Lao PDR - Country Assistance Program Evaluation

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ASIAN DEVELOPMENT BANKOperations Evaluation Department

COUNTRY ASSISTANCE PROGRAM EVALUATION

FOR THE

LAO PEOPLES DEMOCRATIC REPUBLIC

In this electronic file, the report is followed by Managements response and the Board ofDirectors Development Effectiveness Committee (DEC) Chairs summary of a discussion of thereport by DEC.


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Evaluation Study

Operations Evaluation Department

Reference Number: CAP: LAO 2006-05Country Assistance Program Evaluation

April 2006

Lao Peoples Democratic Republic


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CURRENCY EQUIVALENTS

Currency Unit Kip (KN)

1986 1991 1996 2001 2006

(as of 31 March)

KN1.00 = $0.1000000 $0.0014232 $0.0010769 $0.0001124 $0.0000960$1.00 = KN10.00 KN702.63 KN928.59 KN8,892.50 KN10,411.29

ABBREVIATIONS

ADB Asian Development BankADF Asian Development FundADTA advisory technical assistanceAFD Agence Franaise de DveloppementANR agriculture and natural resources (sector)APB Agriculture Promotion Bank

APL Agriculture Program LoanBEGP Basic Education (Girls) ProjectBOL Bank of Lao PDRBSRP Banking Sector Reform ProgramCAPE Country Assistance Program EvaluationCBTA Cross-Border Transport AgreementCMISP Community-Managed Irrigation Sector ProjectCOMPAS Common Performance AssessmentCPI Committee on Planning and InvestmentCPRM Country Portfolio Review MissionCRIP Champassak Road Improvement ProjectCSP Country Strategy and Program

CSPU Country Strategy and Program UpdateDIDMSP Decentralized Irrigation Development and Management

Sector ProjectDMC developing member countryDOR Department of RoadsDP development partnerDPE Division of Poverty EradicationEA executing agencyEdL Electricit du LaosEIA environmental impact assessmentEQIP-I (First) Education Quality Improvement ProjectEQIP-II Second Education Quality Improvement Project

ESP Environment and Social ProgramETSW economic, thematic, and sector workEWCP East-West Corridor ProjectFDI foreign direct investmentFSPL-I (First) Financial Sector Program LoanFSPL-II Second Financial Sector Program LoanGDP gross domestic productGMS Greater Mekong SubregionGWh gigawatt-hour


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ha hectareHIPC highly-indebted poor countryHRD human resources developmentIES impact evaluation studyIMF International Monetary FundITPP Industrial Tree Plantation Project

km kilometerLao PDR Lao Peoples Democratic RepublicLHSE Lao Holding State EnterpriseLRM Lao PDR Resident MissionLTSF Long-Term Strategic FrameworkM&E monitoring and evaluationMAF Ministry of Agriculture and ForestryMCTPC Ministry of Communication, Transport, Post, and

ConstructionMDG Millennium Development GoalMfDR Managing for Development ResultsMOE Ministry of Education

MPH Ministry of Public HealthMTEF medium-term expenditure frameworkMTS Medium-Term StrategyMTSF Medium-Term Strategic FrameworkNAO National Audit OfficeNARPDP Northern Area Rural Power Distribution ProjectNECP Northern Economic Corridor ProjectNEM New Economic MechanismNGO nongovernment organizationNGPES National Growth and Poverty Eradication StrategyNLHP Nam Leuk Hydropower ProjectNNLPPTP Nam Ngum-Luang Prabang Power Transmission Project

NNRBDSP Nam Ngum River Basin Development Sector ProjectNORAD Norwegian Agency for Development CooperationNPL nonperforming loanNPTWSSP Northern Provincial Towns Water Supply and Sanitation

ProjectNR national roadNSC National Statistics CenterNSHDP Nam Song Hydropower Development ProjectNT2 Nam Theun 2NTR normal trade relationsNUOL National University of LaosO&M operation and maintenance

OED Operations Evaluation DepartmentPBA performance-based allocationPCR project/program completion reportPEMSP Public Expenditure Management Strengthening ProgramPERP Postsecondary Education Rehabilitation ProjectPHC primary health carePHCP Primary Health Care ProjectPHCEP Primary Health Care Expansion ProjectPIP public investment program


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PIU project implementation unitPMO Procurement Monitoring OfficePPAR project/program performance audit reportPPER project performance evaluation reportPPR project/program performance ratingPPTA project preparatory technical assistance

PRC Peoples Republic of ChinaPRGF Poverty Reduction and Growth FacilityPRPA Poverty Reduction Partnership AgreementPRS Poverty Reduction StrategyPRSP Poverty Reduction Strategy PapersPSD private sector developmentPSERP Postsecondary Education Rehabilitation ProjectPTDP Power Transmission and Distribution ProjectRARP Rural Access Roads ProjectRCSP Regional Cooperation Strategy and ProgramRCSPU Regional Cooperation Strategy and Program UpdateRETA regional technical assistance

RRDP Roads for Rural Development ProjectRUVWSP Rehabilitation and Upgrading of Vientiane Water Supply

ProjectSAC Structural Adjustment CreditSAF Structural Adjustment FacilitySAPE Sector Assistance Program EvaluationSAPL Second Agriculture Program LoanSARS severe acute respiratory syndromeSCB state-owned commercial bankSCSPP Shifting Cultivation Stabilization Pilot ProjectSDP Smallholder Development ProjectSES special evaluation study

SIDA Swedish International Development Cooperation AgencySMEs small and medium-sized enterprisesSOE state-owned enterpriseSPTWSP Southern Provincial Towns Water Supply ProjectSTDSP Small Towns Development Sector ProjectSTEA Science, Technology, and Environment AgencySTUDP Secondary Towns Urban Development ProjectSWAP sector-wide approachSWIM sector-wide managementTA technical assistanceTCR technical assistance completion reportTHHP Theun Hinboun Hydropower Project

TPAR technical assistance performance audit reportTTC teacher training collegeUDAA Urban Development Administration AuthorityUNDP United Nations Development ProgrammeUS United StatesVIUDP Vientiane Integrated Urban Development ProjectVUISP Vientiane Urban Infrastructure and Services ProjectWASA Water Supply AuthorityWSSSP Water Supply and Sanitation Sector Project


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WTO World Trade OrganizationXHP Xeset Hydropower ProjectXKRIP Xieng Khouang Road Improvement Project

NOTES

(i) The fiscal year (FY) of the Government ends on 30 September.(ii) In this report, $ refers to US dollars.

Director General B. Murray, Operations Evaluation Department (OED)Director R.K. Leonard, Operations Evaluation Division 1, OED

Team Leader S. Hutaserani, Principal Evaluation Specialist, Operations EvaluationDivision 1, OED

Team Members O. Nuestro, Evaluation Officer, Operations Evaluation Division 1, OEDO. Badiola, Sr. Operations Evaluation Assistant, Operations Evaluation

Division 1, OED

Operations Evaluation Department, CE-12


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CONTENTS

Page

EXECUTIVE SUMMARY iii

MAPS ix

I. INTRODUCTION 1A. Objectives and Goal of the Country Assistance Program Evaluation 1B. Scope of the Country Assistance Program Evaluation 1C. Evaluation Methodology of the Country Assistance Program Evaluation 1

II. DEVELOPMENT CONTEXT AND THE GOVERNMENTS STRATEGICPRIORITIES 5

III. ASSESSMENT OF QUALITY AT ENTRY OF COUNTRY STRATEGIES:RELEVANCE AND POSITIONING 11

A. Relevance of Country Strategies to the Governments NationalDevelopment Strategies/Plans 11

B. Relevance of Country Strategies to the Countrys Socioeconomic Issues 13C. Relevance of Country Strategies to the Asian Development Banks

Corporate Strategies 15D. Harmonization of Country Strategies with Other Key Development

Partners 16E. Positioning of Country Strategies 17

IV. ASSESSMENT OF QUALITY AT ENTRY OF COUNTRY PROGRAMS:POSITIONING 20

A. Sufficient Background Research on Sector/Thematic Strategies 21B. Governments Absorptive Capacity and Ownership 21

C. The Asian Development Banks Comparative Advantage andPartnerships with Other Development Partners 22

D. Focus/Selectivity and Synergies 24E. Long-Term Continuity 25F. Constraints/Risks and Adjustment/Monitoring Mechanism to Achieve

Measurable Targets 25G. All Criteria Combined 26

The guidelines, formally adopted by the Operations Evaluation Department (OED) on avoidingconflicts of interest in its independent evaluations, were observed in the preparation of this

report. R. Anderson, E. Breckner, C. Brown, P. Ghate, M. Godfrey, and S. Lohani were theinternational consultants, employed for a total period of 8 person-months to prepare a draft inputof preliminary sector assessments. The Team Leader (the author of this report) developed theevaluation framework, guided the consultants, and prepared this report based on theconsultants' draft input and other sources of materials. The consultants were not involved inprocessing any projects or programs in the Lao People's Democratic Republic. To theknowledge of the management of OED, there were no conflicts of interest of the personspreparing, reviewing, or approving this report.


