ASIAN DEVELOPMENT BANK JFICT: LAO 36589

ASIAN DEVELOPMENT BANK JFICT: LAO 36589

GRANT ASSISTANCE

(Financed by the Japan Fund for Information and Communication Technology)

TO THE

LAO PEOPLE’S DEMOCRATIC REPUBLIC

FOR

BANKING AUTOMATION TO SUPPORT OUTREACH, EFFICIENCY, AND GOVERNANCE

June 2004

CURRENCY EQUIVALENTS

(as of 14 May 2004)

Currency Unit - kip (KN) KN1.00= $ 0.00009599232 $1.00 = KN10,417.50

ABBREVIATIONS ADB – Asian Development Bank BCEL – Banque pour le Commerce Exterieur Lao BOL – Bank of Lao PDR BRIC – Bank Restructuring Implementation Committee BSR – Banking Sector Reform EU – European Union GDP – gross domestic product GMS – Greater Mekong Subregion IBA – international banking advisor IMF – International Monetary Fund ICT – information and communication technology Lao PDR – Lao People’s Democratic Republic LDB – Lao Development Bank MIS – management information system MOF – Ministry of Finance PIU – project implementation unit PRGF – poverty reduction and growth facility SME – small- and medium-sized enterprise SOCB – state-owned commercial bank TA – technical assistance

NOTES

(i) The fiscal year of the Government of the Lao PDR and its agencies ends on 30 September.

(ii) In this report, “$” refers to US dollars.

JAPAN FUND FOR INFORMATION AND COMMUNICATION TECHNOLOGY JFICT Grant Proposal I. Basic Data Name of Proposed Activity Banking Automation to Support Outreach, Efficiency, and Governance

Country Lao People’s Democratic Republic (Lao PDR)

Grant Amount Requested $ 650,000

Regional Grant !Yes / " No

Grant Type " Project / ! Capacity building II. Grant Development Objective(s) and Expected Key Performance Indicators

Grant Development Objectives (GDO): The grant’s development objective is to enable a sustained reduction of poverty in the Lao PDR by reducing the digital divide between the technology deficient Lao banking system and that of other countries in the region in a sector that is increasingly driven by information and communication technology (ICT). The specific banks targeted under the grant include the Banque pour le Commerce Exterieur Lao (BCEL) and the Lao Development Bank (LDB), which together account for three quarters of banking assets in the Lao PDR. The reduced digital divide in banking will increase connectivity between the Lao banking systems and that of other countries; with the regional and global banking systems. This will enable greater integration of the Lao PDR with its main trading partners in the Greater Mekong Subregion (GMS). The reduced digital divide will also bolster and amplify the banking reform program’s impact on poverty reduction in three ways: First, the enhanced outward orientation will support sustained economic growth by strengthening the Lao PDR’s participation in a globalizing economy. Second, by moving the Lao PDR from a manual to a fully automated banking system the grant will support improved governance by (i) achieving basic financial transparency, particularly among branches throughout the country, to allow effective management decisions and prudential oversight by the supervisor and other stakeholders; and (ii) supporting key governance initiatives currently being undertaken, such as anti-money-laundering monitoring and information sharing. Third, the grant will support direct poverty reduction by (i) improving the efficiency of service delivery, particularly in the provinces, enabling greater outreach of banking services to areas populated by the poor; and (ii) raising the ICT capacity level for the nascent bankers, supervisory officials, and clients, particularly for poor and emerging small and medium-sized enterprises.

Expected Key Performance Indicators: The current rudimentary level of banking services and low human resource capacity particularly in ICT requires basic level performance indicators: • at head offices and key branches of BCEL (7) and LDB (18), complementing the installation of

management information system (MIS) software in Bank of Lao PDR (BOL) . • accurate, consolidated monthly financial statements and anti-money-laundering reports produced

according to international accounting standards and delivered promptly to supervisory authorities; • improved efficiency indicators and lower costs (non-interest costs/assets from 10 to 5%) for branch

operations throughout the provinces of the Lao PDR; • prompt and timely management reports for financial and operational status against targets specified

by the yearly corporate plans (monthly reports - none are currently produced); and • at least 70 trained banking staff, supervisory officials, and banking clients who have graduated from

low to medium levels of ICT competence. III. Grant Categories of Expenditure, Amounts, and Percentage of Expenditures

Category Amount of Grant Allocated in $

Percentage of Expenditures

1. Consultants 338,500 52.12. Goods 261,000 40.23. Local Training 50,500 7.7 Total 650,000 100.0Incremental Cost 30,000 0.0

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JAPAN FUND FOR INFORMATION AND COMMUNICATION TECHNOLOGY JFICT Grant Proposal Background Information

A. Other Data Date of Submission of Application 5 December 2003

Project Officer (Name, Position) Eric Manes, senior financial economist and Samiuela Tukuafu, financial management specialist

Project Officer’s Division, E-mail, Phone

Governance, Finance and Trade Division (MKGF), [email protected], 632 6494 and [email protected], 632 6338

Other Staff Who Will Need Access to Edit/Review the Report (Enter the names of all staff, e.g., team members, who will need access to this application.)

Robert Boumphrey, Director MKGF Henrike Feig, Principal Financial Specialist, Finance and Infrastructure Division (RSFI) Brett Coleman, Microfinance Specialist, MKGF Bayanjargal Byambasaikhan, Young Professional, MKGF

Sector Financial Sector Theme Economic Growth, Corporate Governance, Financial Sector

Outreach Name of Associated ADB Financed Operation(s)

Loan 1931 - Lao Banking Sector Reform Project Loan Loan 1946 - Lao Banking Sector Reform Program Loan Technical assistance (TA) 4002 - Strengthened Governance in Support of Banking Sector Reform

Executing Agency Bank of the Lao People’s Democratic Republic (BOL) Grant Implementing Agency (Names, Exact Address, Contact Persons, E-mail, Phone, Fax)

