Regions and Countries

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p. 10 of 20 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Private Sector Development IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Lao People's Democratic Republic : III. Sector Strategies

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B. Infrastructure

1. Energy

46. Hydropower production is the major nonagriculture industry in Lao PDR in terms of contribution to GDP, the Government's budget, and export revenues. Lao PDR is estimated to have 18,000 megawatts (MW) of hydropower generation potential, almost all in the central region. To date only 623 MW have been developed. The Government has decided to accelerate the development of hydropower generation in order to substantially increase electricity exports to neighboring countries, particularly Thailand. Difficulties in raising the required funds, the current uncertainty of energy demand by Thailand for Lao generated hydropower production, and increasing concerns on the social and environmental aspects beset potential projects. Despite this large potential, only 17 percent of the Lao population—particularly only 2 percent of rural households—are connected to the power grid, one of the lowest levels of electrification in Asia.

47. Key concerns in this sector include:

1. increasing domestic tariffs in line with the financial cost of production to improve the financial situation of Electricite du Laos;

2. improving the sector’s capacity to meet demands for rural electrification and those posed by subregional cooperation;

3. continued support for private sector participation in the sector;

4. solicitation and review of foreign investment proposals in a transparent manner; and

5. integrating social and environmental elements into hydropower development planning and implementation.

48. The World Bank has been involved in the build-own-operate-transfer arrangement for the proposed Nam Theun 2 Hydroelectric Project. The World Bank has also assisted in Southern Provinces Rural Electrification. Bilateral donors including Australia, and Japan have been involved in non-grid rural electrification. Private institutions from Australia, France, Republic of Korea, Japan, and Thailand have actively participated in developing the sector.

49. ADB is currently preparing an Energy Sector Strategy Study, which will provide the basis for its interventions in the energy sector in Lao PDR over the next 5-10 years. ADB is expected to assist rural areas in increasing access to electricity, which is a key component in poverty reduction. To this end, the Northern Area Rural Power Distribution Project is included in the 2002 program (PPTA in 1998). Off-grid electrification through renewable sources is considered an attractive option in remote scattered communities. A PPTA for Renewable Energy Development will be processed in 2002 to develop micro-hydropower off-grid electrification in remote areas.

2. Transport

50. The key to future sustainable economic growth and poverty reduction in Lao PDR is the development of an integrated market economy. Transport infrastructure development is critical to providing increased access to markets and economic opportunities. With the high priority given to road development by the Government and donors during the last decade, half the national roads are paved. Nevertheless, less than 2 percent of the provincial roads are paved and most rural communities still do not have year-round road access to markets. Clearly, more roads need to be developed.

51. However, on the other hand, there is an increasingly urgent need to strengthen capacity to adequately maintain existing assets. Maintenance expenditure has not been consistent with efficient management and service delivery. This resulted a rundown in many road sector assets. Careful analysis of recurrent cost implications is required in planning new investments. Particular care is needed in planning financial arrangements for subregional projects where a relatively large share of benefits may accrue to other countries. There is also an increasing need for early integration of social and environmental concerns and opportunities in road planning and development, particularly in rural areas. Logging needs in relation to road construction should be carefully assessed and necessary measures should be appropriately implemented to ensure that transport infrastructure will not be used to facilitate illegal logging.

52. The World Bank, together with ADB and Sweden, is currently discussing establishment of a 12-year road maintenance program with the Government. Australia and Japan have also been involved in roads and bridge construction over the past decade. Sweden, Germany, UNDP and the United Nations International Drug Control Programme (UNDCP) have assisted rural roads development.

53. ADB has assisted the Government in preparing a Road Sector Strategic Vision, providing the sector-wide framework for future road investments. ADB’s focus in the transport sector will be twofold:

1. developing strategic corridors with subregional linkages; and

2. focusing on linkages between national networks and rural roads to assist poverty reduction efforts.

However, such rural access road network development should be accompanied by adequate funding, staffing, and system for sustainable operation and maintenance, including enhancing community participation in the construction and maintenance of rural access roads.

54. Within the planned program is the Rural Access Roads Project in 2000 (PPTA in 1998). The project will provide market access roads in remote areas to support agriculture and rural development efforts. The proposed follow-up project of Rural Access Roads II is planned in 2003 (PPTA in 2001). ADB’s 2003 program in the transport sector also includes the proposed GMS: Northern Economic Corridor Project, linking Kunming and Chiang Rai through Northern Lao areas (see para. 82). An ADTA for Strengthening Social, and Environmental Management in the Road Sector will be processed in 2000. ADB will also provide an ADTA for Implementation of the Road Sector Strategy in 2001.

3. Banking and Finance

55. The very low level of financial intermediation in Lao PDR, combined with the dollarization of the economy, poses a major threat to macroeconomic stability. The weakness of banking system also makes it difficult to effectively mobilize and allocate domestic financial resources, which is essential to reduce the economy’s dependence on foreign assistance. The unsustainable degree of non-performing loans continues to hamper development of overall banking system. Restoration of confidence in the financial system as well as market based lending will be key concerns in developing the formal financial sector.

56. The Lao banking system is characterized by a geographical concentration in Vientiane and large cities. Development of a formal banking system should closely link with the development of microfinance. Microfinance is important in a country such as Lao PDR where around 90 percent of population do not have access to formal banking services. Microfinance has only started to develop in the last five years and hence its capacity is very limited. However, the recent establishment of a pilot microfinance scheme is already showing that it is possible to implement microfinance with a focus on the poor, especially women, and with sustainable interest rates and full repayment.

57. A key component in the sector is the development of a vigorous private sector. Therefore, ADB will help mobilize domestic resources for productive investments that will promote sustainable private sector-led economic growth. ADB, jointly with the World Bank, has prepared a Financial Sector Note, which aims to initiate a substantive dialogue between the Government and the donor community on the policy reforms required to strengthen the financial system in Lao PDR. Following the discussions, a Joint Financial Sector Strategy will be prepared by ADB and the World Bank in consultation with the Government to reflect the consensus reached on the nature of challenges and future policy directions.

58. To assist the Government in building the necessary capacity in the sector, ADB will process two ADTAs, Strengthening Corporate Governance and Management of State-owned Commercial Banks (SOCBs) I and II, in 2000 and 2002, respectively, which will help promote adherence of SOCBs to prudential regulations and good corporate governance activities over the medium term. The Financial Sector Development Project is programmed in 2002 (PPTA in 2001), with possible cofinancing with the World Bank. The project will continue ADB’s involvement in the banking and financial sector through institutional strengthening of BOL and SOCBs for sound banking systems and practices and building a strong foundation for sustainable commercial operations. A loan for Rural Finance Development will be processed in 2003 (PPTA in 2002) on achievements of the ongoing cluster TA approved in 2000 (see para 42).

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