ICRR 13162 Report Number : ICRR13162 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 11/18/2009 PROJ ID : P096710 Appraisal Actual Project Name : Third Lao Pdr Poverty Project Costs (US$M): US$M ): 14.6 15.2 Reduction Support Operation Grant Country : Laos Loan/ US$M): Loan /Credit (US$M): 10.0 10.6 Sector Board : PO Cofinancing (US$M ): US$M): 4.6 4.6 Sector (s): Central government administration (52%) Health (12%) Power (12%) Banking (12%) General education sector (12%) Theme (s): Public expenditure financial management and procurement (33% - P) Administrative and civil service reform (17% - S) Education for all (17% - S) Regulation and competition policy (17% - S) Health system performance (16% - S) L/C Number : CH299 Board Approval Date : 06/05/2007 Partners involved : PHRD Closing Date : 03/31/2008 03/31/2008 Evaluator : Panel Reviewer : Group Manager : Group : Rene I. Vandendries Kris Hallberg Ismail Arslan IEGCR 2. Project Objectives and Components: a. Objectives: The Laos poverty reduction support program, a series of three Poverty Reduction Support Operations (PRSOs), had three main Development Policy Objectives (DPOs). First, to strengthen public resource management, through increased efficiency and transparency . Second, to increase the poverty reduction impact of public spending. Third, to promote sustainable growth and increase resource availability for development objectives . b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): The three DPOs had the following components (or sub-objectives). DPO 1: Public Resource Management (1) Strengthen Public Expenditure Management (PEM) (2) Strengthen the banking sector (3) Improve the performance of State -Owned Enterprises (SOEs) (4) Promote the financial sustainability of utilities . DPO 2: Poverty Reduction Impact of Public Spending (1) Align public spending with pro-poor national goals (2) Monitor the alignment. DPO 3: Sustainable Growth (1) Strengthen private sector development (2) Accelerate regional and global integration (3) Improve natural resource management . The DPOs and their components remained the same throughout the series of PRSOs . There were 10 prior actions for PRSO 1, 10 for PRSO 2 and 11 for PRSO 3, in varying degrees covering all three DPOs . There were also 13 indicators to measure progress, which also remained the same throughout the series of PRSOs . There were five indicators in the area of DPO 1 (progress in fulfilling HIPC-defined PEM indicators, timeliness of budget execution, percent of loss -making SOEs, losses of SOEs, and cost recovery in the electricity sector ), four indicators in the area of DPO 2 (net primary school enrollment, percent of the budget allocated to education and health, percent of rural access to electricity, percent of births delivered by trained personnel ) and four in the area of DPO 3 (number of days to start a business, percent of non -performing loans, percent of products entered in regional tariff agreements, and the public revenue to GDP ratio ). This ICR review covers the achievements of PRSO 3 which also implies the achievements of the program of PRSOs as a whole. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Bank support for the program as a whole was US$ 28 million. PRSO 1 was approved on 3/31/2005 for US$10 million (US$4.5 million IDA credit and US$5.5 million IDA grant) fully disbursed and closed on schedule on 12/31/2005. PRSO 2 was approved on 4/27/2006 for US$8 million IDA grant, fully disbursed and closed on schedule on 2/28/2007. Japanese cofinancing amounted to US$ 4.2 million. PRSO 3 was approved on 6/5/2007 for US$10 million IDA grant, fully disbursed and closed on schedule on 3/31/2008. Japanese cofinancing amounted to US$4.6 million. The European Commission provided parallel financial support . 3. Relevance of Objectives & Design: The objectives of the PRSO series were highly relevant and in line with Laos' poverty reduction objectives embodied in country strategy documents (equivalent to PRSPs) prepared in 2004 and 2006. The program was an integral part of the CAS, and the emphasis on improvements in budgetary management and in the poverty-reducing impact of public spending was especially appropriate : optimum allocation of the new revenues expected to be generated from the large Nam Theun 2 hydroproject, which was receiving simultaneous Bank support, was of vital importance to support poverty reduction, human development and environmental goals . While it could be argued that the absence of focus on rural development in this program for Laos was a shortcoming, previous experience has suggested that, given the country's capacity