BOL, BCEL, LDB – ICT Subcommittee Mr. Phouphet Khamphounvong, Deputy Governor, BOL (ICT Committee Chairperson) 856-21-213109/10 (phone), 856-21- 213108 (fax) Ms. Daly Pholsena, Director General, Accounting and Information Technology Department; (ICT Committee Vice Chair) [email protected] (email), 856-21-213109/10 (phone), 856-21- 213108 (fax) Mr. Khamphout Sitthilath, BSR Project Implementation Unit Director, [email protected] (email) 856-21-223328/9 (phone) 856-21-238192 (fax) Dr. Aksone Bouphakonekham, Chairman, BCEL Mr. Norady Syrattana, Deputy Managing Director, BCEL 856-21-213000/1 (phone), 856-21-213202 (fax) Mr. Sawaeng Sengsavangvong, Chairman, LDB Mr. Nah Chantalivong, Managing Director, LDB 856-21-213300/2 (phone), 856-21- 213204 (fax)

mailto:[email protected]

mailto:[email protected]

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B. Details of the Proposed Grant 1. Description of the Components, Monitorable Deliverables/Outcomes, and

Implementation Timetable Component A Component Name Training and Human Resource Development Cost ($) 200,000 Component Description A key constraint to a modern banking and the efficient provision of

banking services throughout the Lao PDR is the low level of ICT knowledge and capacity among bankers, supervisory authorities, and banking clients. Modern banking ICT systems can be the agent of change by forcing more efficient processes, better MIS and supervisory reports, and connectivity among branches throughout the country. However, for modern systems to be purchased, implemented, and incorporated into daily operations, extensive training and capacity upgrading is needed, covering a wide range of interconnected proficiencies delivered in a number of complementary methodologies. The grant will support a wide range of ICT training, including:

(i) ICT architecture, solutions, and project management for technical staff;

(ii) accounting policies and procedures based on international accounting standards and best practices for accounting staff, credit monitoring, and management tools for credit staff and internal audit procedures for internal audit staff;

(iii) ICT strategy, application, and management for senior management staff; and

(iv) relevant operational ICT knowledge and operational reengineering for staff at all levels.

The component will design the multi-faceted training program, and then deliver classroom training, including a program to train the trainers. Formal training will take place at the BOL-owned, Don Dok Banking College and in local training institutes and will complement applied and on-the-job training at headquarters, throughout the country at the site of bank branches, and at BOL for supervisory staff. Basic training on ICT concepts and ICT strategy has started with support from Asian Development Bank (ADB) in the context of the overall ICT strategy and roadmap development.

Monitorable Deliverables/Outputs The monitorable deliverables will include: (i) a training needs assessment based on a complete diagnostic of current ICT capacity among banking and supervisory staff; (ii) an integrated, customized training plan, which will include a range of classroom and on the job training activities; and (iii) wide ranging multi-faceted ICT classroom-based and on-the-job skills training for 50–100 key bank staff and supervisory officials.

Implementation of Major Activities: Number of months for grant activities

The implementation will be based on a bottom-up assessment and training design covering the first 3 months. Formal classroom training will cover 12 months on-site, and the applied on-the-job training will cover 24 months and be delivered in parallel with the formal classroom training. Basic training has started. The design phase of the more comprehensive program financed by the grant will begin immediately after grant approval.

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Component B Component Name ICT Upgrade for Banking (customize, test, and install). Cost ($) 250,000 Component Description Lack of automation within the banks has contributed to being the

mostly cash-based banking system with a low volume of transactions per bank. The current system dates to the early 1990s and is based on old technology for centrally planned economies where all banks were merely branches of the central bank managed centrally in BOL, with socialist-style accounting, and without consolidation of branch information at the head office. All the state-owned commercial banks (SOCBs) use the same software that has since been customized ad hoc by BOL staff over years to introduce two-tiered banking. The software are a major source of operational, functional, and IT security risk and inefficiency. Currently, the information flow from the front office is paper-based and manually entered into the ledger, allowing major errors and omissions. Connectivity between branches and the head office is problematic as branches send manually entered information to the head office to consolidate in the general ledger and the customer’s account. For regulatory reports, banks manually send to the supervisory authority large database and excel files that are not incorporated into or aligned with financial statements. As a result, basic tasks, such as accounting in multiple currencies are far from routine, despite high currency substitution and at least three currencies in daily use. The classification of risk assets is not reflected automatically in the financial statements and branch information is consolidated manually. Key information can only be produced at best on a quarterly basis and is fraught with errors and inconsistencies. Moreover, the current program to upgrading internal processes throughout the branch network is limited by, rather than driven by, the ICT system. The ICT strategy and plan foresees a system solution deployed in a step-wise modular approach to coordinate with (i) the gradually increasing human capacity in the SOCBs, (ii) the progress in bank restructuring and (iii) the funding available for ICT. According to the ICT strategy and plan, the modular approach envisions a critical mass of investment in technology and training to use and manage the new technology at carefully measured phases. The first phase will concentrate on incorporating core banking functions that integrate new accounting standards for internal and external financial reporting, covering credits and deposits in multiple currencies, and integrating the front with the back office in head offices and multiple branches. The first phase is timed to coincide with the upgrade of BOL systems to ensure good coordination between the producer and user of financial data. The larger of the SOCBs (BCEL, covering 50% of the banking system) has purchased a core banking system, which has yet to be operational. The other bank (LDB, covering 25%), though smaller, is more directly connected to poverty alleviation as it has more branches, is oriented toward rural and small and medium-sized enterprise clients, and has a strategic plan more oriented to grass

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root growth objectives. Based on a turn-key approach to system development, the grant will cofinance purchasing and installing core banking for LDB branches to bring it to the Lao standard of having core banking installed in head office and key branches. As core banking systems are the backbone of bank operations, the benefits for the Lao PDR will include (i) automated capture of transactions; (ii) implementation of international accounting practices; (iii) timely and accurate production of management, supervision, and anti-money-laundering reports; (iv) high standards for internal and external audit; and (v) reengineering of operational procedures. The grant makes it possible to extend the head office core banking package, being financed under the ADB loan, to the key provincial branches of LDB. In this way, the grant will build on and amplify the development impact of the Government’s investment by making the service package more pro-poor.