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V. RESULTS ACHIEVEMENT: BOTTOM-UP ASSESSMENT OF EFFECTIVENESS 27A. Program Contributions to Achieving Intermediate Outcomes by Sector 28B. Program Contributions to Achieving Intermediate Outcomes by Theme 45C. Program Contributions to Achieving the Country Strategy Objective of

Poverty Reduction 54

VI. RESULTS ACHIEVEMENT: TOP-DOWN ASSESSMENT OF LONG-TERMDEVELOPMENT IMPACTS AND THE MILLENNIUM DEVELOPMENT GOALS 54

A. Program Contributions to The Countrys Achievement of Long-TermImpacts 55

B. Exogenous Factors 55C. Countrys Challenges and Prospects: Future within Reach? 55

VII. PROGRAM IMPLEMENTATION: ASSESSMENT OF EFFICIENCY 56A. Project Performance Rating 56B. Financial Performance 57C. Factors Affecting Implementation Performance 58

VIII. PROGRAM ATTRIBUTION: ASSESSMENT OF OTHER ASPECTS 58A. Government Performance 58B. The Asian Development Banks Performance 59C. Harmonization and Partnerships 61D. Nongovernment Organizations Role 62

IX. OVERALL PERFORMANCE ASSESSMENT AND RATING 63A. Sector-Level Performance (Bottom-Up) 63B. Strategic- and Country-Level Performance (Top-Down) 65C. Overall Rating of All Levels of Performance 67

X. KEY FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS 67

A. Key Factors Contributing to Delivery of Results 67B. Lessons from Past and Ongoing Operations 68C. Recommendations 68

APPENDIXES

1. Field Visit/Survey Sites and Socioeconomic Data 712. Quality at Entry of the Country Strategies and Programs: The Asian Development

Banks Corporate Strategies 843. Asian Development Banks Lending and Nonlending Assistance Programs 1034. Detailed Bottom-Up Assessment of Sector Performance 1185. Portfolio Performance of Lending Program 166

6. Questionnaire for Client/Stakeholder Surveys 1697. Harmonization of Development Partners Strategies and Programs 1738. Governments Fiscal Sustainability Prospects by Sector 176

Attachments: Management ResponseDEC Chair Summary


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EXECUTIVE SUMMARY

The objectives of this Country Assistance Program Evaluation (CAPE) are to (i) assessthe performance of the Asian Development Banks (ADB) Country Operational Strategies andCountry Assistance Programs for the Lao Peoples Democratic Republic (Lao PDR) during19862004; and (ii) derive lessons and recommendations for future ADB operations. The goalof the CAPE is to identify lessons and recommendations that will be used in the preparation of

the next Country Strategy and Program (CSP) for the Lao PDR. The scope of the CAPE coversthe period from 1986 to 2004. This time period was selected because (i) 1986 was the year theGovernment started to transform the economy from a centrally planned to a market-basedsystem through the New Economic Mechanism; (ii) prior to 1986, ADB lending accounted foronly 5% of total lending to the country; and (iii) the period of 19 years is not too long to assessthe performance of ADB interventions, although the CAPE focuses on evaluating theperformance of more recent operations to draw up-to-date lessons and recommendations.

The CAPE used a results-based evaluation framework, which provides an integratedevaluation of various performance aspects of the CSPs at different levels (strategic,program/sector/thematic, and country levels). At the strategic level, the quality at entry of

ADBs Country Strategies for the Lao PDR is assessed in terms of relevance and the strength of

positioning of their strategic choices against various criteria. The four criteria for assessingrelevance are (i) the Governments national strategies/plans, (ii) the countrys socioeconomicissues, (iii) ADBs corporate strategies, and (iv) country strategies of other developmentpartners (DPs). The six criteria for assessing positioning are (i) sufficient background researchon the country and sectors, (ii) the Governments absorptive capacity and ownership, (iii) ADBscomparative advantage and partnership with other DPs, (iv) focus/selectivity and synergies, (v)long-term continuity, and (vi) constraints/risks and adjustment/monitoring mechanism to achievemeasurable targets. Overall, the assessment of relevance and positioning is to determinewhether the Country Strategies have made not only relevant, but also coherent choices inpositioning ADB as a key DP in certain priority areas, given existing constraints. At the programlevel, the quality at entry of ADBs Country Programs is assessed in terms of the strength ofpositioning against the same six criteria used to assess the Country Strategies. This is to

determine how well the former have translated the latter into a coherent program to address thecountrys priorities based on ADBs comparative advantage. At the sector/thematic level(under the program level), the performance of lending and nonlending products and services isassessed by sector using the following five criteria: (i) relevance of the design of the lendingprogram to ADBs sector policies and strategies; (ii) effectiveness of the lending and nonlendingprograms in achieving sector outcomes and the objectives of the Country Strategiestodetermine how well the Country Programs have put the Country Strategies into practice toachieve development results; (iii) efficiency of the lending and nonlending programs by sector interms of portfolio performance and other implementation issues; (iv) prospects for sustainabilityby sector; and (v) contributions to impacts by sector. At the country level, the overalldevelopment impacts/results (e.g., sustainable economic growth, poverty reduction, and otherMillennium Development Goals) achieved at the country level were assessed and linked to the

achievement of outcomes and impacts at the sector level through institutional impacts on thecountrys managing for development results (MfDR) capacity.

The overall performance of the Country Strategies and Country Programs, summarizedbelow, is based on two groups of assessment: (i) sector-level performance (bottom-up), and (ii)strategic- and country-level performance (top-down). The rating system follows the CAPEGuidelines of the Operations Evaluation Department.


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Sector-Level Performance (Bottom-Up Assessment)

Sector performance is summarized and rated for all sectors combined under five criteria(relevance, effectiveness, efficiency, sustainability, and contributions to impacts) below:

Relevance. The focus of many projects in most sectors under the Country Programs isfound to be relevant to the priority areas defined in the Country Strategies. However,

project/program design was overly complex and diffused in the agriculture and naturalresources (ANR), financial, and water supply sectors. This resulted in noncompliance with manypolicy reforms, delayed implementation, cost overruns, and low achievement of outputs andoutcomes. Project design in other sectors was generally satisfactory. It was highly satisfactory inthe transport sector, reflecting continuity and synergies among projects. Overall, theperformance of ADBs Country Programs for the Lao PDR is considered relevant.

Effectiveness. The effectiveness of ADBs operations varied by sector. The ANR,financial, and water supply sectors, constituting about a quarter of total lending during the CAPEperiod, were less effective in achieving outcomes. Other sectors were generally effective. Thetwo major sectors (energy and transport) that accounted for more than half (55%) of totallending were rated as highly effective. A series of transport projects delivered the outputs of

about 2,000 kilometers of national and provincial roads. Outcomes during 19942004 includedcontributing a total of 7% of the countrys road network; reducing travel time between Vientianeand Luangprabang from 23 days to 8 hours; and handling traffic, which increased by 22% peryear. Despite concerns regarding the issues related to the mitigation of adverse environmentand social impacts, the outputs of energy projects included four hydropower plants producing355 megawatts and some power transmission lines. Outcomes during 19912004 includedincreasing energy generation capacity by 2,067 gigawatt-hours per year, creating 70% of thecountrys total electricity generation capacity, increasing foreign exchange earnings from energyexports by $520 million, and providing electricity connections to 70,646 households. Overall, theperformance of ADBs Country Programs for the Lao PDR is considered effective.

Efficiency. Overall portfolio performance of ongoing loans is rated as satisfactory. The

average disbursement ratio of all active loans was about the same as the ADB-wide average(21%) over the past decade. There were lapses in implementation and resource utilization: (i)delayed implementation due to the non-availability of counterpart funds, (ii) cost overruns anddelayed disbursements due to poor design, and (iii) problems related to compliance withenvironmental and social safeguards. The lack of counterpart funds delayed projectimplementation in many sectors and contributed to substandard work, as underpaid contractorstried to save money by cutting corners. Poor project design resulted in underachievement ofoutputs and outcomes in water supply and ANR projects. Delayed releases of program loantranches reflected overly ambitious conditionalities. Although the economic internal rates ofreturn of many projects in the two major sectors (energy and transport) were high, the totalportfolio is considered to be borderline efficient because of problems experienced.

Sustainability. The Governments allocation of recurrent expenditure to priority sectors(education and health, and ANR) has been low (11% and 2%, respectively, during 19992003).The high share of the others/unexplained item raises concerns over the lack of fiscaltransparency. More efforts are needed to increase public revenues, restructure publicexpenditure to better reflect the Governments priority sectors, and increase transparency inbudget allocation/utilization. With the recent establishment of the government-owned LaoHolding State Enterprise, foreign exchange earnings from future electricity exports should beaccounted for more transparently as public revenues and used in priority areas. Overallsustainability prospects are regarded as likely, but at the lower end of the range, dependingon government commitment to channel more export earnings into priority sectors.


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Contributions to Impacts. With the exception of the ANR, financial, and water supplysectors, ADB operations in other sectors have made satisfactory contributions to the countrysachievement of impacts. Most notable contributions were in the transport and energy sectors.The outputs and outcomes achieved from a series of transport projects contributed to anopening up of previously unreachable areas, facilitated Greater Mekong Subregion cross-bordertrade and tourism, and contributed to increased provincial gross domestic product per capita.

