unit of staff responsible for coordinating and facilitating functions. The Borrower shall ensure that a high level of technical support is made available to UDAAs by the PCU and provincial and district departments of MCTPC in the Project towns.

in 12 project towns and implemented subprojects as implementing agencies.

5 a. The Borrower shall ensure that: (i) the MFI as the implementing agency/ies for the microfinance component under Part A (iii) of Schedule I hereto, shall closely coordinate with the UDAAs especially with respect to social intermediation activities; and (ii) all necessary sector support and supervision over the MFI’s activities shall be provided by BOL and MOF, particularly through the members of the PSC.

LA, Schedule 5, para. 5

Not complied with. The microfinance subcomponent was implemented through provincial LWUs, as during project implementation a regulatory framework applying to the operations of private MFIs in government funded projects in the Lao PDR had not been developed.

b. Except as the Bank may otherwise agree, an MFI, to be eligible for participation in the Project shall: (i) be a duly registered credit cooperative, a saving and credit cooperative, or a credit union, in any of the Project towns; (ii) have a full-time Executive Director knowledgeable in sustainable microfinance provision, and competent staff with basic knowledge in credit and financial management bookkeeping or accounting; (iii) have a demonstrated commitment and understanding of sustainable pro-poor microfinance principles, primarily low-cost service delivery mechanisms, financial and management systems development and application, character-based lending, savings mobilization, and appropriate risk management; (iv) have a basic Management Information System (MIS) and internal control, accounting, documentation and loan monitoring systems; (v) not have any negative/adverse findings based on credit and background checks to be conducted under the Project; and (vi) have a minimum of 150 member-clients.

LA, Schedule 5, para. 5

Not complied with. The microfinance subcomponent was implemented through provincial LWUs, as during project implementation a regulatory framework applying to the operations of private MFIs in government funded projects in the Lao PDR had not been developed.

c. Once an MFI is selected in accordance with the criteria approved by the Bank, a Subloan Agreement

LA, Schedule 5, para. 5

Complied with.

Appendix 5 27

Covenant Reference in the Loan Agreement Status of Compliance

shall be executed between the concerned MFI and MOF on behalf of the borrower on terms and for an amount no greater than the amount as set out in Section 3.02(b) hereto.

A Subloan Agreement was executed between the concerned provincial LWU and MOF.

d. The Borrower shall ensure that: (i) the MFI shall designate a Project Manager whose primary responsibilities shall include reporting on the status of Project implementation, as well as accomplishments, to the UDAAs, (ii) the UDAAs shall, report on the status of their livelihood program subcomponent to the PCU who shall provide technical assistance to the UDAAs and the MFI, as and when necessary, (iii) the performance of the MFI-shall be assessed annually based on indicators that include increasing net income after grants, increasing number of members, a savings to total assets ratio of at least 5 percent, an increasing loans total assets ratio of at least 5 percent, an increasing loans to total assets ration, total resources growth rate of no less than the inflation rate, and a collection efficiency of no less than 85 percent, and (iv) if the performance is found to be unsatisfactory, the MFI’s participation, shall cease.

LA, Schedule 5, para. 5

Being complied with. The microfinance subcomponent was started at a late stage of project implementation and is still being implemented.

E. Provincial Project Facilitating Committee 6 The Borrower shall ensure that: (a) a Provincial Project

Facilitating Committee (PPFC), to be chaired by the respective vice governor of the Provincial Government and composed of representatives from the relevant UDAA, DCTPC, and other provincial and district agencies concerned, shall be formed in each Project town upon its entry into the Project; (b) the PPFC’s main role shall be to facilitate UDAA reforms, especially in terms of actual delegation of functions from central and provincial level departments to the UDAAs, UDAA local resource mobilization reforms for levying and collecting urban charges and fees, support for staffing and logistics of UDAAs, and facilitating the technical support of other relevant departments such as DCTPC, to UDAAs; and (c) each PPFC shall meet quarterly.

LA, Schedule 5, para. 6

Partially complied with. While a PPFC was established in each of the 12 project towns, its role in UDAA reform was limited.

F. Urban Policy and Institutional Reform Agenda 7 The Borrower shall review and update annually the

Urban Policy and Institutional Reform Agenda in consultation with the Bank and implement or cause MCPTC and UDAAs and other agencies of the Borrower concerned to implement the measures outlined in the Urban Policy and Institutional Reform Agenda within the time periods agreed between the Borrower and the Bank.

LA, Schedule 5, para. 7

Partially complied with. Delegation from central and provincial authorities to UDAAs complete. UDAAs are empowered to levy and collect revenues and given financial authority through provincial decrees. The urban policy and institutional reforms and collection of urban revenues are being

28 Appendix 5

Covenant Reference in the Loan Agreement Status of Compliance

implemented, to varying degrees of success.

8 Without limiting the generality of the above, the Borrower shall ensure that within three months of the Effective Date, a PM Decree shall be issued to amend Article 1 of PM Decree No. 177/PM, and Paragraph 1 of PMO Instruction No. 141/PMO dated 31 May 2000, to provide legislative basis for the establishment of UDAAs in district towns with specific urban socioeconomic characteristics, in addition to the provincial capital cities and towns

LA, Schedule 5, para. 8

Complied with. PM Decree on a legal framework to establish UDAA was issued on 30 May 2003. Local Administration Law dated 21 October 2003 enabled establishment of UDAAs in small towns under the Project.

