Countries and Regions

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p. 3 of 7 BACK | NEXT Executive Summary I. Development Agenda II. ADB's Development Experience III. ADB's Strategy IV. Operational Approach V. Three-Year Assistance Program VI. Performance Monitoring and Evaluation

Country Strategy and Program 2002-2004: Lao People’s Democratic Republic

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II. ADB’s Development Experience

A. Factual Summary of ADB Assistance

24. ADB has approved 49 loans totaling $887.5 million, and 174 technical assistance (TA) grants totaling $83.5 million to the Lao PDR from 1968, when operations there began, until the end of 2000 (Table 2). Nearly half of all ADB loans were approved in the last five years. Until the 1980s, assistance focused on transport and energy infrastructure development. Since the late 1980s, ADB has promoted financial sector development. The focus of support broadened during the 1990s to include rural development, social development, and the environment.

B. Summary Evaluation of ADB Assistance

25. The last country operational strategy study (COSS) for the Lao PDR was prepared in July 1996. The strategy placed high priority on sustainable economic growth through infrastructure investments, and secondary but important emphasis on policy reform, social services, and human development. The COSS also emphasized subregional cooperation to enhance the landlocked economy’s market opportunities.

1. Relevance

26. The COSS continues to be relevant to the Lao PDR’s development constraints. Infrastructure development is a clear priority for a country that has a small, scattered, and remote population, and mountainous terrain. ADB’s past investments have considerably improved the national road network. The key concerns now are to (i) ensure sustainability of infrastructure, (ii) better address development’s adverse social and environmental impacts, and (iii) ensure that the social and economic benefits of development are equitably distributed. To improve relevance, selected social services should be targeted at poor areas, and operations’ equity issues explicitly addressed. ADB interventions can be made more relevant by (i) building on past interventions and/or complementing ongoing interventions, (ii) ensuring direct linkages among all elements of the strategy, and (iii) paying more attention to developing medium-term approaches to addressing financial and institutional weakness.

2. Efficiency

27. ADB assistance should be more consistently efficient and effective. ADB support in some sectors (e.g., transport) has been relatively efficient, but less so in others. The cost efficiency of ADB support could be increased by a narrower geographic focus, and better project designs that take into account real institutional capacities. Greater emphasis on community-based rural infrastructure projects might be more costly in terms of time and ADB staff resources for preparation, but the cost savings to communities and the Government could be substantial in the long term. Increased involvement of local communities in project preparation and implementation could make development projects more efficient. Recent experience suggests that a series of loosely related TA projects is not a cost-efficient modality for institutional strengthening. Institutional strengthening is an ongoing process, and any assistance must take a sufficiently long-term view of the institution’s development needs. Without a strongly committed host agency, development impact will be unsatisfactory.

3. Effectiveness

28. ADB-financed projects have contributed to economic, social, and institutional development, and to recent progress in reducing poverty. Long-term support to power, road transport, and other infrastructure development has developed physical assets and institutional capacity, enhancing economic opportunities for isolated rural communities. ADB support to primary health and education activities is beginning to improve service delivery and to make it more equitable. ADB has also created a decentralized institutional framework through urban sector interventions. However, the road network is underutilized because of inadequate linking of infrastructure developments to market opportunities and improved social services. Past gains in infrastructure development may be undermined by inadequate attention to O&M expenditure, and the impact of the recent regional financial crisis on resource mobilization. Development could have been more effective if more attention had been paid to (i) analyzing local conditions, (ii) identifying priority needs, and (iii) ensuring community participation and ownership in the development process, and if support to sector development had been focused and sustained in line with clearly articulated sector strategies agreed upon by the Government, ADB, and other development partners. ADB support to policy and institutional reform in key sectors such as agriculture, finance, and water supply has been less effective than envisaged.