constraints, coverage of any given program should be kept limited . On the basis of the above, relevance of the objectives is rated substantial. In designing the program the Bank took account of the unsatisfactory outcomes of earlier Bank budget support operations and helped promote better inter -ministerial coordination through the creation of a PRSO Steering Committee and through ensuring adequate TA to support the program . Given the country's limited technical capacity and the still rudimentary state of government and the market economy, the objectives were relatively timid, but the programmatic nature of Bank support was expected to foster continuity of reform . At the same time, project design had an important shortcoming in the poor quality of the M&E system . In particular, poverty measuring could have been incorporated in project design, and more meaningful indicators for private sector development outcomes, such as the level of domestic investment and of Foreign Direct Investment, could have been developed, instead of the rather trivial "number of days to start up a business ." Relevance of design is rated substantial. 4. Achievement of Objectives (Efficacy): In view of the state of development of the Laotian economy at the start of the series of PRSO operations, and given the unsatisfactory outcomes of earlier Bank support, it is unquestionable that progress has been made . But progress has been exceedingly slow in many areas, including public expenditure management, banking sector or state economic enterprises' reform, or in better aligning public spending with poverty reduction goals . On the positive side, there was good progress in improving the financial viability of utilities and in laying some foundations for future private sector development through steps to promote regional and global integration as well as natural resource management . DPO 1: Public Resource Management (a) Strengthen Public Expenditure Management (PEM) The PRSO series was instrumental in introducing key ingredients towards an improved PEM system . Implementation of a Public Expenditure Management Strengthening Plan (PEMSP), with focus on capacity building, began during PRSO 1, a budget with priority expenditure sectors was prepared and a new Government Financial Information System was launched . These activities were strengthened under PRSO 2, and a revised budget law with a new organizational structure for the Ministry of Finance was drafted . By the end of the PRSO series, budget execution had become more timely and transparent : while finalization and publication of the budget previously took respectively 5 and 16 months after the start of the fiscal year, these delays had been reduced to 2 and 6 months by the end of the series, still below the programs' target of 0 and 1 months. A new Budget Law is expected to improve central -provincial fiscal relations. Through its chairmanship of the PRSO steering committee, the Ministry of Finance (MOF) also helped build ministerial understanding of the reforms and thus improve the dialogue between the MOF and line ministries . Progress in meeting HIPC-defined PEM indicators was substantial but also below target : from 0 in the base year, the target was to meet 13 out of 15; it is now expected that 11 will have been met by end-2009. At the same time, progress in procurement reform has been slow. (b) Strengthen the Banking Sector Steps taken in this area included the hiring of international financial advisors and carrying out audits . The quantitative objective was timid, i .e. "a reduction" in outstanding non-performing loans (NPLs) which stood at 64 percent in the base year. While progress was made it was exceedingly slow during PRSO 1 and 2. More progress was made during PRSO 3, by the end of which the percentage of NPLs stood at 4.2 percent. But there has been backsliding since and the sector remains rudimentary, a continuing fiscal risk, and a major impediment to private sector growth. There is little evidence of a fundamental shift in management culture . (c) Improve the Performance of State-Owned Enterprises (SOEs) Progress was made especially through strengthened oversight . The largest SOEs have been restructured . The rather timid targets of "a reduction" in the percentage of loss-making SOEs and in the sum-total of SOE losses, at respectively 30 percent and 200 billion kip in the base year, were both achieved by small margins during PRSO 1. More recent but sketchy data point to further but slow improvement . (d) Promote Financial Sustainability of Utilities The expected outcome was improved cost recovery and significant progress has been made