G. Town Participation, subproject Appraisal and Approval 9 The Borrower shall ensure that each urban town to be

included in the Project, shall agree to establish within one month of confirmation of inclusion in the Project, UDAA, and strengthen its capacity and undertake relevant activities under the Urban Policy and Institutional Reform Agenda.

LA, Schedule 5, para. 9 (a)–(d)

Complied with.

10 The PIU/UDAA shall proceed with Subproject preparation following identification of Subproject components. The feasibility study and the Subproject proposal prepared by PIUs shall be appraised by PCU subject for Bank's review and approval of (i) the rationale, scope, cost and implementation and procurement arrangements, (ii) economic and financial justification, (iii) social and environmental assessments and resettlement plan, (iv) UDAA financial assessments for O&M costs and debt service, and (v) UDAA operational and local revenue mobilization plans.

LA, Schedule 5, para. 10(a)

Complied with.

11 Following endorsement of the Subproject by the Bank which involves procurement of equipment and vehicles for solid waste and septic management, a Subsidiary Loan Agreement shall be executed between UDAA, and MOF and MCTPC on behalf of the Borrower, for an amount sufficient to cover the cost of such procurement, on terms set out in Section 3.02 of the Loan Agreement.

LA, Schedule 10, para. 10(b)

Complied with. Subsidiary loan agreements signed and submitted to ADB.

H. Local Revenue Generation 12 Prior to the appraisal of the Subproject, UDAAs shall

prepare and agree to implement operational and local revenue mobilization plans with monitorable targets to gradually increase revenues from their own sources and to strengthen their technical, operational and financial management capacities.

LA, Schedule 5, para. 11(a)

Complied with. UDAAs have prepared revenue mobilization plans.

13 Immediately upon the successful appraisal of their respective Subproject, the UDAAs shall commence implementing imposing user charges for solid waste collection, sanitation, and parking and slaughterhouse fees, fees for lease of public places, and hotel and guest house charges.

LA, Schedule 5, para. 11(b)

Partially complied with. Xam Nua, Pakxan and Xay are relatively ahead in terms of revenue collection, with collection of 40%, 37%, and 20% of operation and maintenance costs, respectively. Other towns have had varying degrees

Appendix 5 29

Covenant Reference in the Loan Agreement Status of Compliance

of success in the collection of solid waste fees, parking fees, and market fees.

14 The relevant Provincial Government and UDAAs shall ensure that, within 2 years of subproject appraisal, each UDAA shall commence (i) charging special levies for wastewater and public lighting in the form of surcharges on the electricity and water bills on a consumption basis, and (ii) charging urban obligation fees.

LA, Schedule 5, para. 11(c)

See above.

15 The Borrower shall, within two years of Subproject appraisal in each Project town, commence allocating annually to UDAAs on a permanent basis and according to an established formula and mechanism, a portion of the monies accrued in the Road Maintenance Fund.

LA, Schedule 5, para. 11(d)

Partially complied with. UDAA receives 5% of the road maintenance funds, but the amount is insufficient for maintenance purposes.

16 The Borrower shall ensure that UDAAs generate revenues form their own sources to meet the following percentages of total cost that they incur in providing services and undertaking O&M of existing and Project facilities including roads and drainage, on the following basis: (a) within two years of Subproject appraisal, 30%, (b) within four years of Subproject appraisal, 65%, and (c) within six years of Subproject appraisal, 100%.

LA, Schedule 5, para. 12

Partially complied with. Given the limited capacity of UDAAs (which represent a totally new concept for small towns), it is unlikely that this target will be achieved. It has been assessed that a more realistic target would be 30% of O&M costs within 4 years of appraisal. O&M will cover regular maintenance work but not a major repair.

17 The Borrower shall establish immediately after the Effective Date, an imprest account at the BOL, and each UDAA shall establish a sub-imprest account with a bank acceptable to the Bank, immediately after the appraisal of any Subproject. The initial amount to be deposited into the imprest account shall not exceed the equivalent of the estimated expenditure during the first six months after the Effective Date, 10% of the Loan amount, whichever is lower. The initial amounts to be deposited into the sub imprest accounts shall not exceed the equivalent of the estimated expenditure for the relevant Subproject during the first six months. SOE procedure shall be used for reimbursement of eligible expenditures for the Project and to liquidate advances provided into the imprest account, for individual payments not exceeding the equivalent of $50,000.

LA, Schedule 3, para. 13

Complied with. Initial advance of $300,000 was released on the establishment of imprest account at the BOL. The imprest ceiling was increased from $0.8 million to $1.2 million in January 2008 to meet the increased disbursements for civil work contracts.

18 Within 3 years of the Effective Date, the Borrower shall, based on the study carried out by VUDAA of the Borrower on introducing a property related tax, prepare a concept plan to introduce this tax in small towns.

LA, Schedule 5, para. 14

Not complied with. MPWT has agreed to prepare the concept plan by reassessing the viability of VUDAA report. This is a challenge,

30 Appendix 5

Covenant Reference in the Loan Agreement Status of Compliance

however, as such a tax is a completely new and innovative concept for the Government.

I. Civic Awareness and Community Participation 19 The Borrower shall ensure that civic awareness activities

under the Project shall: (a) focus on stimulating demand for improved urban infrastructure and services and eliciting cooperation of Project town residents for successful implementation of the Project; and (b) involve: (i) information dissemination on the scope and nature of the Project; (ii) educating the Project towns’ residents on linkages between environment and health as well as benefits to be derived from Project interventions, (iii) informing the residents of their role and responsibility for good environmental practices for solid waste and septic management, and (iv) raising the awareness of the towns’ residents on the cost implications of improved services. Cooperation with United Nations Fund for Children Education (UNICEF) and other relevant programs shall be maintained, where possible, to utilize the existing experience and promotion materials.