4. Major Sector Reviews: Success and Failures

29. Recently completed and ongoing economic and sector work that fed into this country strategy and program (CSP) included (i) agriculture, education, rural finance, road, energy, environment, and urban sector strategy studies; (ii) studies on primary health care, financial sector, and private sector; and (iii) the medium-term expenditure framework and public investment program. Key operations evaluation findings include the following:

a. Agriculture and Rural Development

30. Rural infrastructure has been developed and agriculture production increased. Ministry of Agriculture and Forestry capacity in planning, policy analysis, applied research, and extension has been strengthened. The policy environment for private investment and trade in agriculture has improved. Agriculture along the Mekong river corridor has become more commercialized. Overall rice yields have increased with the improvement of irrigation systems. However, concerns include: the sustainability of some past investments, especially in irrigation; deforestation due to shifting cultivation; the limited scope for crop diversification and nonfarm employment; and the limited coverage and cultural inadequacy of research and extension services, especially in remote ethnic minority areas.

b. Environment

31. ADB has helped strengthen institutional capacity, develop new environmental regulations and safeguards, increase awareness of environmental issues, conduct environmental impact assessment of some investments, and improve some urban environments. Some ADB investments in hydropower, however, have had unanticipated adverse environmental impacts; the integration of environmental issues into economic planning is weak, as is capacity to enforce environmental safeguards; and civil society is not yet fully involved in environmental protection.

c. Education

32. ADB has helped improve coverage of basic education through school construction and rehabilitation; redress gender imbalances in education; introduce curriculum reform; and improve teacher quality. However, the Lao PDR still lags behind its neighbours in education quality, coverage, and gender equality, and the country’s capacity to sustain and effectively use education assets developed with ADB and other funder support is doubtful. The community must participate in development so that project designs can reflect local conditions and thus make investments more efficient.

d. Health

33. ADB has helped bring primary health care services to the poor by supporting village health centers and providing health kits to isolated communities. However, health indicators remain among the lowest in the region, and capacity to plan and deliver health care services and to undertake financial management is still weak. Greater community participation is critical to make investments more efficient.

e. Urban Development and Water Supply and Sanitation

34. ADB assistance in urban infrastructure and services has improved the urban environment. ADB has engaged in policy dialogue with the Government, focusing on decentralized urban governance and emphasizing mobilization of local resources, and cost recovery measures as integral elements of institutional reform and prerequisites for sustainable delivery of services. ADB urban sector projects led to the establishment of urban local administrations and creation of fiscal frameworks for local revenue generation. Capacity building of UDAAs has been an important component of ADB assistance. However, the following need improvement: (i) analysis of local conditions and needs, (ii) stakeholder involvement, and (iii) attention to sustainability and institutional capacity issues.

f. Transport

35. ADB has contributed to substantial progress in expanding transport infrastructure, increasing the access of many towns to national and regional markets, and developing institutional capacity of transport agencies. ADB has promoted subregional cooperation in transport development, including projects to improve the links among the Lao PDR, Viet Nam, and Thailand. Still, most rural communities do not have reliable access to markets, and most provincial roads remain unpaved. O&M systems must be improved, and social and environmental concerns and barriers to maximizing economic benefits from transport development must be addressed.

g. Power Supply

36. ADB-financed hydropower generation and transmission projects have increased budget revenue and foreign exchange earnings by exporting electricity to Thailand. ADB support has also played a catalytic role in attracting additional private and other financing. Major weaknesses in past support are inadequacies in addressing social and environmental concerns, tariffs and financial sustainability, domestic consumption, and contract management.

h. Financial Sector Development

37. Despite some successes (e.g., in skills development and building the legal and regulatory infrastructure), ADB support to the financial sector has not generated the expected results. The system introduced has not been effectively implemented. The sector remains constrained by poor loan recovery, weak management, inadequate prudential control, weak outreach and/or coverage, and dominant state-owned financial institutions. Basic market institutions that play a critical role in financial sector development (land mortgage systems, foreclosure systems, and the auditing and accounting professions) remain poorly developed. ADB needs to continue to promote financial sector development, but should be innovative in improving performance by strengthening the Government’s commitment to financial sector reform.

i. Gender and Social Development

38. Despite the increased attention paid to gender and ethnic equity, women and ethnic minorities still remain marginalized in the development process. ADB should help strengthen institutional capacity to address these issues.

C. Portfolio Performance and Status

39. The overall portfolio performance of ADB projects in the Lao PDR could be improved but is generally satisfactory. The contract award ratio at the end of 2000 was 24.5 percent (disbursement ratio of 21.3 percent) compared with ADB’s overall ratio of 21.0 percent (20.5 percent for disbursements). Following a country portfolio review in 2000, ADB and the Government agreed on a time-bound action plan that includes monitoring contract awards, submission of audited financial statements, and compliance with loan covenants; strengthening procurement management; improving budgeting and allocation procedures; and simplifying fund flow management mechanisms and disbursement procedures. The ADB Lao Resident Mission (LRM) and Committee for Planning and Cooperation (Department of International Economic Cooperation) closely monitor action plan implementation through quarterly portfolio review meetings (QPRMs) with national project directors. Weak institutional and human capacity still constrain efficient implementation of many projects.