Similarly, the outputs and outcomes of the energy projects contributed to tripling the countryselectricity generation capacity and increasing energy exports from 8% of total exports to 27%.These outcomes indirectly contributed to the countrys achievement of the annual economicgrowth of 6% over the past decade, and progress in poverty reduction from 48% in 1990 to 33%in 2003. Overall, ADBs contributions to impacts are regarded as significant (satisfactory).

Overall Rating of the Sector-Level Performance. Overall, the sector performancebased on the five criteria is rated as successful (Table 7 in the main text).

Strategic- and Country-Level Performance (Top-Down Assessment)

Strategic- and country-level performance is summarized and rated below, consisting of

(i) the quality at entry of overall CSPs in terms of relevance and positioning, (ii) ADBsperformance, and (iii) contributions to the country-level MfDR capacity and long-term impacts.

Quality at Entry of Overall Country Strategies and Programs. In terms of relevance,the strategic choices of the combined three periods of ADBs Country Strategies for the LaoPDR (1991, 1996, and 2001) are rated as generally relevant to the Governments nationaldevelopment strategies/plans; the countrys socioeconomic issues; ADBs corporate objectives;and country strategies of other key DPs, which focused on transforming the economy from acentrally planned to a market-based system from the late 1980s and on poverty reduction fromthe late 1990s onward. In terms of positioning, the overall Country Strategies are rated as partlysatisfactory because of the lack of coherence. This was particularly the case for the 2001 CSP,which did not focus on ADBs comparative advantage in physical infrastructure (energy and

transport) in supporting private sector-led growth. It diverted attention to many sectors, withoutaddressing limited government absorptive capacity. This implies that the overall CountryStrategies had made relevant, but not coherent, choices in positioning ADB as a major DP inparticular sectors/areas. For the overall Country Programs, in terms of positioning, they are alsorated as partly satisfactory due to the lack of coherence. Although lending to the two sectors inwhich ADB had comparative advantage comprised more than half, the remainder of theprograms was spread thinly in many sectors. Thus, the quality at entry of the overall CSPs israted as partly satisfactory.

ADBs Performance. ADBs role in the development of the Lao PDR was regarded byother DPs as favorable. The Government appreciated ADBs client-oriented approach inresponse to the countrys development needs. ADBs lending volume appears to have

exceeded the Governments absorptive capacity, as reflected in inadequate provision ofcounterpart funding and recurrent cost financing, and in institutional weaknesses. ADB financedmany small projects in too many sectors, thus reducing the degree of program coherence.Policy lending in the ANR and financial sectors failed to achieve many of the expected reformsdue to overly ambitious program design. Although ADBs performance was weak in somesectors, it performed well in the key sectors in which it had a comparative advantage (transportand energy), particularly in terms of focus and continuity of projects and staffing, and closesupervision during implementation. Self-reinforcing outcomes and critical masses weregenerated. Overall, ADBs performance is rated as satisfactory.


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Contributions to the Countrys MfDR Capacity and Long-Term Results/Impacts.ADBs contributions to building the countrys MfDR capacity were through standalone advisorytechnical assistance (TA) to improve (i) statistical capacity; (ii) poverty assessment, andmonitoring and evaluation (M&E) capacity; and (iii) fiduciary arrangements or governance.These TAs, which were not attached to projects, generally did not perform well due to lowgovernment commitment and less ADB supervision. In the TAs for improving the statistical andpoverty M&E capacity, the focus was more on strengthening statistical capacity and less on

M&E capacity, with insufficient followup, as the data collected later disappeared. In the area offiduciary arrangements, a number of TAs were provided to improve the countrys procurementand audit procedures, accounting regulations, and public expenditure management. However,due to inadequate government ownership, the Procurement Office supported by ADB ceasedfunctioning for a while, although it was subsequently restored with assistance from the WorldBank; and the sustainability of the National Audit Office is threatened due to insufficient budget.In public expenditure management, expected outputs were achieved, including preparation ofthe Medium-Term Expenditure Framework linking annual budgets to investment priorities.However, not all the priorities were supported by the budget, as these priorities were setseparately in the Governments National Growth and Poverty Eradiation Strategy (NGPES) asdistinct from the Fifth Plan (20012005). The NGPES is now being integrated with the new SixthPlan (20062010), to be supported by a single budget. Joint efforts with the World Bank are

designed to improve the countrys public expenditure management capacity in a coherentmanner under the Nam Theun 2 Project. Overall, ADBs contributions to the countrys MfDRcapacity are regarded as modest (partly satisfactory).

The Lao PDR achieved a reasonably high economic growth rate (6% per annum) overthe past decade and made progress in reducing incidence of poverty from 48% in 1990 to 33%in 2003. These impacts resulted from the joint efforts of the Government and DPs, including

ADB. ADBs contributions to the country-level impacts were notable through the critical massesdeveloped in the energy and transport sectors, since good infrastructure is necessary to supporteconomic growth. Sustainable economic growth, in turn, is a necessary condition for sustainablepoverty reduction. Despite all these positive impacts, the Lao PDR is still faced with formidabledevelopment challenges, including (i) weak public financial management and governanceboth

on the expenditure side (imbalance between capital and recurrent budget, and nontransparentbudget allocation) and on the revenue side (insufficient revenue mobilization from taxes andother sources); (ii) weaknesses in the enabling environment for private sector development andforeign direct investment; and (iii) debt overhang. Thus, the country-level impacts from the topdown are rated as modest (partly satisfactory).

Overall Rating of the Strategic- and Country-Level Performance. While the quality atentry of the CSP and contributions to the countrys MfDR capacity and impacts were partlysatisfactory, ADBs performance was satisfactory. The resulting overall CSP performance at thestrategic and country levels is rated as borderline successful (Table 9 in the main text).

Overall Rating of All Levels of Performance

Given the bottom-up and top-down performance assessment above, the overall CSPperformance at all levels combined is rated as successful (Table 10 in the main text).

Lessons from past and ongoing ADB operations are identified below:

Continuity Was Key to Achieving Critical Masses and Development Effectiveness.The success of the Country Programs in generating critical masses and achieving developmenteffectiveness reflected a systematic and continued series of interventions, allowing succeedingprojects to build on past achievements (e.g., in the energy and transport sectors).


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Without Overall Sector Focus and Coherent Strategy by Sector, InvestmentsBecame Diffused and Failed to Achieve Development Effectiveness. Without overall sectorprioritization and a clear strategy for each sector, any investment could be justified as a priority.This led to scattered investments, particularly in the ANR sector.

Limited Government Absorptive Capacity and Ownership Resulted in a Shortage

of Counterpart Funding and Recurrent Cost Financing. ADB lent too much for theGovernment to effectively absorb. This was reflected in inadequate counterpart funding andrecurrent cost financing. The former caused delays in project implementation, higher bid prices,and substandard work across sectors. The latter threatened project sustainability in somesectors (e.g., education and health). The Lao PDR is a highly aid dependent country with officialdevelopment assistance accounting for 85% of total government expenditure. The total volumeof aid appears to have exceeded the countrys absorptive capacity. The high aid dependencyratio raises questions about whether the Government or funding agencies are settingdevelopment priorities.

Weak Government Commitment Deterred Achievement of DevelopmentEffectiveness. Weak government commitment was also reflected in delayed compliance with

policy reforms and limited follow-through on the issuance of implementation decrees. Both hadnegative effects on delivering the expected development results.

Complicated Project/Program Design Deterred Achievement of DevelopmentEffectiveness. Inadequate project preparation in the ANR and water supply sectors led toimplementation delays, cost overruns, and cancellation of components. In all program loans,proposed policy conditionalities were too complex and ambitious to implement.

Limited Strategic Partnerships among DPs Resulted in Piecemeal Outcomes.Weak aid coordination during the CAPE period resulted in a lack of strategic partnerships (e.g.,cofinancing strategies, and program-based or sector-coordinated approaches) and in piecemealoutcomes. However, progress on aid coordination and harmonization has recently improved.

ADBs Mekong Regional Department, inclusive of the Lao PDR Resident Mission, shouldconsider the recommendations below in formulating the next CSP in 2006.

Recommendations Responsibility

Need to Address the Problems of Limited Government Absorptive Capacity andOwnership/Commitment. Given the countrys high aid intensity ratio and low absorptive capacity, thedevelopment agenda has been driven largely by funding agencies. This was reflected in theGovernments inability to provide counterpart funds and its inertia in following through on major reformmeasures. These were endemic problems occurring across sectors. Although ADB has recentlyapproved a more flexible policy framework for cost sharing, which allows the government of eachdeveloping member country to finance a lower proportion of counterpart funds based on a specificcountrys cost-sharing ceiling, government ownership/commitment (e.g., in terms of macroeconomicperformance and fiduciary arrangements) is still a key factor determining the ceiling. MKRD shouldconsider (i) determining the Lao PDRs cost-sharing ceiling based on the aggregate portfolio of thenext CSP period during the preparation of the 2006 CSP; and (ii) discussing the issue of high aidintensity ratio with other DPs and pursuing collective policy dialogue with the Government. Thisobjective would be to determine whether the total amount of aid should be reduced to be more in linewith the absorptive capacity and how to improve the Governments capacity in raising more domesticrevenues so as to reduce the countrys dependence on aid in the long run. Increasing aid flows in thecurrent circumstances will not necessarily result in the achievement of better development results.