LA, Schedule 5, para. 15

Complied with. Civic awareness activities stimulated demand for improved urban infrastructure and services.

20 The Borrower shall ensure that: (a) community dialogue activities shall be directed at involving Project town residents at each stage of the Project town improvements, including Subproject preparation, detailed design, construction process, and follow-up monitoring activities; (b) a participation strategy shall be developed and implemented to generate periodic feedback from stakeholders; and (c) wherever possible, NGOs with relevant experience are involved in these processes.

LA, Schedule 5, para. 16

Complied with. Community dialogue activities were conducted at each stage of the Project, and the participation strategy was developed and implemented.

21 The Borrower shall ensure that community partnering shall: (a) target the Project town communities to enable them to become active partners in community-led village upgrading program; (b) build the capacity of village organizations and communities in participatory village planning and decision-making in prioritizing works, choice of designs, village participation in procurement, operation and maintenance and monitoring and evaluation activities, and (c) assist the villages in establishing village-working committees, cost sharing mechanisms, training of village leaders and key persons including women members as well as UDAA staff.

LA, Schedule 5, para. 17

Complied with. Community partnering helped build village organizations and aided communities to strengthen their capacities and participate in community-led village upgrading programs.

22 The Borrower shall ensure that: (a) the Project shall incorporate mechanisms to address the specific needs of the poor, women, and ethnic minorities; and (b) Part A (iii) of Schedule 1 hereto, which shall prioritize villages with higher percentages of poor and ethnic minorities, shall include measures for: (i) adequate representation of poor, women and ethnic minorities in village working committees, (ii) targeting women in civic awareness and community dialogue activities as well as sanitation and solid waste management, (iii) where the percentage of ethnic minorities is higher, utilization, in community dialogue and partnering programs, of NGOs, with experience in working with ethnic minorities, (iv) allowing

LA, Schedule 5, para. 18

Complied with. The Project addressed specific needs of the poor, women, and ethnic minorities through village organizations.

Appendix 5 31

Covenant Reference in the Loan Agreement Status of Compliance

the poorer villagers to make in kind contribution to the cost of improvements, (v) prioritizing the poor, women, and ethnic minorities to be hired as laborers in construction activities, (vi) promoting community-based service delivery and village contracts for solid waste collection, by which the poor’s burden for service charges is relieved, and (vii) in case subprojects are likely to affect ethnic minorities, taking mitigation measures, either as part of a resettlement plan or a separate indigenous peoples’ development plan.

J. Operations and Maintenance (O&M) 23 The Borrower shall ensure that UDAAs shall be

responsible for regular O&M of the Project facilities built under Urban Infrastructure and Services Improvements: (a) establish detailed O&M functions and procedures, including annual O&M programs, (b) submit them for Bank review, and (c) implement them in a timely manner after taking the Bank's view into account, during the Project and post-Project period.

LA, Schedule 5, para. 19

Complied with.

K. Environmental and Resettlement Issues 24 The Borrower shall ensure that: (a) selection of a

Subproject shall avoid areas of environmental sensitivity, sites that could impact on areas of cultural heritage importance, areas where there are geological or topographic problems, and sites where either groundwater or surface water, likely to be used by others, would be adversely affected by Project activities and mitigation is not possible; (b) site selection shall take into account the potential nuisance to surrounding areas during the construction period; (c) site selection shall minimize land use changes; (d) where negative environmental impacts are unavoidable, mitigation measures shall be taken to minimize the impacts; and (e) an initial environmental examination or environmental impact assessment shall be prepared as part of Subproject feasibility in each Project town, in accordance with applicable environmental laws and regulations, and relevant guidelines of the Bank and environmental management and monitoring plan agreed to by the Borrower, and be submitted to the Bank together with Subproject appraisal report, prior to any construction-related activities.

LA, Schedule 5, para. 20

Complied with. Subproject selection took into account the environmental and resettlement impacts. The Government approved the IEE reports and issued environmental certificates for the project towns. The environmental management and monitoring plan including mitigation measures was prepared and implemented.

25 The Borrower shall ensure that: (a) the Project shall be carried out, and all Project facilities are operated and maintained, in accordance with the existing laws, regulations and standards of the Borrower concerning environmental protection, and the Bank's environmental guidelines, (b) the environmental mitigation measures set forth in the IEE prepared for each Subproject are undertaken during Project Implementation, and (c) PCU provides the Bank with an annual report consolidating copies of all safety and environmental quality monitoring reports from the UDAAs.

LA, Schedule 5, para. 21

Reported in the quarterly progress reports.

26 Where resettlement is unavoidable, the Borrower shall carry out Resettlement Plan to improve or restore the pre-project living standards of affected families and

LA, Schedule 5, para. 22

Resettlement plan or framework provided during appraisal. SRP for

32 Appendix 5

Covenant Reference in the Loan Agreement Status of Compliance

provide adequate compensation at least at replacement rates to all persons affected by the Project and submit to the Bank for approval the Resettlement Plan for each Subproject prior to award of the civil works.

the Phase 2 and 3 towns submitted and approved. SRP for Phase 4 towns also completed.