Monitorable Deliverables/Outputs The monitorable deliverable for this component is the purchased system, customized into the Lao language, and its installation and successful initial operation into LDB’s head office and principle branches.

Implementation of Major Activities: Number of Months for Grant Activities

Implementation of this component will start 6 months from grant approval and will require 6 months for on-site implementation.

Component C Component Name Implementation and Operational Support Cost ($) 200,000 Component Description The design of the ICT strategy, plan, and phased integrated solution

has been carried out under separate preparatory work financed jointly by ADB and the European Union. This was presented and discussed with the ICT committee in January 2004. This component will finance an ICT and banking reengineering consultant to assist the implementing agency to manage and implement the entire complex project. This will be a highly technical effort, far beyond the current capacity of the Lao officials, involving the (i) creation of technical specifications, including accounting requirements; (ii) requests for information from various suppliers in the field to finalize the specifications; (iii) preparation of bidding documents according to rules for international competitive bidding (ICB); (iv) international advertising; (v) liaison with suppliers interested in selling software and hardware for the project; (vi) receiving and evaluation of tenders; (vii) negotiation of final contracts; (viii) advice on disbursement arrangements, including safeguards for performance risk; (ix) oversight of the implementation of the purchased solution; and (x) development of relevant training materials to assist the training component.

Monitorable Deliverables/Outputs The monitorable deliverables include (i) a report on the initial stock-taking of what is available at both banks and their specific needs, (ii) detailed specifications of the ICT solution and proposed implementation plan, (iii) an ICB process based on detailed specifications of the ICT solution of the banking system and a list of qualified suppliers; (iv) assistance to the executing agency in evaluating and negotiating with the best evaluated supplier, (v) the assurance of a workable system designed to fit the immediate and

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transitional needs of the Lao banking system, and (vi) installation and on-the-job training support with any training materials left behind.

Implementation of Major Activities: Number of Months for Grant Activities

The consultant will begin work immediately after the approval of the grant to begin implementation of the first phase of the ICT strategy and plan. The implementation consultant will require 3 months of work to develop the specifications and bidding documents based on information provided from suppliers. The consultant will assist in the evaluation and negotiations covering the next 2 months and will be adviser to the executing agency on technical implementation and operational change issues (processes and people) for the subsequent 7 months.

2. Financing Plan for Proposed Grant to be Supported by JFICT

Financier Amount ($) Japan Fund for Information and Communication Technology (JFICT)

650,000

Government 240,000 Other Sources (Please Identify) 1,445,000 from Loan 1931 (approved March 2004) Total 2,335,000

3. Genesis The grant was conceived as an integral part of a comprehensive program to restructure the banking system of the Lao PDR with the objective of increasing access to finance by a greater proportion of the local communities across the country in order to deepen and broaden the financial sector’s role in the economic development of the Lao PDR. The reform framework, covering fiscal and monetary policy, state-owned enterprise restructuring, and banking sector reform was developed through a coordinated approach by ADB, the International Monetary Fund (IMF) and the World Bank, beginning in late 2001. Recognizing the key role of upgraded ICT in the reform of the banking sectors, a number of initial exploratory ICT missions were fielded in early and mid 2002 and, in consultation with ADB and the World Bank, proposed a uniform approach to ICT for the banking sector. At the same time the Government agreed to enter a far-reaching reform program supported by a poverty reduction and growth facility from IMF and a series of program and TA loans from ADB and the World Bank to carry out a major restructuring of the Lao economy. On this basis, a concept paper for JFICT financing was prepared by ADB and approved in August 2002 to specifically complement the ICT upgrade being supported by a banking reform package presented to the ADB Board in November 2002. In late 2002, events in the Lao PDR brought the uniform approach to ICT upgrade (whereby BOL would provide identical data exchange and MIS services to all state-owned banks) into question and emphasized the need for an overall ICT strategy and plan that recognized the need for tailored solutions for each bank prior to proceeding with the implementation of a costly ICT program. Moreover the strategy should be forward looking as well as prepared and owned by the Government. Specifically, (i) one of the banks purchased an expensive “point-of-sale” system with unknown connectivity to the back office systems under consideration; (ii) a second bank disbanded the unified and phased approach and sought a fully integrated front office and back office system, thereby raising the cost estimates well outside the available financing package; and (iii) a TA program began in early 2003 to introduce an MIS for the supervisory authorities supported by the European Union, which predicated its activities on efficient back office systems already in place in the banks. These and other developments currently being discussed in the Lao PDR emphasized the need to develop an agreed upon, logically phased ICT plan based on a reassessment of the SOCB conditions and initiatives already under way. International banking advisers (IBAs) were deployed in each of the state-owned banks in March and June 2003 under the ADB TA Loan 1931 and will now be in key position to ensure (i) a prudent approach to