MKRD, theGovernment(Ministry of

Finance andCommittee onPlanning andInvestment),and the aidcommunity


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Recommendations Responsibility

Need for Sector Selectivity. Given the lower indicative planning figure of $22.7 million for 2006 ($30million in 2005) compared with the average of $55 million over the CAPE period for the Lao PDR, andconcerns over the Governments limited absorptive capacity, the next CSP should focus on a smallernumber of sectors. The sectors should be prioritized based on the following considerations: (i)government priorities for ADB assistance, (ii) involvement of other DPs, (iii) relative funding position inthe sectors among DPs, and (iv) ADBs comparative advantage in terms of sector performance based

on the CAPEs findings. Indicative directions for ADB interventions are shown in Table 12 of the maintext.

MKRD

Need for Stronger Harmonization and Partnerships with Other DPs. In line with the expectationsstated in the Paris Declaration, ADB should develop more strategic partnerships with other DPs (e.g.,

joint CSPs and sector strategies, cofinancing strategy, and program-based or sector-coordinatedapproaches) to provide a more coherent assistance program. This will help reduce the Governmentstransaction costs, enhance its role in leading the countrys development agenda, and increase thepossibility for other DPs to finance future recurrent costs after project implementation.

MKRD andOCO

Need to Improve the Results Achieved by Program Lending. Given the disappointing results ofprogram lending, ways must be found to improve performance if use of this modality is to becontinued. This may involve (i) developing a more realistic package of reforms that are consistent with

the Governments institutional capacity and political economy; (ii) having a more realistic time frame toimplement the policy changes that reflect the institutional constraints in the country and to followthrough on the issuance of implementation decrees to ensure achievement of outcomes/impacts; (iii)improving the analysis on which the policy reforms are based; and (iv) making future program lendingmore manageable/flexible, based on cash-on-delivery (e.g., cluster program modality), with digestiblereform programs that are government owned.

MKRD

Need to Strengthen Sector Strategies with Focus on Governance, Anticorruption, and theEnabling Environment for PSD. The lack of good sector strategies resulted in diffused investmentsand failure to achieve sector outcomes. The role of ADTAs and economic, thematic, and sector workshould be strengthened to develop sector strategies to guide future ADB operations. These shouldlook not only at factors specific to the sectors, but also on factors outside the sectors that are importantpreconditions for increased sector efficiency (e.g., governance, anticorruption, banking, enterprisereforms, the business climate, and the countrys competitive position after gaining full accession to the

World Trade Organization). The implementation of social safeguard policies also needs to bestrengthened.

MKRD

Need to Improve the Management of the TA Program. Many ADTAs did not perform well, withlimited government commitment. This was particularly true for TAs that were not attached to anyproject. ADB should improve the management of TAs by (i) increasing government participation in TAdesign and implementation to increase client ownership; (ii) improving the link between the lendingand nonlending programs; (iii) programming TA strategically, rather than in an ad-hoc fashion; and (iv)focusing on achievement of TA outcomes, rather than outputs.

MKRD

Need to Balance the Coverage of the next CSP with Available ADB Resources. Given the need tostrengthen aid coordination, policy dialogue, and project implementation at the field level, LRMs roleshould be strengthened with increased delegation of authority and redeployment of staff. This should

be considered in relation to the regional role of the Thailand Resident Mission.

MKRD andBPMSD

ADB = Asian Development Bank; ADTA = advisory technical assistance; BPMSD = Budget, Personnel, and Management Systems Department; CAPE =Country Assistance Program Evaluation; CSP = Country Strategy and Program; DP = development partner; Lao PDR = Lao Peoples DemocraticRepublic; LRM = Lao PDR Resident Mission; MKRD = Mekong Regional Department; OCO = Office of Cofinancing Operations; PSD = private sectordevelopment; TA = technical assistance.


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I. INTRODUCTION

A. Objectives and Goal of the Country Assistance Program Evaluation

1. The objectives of the Country Assistance Program Evaluation (CAPE) are to (i) assessthe performance of the Asian Development Banks (ADB) Country Operational Strategies and

Country Assistance Programs1 for the Lao Peoples Democratic Republic (Lao PDR) during19862004; and (ii) derive lessons and recommendations for future ADB operations. The goalof the CAPE is to identify useful lessons and recommendations that will be used in thepreparation of the next Country Strategy and Program (CSP) for the Lao PDR.

B. Scope of the Country Assistance Program Evaluation

2. The Lao PDR became an ADB member in 1966. ADBs first loan to the country wasapproved in 1970. By the end of 2004, ADB had provided financing for 62 public-sector loanstotaling $1.11 billion, all from the Asian Development Fund (ADF) resources. The scope of theCAPE covers the period from 1986 to 2004 (19 years), during which ADB approved 50 loans for$1.05 billion, 54 project preparatory technical assistance (PPTA) grants for $24.8 million, and

131 advisory technical assistance (ADTA) grants for $69.3 million. Of the 50 loans, 6 wereprogram loans (2 in agriculture and natural resources [ANR], 3 in finance, and 1 in environment)totaling $135 million (13% of ADBs total lending for the Lao PDR). This time period wasselected for the CAPE because (i) 1986 was the year the Government started to radicallytransform the economy from a centrally planned to a market-based system through the NewEconomic Mechanism (NEM); (ii) prior to 1986, ADB had provided only 12 loans to the Lao PDR(5% of ADBs total lending to the country); and (iii) the period of 19 years is not too long toassess the performance of ADB interventions, although the CAPE focuses on evaluating theperformance of more recent operations to draw up-to-date lessons and recommendations.During the period, annual ADB lending to the Lao PDR averaged $55 million.2

C. Evaluation Methodology of the Country Assistance Program Evaluation

3. This section describes the evaluation methodology (consisting of evaluation framework,approach, and methods) applied to the CAPE.3

1. Results-Based Evaluation Framework

4. A results-based evaluation framework (Figure 1) was used to guide the CAPE. Thisframework reflects the CAPE Guidelines of the ADBs Operations Evaluation Department (OED)and incorporates the thrust of the Common Performance Assessment (COMPAS)4 of multilateral

1 In 2001, ADB combined the Country Operational Strategy (COS) and Country Assistance Program (CAP) into theCountry Strategy and Program (CSP). To avoid using the old terms, this CAPE will refer to the COS as Country

Strategy and to the CAP as Country Program.2 The annual average indicative planning figure for ADF VIVIII (19922004) was about $58 million.3 Evaluation methodology is defined as a systematic and coherent set of procedures used to carry out the entire

process of analysis, while evaluation framework is defined as the essential structure of the analysis. Evaluationapproach is defined as an analytical tool applied to the analysis within the proposed framework. Evaluation methodis defined as a procedure for using the analytical tool to accomplish the analysis within the proposed framework.

4 COMPAS is one of the joint efforts of multilateral development banks to harmonize their approaches for assessingand monitoring the institutional performance of recipient countries in managing for development results (MfDR), inaccordance with one of the main thrusts (i.e., harmonization) of the 2005 Paris Declaration on Aid Effectiveness.The COMPAS indicators for MfDR include statistical capacity, poverty assessment and monitoring and evaluation(M&E) capacity, and public expenditure management capacity.


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development banks. The framework provides an integrated evaluation of various performanceaspects of the CSPs at different levels (i.e., strategic, program/sector/thematic, and countrylevels). At the strategic level, the quality at entry of ADBs Country Strategies for the Lao PDRis assessed in terms of relevance and the strength of positioning of their strategic choicesagainst various criteria. The four criteria for assessing relevance/responsiveness are (i) theGovernments national strategies/plans, (ii) the countrys socioeconomic issues, (iii) ADBs

corporate strategies, and (iv) country strategies of other development partners (DPs).5 The sixcriteria for assessing positioning/coherence are (i) sufficient background research on thecountry and sectors, (ii) the Governments absorptive capacity and ownership, (iii) ADBscomparative advantage and partnership with other DPs, (iv) focus/selectivity and synergies, (v)long-term continuity, and (vi) constraints/risks and adjustment/monitoring mechanism to achievemeasurable targets. Overall, the assessment of relevance and positioning is to determinewhether the Country Strategies have made not only relevant, but also coherent choices inpositioning ADB as a key DP in certain priority areas, given existing constraints.