27 The Borrower and UDAA shall ensure that prior to construction work commencing; the relocation, resettlement and compensation of all persons who are adversely affected by the Subproject shall be carried out in accordance with the Resettlement Plan and in compliance with the Bank's Involuntary Resettlement Policy (1995) and Handbook on Resettlement.

LA, Schedule 5, para. 23

No resettlement required for the Project.

28 The Borrower shall ensure that (a) all land, properties, and rights in land and water required for the Project are made available in a timely manner, (b) adequate budgetary allocation is made on a timely basis to cover the cost of land acquisition, including compensation, and (c) UDAAs shall keep the Bank informed of progress of the implementation of the Resettlement Plan on a semi-annual basis.

LA, Schedule 5, para. 24

No land acquisition and resettlement required for the Project.

29 The Borrower shall ensure that the implementation of the Resettlement Framework as agreed between the Borrower and the Bank during the Project shall protect and not prejudice, the interests of the poor and disadvantaged groups.

LA, Schedule 5, para. 25

No land acquisition and resettlement required for the Project.

L. Project Performance Management System 30 The Borrower shall ensure that (a) monitoring and

evaluation in accordance with the Bank's PPMS and agreements reached with the Bank is undertaken for each component of the Project to ensure that the Project facilities are managed efficiently and that the benefits are maximized, and (b) PCU develops a comprehensive PPMS which shall provide a mechanism to involve the beneficiary, (c) actual carrying out of the activities under the PPMS, include the establishment of benchmarks through baseline physical and socioeconomic surveys, and initial data collection and analysis shall be responsibility of and undertaken by, the PIUs, and (d) the surveys are repeated at intervals to determine changes in key indicators of increased community participation, public accountability, transparency, better provision and coverage of services (especially for the poor, women and minority groups), opportunities generated and direct employment generation.

LA, Schedule 5, para. 26(a)–(d)

The initial PPMS was complicated and difficult for data entry and processing. The PCU modified the system and produced a simplified PPMS. UDAAs agreed to utilize the simplified PPMS for monitoring of the UDAA’s assets and evaluating the quality of public services provided by UDAAs.

Within six months of the Effective Date, PCU shall submit a detailed implementation plan for monitoring benefits and shall prepare benchmark information for the Bank's review and concurrence.

LA, Schedule 5, para. 26(e)

Complied with.

The Borrower shall furnish the Bank an annual PPMS reports throughout the implementation of the Project.

r Complied with. Included in the quarterly Reports.

31 The Borrower shall (i) maintain, or cause to maintain, separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors

LA, Art. IV, Section 4.06(b)

Complied with. The auditor issued an unqualified opinion to all audited financial reports

Appendix 5 33

Covenant Reference in the Loan Agreement Status of Compliance

whose qualifications, experience and terms of reference are acceptable to the Bank; (iii) furnish to the Bank, as soon as available, but in any event, not later than nine months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the covenants on this Loan Agreement as well as on the use of the procedures for imprest account/SOE), all in the English language, and (iv) furnish to the Bank such other information concerning such accounts and financial statements and the audit thereof as the Bank shall time to time reasonably request./

submitted to ADB. Consolidated audited financial reports for 2008–2009 will be submitted in December 2010.

32 The Borrower shall furnish, or cause to be furnished, the Bank quarterly reports on the carrying out of the Project, and on the operation and management of the Project facilities.

LA, Art. IV, Section 4.08(b)

The 2007 annual report has been submitted. Quarterly reports submitted to ADB.

33 Promptly after physical completion of the Project, but in any event, not later than three months thereafter or such later date as may be agreed for this purpose between the Borrower and the Bank, the Borrower shall prepare and furnish to the Bank a report, in such form and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan.

LA, Art. IV, Section 4.08(b)

Project completion report submitted.

ADB = Asian Development Bank, BOL = Bank of Lao, CPC = committee for planning and cooperation, DCTPC = Department of Communication, Transport, Posts and Construction, IEE = initial environmental examination, Lao PDR = Lao People’s Democratic Republic, LWU = Lao Women’s Union, MCTPC = Ministry of Communication, Transport, Posts, and Construction, MFI = microfinance institution, MOF = Ministry of Finance, MPWT = Ministry of Public Works and Transport, NGO = nongovernment organization, O&M = operation and maintenance, PCU = project coordination unit, PIU = project implementation unit, PM = prime minister, PMO = Prime Minister’s Office, PPFC = provincial project facilitating committee, PPMS = project performance management system, PSC = project steering committee, SOE = statement of expenditure, SRP = short resettlement plan, UDAA = urban development administration authority; VUDAA = Vientiane Urban Development Administration Authority.

34 Appendix 6

SUMMARY OF ADB-FINANCED CONTRACTS A. Civil Works

Towns Contract/Package

Contract Amount

($)

Construction Period

(months) Signing Completion

Date Phase 1 Pakxan Package 1/Road

Improvement 469,254 8 12 Sep 2005 28 Jul 2006 Package 2/Road

Improvement 171,257 6 12 Sep 2005 5 Jul 2006 Package 3/Road

Improvements 414,935 8 12 Sep 2005 28 Jul 2006 Package 4/Landfill 101,641 6 12 Sep 2005 28 May 2008 Package 5/Drainage 74,915 3 20 May 2008 4 Sep 2008 Package 6/Village

Upgrading (14 contracts) 210,636 6 17 Jan 2007 29 Apr 2007 Vangvieng Package 1/Road