40. Of 12 postevaluated ADB projects, 33.3 percent were classified as generally successful and 58.3 percent as partly successful, compared to 56.0 percent and 32.5 percent ADB-wide, and 45.9 percent and 32.7 percent in group-A countries¹¹ , respectively. The ratio of projects classified as unsuccessful is 8.3 percent, lower than ADB’s overall 11.3 percent, and group- A countries’ 21.4 percent. All transport projects are rated as generally successful. Half the energy sector projects were rated as generally successful, with the remaining partly successful. All social and most agriculture sector projects were rated partly successful.

D. Conclusions and Lessons for the Country Strategy and Program

1. Effective Poverty Reduction

41. Poverty is linked to limited access to resources, services, and opportunities. The benefits of economic growth have not been distributed equitably, with rural and isolated areas benefiting much less than urban areas. Few ethnic minorities have received the benefits of development, with women benefiting less than men. Given widespread poverty and low per capita income, economic growth must remain a priority, but assistance should help achieve equitable development.

42. Progress in human development has been slow. Despite substantial support to human development, its key indicators are among the lowest in the region. Isolated rural populations and women are the worst affected. The quality and coverage of social services must be improved, but current expenditure is insufficient to pay teachers and health workers. Targeting of the poorest areas has had only limited success. Unsustainable expansion of physical assets at the expense of adequate operations and maintenance budgets should be avoided.

43. Weaknesses remain in managing and enforcing environmental safeguards. Rapid population growth and resource-based development increase the need for sustainable management of natural resources.

44. Private investment and economic integration can help reduce poverty. The greatest progress in improving economic opportunities has occurred in the Mekong river corridor where the private sector has developed due to access to domestic urban and international markets. Barriers to private investment and economic integration must be dismantled to reduce poverty and achieve development goals

2. Policy and Project Design Weaknesses

45. Tangible progress in policy and institutional reforms is the prerequisite for efficient ADB investment, as reflected in dialogue and agreements reached with the Government during annual programming. ADB should not “force” dialogue and policy reform, but must help the Government identify and “own” the reform process. Stakeholder participation in project design, implementation, O&M, and use will make the project more effective.

46. Domestic resource mobilization, public finance management, and expenditure accountability should be emphasized. Key concerns relate to the need to (i) improve resource mobilization and reduce Government dependence on ODA financing; (ii) balance capital and recurrent expenditure; (iii) sustain assets developed with ADB support; and (iv) improve community participation in and transparency and accountability of interventions.

47. Coordination between development projects must be strengthened. Opportunities to build on earlier or parallel development projects have not been fully realized because of the lack of medium-term sectoral and/or regional development strategies developed by the Government in consultation with major development partners, and the lack of geographic focus in ADB activities.

48. Implementing agencies’ capacity in project design, procurement, financial management, and community mobilization must be analyzed. TA to address institutional weaknesses must have an adequate time frame.

49. ADB assistance must strengthen the Government’s capacity to analyze the potentially adverse social and environmental impacts of infrastructure projects and needs of diverse socioeconomic subgroups, and the design and enforcement of measures to maximize the social and environmental benefits of ADB investments.

3. Weaknesses in Program and Project Monitoring

50. Effective monitoring of ADB assistance at all levels could make ADB assistance more effective and efficient. The establishment of the LRM was an important step to improve monitoring. The following improvements are still required under the CSP:

1. Country program-level monitoring . ADB’s program needs to be monitored against verifiable indicators of progress in implementing policy and institutional reforms.
2. Project-level monitoring . Effective project monitoring requires adequate resources for regular assessment of development impact via consultations with intended project beneficiaries. The Government has stressed the need for lower ADB staff turnover and longer review missions with greater emphasis on in-field inspection. There is a need to further strengthen the LRM’s capacity for project monitoring through provision of additional international staff for rural development and social sectors.
3. Community-level Monitoring. Given the difficulty of reaching many project sites, and the weak capacity of many local authorities, community-level monitoring must be emphasized. The geographic scale of high-risk projects should be limited to facilitate monitoring.

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