5. At the program level, the quality at entry of ADBs Country Programs is assessed interms of the strength of positioning against the same six criteria used to assess the CountryStrategies. This is to determine how well the former have translated the latter into a coherent

program to address the countrys priorities based on ADBs comparative advantage. At thesector/thematic level (under the program level), the performance of lending and nonlendingproducts and services is assessed by sector using the following five criteria: (i) relevance of thedesign of the lending program to ADBs sector policies and strategies (as well as to some sectorstrategies prepared under ADTAs and economic, thematic, and sector work [ETSW]); (ii)effectiveness of the lending and nonlending programs in achieving sector outcomes and theobjectives of the Country Strategiesto determine how well the Country Programs have put theCountry Strategies into practice (i.e., whether things have been done right/well) to achievedevelopment results; (iii) efficiency of the lending and nonlending programs by sector in terms ofportfolio performance and other implementation issues; (iv) prospects for sustainability bysector; and (v) contributions to impacts by sector.

6. At the country level, the overall development impacts/results (e.g., sustainableeconomic growth, poverty reduction, and other Millennium Development Goals [MDGs])achieved at the country level were assessed and linked to the achievement of outcomes andimpacts at the sector level through institutional development impacts on the countrys managingfor development results (MfDR) capacity.

7. This evaluation framework is results-based in that, under the effectiveness aspect, itevaluates the development effectiveness6 of the Country Programs in achieving the CountryStrategy objectives, measured by intermediate sector outcomes/results (bottom-upassessment). This is linked to the countrys achievement of long-term developmentimpacts/results (top-down assessment). Thus, it is a forward-looking evaluation framework,focusing on the end results achieved.

5 DPs refer to international funding agencies, the private sector, and civil society, including nongovernmentorganizations (NGOs).

6 Development effectiveness is defined here as the extent to which Country Programs operations have achievedintermediate sector outcomes, thereby contributing to achieving the Country Strategy objectives.


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CountrysDevelopmentResults/

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CountryStrategiesof

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2. Evaluation Approach and Limitations

8. Various sets of evaluation criteria are used as the evaluation tool within this frameworkto assess both the quality at entry of the Country Strategies and Country Programs (para. 4)and the implementation performance of the Country Programs at the sector/thematic andcountry levels (paras. 5 and 6). Although the implementation performance of the Country

Programs at the sector level is evaluated by five criteria, the key criterion is effectiveness whichwill determine the contributions of the Country Programs in achieving sector outcomes and theCountry Strategy objectives (bottom-up assessment). The achievement of such intermediateoutcomes is linked to the countrys achievement of long-term impacts (top-down assessment) interms of contributions by ADB, rather than attribution. The country-level impacts cannot beattributed solely to ADBs efforts. Rather, such impacts are a result of combined efforts of theGovernment, funding agencies, the private sector, and civil society. Methodological difficultiesregarding attribution constitute a limitation of all CAPE studies, including this one.

9. The CAPE used a results matrix to trace the results chain (rather than to disaggregatethe results) of ADBs contributions (in terms of inputs, outputs, and outcomes at the sector level)to the overall achievement of development results at the country level. The input column

computed ADB inputs by sector in terms of cumulative disbursement values over the past yearsas a proportion of total cumulative disbursement values by all funding agencies andnongovernment organizations (NGOs) combined over the same period. This proportion roughlyindicates the importance of ADBs role in each sector relative to the achievement of sectoroutcomes, linked to the country-level impacts. If ADB was a major funding agency in any sector,the achievement of sector outcomes and impacts can be considered as being influenced by

ADB interventions; if not, ADBs influence is considered more limited. This approach ofrecognizing the efforts of all DPs in contributing collectively (rather than separately) to achievingdevelopment results reflects the importance of country-led development.

3. Evaluation Method

10. The evaluation method draws together evidence from a literature review, perceptions ofkey informants and beneficiaries, and data analysis.

(i) Literature Review. The CAPE used secondary data/information from existingdocuments of the Government, ADB, and other key DPs (e.g., country economicreviews; loan documents; TA reports; national development strategies and plans;CSP reports of ADB and other DPs; evaluation reports of ADB, the Government,and other DPs; etc.).

(ii) Perceptions of Key Informants. Primary data/informationboth qualitative andquantitativewas collected through (a) participatory consultation workshops;7 (b)structured surveys of clients/stakeholders/beneficiaries to obtain their

perceptions on ADB operations and performance; and (c) participatory keyinformant interviews and focus group discussions with stakeholder groups,including interviews of beneficiaries during field visits of selected projects (Table

7 Two participatory consultation workshops were held at the Lao Plaza Hotel, with the assistance of the Lao PDRResident Mission (LRM), in May and November 2005. In the first workshop, key features of the CAPE positionpaper (e.g., the CAPE objectives, goals, methodology, activities, and schedule; and a summary of ADB assistance)were presented, followed by discussion and feedback. In the second workshop, the preliminary CAPE findings,lessons, and recommendations were presented, followed by discussion and feedback. Both workshops werechaired by the LRM Country Director and attended by about 40 people from various stakeholder groups, includinggovernment officials from concerned agencies as well as representatives from funding agencies and civil society.


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A1.1, Appendix 1). This CAPE used a mix of qualitative feedback andquantitative analysis of indicators before and after ADB assistance to assess

ADBs contributions to outcomes and impacts.8

(iii) Data Analysis. The data/information collected from the two steps above was

analyzed to assess the performance of the CSP.

II. DEVELOPMENT CONTEXT AND THE GOVERNMENTS STRATEGIC PRIORITIES

11. This chapter assesses the broad trends in economic, social, and political development,including progress in achieving poverty reduction and other MDGs. The assessment is dividedinto different periods to provide background information on the context within which ADBsstrategies and programs were developed.

12. Prior to Major Economic Reforms (19751985). The Lao Peoples Revolutionary Partytook control of the country in 1975. By 1985, after a decade of pursuing development along thesocialist line of a command economy, the economy faced an economic crisis. Manufacturinggrowth had decreased by half, exports had declined to 30% of imports, external debt had

doubled, and the debt-service ratio9

had risen to 22% during the First 5-Year Plan (19811985)period. The strategic objective of the Plan was to achieve food self-sufficiency andcollectivization of agriculture. Economic activities tended to center around subsistence andbarter trade systems, posing difficulties in mobilizing domestic resources to finance thecountrys fiscal deficit. Many state-owned enterprises (SOEs) were not financially viable andrequired subsidies through the budget. The situation was aggravated by the cessation of aidfrom the former Soviet Union, which affected the countrys investment programs.

13. Transition from a Centrally-Planned to a Market-Based System (19861990). In1986, the Government took a bold step toward reforms by endorsing the NEM. It aimed atdecentralizing economic decision making and creating a market-oriented economy, in which theprivate sector would be the main engine of economic growth. The NEMs key policy reforms

included liberalizing the foreign direct investment (FDI) law enacted in 1988 and developing aprivatization plan (1991). These measures were to be implemented during the Second Plan(19861990) without sacrificing continued food self-sufficiency, the strategic objective of thePlan. However, the food self-sufficiency objective and the overall agriculture sector wereadversely affected by severe droughts during 1987 and 1988. The NEM reforms gatheredmomentum in 1989, supported by the World Banks Structural Adjustment Credit (SAC) I and IIand the International Monetary Funds (IMF) Structural Adjustment Facility. This assistancesupported medium-term macroeconomic stabilization and structural adjustments and wascomplemented by ADB assistance for policy adjustments in the agriculture and financial sectorsin 1989 and 1990. At the end of the period, the Lao PDR was a poor country, with per capita

8 According to the OEDs CAPE Guidelines, counterfactuals are not observable, and different stakeholders mayhave diverging views on what would have happened in the absence of the assistance. Since counterfactuals arenot observed, proxy indicators, indirect measures, and a mix of qualitative and quantitative indicators will have tobe used as evidenced of ADBs contributions to outcomes. The counterfactual technique also has its ownlimitations: (i) it is difficult to do within a limited time and budget; and (ii) accessible pure controlled areas, whichhave not been influenced by assistance of other DPs, are difficult to find. Thus, although counterfactuals can beidentified, there is no guarantee that they will correctly represent what would have happened had there not been

ADB assistance. Given the limitations of the counterfactual technique and the suggestion in the CAPE Guidelines,this CAPE used a mix of qualitative and quantitative indicators before and after ADB assistance.

9 Defined as the ratio of external debt payments to exports.


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gross domestic product (GDP) of $180 and almost half (48%) of the countrys population livingin poverty.10

14. Improved Macroeconomic Performance (19911995). Aligned with the NEM, thestrategic objective of the Third Plan (19911995) was to facilitate the countrys transition to amarket economy by promoting infrastructure development and undertaking policy and

institutional reforms to encourage private sector development (PSD). By the early 1990s, therewere significant achievements: (i) more than 100 SOEs had been privatized; (ii) tax collectionhad improved; (iii) the FDI law had been revised (1994) to allow ventures that were 100%foreign-owned; (iv) FDI had increased; (v) commodity price controls and transport restrictionshad been lifted; (vi) economic growth resumed (averaging 7% during 19931995); (vii) exportswere 18% of GDP; (viii) inflation had fallen to around 6% in 1993 after peaking at 60% in 1989;and (ix) the nominal exchange rate had stabilized. On the political front, a new constitution wasadopted (1991) after the first national elections in 1989. The same ruling party has held powerup to the present. The World Banks evaluation of SAC-I and II found that, while these externalassistance programs brought about sweeping macroeconomic policy reforms in the early 1990s,progress in translating such policies into administrative actions was slow (e.g., while many lawsto create an enabling legal and regulatory framework for PSD had been enacted, the

preparation of the needed regulations and directives to make them operational lagged behind);and the overall macroeconomic position remained fragile. This was due to weak governanceand corruption, factors that reflected institutional constraints, vested interests, and lack of atradition of transparency. These are common problems for transitional economies. Fiscal deficitsremained high (averaging 9.7% of GDP). While poverty had declined from the preceding period,the country remained poor, with per capita GDP of $377 and poverty incidence of 46% at theend of the period.