through regular tariff increases over the program period . The quantitative target was an increase in cost recovery in the electricity sector from a base line of 83 percent to 102.5 percent by 2011: cost recovery increased to 90.5 percent during PRSO 1, 93.1 percent during PRSO 2, and the sector was profitable by 2008. The proportion of water utilities operating at full cost recovery also rose, by 24 percent over the program period . Modest progress in PEM, banking sector reform and SOE performance, together with substantial progress in the financial performance of utilities, suggest a modest rating for efficacy. DPO 2: Poverty Reduction Impact of Public Spending (a) Align Public Spending with Pro-poor National Goals The quantitative targets were an "increase" in net primary enrollment, an "increase" in the percent of the budget allocated to education and health, an increase in the percentage of rural access to electricity from 41.2 percent in the base year to 55 percent by 2010, and an "increase" in the percentage of births delivered by trained personnel. Net primary enrollment increased marginally from 83 percent in the base year to 84 percent during PRSO 1, PRSO 2, and PRSO 3. The percent of the budget allocated to education and health increased, but erratically, from 15.4 percent in the base year to 18.7 percent during PRSO 1, but then declined to 17.8 percent during PRSO 2 and 17.3 percent during PRSO 3. Separating education from health, ICR data suggest the following percentages allocated . Education: base year: 11.1; during PRSO 1: 13.4; during PRSO 2: 11.6; during PRSO 3: 14.5. Health: base year: 4.3; during PRSO 1: 5.3; during PRSO 2: 6.2; during PRSO 3: 2.8. The picture that emerges is one of some overall progress, at least in education but not in health; but, the lack of quality evidence in this area is disconcerting . The percent of rural access to electricity did increase from 41.2 percent in the base year, to 44.6 percent during PRSO 1 and PRSO 2, and 60 percent during PRSO 3, exceeding the target. Likewise, the percent of births delivered by trained personnel increased from 17 percent in the base year to 25.8 percent during PRSO 2 and 23 percent by the end of the program . The upshot is that some but very limited progress took place . (b) Monitor the Alignment The ICR gives no information, except that a PER has been completed, but the data provided are sketchy and not convincing. Marginal progress towards DPO 2 suggest an efficacy rating of modest. DPO 3: Sustainable Growth (a) Strengthen Private Sector Development A comprehensive strategy for private sector development and trade has been prepared . Revised foreign and domestic Investment Laws were a prior action for PRSO 1. A new Enterprise Law, based on international best practices in business regulations, was approved by the National Assembly during PRSO 1 and implementation began during PRSO 2. The quantitative target, the number of days needed to start a business, declined from 198 in the base year, to 163 by the end of PRSO 2 and 103 by the end of PRSO 3. Unfortunately, no evidence is provided on the impact of these reforms on trade or investment activity . (b) Accelerate Regional and Global Integration Good progress was made in this area . Laos entered regional and international agreements that require increased transparency and specific policies . By the end of 2006, all traded products were included in Asian Free Trade Area tariff ranges, and the country is committed to access to WTO . (c) Improve Natural Resource Management A Forest Industry Restructuring Plan to rationalize industrial capacity and resource supply was a prior action for PRSO 3 and was instrumental in, among others, raising government revenues . The quantitative target on the government revenue to GDP ratio, i.e. "an increase" was achieved as the ratio increased from 11 percent in the base year, to 11 percent by the end of PRSO 1, 11.4 percent by the end of PRSO 2 and 14.2 percent by the end of PRSO 3. However, the ICR provides no details on the likely sources of this increase . On balance, progress made towards DPO 3 suggests an efficacy rating of substantial. 