Improvement 358,163 8 14 Sep 2005 16 Jul 2006 Package 2/Road

Improvement 259,655 8 16 Jan 2006 6 Oct 2006 Package 3/Drainage 158,587 8 14 Sep 2005 17 Jun 2006 Package 4/Landfill 101,526 6 14 Sep 2005 5 Feb 2006 Package 5/Road

Improvement 119,423 6 1 Jan 2007 14 Jun 2007 Package 6/Streetlight 149,778 6 25 Mar 2008 15 Dec 2008 Package 7/Village

Upgrading (3 contracts) 128,769 6 25 Jan 2007 17 Jul 2007 Variation/Road

Improvement 31,241 1 2 Jul 2009 30 Sep 2009 Xam Nua Package 1/Road

Improvement 277,442 8 7 Sep 2005 3 Jul 2006 Package 2/Road

Improvement 313,583 8 7 Sep 2005 3 Jul 2006 Package 3/Road

Improvement 260,178 8 7 Sep 2005 3 Jul 2006 Package 4/Landfill 60,077 6 7 Sep 2005 2 May 2006 Variation/Road

Improvement 187,169 2.5 11 Sep 2009 16 Nov 2009 Package 5/Village

Upgrading (6 contracts) 179,966 6 1 Apr 2007 29 May 2007 Pek Package 1/Road drains,

waterway 211,850 8 7 Sep 2005 2 Jul 2006 Package 2/Road drains,

waterway 249,275 8 7 Sep 2005 2 Jul 2006 Package 3/Road

Improvement 164,282 8 7 Sep 2005 2 Jul 2006 Package 4/Road

Improvement 168,071 8 19 Jan 2007 1 Sep 2007 Package 5/Road

Improvement 201,275 8 19 Jan 2007 1 Sep 2007 Package 6/Landfill 102,835 6 7 Sep 2005 1 May 2006 Road Drains (Contract

Variation #1 92,974 1 2 Jul 2009 30 Mar 2009

Appendix 6 35

Towns Contract/Package

Contract Amount

($)

Construction Period

(months) Signing Completion

Date Road Drains (Contract

Variation #2) 212,497 2.5 10 Sep 2009 30 Nov 2009 Package 7/Village

Upgrading (18 contracts) 269,520 6 17 Jan 2007 26 Jul 2007 Phase II Louang Namtha

Package 1/Road Improvement 573,319 8 18 Dec 2006 20 Sep 2007

Package 2/Drainage 185,750 8 12 Jan 2007 20 Sep 2007 Package 3/Side drain,

sidewalk, street 283,053 8 18 Dec 2006 20 Sep 2007 Package 4/ Construction of

Landfill 116,614 6 18 Dec 2006 20 Jul 2007 Package 5/Village

Upgrading 179,987 6 25 Jul 2007 9 Feb 2008 Xai Package 1/Road, streetlight 397,659 8 22 Dec 2006 5 Dec 2007 Package 2/Road

Improvement 395,610 8 22 Dec 2006 5 Dec 2007 Package 3/Road

Improvement 333,322 8 22 Dec 2006 5 Dec 2007 Package 4/ Construction of

Landfill 85,210 6 22 Dec 2006 5 Jun 2007 Package 5/Village

Upgrading 209,928 6 19 Jun 2007, 6 Sep 2007 26 Dec 2007

Phongsali Package 1/Road Improvement 574,718 10 20 Dec 2006 8 Feb 2008

Package 2/Streetlight 174,627 3 17 Jan 2007 25 Apr 2007 Package 3/Road

Improvement 183,080 6 17 Jan 2007 30 Dec 2007 Package 4/ Construction of

Landfill 55,042 6 20 Dec 2006 15 Oct 2007 Package 5/Village

Upgrading 59,981 6 15 Aug 2007 1 Nov 2007 Phase III Houayxay Package 1/Road

Improvement 272,237 8 26 Mar 2007 23 Dec 2007 Package 2/Road

Improvement 202,050 8 26 Mar 2007 14 Dec 2007 Package 3/Road

Improvement 456,663 8 26 Mar 2007 20 Dec 2007 Package 4/ Construction of

Landfill 95,078 6 26 Mar 2007 23 Oct 2007 Package 5/Village

Upgrading 149,973 6 9 Oct 2007 10 May 2008 Xaignabouli Package 1/Road

Improvement 230,190 8 23 Mar 2007 3 Jun 2008 Package 2/Road

Improvement 330,314 8 23 Mar 2007 3 Jun 2008 Package 3/Road

Improvement 397,920 8 23 Mar 2007 3 Jun 2008 Package 4/ Construction of

Landfill 79,691 6 23 Mar 2007 19 Jan 2008 Package 5/Village

Upgrading 238,772 6 2 Jun 2007 2 Mar 2008

36 Appendix 6

Towns Contract/Package

Contract Amount

($)

Construction Period

(months) Signing Completion

Date Salavan Package 1/Road

Improvement 248,922 8 26 Mar 2007 28 Feb 2008 Package 2/Road

Improvement 467,721 8 26 Mar 2007 20 Mar 2008 Package 3/Road

Improvement 203,717 8 26 Mar 2007 20 Mar 2008 Package 4/ Construction of

Landfill 102,492 6 26 Mar 2007 31 Dec 2007 Package 5/Village

Upgrading 145,693 6 30 Jan 2007 30 Nov 2007 Additional Towns Lamam Package 1/Road

Improvement 430,000 8 15 May 2008 22 Mar 2009 Variation, Road

Improvement 55,725 1 7 Feb 2009 15 Mar 2009 Package 3/Landfill 70,000 6 15 May 2008 22 Jan 2009 Samakkhixai Package 1/Road

Improvement 247,901 8 19 May 2008 13 Mar 2009 Package 2/Road

Improvement 182,099 8 19 May 2008 13 Mar 2009 Civil works (Contract

Variation #1) 55,966 1 2 Jul 2009 10 Aug 2009 Civil works (Contract

Variation #2) 99,987 2.5 15 Sep 2009 30 Nov 2009 Package 3/Landfill 70,000 6 19 May 2008 26 Jan 2009 B. Equipment and Materials

PCSS No.