15. Financial Destabilization (19962000). The Lao PDR joined the Association ofSoutheast Asian Nations in 1997. The move was consistent with the countrys Fourth Plan(19962000), the strategic objective of which was to facilitate the transition to a marketeconomy and poverty reduction, mainly by improving infrastructure, human resources

development (HRD), regional cooperation, and environmental preservation. An exogenousshockthe 1997 Asian financial crisishad an adverse impact on the Lao PDR due to its closeeconomic relationship with Thailand. The currency collapsed, economic growth fell to 4% in1998 compared with 7% in the previous 3 years, and inflation shot up to 134% in 1999.Economic growth later picked up to average 6% over the period. Although inflation subsequentlyfell to 27% in 2000, it remained in double digits, about 11% in the following period (20012004)(Table A1.2, Appendix 1). High fiscal deficits continued (averaging 9.6% of GDP). The povertyincidence remained high (39% in 1998) and GDP per capita remained low ($335) at the end ofthe period.

16. Recovery and Consolidation (20012005). The economy recovered during the FifthPlan (20012005). The strategic objective of the Plan was to ensure social and political stability

with sustainable growth and poverty reduction, especially through food self-sufficiency,environmental preservation, HRD, and mobilizing savings to encourage PSD. In September2001, the Government signed the Poverty Reduction Partnership Agreement (PRPA) 11 with

10 The poverty incidence was defined as the proportion of people living below the national poverty line of less than$1.5 per day.

11 The PRPA objectives are to (i) halve poverty incidence and stop poppy cultivation by 2005, (ii) eradicate povertyand stop shifting cultivation by 2010, and (iii) graduate from being a least developed country by 2020. Poverty is tobe reduced through (i) sustainable economic growth, (ii) accelerated human and institutional development, (iii)improved governance, (iv) environmental sustainability, and (v) encouraging greater peoples participation in thedevelopment process.


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ADB. Four sectors were identified as priority sectors for poverty reduction (agriculture and ruraldevelopment, education, health, and road transport). In 2001, IMF provided a $40 millionPoverty Reduction and Growth Facility, which required greater effort in revenue collection andbank restructuring. The FDI law was further amended in 2004 mainly to improve tax incentivesto encourage investors to reinvest their profits. 12 The United States (US) granted bilateralnormal trade relations (NTR)13 status to the Lao PDR in 2004, which is expected to help expand

its manufacturing exports to the US. The Lao PDR began its accession to the World TradeOrganization (WTO) in October 2004, although full accession is likely to be effective only in afew years time. The first half of 2004, saw a recovery in tourist arrivals, which were 30% higherthan the year-earlier period, when there was the regional outbreak of severe acute respiratorysyndrome (SARS).

17. With the countrys heavy dependence on external assistance and the financing of mostof the public investment program by foreign borrowings and grants, concerns were raised overthe Governments absorptive capacity and ability to repay debt.14 The Lao PDR was classifiedby the IMF and World Bank as a highly-indebted poor country (HIPC), eligible for debt relief.Using data from 41 HIPCs combined during 19891997, one study found that the total debtrelief of $33 billion resulted in new borrowing of $41 billion.15 This confirmed the mortgaging-the-

future hypothesis that the HIPC governments replaced forgiven debt with new debt, resulting inhigher debt burden. For the Lao PDR, although the Government adopted an austere debt policyunder which no commercial loans are contracted and all new loans should be concessional andhave a grant element up to 40%50%, the debt burden remains high. 16 IMFs Article IVconsultation (2004) noted the countrys improvements in macroeconomic performance since theturn of the century, with an economic growth rate averaging 6% per annum, lower inflation, andfiscal restraint. Despite such improvements, its revenue base remained weak (averaging 12% ofGDP) due to weak tax collection and administration. Continued reforms are needed, especiallyrevenue mobilization; banking and SOE reforms; and promoting good governance, the rule oflaw, and other elements needed to foster an enabling environment for PSD. These issues werealso emphasized in ADBs country performance assessment for the Lao PDR for performance-based allocation (PBA) under ADF. ADBs PBA assessment indicates that the country has high

portfolio performance, with generally satisfactory macroeconomic, structural, and socialperformance, although many issues remain to be tackled. Governance performance (in terms ofpublic sector management, transparency, accountability, and corruption) was found to be poor,thus reducing the countrys overall performance rating.17

18. Other issues/challenges faced by the country, which are also emphasized in the PBAassessment, include the following: (i) high fiscal deficits (averaging 7% of GDP, albeit havinggone down from 8% to 5% recentlyTable A1.2 and Figure A1.1, Appendix 1), most of which

12 The law on domestic investments was also amended to equalize tax incentives for FDI and domestic investors, andto streamline the investment process. But the tax exemption may erode the Governments revenue base.

13 NTR requires further trade liberalization (e.g., reduction in quota restrictions and rationalization of import tariffs) by

the Lao PDR as a step toward accession to the World Trade Organization (WTO). Under NTR, the Lao PDRreceives most-favored-nation treatment for exports to the US.14 The stock of external debt of the Lao PDR was high, at $3 billion in 2003 (or $1.2 billion in net present value terms).

However, about half was owed to the Russian Federation. In June 2003, the Russian Federation agreed to write off70% of the debt owed to it and allow the Government to service the remaining debt of about $380 million over aperiod of 33 years at a preferential interest rate.

15 W. Easterly. 2002. The Elusive Quest for Growth. Massachusetts Institute of Technology Press. Cambridge.16 According to ADBs PBA assessment for 2005, although the Lao PDRs debt burden remains high, due to its mostly

concessional nature, the debt-service burden (averaging 9.4% of exports) will be manageable provided economicreforms are on track, especially fiscal reform.

17 Based on the results of the PBA assessment, the ADF allocation to the Lao PDR was reduced from the average of$55 million per year during the CAPE period to $30 million in 2005 and $22.7 million in 2006.


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have been financed by foreign borrowings and grants; (ii) a high proportion of capitalexpenditure, accounting for more than 60% of total expenditure; (iii) low domestic resourcesmobilization, with gross domestic investments and savings averaging 21% and 16% of GDP,respectively; (iv) difficulties in attracting FDI and expanding exports (with exports declining to anaverage of 16% of GDP during 20012004 compared with 20% in the preceding period, andexport growth increasing only slightly to 2.5% per year during 20012004 compared with 1.7%

in the preceding period) due to inadequate labor skills, high transport and logistics costsbecause of the countrys rugged terrain, weaknesses in the transport systems, small andfragmented domestic market associated with dispersed population; (v) difficulties in developingsmall and medium-sized enterprises (SMEs) due to limited access to credit and entrepreneurialskills, nonconducive investment laws and climate, and high transaction costs of doing business;(vi) low demand for school graduates and limited demand to improve the quality of educationdue to the underdeveloped job market; (vii) lack of competitiveness 18 in the manufacturingindustry (garments, in particular, which account for 23% of the total exports); although thecountry was granted NTR status by the US, competition in the world garment industry intensifiedwith the expiry of preferential export quotas under the Multi-Fiber Agreement; and (viii) weakagriculture sector (providing livelihood for more than three-quarters of the countrys populationand about half of GDP)19 due to high dependency on traditional cultivation;20 insufficient access

to essential inputs, rural infrastructure, and markets; and lack of agriculture diversification,commercialization, and a conducive investment climate. Given these constraints, the countryspoverty level remains high, albeit declining.

19. Countrys Current MDG Status. The 6% economic growth rate achieved over the pastdecade (19952004) contributed to satisfactory progress on the MDG indicator on povertyreduction. The poverty incidence fell from 48% in 1990 to 46% in 1993, 39% in 1998, and 33%in 2003 (Table A1.3, Appendix 1). The current GDP per capita ($401 in 2004) is not muchhigher than a decade ago ($386 in 1995). The Lao PDR is still one of the poorest countries inthe world, with level of GDP per capita, poverty incidence, and other MDG and social indicatorscomparable to those of Cambodia, but poorer than those of Viet Nam (Table 1). Although itspopulation size (5.8 million) is about half that of Cambodia and much lower than that of Viet

Nam, its current population growth rate remains the highest (2.8%21

compared with 1.8% forCambodia and 1.6% for Viet Nam).

18 Although the labor cost is low, labor productivity (measured by value added per worker) is also low. While the LaoPDR labor cost is 44% that of Indonesia, productivity is 33%. Excluding labor cost, other costs of doing business(transport, telecommunications, electricity, and rental costs) in the Lao PDR are higher than in other East Asiancountries (World Bank. 2004. Lao PDR Country Economic Memorandum: Realizing the Development Potential ofLao PDR. Report No. 30188-LA. Washington, D.C.).