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ICT upgrade, (ii) logical integration into an overall operational restructuring process, and (iii) a high level ownership of the ICT upgrade process. The Government is in parallel now developing a modern anti-money-laundering system that will require additional reporting and monitoring, thereby creating a new dimension to the ICT requirements for the banks and the supervisory authorities. The ICT plan, coupled with the operational restructuring plans being implemented with support from the IBAs under Loan 1931, will form the basis for proceeding with an appropriately integrated and logically phased approach to ICT upgrade for the banks and the supervisory authorities. 4. Sustainability The long-term sustainability of efforts supported by the grant is assured through the “exit strategy” embodied in the overall banking sector reform program. The program, within which this grant program will be deployed, will focus on sustained operational restructuring of the state-owned banks and eventual investment into the banks’ capital by the private sector, initially through the introduction of private strategic investors. Therefore, the program’s objective is sustainable nongovernment banks continuing to invest in technology and ICT training in order to remain competitive within rapidly developing financial markets. To contribute to the long-term sustainable impact, the training program embodied in this proposed grant will include a train-the-trainer’s component so that the upgraded technological know-how can be nurtured and expanded after the project has concluded. This is of particular importance due to the rapidly evolving nature of banking technology as well as the evolving character of the SOCBs. Significantly, however, the sustainability of banking reform, generally, has been strengthened through two years of ownership-building and capacity-building activities to increase awareness and ability for high-level management in the banks and the supervisory authorities to undertake sustained reforms. Included in that awareness building were components on the role of ICT in banking. As a result, the overall ICT upgrade program is “demand driven” by virtue of its support for comprehensive restructuring and competitive strengthening, thereby supporting sustainability of the initiative and enabling aid agencies to exit from the project. As testimony to the Government’s commitment to sustainable banks, and the “demand driven” nature of the ICT program, the Government, for the first time, borrowed TA money from ADB for capacity building in support of bank restructuring generally and specially to finance a major program of ICT upgrade. The TA loan is also financing IBAs to work with bank boards and management, full time for 3 years, to local banking capacity and reform operations in the banks. The ICT upgrade is a key area of the turnaround program and therefore will be logically integrated and appropriately sequenced into the overall bank operational restructuring program, helping to ensure a sustainable program for the future. Ownership of implementation of the banking reform will also support sustainability of the grant program. The overall reform program is being guided and overseen by a high-level BOL committee, the Bank Restructuring Implementation Committee (BRIC) chaired by BOL’s deputy governor and consisting of the five director-general-level BOL officials. While each BRIC member chairs his or her own implementation committee, the deputy governor chairs the ICT subcommittee, demonstrating the demand for and the perceived importance of the ICT program at the high level of BOL. This structure is working well and serving to ensure the long-term sustainability of reforms and investments in the banking sector, including investments in ICT capacity. Simultaneously, the European Union is supporting the building of MIS for the supervisory authorities and is providing an intensive 2-year program of technical training in priority banking areas–to raise the capacity of all levels of staff in the banks and the prudential supervision department. As the European Union-sponsored detailed curriculum program is still being reviewed, and the training in ICT embodied in the grant will complement this effort, particularly by its emphasis of on-the-job, customized training and through its attention to ICT management in order to ensure a sustained and continued approach to ICT improvement.

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5. Participatory Approach Local participation and control of decision-making in the design and implementation of the grant activity is being driven by bankers in a continued approach to ownership and capacity building that has been a cornerstone of the preparation of banking sector reform. The result of this ownership-building is a Lao-owned and Lao-driven approach to bank restructuring, which has the benefit of a significant amount of TA to support implementation, including ICT implementation–much of it borrowed by the Government under an ADB TA loan. Although the Government has brought to bear significant resources to mobilize international advisers, the advisers do not have decision-making capacity. The assignment of the international advisers is designed to empower local officials, bank management, and staff of local branches. Thus, all decision-making and implementation aspects of the banking reform, including the ICT upgrade, is being driven by bankers in local communities throughout the country and overseen by high-level BOL officials. At the start of the program, new boards and management teams were installed in the banks and assigned international advisers to guide them, while BRIC was established with an ICT subcommittee consisting of a policy level chaired by the BOL deputy governor with the managing directors of both banks as members, and the technical level consisting of the technical staff of BOL and local banks. The high-level chairmanship and grassroots membership of the ICT two-level committee is evidence of the extremely high importance being placed on ICT by the top Lao officials also underscores that implementation will take place at the community level with the full participation of local officials and staff from the provincial branches. Implementation will also necessarily involve the participation of community-based provincial clients of the banks, including individual depositors and small and medium borrowers. As the first activity of the ICT committee, the strategy and plan has been prepared primarily by the Lao PDR, with the assistance of international technical advisers supported by ADB and the European Union, through a series of six workshops over 3 months. Basic ICT training for the Lao participants is complementing this intensive effort in order to fully empower the Lao officials to have full control of all decisions regarding the specifications of the plan. As initial evidence of this empowerment, a decision-making system regarding ICT training has been established by the ICT committee, whereby a set of potential training institutes were required to give presentations to the ICT committee, for it to make a final selection. This local decision-making system was tested for the basic training financed by ADB and will serve well the training activities financed by the grant. The primary stakeholders (the banks and the supervisory authorities) are fully participating in the decision making through their involvement in BRIC and its ICT subcommittee. Other stakeholders, such as ADB, IMF, World Bank, and European Union are fully involved through their role as advisers and observers to the workshops. The Ministry of Finance and the Committee for Planning and Cooperation is also intimately involved through frequent consultations and ultimate clearance of all activities involving foreign financing.

Primary Beneficiaries and Other Affected Groups and Relevant Description

Other Key Stakeholders and Brief Description

Primary beneficiaries include • The Lao PDR financial sector participants

(including bank management and staff of two SOCBs and their principle branches) and the supervisory authorities, who will raise their level of ICT proficiency and capacity in providing quality financial services and engaging in efficient banking oversight.

• Current and future clients, particularly small and medium-sized enterprises, of the banking system, including the provincial areas as the banks and their branches become better able

Other beneficiaries include • Recipients of fiscal financing for poverty

reduction as improved governance and oversight of the banks will lead to fewer losses and therefore greater fiscal resources for public programs in human development.

• Other banks of the region and foreign investors, who will be able to work more closely with a Lao economy as it approaches international banking standards and automation capacity, which will narrow the digital divide between the Lao PDR and other countries of

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to provide quality services. the region. • Poor citizens of the Lao PDR, who will benefit

from local economic growth, a stronger commercial system, and an introduction to financial services.