EA Contract Number or Supplier Item or Description

Procurement Mode Date

Amount Disbursed

($) 0002 Package No. 1 4 WD pickup for 4

towns IS Sep 2004 82,993 0003 Package No. 3 Motorbikes DP 19 Mar 2004 65,043 0004 Package No. 7 Office equipment DP 4 Mar 2005 32,437 0005 Package No. 6 4WD pickup truck and

2WD pickup truck IS 1 Jun–31 Jul 2005 115,246 0006 Various Office equipment DP 1 Aug–30 Sep 2005 49,276 0022 Various Small contracts SOE Shopping 1 Oct 2005–30 Jan 2006 48,185 0024 Various Small contracts SOE Shopping 1–31 Mar 2006 6,125 0025 Various Small contracts SOE Shopping 1–31 May 2006 16,107 0026 RM Asia (HK) Ltd. 1 tractor for SWM LIB 6 Sep 2006 99,748 0027 Lao Thani

Agriculture Promotion Trading

Vehicles and equipment for solid waste management and septage (road vehicles) LIB 6 Jun 2006 374,510

0070 Lao Thani Agriculture Promotion Trading

Supply and delivery of SWM equipment and vehicles NCB 31 Jul 2007 727,500

0071 RM Asia (HK) Ltd. Supply and delivery of SWM vehicles and equipment (tractors) NCB 31 Jul 2007 187,040

0084 Various Office equipment and furniture (PMU) DP 1 Mar 2008 64,436

Appendix 6 37

PCSS No.

EA Contract Number or Supplier Item or Description

Procurement Mode Date

Amount Disbursed

($) 0085 Various Office furniture in

Houayxay and computer in Salavan Shopping Sep 2008 311

0086 Isuzu Lao Supply of 2 dump truck units for SWM Shopping 6 May 2009 99,800

0087 Inxythong Motors Supply of 2 tractor units for SWM Shopping 1 May 2009 42,520

0102 Various Office furniture for Vientiane, Vangvieng, Pek, Louang Namtha, Salavan, Lamam and Samakkhixai Shopping Q4 2009 7,495

8801 Various Office equipment Shopping Jan–Dec 2006 3,780 8802 SOE Small contracts

equipment and furniture Shopping Jan–Dec 2007 6,222

8803 Various Small contracts for equipment and furniture Shopping Jan–Sep 2008 68,271

8804 Various Office furniture Shopping Oct–Dec 2009 366 8805 Various Various expenses for

training, equipment, administration costs for Vientiane, Lamam and Samakkhixai Shopping Jan–Dec 2010 1,700

Total 2,099,111 DP = direct purchase, IS = international shopping, LIB = limited international bidding, NCB = national competitive bidding, PCSS = procurement contract summary sheet, PMU = project management unit, SOE = statement of expenditure, SWM = solid waste management, WD = wheel-drive.

38 Appendix 7

ECONOMIC AND FINANCIAL REEVALUATION

1. The financial and economic analysis undertaken for the reevaluation employed the same general methodology and assumptions, as did the analysis conducted at appraisal. It also included a review as to the sustainability of the urban development administration authorities (UDAAs). The reevaluation of economic and financial viability was conducted for three of the four pilot towns. It was decided to omit Pek because not enough details of the appraisal methodology and assumptions could be recovered for a satisfactory reevaluation. Economic benefits were measured by comparing the project town conditions with and without the project component. Financial benefits were measured by revenues for revenue-generating subcomponents. Economic costs and benefits were valued at border equivalent prices for tradable goods, and for nontradable goods at domestic prices after removing the effects of taxes and subsidies. The costs and benefits are expressed in 2009 constant prices. Against the approach taken at appraisal, the use of shadow price adjustment factors, which are considered no longer applicable, has been dropped. This change increases the component economic costs, and it is for that reason conservative. A 20-year analysis period has been assumed for each component. No terminal value has been included at the end of the analysis period, although the facilities built will clearly continue to deliver benefits indefinitely for as long as they are kept in working order through maintenance and periodic renewal. A. Costs 2. For the townwide infrastructure and amenities component, investment costs are made up of actual costs for construction, design, and supervision consulting services. They exclude financing charges during implementation. Operation and maintenance (O&M) costs have been estimated at 5% of investment costs, following the approach taken at appraisal. A financial reevaluation was undertaken for revenue-generating subcomponents. Their capital costs are actual costs of equipment, building, and site clearance works. Refurbishment and replacement of equipment at expiry of an assumed 10-year lifecycle are included into the analysis as capital costs.

B. Benefits

1. Economic Benefits 3. The benefits of town road and drainage improvements include increased land values and avoided residential property damage due to flooding. Following urban improvements, property value increases are normally associated with growth in overall productivity, income, and economic activities involving the towns and their residents, a desired impact of the project. Benefits were quantified for the town road improvement and drainage subprojects using the increase in pilot towns’ urban land values with and without the project. This measure was derived by comparing the estimate at appraisal of the land value assuming the subproject was not implemented with the value estimated post-implementation. The land value estimation at appraisal and after project implementation took the same approach in using the assessment of urban authority officials of the pilot towns. Table A7.1 gives details of the estimates.