19 The agriculture growth rate averaged 4.3% per year over the past decade. Industry and services grew more rapidly(Table A1.2 and Figure A1.2, Appendix 1).

20 Most upland farmers still engage in traditional subsistence cultivation (swidden agriculture with slash and burn).21 The average number of births per woman is 4.8.


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Item

GDP Growth (%, constant) 7.0 (1995) 6.9 (2004) 6.9 (1995) 5.2 (2003) 9.5 (1995) 7.5 (2004

GDP per Capita ($, current) 377.0 (1995) 401.0 (2004) 322.0 (1995) 296.0 (2003) 287.2 (1995) 500.0 (2004Population (million) 4.6 (1995) 5.8 (2004) 10.5 (1990) 13.1 (2004) 66.2 (1990) 82.1 (2004

Population Growth (% change) 2.6 (1995) 2.8 (2003) 2.7 (1990) 1.8 (2004) 2.3 (1990) 1.6 (2004Infant Mortality Rate (below 1 104.0 (1995) 87.0 (2002) 91.0 (1992) 64.0 (2002) 44.0 (1990) 30.0 (2002

year/1,000 live births)Adult Literacy Rate (%) 60.2 (1995) 66.4 (2002) 62.0 (1990) 73.6 (2004) 88.0 (1990) 90.3 (2002Gross Enrollment Ratio (%, 104.8 (1991) 83.0

a(2002) 120.9 (1990) 123.4 (2001) 103.0 (1992) 106.8 (2002

primary)Human Development Index 0.487 (1995) 0.545 (2003) 0.512 (1990) 0.571 (2003) 0.470 (1990) 0.691 (2004Human Poverty Index 38.2 (2003) 41.3 (2003) 21.2 (2003Poverty Incidence (%) 38.6 (1998) 32.7 (2003) 39.0 (1993) 33.8 (2003) 50.7 (1990)Road (km/'000 Population) 1.0 (1999) 5.6 (2004) 0.2 (1999)Electrification Ratio (%) 16.0 (1999) 20.0 (2004) 35.0 (1999)

ADB = Asian Development Bank, GDP = gross domestic product, km = kilometer, Lao PDR = Lao People's Democratic Republic, UNDP =United Nations Development Programme.a

This figure is net enrollement ratio, while the figures in the other columns are gross enrollment ratios.

Latest Year

CambodiaEarly to Late

1990s Latest Year

in Asia: Promoting Full, Productive, and Decent Employment. Manila; UNDP. 2003. Human Development Report. New York.

Table 1: Comparison of Economic and Social Indicators in Some Greater Mekong Subregion Countries

Viet NamEarly to Late

1990s Latest Year

Lao PDR

Sources: ADB. 2005. Country Strategy and Program Update (20062008): Lao PDR. Manila; ADB. 2005. Key Indicators 2005: Markets

Early to Late

1990s

20. About one quarter of the Lao PDR population live in mountainous regions. There is highethnic diversity (more than 47 official minority groups).22 Inequality, as measured by the Ginicoefficient, is high (37%), with the northern region provinces23 being the poorest. Insufficienteffort has been made to mitigate the adverse impacts of war (e.g., contaminated land andunexploded ordinance). Progress related to the social/non-income MDG indicators remains

poor. Table A1.4 (Appendix 1) shows that slow to moderate progress was made in improvingsome of these MDG indicators. By the early 2000s, adult literacy rate was 66%; primary schoolnet enrollment rate was 83%; infant mortality rate was 87 per 1,000 live births; child mortalityrate was 106 per 1,000 live births; maternal mortality was 530 per 100,000 live births; and theproportions of the population with access to safe water and improved sanitation were 52% and51%, respectively. To further facilitate poverty reduction and more rapid improvement in otherMDG indicators, the Government endorsed the National Growth and Poverty EradicationStrategy (NGPES) in 2003, which identifies 47 priority districts24 and the same 4 priority sectorsas identified in the joint PRPA with ADB. Under the World Bank assistance, a Poverty ReductionFund was established in 2003 as part of the Poverty Reduction Strategy Papers, with subprojectactivities in 10 target districts.

21. Future Prospects for Achieving MDGs. The poverty incidence targets under theNGPES (based on the assumption of 7% GDP growth and 2.5% population growth) are 22% by

22 The unofficial figure is about 230 groups. Although ethnic diversity enriches cultural dimensions of the country, toomuch diversity can deter economic development due to barriers in languages and livelihood patterns. It can alsoresult in ethnic tensions. In 2004, the Government launched a series of military attacks on Hmong rebels in thenorthern region of the country, and offered amnesty and land to those who ceased resistance.

23 Including Bokeo, Huaphanh, Luangnamtha, Luangprabang, Oudomxay, Phongsaly, Xayabury, Xaysomboun, andXiengkhouang (see Map 1, page ix).

24 There are 142 districts in the countrys 17 provinces (including the Vientiane Municipality). Of the 142 districts, 47are classified as the poorest, 70 as poor, and 25 as non poor.


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2006, rather than 24% by 2015, as specified under the MDG targets (Table A1.4, Appendix 1).In reality, however, not all NGPES priorities were supported by the budget, and the actualaverage GDP growth achieved so far is about 6% (rather than 7%). The more likely case isprojected by the World Bank in the base case-plus scenario with the Nam Theun 2 (NT2)Hydroelectric Project, 25 under which GDP will grow around 56% per year (Table A1.5,

Appendix 1). This is expected to reduce the poverty incidence to 23% by 2015 (Table A1.6,

Appendix 1), thus achieving the income MDG target 1, as planned.

22. Estimates of MDG trends by the United Nations Development Programme (UNDP) alsoindicate that the Lao PDR is likely to realize the income MDG target 1 by 2015 (indicator 1:halve, between 1990 and 2015, the poverty incidence to 24%; and indicator 2: halve the povertygap ratio to 6%) (Figures A1.3 and A1.4, Appendix 1). However, some non-income MDGindicators on poverty under target 2 seem unlikely to be achieved based on the current trends(indicator 4: halve, between 1990 and 2015, the prevalence of underweight children under 5years of age to 20%; and indicator 5: halve the proportion of population living below theminimum level of dietary energy consumption to 16%) (Figures A1.5 and A1.6, Appendix 1).Other non-income MDG indicators on education and health (Figures A1.7A1.13, Appendix 1)seem likely to be achieved, but with more difficulty than the income indicators. For example, the

MDG target 3 (indicator 7: ensure that by 2015 the proportion of pupils starting grade 1 whoreach grade 5 will reach 95%) will be difficult to achieve under the current trend (Figure A1.5,

Appendix 1). These results imply that more effort should be directed toward improving thecapacity of public service delivery, particularly at the provincial and district levels. This isexpected to increase household income and, in turn, the demand for improved education andhealth, rather than focusing on the supply side alone (i.e., improving public revenue andexpenditure management). Improved non-income MDGs are likely to contribute to furtherpoverty reduction as projected by the World Bank study cited above. The study simulated theimpacts of key socioeconomic variables on poverty reduction using nationwide householdsurvey data.26 It was found that improved agriculture and employment (irrigation, productiveassets, and off-farm employment) had the strongest poverty reduction impact (e.g., switchinghousehold heads from being subsistence farmers to off-farm self-employed reduced poverty by

9%). Providing all villages with necessary infrastructure (e.g., electricity and piped water supply)reduced poverty by 7% and 5%, respectively. Increasing the education of household heads by 1year reduced poverty by 3%. On improving the environment through increased access to cleanwater, Figure A1.14 (Appendix 1) shows that the target is likely to be achieved (indicator 30:double by 2015 the proportion of population with sustainable access to an improved watersource).

25

In the absence of the NT2 Project (base case scenario), the estimated annual economic growth rate is 45%,compared with 68% under the high case scenario (with the NT2 Project, together with 13 smaller hydro projectsunder the Electricit du Laos (EdL) power expansion plan, improved village forestry management, and theexploitation of an additional gold-copper mine). The base case and base case-plus scenarios differ only in theassumption about the NT2 Project, while other components (mining and forestry) of the resources sector are thesame. In these two scenarios, the growth rate assumptions for agriculture (excluding forestry), industry (excludingnatural resources), and services are also the same, at 3%, 8%, and 6%, respectively, based on recent subsectorgrowth rates adjusted for factors expected to affect these sectors in the future (e.g., rice and garments areassumed to increase more slowly because of expected crop diversification and increased competition from thePeoples Republic of Chinas (PRC) accession to WTO, respectively). For the high case scenario, thecorresponding sector growth rate assumptions are 4%, 10%, and 7%, respectively.