6. Coordination A high level of coordination among ADB, IMF, World Bank, European Union, Australian Agency for International Development (AusAid), Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ), and Japan International Cooperation Agency (JICA) has characterized the design of the Lao reform program generally and specifically for the design of the bank restructuring activities. In particular, JICA, which has been heavily involved in macroeconomic management and state-owned enterprise reform through its macroeconomic policy support program, has been involved in all consultations and workshops leading to the design of the bank restructuring program carried out in 2001 and 2002. ADB and the World Bank agreed at the awareness-building and design stages of the banking program that the two institutions would work jointly to help ensure a coordinated message and approach during the critical early days. As part of that team approach, the World Bank supplied a technical staff member for a 2-week mission to carry out the first diagnostic of ICT in January 2002. In May 2002, the World Bank and ADB agreed to the formal delineation of sector responsibility, through the design of each institution’s lending instruments, ADB to carry out a 3-year program of banking reform, and the World Bank to focus on fiscal budget preparation, public resource management, and state-owned enterprise reform. As part of that formal delineation, the two institutions and the Government agreed that the ICT program would be best carried by ADB’s broad program for bank restructuring (Sections B3, B4, B5 and Sections C1, C2 and C3.) However, as banking represents a key area of public resource management in the Lao PDR, ADB has been working closely with IMF and the World Bank throughout the design phase and will continue to do so during implementation. 7. Detailed Cost Table Please refer to Appendix 1 for the detailed cost estimates. C. Linkage to ADB Strategy and ADB-Financed Operations 1. Key Documents Citing Objective(s) Supported by the Grant

Document Document Number

Date of Last Discussion

Objective(s)

Poverty Reduction Strategy Paper National Poverty Eradication Program Country Strategy and Program Update Report and Recommendation of the President for Loan 1946

Draft Sec.M63-03 R249-02

4 September 2003 28 August 2003 28 November 2002

Macroeconomic stability, private sector development, and regional integration Human resource development, private sector development, and governance and capacity building Efficient intermediation and sound banking capable of supporting of private-sector-led growth and rural outreach.

2. Linkage to Specific ADB-Financed Operation Project Name Banking Sector Reform Program, Banking Sector Reform

Project Project Number Loan 1946, Loan 1931

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Date of Board Approval 28 November 2002, 14 November 2002

Loan Amount $ 15,000,000; 4,000,000 3. The Project’s Development Objective The project’s development objective is to eliminate the loss incurring activities and increase profitability in the SOCBs through improved internal and external governance while significantly enhancing overall efficiency, thereby increasing the banking sector’s contribution to private sector led economic growth and expanding the outreach of financial services to a greater proportion of the country. 4. Main Components No. Component Name Brief Description 1. Program Loan Three-tranche program loan covering (i) banking reform, (ii)

SOCB restructuring, (iii) judicial strengthening, and (iv) rural and microfinance.

2. International Banking Advisers

(IBAs)

Four IBAs to design restructuring programs, ensure compliance with new operational procedures, and provide daily, on-site advice to the board and management, full time for 3 years.

Four domestic banking assistant to ensure the effectiveness of the IBAs due to the language and capacity constraints of the board, management, and staff of the SOCBs.

3. Upgrade of ICT software and hardware for two SOCBs

Hardware, communication systems, and basic-off-the-shelf software to automate the back-office and service delivery channels for the SOCBs, including all branches throughout the country.

5. Rationale for Grant Funding versus ADB Lending The grant is complementing a TA loan 1931 for ICT upgrade of the banking sector. The grant has been designed to cofinance the ICT program to amplify the development impact of the banking sector reform program while reflecting the objectives and policies of the Government. In particular, the Government generally seeks loan funding for investments into hard goods and services while seeking grant financing for training and capacity building. In the case of the ICT program, the TA loan 1931 will be financing the hardware, communications systems, and basic software package while the grant will be complementary financing for the associated training, software customization and installation, and the implementation/reengineering support necessary to bring the ICT program into operation and ensure its long-term sustainability. The package thus demonstrates government commitment through a package that envisions loan funds for most of the project cost, covering investment, while seeking grant financing for the softer, capacity-building aspects. D. Implementation of the Proposed Grant 1. Provide the Name of the Implementing Agencies (IA) BOL will be the Executing Agency supported by ICT Subcommittee, LDB and BCEL, the implementing agencies (refer to Appendix 2). BOL will provide adequate furnished office facilities for the consultants. The TA grant is expected to be implemented over a period of 24 months. From the date of commencement, the consultants will prepare an inception report after 4 weeks, and interim progress reports every 3 months thereafter. A draft final report will be provided 3 months before the end of the TA.

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The TA will require 13 person-months of international and 20 person-months of domestic consulting services, to be served intermittently. The international consultants will include an ICT operations reengineering specialist who will also be team leader (8 person-months) and an ICT and reengineering training specialist (5 person-months). The domestic consultants will include a software development specialist (10 person-months) and a training assistant and ICT troubleshooter (10 person-months). The terms of reference for the consultants are presented in Appendix 3. The consultants will be engaged and supervised in accordance with ADB’s Guidelines on the Use of Consultants by ADB and its Borrowers including other arrangements satisfactory to ADB for engagement of domestic consultants. The consultants will be selected as individuals, either from firms or independently. Goods and other services will be procured in accordance with ADB’s Guidelines on Procurement. The principal procurement action will be for the LDB core banking system, which will follow a two-stage ICB procedure due to the size of the purchase and complexity of the specifications. Other procurement activities will be small, off-the-shelf office equipment and will follow either a three-quote local shopping system or direct purchase for minor items. ADB will administer the use of the JFICT funds in accordance with ADB’s Loan Disbursement Handbook, January 2001. Funds for consultants’ fees and related expenses will be directly paid based on the individual consultant’s contract. Each international consultant’s contract will include provisions for advance of funds to enable effective implementation of operational activities and these amounts will be liquidated with supporting documents. Funds for training will be assigned under contract to one of the international consultants, who will be accountable for its use and liquidation. Most of the ICT upgrade will be paid directly by ADB to the approved supplier(s). 2. Risks Affecting Grant Implementation

Type of Risk Brief Description Measure to Mitigate the Risk Migration of trained staff

Highly trained people, particularly in the area of ICT, become attractive to other employers outside SOCBs.

A commitment to stay within the SOCBs for a limited time will be sought as a condition for participating in the training program.

Cofinancing package Government may decide to cancel part of Loan 1931 rather than investing such a high amount in ICT.

Continued awareness-building activities with the Government about the role of ICT in commercial systems have intensified.

Delays in bank restructuring

ICT upgrade needs to be well- coordinated and logically timed within the operational restructuring program in order to achieve the development objectives.

The ICT upgrade is deployed as part of a performance-based restructuring program supported by four IBAs and overseen by high-level committees. ADB is conducting quarterly reviews to frequently assess performance.