Appendix 7 39

Table A7.1: Estimate of Urban Land Value in Pilot Towns, without Project and after Project Implementation

(KN million per hectare)

Pilot town Without project, at appraisal After project implementation Pakxan 493 3,725 Vangvieng 748 6,209 Xam Nua 987 7,451 Source: Based on pilot town urban authority officials’ assessments.

4. With the project implemented, the reported estimate of urban land values in the three pilot towns was found to exceed values anticipated at appraisal by several multiples: current reported urban property values in Pakxan, Vangvieng, and Xam Nua range from KN3.7 billion to KN7.5 billion per hectare, against the estimated range at appraisal of KN0.5 billion to KN1.0 billion. At appraisal, the component benefits were valued assuming that 80% of the increase in urban property value could be attributed to the component. To allow for optimism bias in the land valuation, for the beneficial contribution of other subprojects, particularly those relating to town cleanliness and environment, and for other non-project factors,5

the present analysis has assumed that 30% is attributable.

2. Financial Benefits

5. The financial benefits of the project were quantified for the revenue-generating wastemanagement subcomponent of each pilot town included in the reevaluation.

Table A7.2: Average Domestic Solid Waste Management Fee

Pilot town Population Average fee

(KN per head per month) Pakxan 18,660 2,250 Vangvieng 11,803 1,709 Xam Nua 15,391 1,529 Source: Government of the Lao PDR.

6. Using average fees derived from the solid waste management fee tariff approved by the provincial authority of each town, revenue from solid waste management has been reestimated and calibrated against reported performance. Revenue for domestic waste was calculated using an average monthly fee per head of town population (Table A7.2), the average being in turn calculated from approved rates for domestic waste by household category. The revenue for nondomestic waste was estimated by deriving an average monthly fee per ton using the approved rates for nondomestic waste by nondomestic user category. The average nondomestic waste fee was estimated to be KN22,500 per ton per month in the two pilot towns other than Vangvieng, where an average monthly fee of KN38,000 per ton was estimated. Solid waste collection fees were assumed to remain constant in real terms in the reevaluation, which is in contrast to the assumption made at appraisal of a 2% real annual increase. C. Economic and Financial Analysis

1. Economic Analysis

5 Such as, with effective roads, Pakxan’s proximity to the national capital, Vangvieng’s natural attractions for tourism,

and Xam Nua’s unique place in the birth and history of the Lao PDR.

40 Appendix 7

7. Economic internal rates of return (EIRRs) were recalculated for the road and drainage improvement subcomponents in the three pilot towns. The EIRRs range from 35.1% to 67.1%, about double the range of 19.3%–25.6% that was found at appraisal and which was itself already well above the 12% required minimum economic yield. The EIRRs demonstrate how an exceptionally high economic efficiency can be achieved in investing to improve urban infrastructure and amenities in small towns. To illustrate, by generating an equivalent value in cumulative net social benefits, a town improvement project with a 67.1% EIRR will recover its economic investment cost in less than 2 years. 8. The substantially higher EIRRs on reevaluation are due to much larger increases in urban land value in pilot towns after project implementation when compared to those anticipated at appraisal. Table A7.3 shows the reevaluated EIRRs for pilot town urban road and drainage subcomponents.

Table A7.3: Summary of the Town Road Improvements and Drainage EIRR

Pilot town EIRR (%) Pakxan 35.1 Vangvieng 42.7 Xam Nua 67.1 EIRR = economic internal rate of return. Source: Asian Development Bank estimates.

2. Financial Analysis

9. Using the average actual solid waste management fees and otherwise retaining the assumptions and methodology from appraisal, financial internal rates of return (FIRRs) were recalculated for the three pilot towns. They range between 6.1% and 7.3%. When compared to the weighted average cost of capital (WACC) of 4.3%, retained unchanged from appraisal, these FIRRs indicate financial viability for the pilot towns’ solid waste management subcomponents. Table A7.4 shows the FIRR for each pilot town.

Table A7.4: Summary of the Solid Waste Management FIRR

Pilot town FIRR (%)

Base case At 50% domestic revenue coverage Pakxan 10.0 6.2 Vangvieng 6.1 3.5 Xam Nua 7.3 3.5 FIRR = financial internal rate of return. Source: Asian Development Bank estimates.

10. The reestimated solid waste management revenues imply an 80% rate of revenue collection (revenue coverage) for the domestic waste management service. However, there may be social benefit and social assistance grounds to broaden the service being provided free of charge as a public service obligation to lower income households, which would lower the revenue coverage for the domestic service. For illustration, at 50% domestic revenue coverage, only Pakxan’s solid waste management subproject remains financially viable, with an FIRR of 6.2%. Those of Vangvieng and Xam Nua would have an FIRR of 3.5%, which is below the 4.3% WACC. In these two cases, a contribution from public funds will be needed to pay for the extended public service obligation and restore financial viability.