5. Efficiency (not applicable to DPLs): N/A ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re- re -estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal % % ICR estimate % % * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The relevance of the PRSO series and of each individual operation was substantial, as discussed in section 3 above. The efficacy in terms of improving public resource management and the poverty -reducing impact of public spending, however, was modest, in contrast to the significant progress made towards laying some of the foundations for sustainable growth . On balance the outcome is rated moderately satisfactory. a. Outcome Rating : Moderately Satisfactory 7. Rationale for Risk to Development Outcome Rating: Government commitment to sustaining the reform program is expected to remain strong as witnessed by a new series of Bank-supported PRS operations. But the dependence of the economy on a few primary commodities for growth and fiscal revenue mobilization entails important risks . a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: The risks involved in initiating PRSC lending to Laos were well recognized by the Bank, mitigation measures were put in place and, in retrospect, the decision to proceed appears justified given the progress made towards the beginnings of a reform process in Laos . Bank supervision intensified as the Task Team Leader moved to the field. Starting with PRSO 2 cofinancing materialized. But the poor quality of the M&E framework was an important shortcoming in design and quality -at-entry. at -Entry :Moderately Satisfactory a. Ensuring Quality -at- b. Quality of Supervision :Satisfactory c. Overall Bank Performance :Satisfactory 9. Assessment of Borrower Performance: The borrower demonstrated commitment to reform by engaging in a constructive dialogue with the Bank and other donors, building local appreciation of the reforms and chairing the PRSO Steering Committee . Solid achievements included the progress towards cost recovery in the utilities sector and moving the economy gradually towards closer regional and global integration . a. Government Performance :Satisfactory b. Implementing Agency Performance :Satisfactory c. Overall Borrower Performance :Satisfactory 10. M&E Design, Implementation, & Utilization: Monitoring of the general progress of the reform program was done through ascertaining compliance with prior actions for each operation and with triggers for the next . On the other hand, while an M & E framework was designed, the targets set for the progress indicators that were chosen were often phrased vaguely as "increases" or "reductions" rather than as concrete outcomes . M&E design is rated modest. But, the lack of reliable data for many of the indicators made implementation and utilization of the M and E framework moot; both are rated negligible. a. M&E Quality Rating : Negligible 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): The following is a summary of the ratings for all three PRSOs . Ratings ICR IEG Review Comments Outcome PRSO 1 Satisfactory Moderately Satisfactory See Section 6 PRSO 2 Satisfactory Moderately Satisfactory See Section 6 PRSO 3 Satisfactory Moderately Satisfactory See Section 6 Risk to Development Outcome PRSO 1 Low Moderate See Section 7 PRSO 2 Low Moderate See Section 7 PRSO 3 Low Moderate See Section 7 Bank Performance PRSO 1 Satisfactory Satisfactory PRSO 2 Satisfactory Satisfactory PRSO 3 Satisfactory Satisfactory Borrower Performance PRSO 1 Satisfactory Satisfactory PRSO 2 Satisfactory Satisfactory PRSO 3 Satisfactory Satisfactory ICR Quality PRSO 1 Satisfactory PRSO 2 Satisfactory PRSO 3 Satisfactory 12. Ratings : 12. ICR IEG Review Reason for Disagreement /Comments Outcome : Satisfactory Moderately See Section 6 Satisfactory Risk to Development Negligible to Low Moderate See Section 7 Outcome : Bank Performance : Satisfactory Satisfactory Borrower Performance : Satisfactory Satisfactory Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate . 13. Lessons: There are two major lessons which follow from the evaluation of this PRSO series . First, good ESW and TA are absolutely essential for reforms to succeed in a country with capacity constraints as severe as they are in Laos . Second, the efficacy of Bank and other donor interventions cannot be judged adequately in the absence of a minimum of basic data. The Bank should make a major effort to help strengthen the information and data base in the country. 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: The ICR does a good job clarifying the sometimes unclear description of the program in the program documents . But, it suffers from the lack of adequate information and data which makes it difficult to evaluate the success (or lack of it) of the program. It is nearly impossible e.g. to judge the efficacy of the efforts to make public spending more pro-poor. There is a lack of clarity and inconsistency in some areas, such as in the information provided on cost recovery in the electricity sector, with differences between text, tables and data in the ISRs . a.Quality of ICR Rating : Satisfactory