Poorly designed ICT solution

There is always a risk of supplier- driven, inappropriate ICT purchases–when there is lack of planning and strategic thinking behind the ICT plan.

The Lao authorities are discussing a well-prepared, logically sequenced, highly detailed and BOL-owned ICT strategy and plan. Basic ICT training for bank and BOL staff was carried in preparation for implementation.

3. Incremental ADB Costs

Component Incremental Bank Cost

Amount requested ($) 30,000

Justification

The grant is unusually complex in that it is complementing a loan operation, involves a complicated multi-faceted training

d i l th ti f t h i ll d d

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program, and involves the preparation of technically advanced procurement actions requiring a skill set not readily available within ADB.

Type of work to be rendered by ADB

An ICT consultant will be hired to ensure the (i) logical technical integration of the loan and grant financing, (ii) internal consistency among the training program and (iii) technical strength of procurement process.

4. Monitoring and Evaluation

Key Performance Indicator Reporting Mechanism Plan and Timetable for M&E Head office and the key branches of BCEL (7) and LDB (18) to be upgraded.

Quarterly implementation progress reports submitted by the SOCBs and quarterly progress reports of the consultants.

Quarterly missions will be undertaking quarterly performance reviews of SOCB and IBA progress and performance under the bank restructuring program.

Accurate, consolidated monthly financial statements and anti-money-laundering reports produced according to international standards.

Internal management reports to the Asset Liability Management Committee (ALCO), off-site supervision reports and reports to the Financial Intelligence Unit.

Quarterly review missions and annual external audits of banks.

Improved efficiency indicators and lower costs such as (noninterest costs/assets) for branch operations.

Monthly operation performance reports from branches and quarterly financial statements.


Prompt management reports for financial and operational status against targets.

Business plan results as required by restructuring agreements.


A cadre of trained banking staff, supervisory officials and banking clients.

Training progress and evaluation reports, including test results from consultants.

Quarterly review missions and annual review of training activities.

5. Estimated Disbursement Schedule

Fiscal Year (FY) Amount ($)

FY2004 350,000

FY2005 250,000

FY2006 50,000

Total Disbursements 650,000

E. Clearances Director General of relevant regional department endorses the cleared JFICT grant proposal to the Government of Japan, through the Office of Cofinancing Operations (OCO).

13

Cleared By Name / Division / Signature Comments

1. Director-General of the relevant regional department

Mr. Rajat Nag, Director General, Mekong Department

" Cleared / ! Not Cleared Comments:

2. Director of the division in the relevant regional department or resident mission

Mr. Robert Boumphrey, Director, MKGF " Cleared / ! Not Cleared Comments:

Name / Division Comments

3. Staff review committee members

1. Mr. Kazu Sakai, Deputy Director General, MKRD (Chairman of Staff Review Committee)

2. Ms. Henrike Feig, Principal Financial Sector Specialist, RSFI

3. Ms. Mala Hettige, Senior Evaluation Specialist, Operations and Evaluation Department (OED)

4. Mr. Victor Diem, Senior Financial Control Specialist, Loan Administration Division (CTLA-3)

5. Ms. Rita O’Sullivan, Counsel, Office of the General Counsel (OGC)

6. Mr. Bert Van Ommen, Consultant, Office of Cofinancing Operations (OCO)


4. Other reviewers 1. Mr. Omar Tiwana, Senior Consulting Services Specialist, Consulting Services Division (COCS)

2. Mr. Walter Poick, Portfolio Management Specialist, Project Coordination and Procurement Division (COPP)

3. Ms. C. Hu, Economist, Economics Analysis and Operations Support Division (EREA)


5. CC list

Directors General, MKRD/Operations Evaluation Department /Regional Sustainable Development Department/Strategy and Policy Department General Counsel Principal Director, Central Operations Services Office Controller Assistant Chief Economist, Economic Analysis and Operations Support Division, Directors, Consulting Services Division /Project Coordination and Procurement Division /Operations Coordination Division/Finance and Infrastructure Division Assistant General Counsel

14

Assistant Controller, Loan Disbursement Division Country Director, Lao Resident Mission Gil-Hong Kim, Operations Coordination Division Lao team, MKGF

F. Checklist

1. Does the application support activities that will assist the DMCs to bridge the digital divide to help reduce poverty in Asia and Pacific?

" Yes / ! No Response is found in Sections B-1, B-3, and B-4. 2. Do the proposed activities fit within at least one of the following basic purposes of the JFICT? The purposes are

(i) support ICT-related activities in Developing Member Countries that can add substantive value to promote and impact the poverty reduction strategy of ADB and other related development aims;

(ii) encourage private sector participation in ICT development and enhance its capabilities in the region;

(iii) improve regional and international cooperation, partnership, and networking to enhance local efforts at development through appropriate ICT applications.

" Yes / ! No Response is found in Sections B-3, and B-4. 3. Are the proposed activities designed and expected to be implemented with full participation by local community groups and nongovernmental organizations (NGOs)?

" Yes / ! No Response is found in Section B5. 4. Do the activities support interventions that will have a catalytic effect or magnify the impact of ADB-financed operation(s)?

" Yes / ! No Response is found in Sections B2, B3, C3, C5. 5. Does the application identify methods to monitor and evaluate outcomes, implementation progress, and the impact of the grant on the beneficiaries? " Yes / ! No Response is found in Sections B3, B4, B5, and D-4 6. Are Japanese NGOs participating in this JFICT activity? ! Yes / " No 7. Have Japanese aid agencies (e.g., Japan Bank for International Cooperation, JICA) been consulted in the development of the JFICT application?

" Yes / ! No Response is found in Section B6. Please confirm statements 8–-16 below.