26 The Lao Expenditure and Consumption Survey II and the Multiple Indicator Cluster Survey (2000).


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III. ASSESSMENT OF QUALITY AT ENTRY OF COUNTRY STRATEGIES: RELEVANCEAND POSITIONING

23. This chapter traces the evolution of ADBs three Country Strategies for the Lao PDR andassesses their quality at entry in terms of relevance and positioning (Figure 2). Relevance/responsiveness is a broad criterion, determining whether the Country Strategies made a

relevant choice of objectives in response to, or in harmonization with, the following four criteria(assessed in sections AD below): (i) the Governments national development strategies/plans,(ii) the countrys socioeconomic issues, (iii) ADBs corporate strategies, and (iv) countrystrategies of other key DPs. Positioning/coherence is a specific criterion, determining thedegree of coherence of the Country Strategies in narrowing down the strategic choices to themost important ones, based on the following six criteria (assessed in section E below): (i)sufficient background research on the country and sectors, (ii) Governments absorptivecapacity and ownership, (iii) ADBs comparative advantage and partnerships with other DPs, (iv)focus/selectivity and synergies, (v) long-term continuity, and (vi) constraints/risks andadjustment/monitoring mechanism to achieve measurable targets. Overall, the assessment ofrelevance and positioning is to determine whether the Country Strategies have made a relevantand coherent choice in positioning ADB as a key DP in certain priority areas, given existing

constraints.

A. Relevance of Country Strategies to the Governments National DevelopmentStrategies/Plans

24. Prior to the First Formal 1991 Country Strategy. ADB started providing lendingassistance to the Lao PDR in 1970, prior to the establishment of the Peoples DemocraticRepublic in 1975. Since there was no formal country strategy at that time, the Country Programfollowed the Governments development agenda. The evolution of the first Country Strategy in

ADBs Country Strategiesx 1991x 1996x 2001

Country Strategies

of Other Key DPs

ADBs Corporate

Strategies

GovernmentsAbsorptiveCapacity andOwnership

ADBsComparative

Advantage andPartnerships

with Other DPs

Focus/Selectivity and

Synergies

Long-TermContinuity

Countrys

Socioeconomic Issues

Criteria for Relevance:

Criteria for Positioning:

SufficientBackgroundResearch onthe Countryand Sectors

Constraints/Risks and

Adjustment/Monitoring

Mechanism toAchieve

MeasurableTargets

Figure 2: Criteria for Evaluating the Quality at Entry of Country Strategies

ADB = Asian Development Bank, DP = development partner.

Governments National

Plans/Strategies


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1991 was in parallel with the Governments intention to move the economy toward a marketsystem (Table A2.1, Appendix 2). This was followed by the 1996 Country Strategy, the 2001 fullCSP, and the annual CSP Updates (CSPUs) from 2002 to 2005. The CAPE found theseCountry Strategies to be generally responsive to the corresponding national developmentstrategies/plans. The formers strategic objectives and priority areas were closely aligned withthose of the latter, with synchronized timing. This was not surprising, as ADB provided some

ADTAs to directly and indirectly help the Government in preparing the national plans, especiallythe Third Plan.

25. 1991 Country Strategy. As shown in Figure A2.1 (Appendix 2), the objective of the1991 Country Strategy was to transform the economy into a market system through thefollowing priority areas: (i) policy and institutional reforms to encourage PSD, (ii) directinvestments in essential physical infrastructure, and (iii) selective investments in basic socialservices due to limited government absorptive capacity. 27 The importance of the ANR andfinancial sectors in the countrys transformation was subsumed under the first priority area.Poverty reduction, PSD, and gender and environmental concerns were identified as cross-cutting themes. Since the objective and priority areas of the 1991 Country Strategy were almostthe same as those of the Governments Third Plan (19911995), the CAPE rated the former as

highly responsive to the latter.

26. 1996 Country Strategy: Failure to Address Environmental Concerns. The objectiveof the 1996 Country Strategy was to facilitate a transition to a market system through thefollowing priority areas: (i) enhancing sustainable growth and broadening its impacts throughphysical infrastructure development, (ii) policy and institutional reforms to facilitate PSD, (iii)HRD and capacity development, and (iv) regional cooperation (Figure A2.2, Appendix 2). 28

Gender concerns were identified as the main cross-cutting theme, whereas PSD and regionalcooperation were part of the priority areas. The 1996 Country Strategy made the right choice inaddressing regional cooperation, since the Greater Mekong Subregion (GMS) Program wasinitiated in 1992. However, it did not address environmental concerns--either in its priority areasor as a cross-cutting theme. This concern was one of the priority areas of the Governments

Fourth Plan (19962000). Given that (i) the countrys extensive areas of primary tropical forestand biodiversity were under threat from commercial logging, shifting cultivation, upland erosionand consequent watershed deterioration, and flooding by hydroelectric reservoirs; and (ii) thecountrys comparative advantage was in resource-based products (in particular hydropower,timber, and minerals), the failure to address environmental issues as cutting across sectorsresulted in environmental problems, such as those associated with the Nam Leuk HydropowerProject (approved in 1996). The countrys overall environmental outlook has not been favorableas indicated by a recent low Environmental Performance Index score of 52.9 (out of 100) for theLao PDR, ranking 102nd out of 133 countries.29 Environmental issues are important in the LaoPDR. Due to this strategic gap, the 1996 Country Strategy is rated as partly responsive to theFourth Plan.

27. 2001 CSP. The 2001 CSP focused on poverty reduction, while emphasizing communityparticipation, through three ADB-wide pillars: (i) pro-poor, sustainable economic growth; (ii)

27 Seven sectors were recommended in the 1991 Country Strategy: ANR, industry/finance, energy, transport,education, health, and water supply.

28 Eight sectors were recommended in the 1996 Country Strategy: ANR, finance, energy, transport, education, health,water supply, and urban development.

29 This index was calculated for 2006 by the Yale Center for Environmental Law and Policy and the Center forInternational Earth Science Information Network at Columbia University. The index was tracked in six establishedareas of environment: environmental health, air quality, water resources, biodiversity and habitat, productivenatural resources, and sustainable energy.


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inclusive social development; and (iii) good governance through policy and institutionaldevelopment (Figure A2.3, Appendix 2). The 2001 CSP identified four priority areas for ADBinterventions: 30 (i) rural development and market linkages; (ii) HRD; (iii) sustainableenvironmental management; and (iv) PSD and regional cooperation, with geographic focus onpoor regions/provinces, particularly in the North (see footnote 23). Governance andenvironmental concerns became part of the strategic pillars and priority areas. These four

priority areas also reflected the Governments four priority sectors (agriculture and ruraldevelopment, education, health, and road transport) identified in the NGPES. Since theGovernments Fifth Plan (20012005) also focused on poverty reduction, with the NGPES as itslong-term poverty reduction strategy, the 2001 CSP is rated as highly responsive to theGovernments strategy/plan.31

28. Although the GMS Program was initiated in 1992, ADB prepared its first RegionalCooperation Strategy and Program (RCSP) only in March 2004 to support a 3-year rolling GMSProgram (20052007). The RCSP Update (RCSPU) was prepared in 2005. Most of the 2001CSP priority areas were echoed in the 2004 RCSP, with substantial consistency. During the 13 th

GMS Ministerial Conference held in December 2004, three priority areas were emphasized inthe GMS action plan: (i) enhancement of connectivity, (ii) promotion of competitiveness, and (iii)

development of a greater sense of community. These priorities were the pillars of the 2005RCSPU to guide GMS operations and achieve the GMS vision.

29. Overall. Based on the above findings, the objectives and priority areas of the combinedthree periods of the Country Strategies are generally found to be relevant/responsive to thoseof the Governments national development strategies/plans. They are not considered highlyrelevant because of the strategic gap in not addressing environmental concerns, at least as across-cutting theme, in the 1996 Country Strategy.

B. Relevance of Country Strategies to the Countrys Socioeconomic Issues

30. 1991 Country Strategy. The degree of relevance of a country strategy depends on the

depth of its reach into the core of prevailing socioeconomic problems. During the first few yearsafter the 1986 introduction of the NEM, the country experienced difficulties becauseinefficiencies inherited from the centrally planned regime could not be resolved quickly. The1991 Country Strategy aimed at helping the country to move to a market system. The CAPEconsiders it as highly responsive to the socioeconomic problems facing the country at thattime, since the two priority areas covered (viz., policy reforms and physical infrastructure) wereneeded to move the country forward (Figure A2.1, Appendix 2).

31. 1996 Country Strategy: Failure to Address Governance Issue.Although the country,with the assistance from key DPs, was able to achieve sweeping policy reforms during the firsthalf of the 1990s, progress in translating the new policies into administrative actions was slow(para. 14). Based on the World Banks evaluation of its SAC I and SAC II, the countrys overall

macroeconomic position remained fragile due to weak governance and corruption (Figure A2.2,Appendix 2). The 1996 Country Strategy continued the market-orientation mandate, with fourspecific priority areas (economic growth, policy reforms to promote PSD, HRD and capacitydevelopment, and regional cooperation), but without addressing the weak governance system

30 The sectors recommended in the 2001 CSP were the same as those in the 1996 Country Strategy.31 The Governments strategy is being implemented through an action plan to the year 2010 (approved in 1996 by the

National Assembly). The action plan is being carried out in two stages: (i) improved economic base to ensuresustained growth (20012010), and (ii) high economic growth with improved equity and access to

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Lao PDR - Country Assistance Program Evaluation