Appendix 7 41

D. Sustainability of the Urban Development Administration Authorities

1. Financial Cost Recovery

11. Based on their reports for fiscal years 2008–2010, UDAAs have generally begun to recover their recurrent O&M costs. The details for a selection of UDAAs can be found in Table A7.5. Most UDAAs derive the bulk of their regular own-source revenue from a combination of solid waste management and urban obligation fees and levies. Information from several UDAAs interviewed suggests that significant additional UDAA staff time and/or other costs will be needed in any effort to deepen the current revenue base or to broaden it by tapping less established sources such as the surcharge for electricity and water. This brings into question the UDAAs’ general ability to recover their capital as well as recurrent cost from own-source revenues. Already the great majority of the equipment subsidiary loans appear likely to require restructuring.

Table A7.5: Summary of UDAA Financial Cost Recovery

(KN ‘000)

Itema Pakxan Vang-vieng Xaib

Louang Namtha

Phong-sali

Houay-xay Salavan Lamarmc

2007/2008 Revenue 175,743 139,198 208,211 114,599 3,607 56,817 Expenses 138,681 68,552 153,263 95,107 640 56,513 Balance 37,062 70,646 54,948 19,492 2,967 304 2008/2009 Revenue 200,567 77,212 229,485 92,851 37,983 101,867 116,217 Expenses 222,800 99,882 202,277 71,348 27,923 101,867 110,735 Balance (22,233) (22,670) 27,208 21,503 10,060 0 5,482 2009/2010 Revenue 163,106 166,410 309,780 282,188 84,374 113,524 108,585 103,926 Expenses 139,431 155,303 256,933 243,350 103,333 104,975 108,351 100,644 Balance 23,675 11,107 52,847 38,838 (18,959) 8,549 234 3,282 ( ) = negative, UDAA = urban development administration authority. a By fiscal year. For 2009/2010, only 11 months have been included. Figures have been rounded. Expenses exclude

payroll costs of UDAA administrative staff members who are paid from a separate provincial budget. b Revenue estimated from data for February 2010. For earlier years, no data were available for this analysis. c Operation began in 2008/2009. Source: UDAAs’ reports.

2. Sustainability

12. Two central themes run through the project completion reports of two earlier Asian Development Bank (ADB) loans for urban development in the Lao People’s Democratic Republic (Lao PDR).6

6 ADB. 2005. Project Completion Report Secondary Towns Urban Development Project (Lao People’s Democratic

Republic) (Loan 1525-LAO [SF]). Manila; ADB. 2008. Project Completion Report Vientiane Urban Infrastructure and Services Project (Lao People’s Democratic Republic) (Loan 1834-LAO). Manila.

They are (i) high to exceptionally high net social benefits and economic returns on investment, as confirmed by post-completion reassessment; and (ii) weak performance in project financial cost recovery. That recovery is the key to those projects’ strategy for ensuring sustainable provision of urban services and other improvements introduced into the project locales. This project completion report conveys the same central themes. The stubborn sustainability question, occurring in conjunction with the strong economic investment efficiency, begs further examination.

42 Appendix 7

13. ADB has put forward a detailed specification of what should be the UDAAs’ own revenue sources. It includes the following: (i) the user charges for solid waste and septage management services; for slaughterhouse, hotel, and guest house operations; and for use of public places including parking; (ii) the surcharges (realized by consumption) on electricity and water bills for street lighting and wastewater, and an urban obligation charge; (iii) an earmarked share of the national Road Maintenance Fund; and (iv) planned introduction of a property-related tax based on urban property values. From this list, it is clear that, to secure the financial sustainability of UDAAs, ADB’s approach is centered on the local community of direct beneficiaries, with its interest being vested in, and its collective ability to pay for, UDAA-provided amenities and services. 14. From a pure funding perspective, the approach raises a number of issues, which include the following. One, in promoting and supporting strong growth of town productivity, income, and employment opportunities, urban improvements reward a wide range of indirect beneficiaries who have a collective capacity to contribute additional payment toward the cost of the improvements. This could allow UDAAs to select more effective equipment and technology for investment and maintenance of facilities and thereby to provide an improved standard of service to their user constituencies. For example, for solid waste and septage handling equipment, and also for landfill site management, the affordability level of capital and recurrent budgets severely limit standards in septage disposal and landfill operations, and this might even increase the risk of third-party exposure to hospital and hazardous waste.7

15. Two, in an economic downturn, with UDAAs depending on a lagging and limited user charge revenue base, and being held to performance on cost recovery, their maintenance programs would be under extra pressure for spending cuts. That would be to the detriment of facilities and service quality in the long term.

16. Three, given the diversified UDAA tariffs targeting direct beneficiaries, the additional expense of cost and time is significant for both the UDAAs and the direct beneficiary community, (i) in conducting community outreach campaigns to deepen and broaden the designated revenue base, and, (ii) for the revenue collection itself. 17. Four, as a result, more scarce UDAA human and financial resources are diverted from the work of managing maintenance of the urban infrastructure and delivery of the services and their further development. Similarly, the beneficiaries have to give up more occupation or leisure time to attend a meeting with UDAA officials or to pay yet another UDAA charge.

18. A significant lesson to be learned from the implemented project is that, as a strategy to deliver sustained and adequate funding to urban development, the scheme of UDAA revenue generation that is centered on user charges and local levies, and featured in three ADB loans for urban development in the Lao PDR, raises some issues of effectiveness and efficiency. As such, it could benefit from a more detailed review. The review should include to investigate alternative approaches, including, as one idea to explore, a single revenue source in the form of an urban amenities surcharge on the turnover tax incurred for transactions in the locality. It is also clear that any review should provide a better understanding of how different revenue designs could elicit the local community’s involvement in monitoring, and holding to account, the performance of a UDAA.

7 For instance, garbage scavengers comprise a high-risk low-income category.