15

8. Proposed JFICT activities are not eligible or cannot be funded under loans, or through other sources of funding available to ADB. " Confirmed 9. Proposed JFICT activities are not being used to prepare projects or grants, or supplement existing project or grant preparation activities being funded through the Japan Special Fund or other project/grant preparation funds. " Confirmed 10. The application does not include pilot activities that are not linked to ADB-funded operations in the pipeline or under implementation. " Confirmed / ! Not Applicable 11. The application includes an exit strategy or a mechanism to ensure long-term sustainability. ! Confirmed " Not Applicable 12. The legal status, financial soundness, track record, and arrangements for use and accounting of grant funds have been checked for grants that are expected to be executed by community groups or NGOs. " Confirmed / 13. Where funding of incremental costs (staff or consultants) for grant preparation and/or implementation is requested, a full justification is provided. " Confirmed / ! Not Applicable 14.. The grant will not include study tours or foreign training. " Confirmed 15. The application does not include support for academic training, research work, and core program activities of global/regional programs. " Confirmed / ! Not Applicable 16. The director-general and the director of the relevant regional department have endorsed the grant activity. " Confirmed

----------------------------------------------------------------------------- Appendixes

1. Detailed Cost Estimates 2. Implementation Arrangements 3. Terms of Reference for Consulting Services

DETAILED COST ESTIMATES Appendix 1 16

Costs ContributionsCode Supplies and Services Rendered Unit Quantity Cost Total

Units Per Unit $

Amount

Method of

Procure-ment

ADB Loan L1931

Component A. Training and Human Resource Development Subtotal 310,000 200,000 110,000 0

1.1 Equipment and Supplies1.1.1 Computer Unit 2 2,000 4,000 4,000 DP1.1.2 Overhead Projector Unit 2 2,000 4,000 4,000 DP1.1.3 Furniture Lump sum 2 4,000 8,000 3,000 DP 5,000

1.2 Training, Workshops, Seminars1.2.1 Skills Training Participant 75 500 37,500 37,500 LCB1.2.2 Workshops Lump sum 3 1,000 3,000 3,000 DP1.2.3 Study Guides and Handouts Lump sum 1 5,000 5,000 5,000 DP

1.3 Consulting Services1.3.1 Training Consultant Month 5 15,000 75,000 75,0001.3.2 Local Consultant Month 10 2,000 20,000 20,0001.3.3 International Travel Return Trip 4 4,000 16,000 16,0001.3.4 Per Diem 20,000 20,0001.3.5 Operational Costs 22,500 12,500 10,000

1.4 Other Project Inputs 1.4.1 Office Accommodation Lump sum 1 45,000 45,0001.4.2 Counterpart Staff Lump sum 1 25,000 25,0001.4.3 Office Support and Supplies Lump sum 1 10,000 10,0001.4.4 Training Support Lump sum 1 15,000 15,000

Communities

Govern ment

Other FundersJFICT

DP = direct payment, LCB = local competitive bidding. Source: ICT Strategy developed by a consultant and funded by ADB and European Union. 2003.

Continued on next page

DETAILED COST ESTIMATES


Units Per Unit $

Amount

Method of

Procure-ment

ADB Loan L1931

Component B. ICT Upgrade for Banking Subtotal 1,680,000 250,000 90,000 1,340,000 0

2.1 Equipment and Supplies

2.1.1 System Upgrade for BCEL and Branch Rollout Lump sum 1 510,000 510,000 510,000

2.1.2 Core Banking System for LDB plus Financial and Risk Management Modules Lump sum 1 630,000 630,000 630,000

2.1.3 Branch Rollout (8 LDB branches) Branch 8 25,000 200,000 200,0002.1.4 Branch Rollout (10 LDB branches) Branch 10 25,000 250,000 250,000 ICB

2.2 Consulting Services

2.3 Other Project Inputs (Specify)2.3.1 Office Accommodation Lump sum 1 25,000 25,000 25,0002.3.2 Counterpart Staff Lump sum 1 30,000 30,000 30,0002.3.3 Office Support and Supplies Lump sum 1 35,000 35,000 35,000

JFICT Govern ment

Other Funders

Communities

ICB = international competitive bidding. Appendix 1 17

Source: ICT Strategy developed by a consultant and funded by ADB and European Union. 2003.

Continued on next page

Appendix 1 18

DETAILED COST ESTIMATES


Units Per Unit $

Amount

Method of

Procure-ment

ADB Loan L1931

Component C. Implementation and Operational Support Subtotal 245,000 200,000 40,000 5,000 0

3.1 Training, Workshops, Seminars3.1.1 Workshops lump sum 5 1,000 5,000 5,000 DP

3.2 Consulting Services

3.2.1 Operational Reengineering, Implementation, and Project Management month 8 15,000 120,000 120,000

3.2.2 Local Consultant month 10 2,000 20,000 20,0003.2.3 International Travel return trip 5 4,000 20,000 20,0003.2.4 Per Diem 31,000 31,0003.2.5 Operational Costs 4,000 4,000

3.3 Other Project Inputs (Specify)3.3.1 Office Accommodation lump sum 1 10,000 10,000 10,0003.3.2 Counterpart Staff lump sum 1 15,000 15,000 15,0003.3.3 Office Support and Supplies lump sum 1 15,000 15,000 15,0003.3.4 Audit lump sum 1 5,000 5,000 5,000

Components 1 to 3 = Subtotal Subtotal 2,235,000 650,000 240,000 1,345,000D. Contingency (maximum 10% of total JFICT contribution) 100,000 100,000

Total Project Cost Total 2,335,000 650,000 240,000 1,445,000 0

JFICT Govern ment

Other Funders

Communities

DP = direct payment. Source: ICT Strategy developed by a consultant and funded by ADB and European Union. 2003.

Appendix 2 19

IMPLEMENTATION ARRANGEMENTS

Executing Agency Implementing Agency

BSR PIU

BCEL Head Office

ICT Working Group BRIC ICT Committee

BCEL ICT Reps LDB ICT Reps

LDB Head Office

BCEL Branches (7)

LDB Branches(18)

Steering Committee

BRIC

Bank of Lao PDR

BCEL = Banque pour le Commerce Exterieur Lao, BRIC = bank restructuring implementation committee, BSR = banking sector reform, ICT = information and communication technology, LDB = Lao Development Bank, Lao PDR = Lao People’s Democratic Republic, PIU = project implementation unit.

20 Appendix 3

TERMS OF REFERENCE FOR CONSULTING SERVICES 1. A team of four consultants (two international and two domestic) will be engaged to provide the consulting services. The terms of reference of the consultants will include, but will not necessarily be limited to, the following: A. Information and Communication Technology Operations Reengineering Specialist and Team Leader (8 person-months) 2. The information and communication technology (ICT) team leader (international consultant) is to coordinate closely with the international banking advisers (IBAs) engaged under the (TA) Loan 1931, the ICT committee, and the management team of the state-owned commercial banks (SOCBs). He or she will be responsible for reengineering the operating processes, and formulating and implementing an ICT operational plan for each SOCB. The position requires relevant ICT qualifications and prior work experience in banking automation and restructuring of internal operating processes including financial management processes. Experience in similar projects in banks within the region will be an added advantage as will qualifications in the accounting field. 3. The team leader will be responsible to the project officer for managing and supervising the implementation of the TA activities and the performance of the entire team. Within the framework of the TA and the ICT plan, the ICT team leader will do the following:

(i) Lead the consultant team in a review of the existing policies, processes, procedures, and information technology in the Banque pour le Commerce Exterieur Lao (BCEL) and the Lao Development Bank (LDB).

(ii) In close consultation with the accounting staff, management teams, and IBAs

of each bank, formulate appropriate accounting policies with supporting processes and procedures, based on international standards and best practices, for approval by the board of directors of each bank.

(iii) Following the analysis of the ICT needs of both banks in step (i) develop

technical specifications for the hardware and software required to implement the proposed changes to the policies, processes, and procedures in step (ii). The overall project specifications and implementation plan is to be approved by the Bank Restructuring Implementation Committee (BRIC) ICT committee.

(iv) Propose changes to the organizational arrangements covering the

accounting, treasury, and ICT functions in support of steps (ii) and (iii).

(v) Advise and assist in the preparation of the international competitive bidding invitation to tender documents based on a detailed ICT network solution package and a comprehensive list of suppliers that are qualified and likely to bid.

Appendix 3 21

(vi) Assist the Bank of the Lao People’s Democratic Republic (Lao PDR) in the evaluation and negotiation process, and advise on disbursement arrangements including safeguards against nonperformance.

(vii) Oversee the implementation of the successful ICT network package,

including system installation and customization, and ensure that a workable system is in place that addresses the immediate and transitional needs of the two SOCBs.

(viii) Develop and provide relevant training materials on the new policies,

processes (including the new ICT package), and procedures to assist the training component.

(ix) Provide progress reports (following each mission) and a draft final report 3

months before completion of the TA, to the ADB project officer and the Bank of the Lao PDR.

B. Software Development Specialist (10 person-months) 4. The specialist (domestic consultant) will assist the team leader by providing the required local (including language) and back-up project support and software customization and installation. The specialist must have working experience and knowledge of ICT operations, knowledge of the general banking environment in the Lao PDR, prior experience in developing computer software and installing hardware, and familiarity with the software and hardware available. Prior experience with the government and SOCB accounting systems and requirements will be an added advantage. 5. The specialist will do the following:

(i) Assist the team leader in the review of policies, processes, procedures, and information technology of both banks.

(ii) Provide the local knowledge, support, and translation necessary to aide the

work of the team leader.

(iii) Assist the team leader in liaising with local staff of both banks in-order to finalize steps (ii), (iii), and (iv) of his or her TOR.

(iv) Assist the team leader in the tender, evaluation, and procurement

arrangements.

(v) Assist the team leader to install all hardware equipment and ensure that bank staff are aware of their use and safe management.

(vi) Customize the purchased software packages into the Lao language and

provide support to both banks in their application and security.

22 Appendix 3

(vii) Prepare draft progress reports on the computerization work for the team leader to consolidate in his or her regular reports.

(viii) Perform any other tasks as required from time to time by the team leader and

the project officer in order to achieve the objectives and goals of the project within the approved budget and project duration.

C. ICT and Reengineering Training Specialist (5 person-months) 6. The specialist (international consultant) will assist the implementing agencies in designing and carrying out a multi-faceted training program, including a program to train the trainers. This is to be achieved through close coordination and consultation with the team leader. The specialist must have expertise in information technology and/or banking and at least 5 years experience working in the operational areas of a financial institution. Experience in delivering training programs in similar projects in the region will be an added advantage. 7. The specialist will do the following:

(i) Consult closely with staff of the two banks, training consultants from the European Union and the team leader to assess the capacity of existing staff and the training needs of both banks.

(ii) Based on step (i), develop an integrated, customized training plan, which will

include several training modules covering awareness training and a range of classroom and on-the-job training activities.

(iii) Develop appropriate training materials for each type of module, ensuring that

the reengineering work and developments in ICT are adequately covered.

(iv) Conduct initial classroom training and train the ICT training assistant together with selected bank trainers to be able to deliver the training program and use the training materials independently.

(v) Prepare draft progress reports on the training component for the team leader

to consolidate in his or her regular reports.

(vi) Perform any other training related tasks required by the project officer to help achieve the objectives and goals of the project within the approved budget.

D. ICT Training Assistant and Troubleshooter (10 person-months) 8. The role of the assistant (domestic consultant) is to provide the required project

support to the ICT training specialist in developing the training plan and delivering the actual training programs. He or she must have qualifications in ICT and basic accounting and prior working experience in basic training programs and banking.

Appendix 3 23

9. The assistant will:

(i) assist the team leader in the initial review and assessment of policies, processes, procedures, and ICT system;

(ii) assist the team with installing of hardware and software at each bank

headquarter and branches;

(iii) assist the training specialist in conducting the training needs assessment, designing the training plan, and translating all training materials.

(iv) assist the training specialist in delivering wide-ranging multi-faceted ICT

classroom-based and on-the-job skills training for 70–100 key bank staff and supervisory officials;

(v) provide troubleshooting support to bank staff on the use of hardware and in

the application of new programs; and

(vi) perform any other training tasks as required from time to time by the ICT and reengineering training specialist and the project officer to achieve the objectives and goals of the project within the approved budget and project duration.