Docum ent of Tbe World Bank FOR OMCLaL USE ONLY Report o P-5707-LA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 6.3 MILLION TO THE LAO PEOPLE'S DEMOCRATIC REPUBLIC FOR A FOREST MANAGEMENT AND CONSERVATION PROJECT FEBRUARY 23, 1994 MICROGRAPHICS Repor. No: P- 5707 LA Type: MOP This document has a restricted distribution and mav be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed witbout World Bank authorization. CURRENCY EOUIVALENTS (as of November 1, 1993) Currency Unit = Kips Kip 1.00 = US$0.0014 US$1.00 = Kips 715 WEIGHTS AND MEASURES I kilogram (kg) = 2.20 lb 1 kilometer (km) = 0.62 mile 1 hectare (ha) = 2.47 acres ABBRETIATIONS AND ACRONYMS DOF - Department of Forestry FINNIDA - Finnish International Development Agency FRCP - Forest Resources Conservation Project GEF - Global Environment Facility GET - Global Environment Trust Fund ICB - International Competitive Bidding LCB - Local Competitive Bidding MAF - Ministry of Agriculture and Forestry SIDA - Swedish International Development Authority TFAP - Tropical Forestry Action Plan FISCAL YEAR October 1 - September 30 * ^ FOR OMCIAL USE ONLY LAO PDR FOREST MANAGEMENT AND CONSERVATION PROJECT Credit and Project Summary Borrower: Lao PDR Amount: SDR6.3 million (US$8.7 million equivalent) Terms: Standard, with 40 years' maturity FinancinQ Plan: Local Foreign Total -----US$ million Government 1.0 0.0 1.0 GET 1.2 3.8 5.0 FINNIDA 0.9 4.7 5.6 IDA 2.4 6.3 8.7 TOTAL 5.5 14.8 20.3 Economic Rate of Return: Not applicable Poverty Impact: Program of Targeted Interventions Staff Appraisal Report: Report No. 10276-LA Maps: IBRD Nos. 23388, 23534 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. *e MEMORANDUM AND RECOMMENDATION OF THR PRESIDENT OF THE IDA TO THE EXCUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE LAO PEOPLE' S DEMOCRATIC REPUBLIC FOR A FOREST MANAGEMENT AND CONSERVATION PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Lao People's Democratic Republic for SDR6.3 million (US$8.7 million equivalent) to help finance a Forest Management and Conservation Project. The proposed credit would be on standard IDA terms, with a maturity of 40 years- The project would be cofinanced by a SDR3.7 million (US,5.0 million equivalent) grant from the Global Environment Trust Fund (GET) and a Finnish Marks 28.0 million (US$5.6 million equivalent) grant from the Finnish International Development Agency (FINNIDA) for parallel financing. 2. Countrv/Sector Background. The Lao economy is among the least developed in the world, with an average per capita income of about US$200 (1990). With a populatien of about 4.2 million people for a total area of 236,000 sq km, the country has a low population density of 17 persons per sq km, but population is growing at 2.9% per year. About 89% of the people live in some 11,000 rural villages. Up to 75% of the land area is hilly to mountainous, predominantly in the north and east, and due to the shortage of lowlands, is under increasing pressure from forest encroachment. 3. The Forest Resource. Lao PDR is heavily dependent on its natural resource base to provide a livelihood for the bulk of its population and to earn foreign exchange. In 1991, wood products accounted for up to 54% of official exports, while the share of forestry in the Gross Domestic Product was estimated at about 15%. Moreover, some 80% of domestic energy consumption is wood-based, while the forests also provide a host of minor products, foodstuffs and medicine which are also exported. However, the forest cover of Lao PDR is declining steadily. From 1940 to 1981, the national forest area fell from 16 million ha (70% of the country) to 11 million ha (48%), corresponding to an average annual loss of 120,000 ha, or about 1% of total forest area per annum. The Tropical Forestry Action Plan (TFAP) for Lao PDR, which was completed in 1990 with multi- donor support, reported that of the 300,000 ha annually under shifting cultivation, about 100,000 ha involved clearing of forest land while another 100,000 ha were degraded by forest fires. Illicit logging was estimated at about 50% of authorized logging, and unsustainable commercial exploitation using destructive logging practices also significantly contributed to forest degradation. Other factors included the marginalization of forest communities, distortions in pricing and taxation policy which encouraged malfeasance and transfer pricing, and inefficient domestic processing. 4. Forestry Sector Reforms. In the past two years, Government has been developing a forestry reform program. The main features are the improvement of forest inventory and management planning, change of emphasis from forest extraction to sustainable management, provision of incentives to resource users, re-establishment of central jurisdiction over forest management, and elimination of distortions in resource pricing and taxation. To support this reform program, Government issued in November 1993 a Prime Minister's Decree No. 169 on the Manacement and Use of Forests and Forest Land (the Forestry Decree), and the -2- entry into effect of the Decree is a condition of Credit effectiveness. This project, wh.ch supports the reform program, is consistent with the Bank's forestry policy. 5. Project Obiectives. The project aims at assisting Government to itnplement a new resource management system in Lao PDR to better achieve the sus<..tinable management and conservation of the country's forest resources. The integrated project focuses on implementing forestry sector reforms, developing the Department of Forestry's operational capacity, and implementing improved programs in forest inventory and planning, and sustainable forest management and protection. Project activities in production and village forest areas would b,e supported by IDA, while the establishment of protected areas for biodiversity conservation would be funded by GET for a Wildlife and Protected Areas Management Project which is an integral part of the project. FINNIDA would fund technical assistance and human resource development for production and village forest areas, and GET for the protected areas. 6. Proiect Description. The project would cover an estimated total forest area (Maps 23388 and 23534) of about 500,000 ha in provinces throughout the country with forest resources, to be zoned and delineated into village, protection, conservation and production forests, and placed under sustainable forest management and protection. The project areas are located mostly in the central and southern regions, which still have a large proportion of relatively intact natural forest and include several proposed protected areas for biodiversity conservation. Specifically, the five-year project would support: (a) implementation of an appropriate institutional framework and formulation of the necessary regulatory framework for the forestry sector; (b) field implementation of three programs: (i) forest resource inventory and planning; (ii) sustainable forest management and protection; and (iii) establishment and management of protected forest areas; (c) human resource development; and (d) technical assistance. 7. Project Imnlementation. The project would be implemented by the Department of Forestry. The total project cost is estimated at US$20.3 million equivalent, with a foreign exchange component of US$14.8 million equivalent (73%). The total financing required is US$19.3 million, of which IDA would finance US$8.7 million equivalent (41t of total foreign exchange costs and 46% of local costs), GET US$5.0 million (25% of foreign exchange costs and 24t of local costs), and FINNIDA an amount of US$5.6 million on a parallel basis. A breakdown of project costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Lao PDR are presented in Schedules C and D, respectively. Maps are also attached. The Staff Appraisal Report, No. 10276-LA, dated February 23, 1994, is being distributed separately. 8. Proiect Sustainabilitv. The sustainability of the project is dependent on continued Government commitment to the new resource management -3- system, based on the provision of adequate incentives to forest users and effective field capability for regulation and control of forest resource use. In addition to supporting the formulation of the necessary regulatory framework, the project design includes the protection of traditional access of users to the forest resources and limited buffer zone development to reduce unsustainable forest exploitation in exchange for forest conservation measures for community and private forest users. Public agencies would be compensated for reduced dependence on forest products from the Forest Management Fund to be established under the Forestry Decree from resource tax revenues and other sources. This Fund would be managed by DOF and used to fund its activities, including the operation of the protected areas system. The establishment of a Conservation Trust Fund under the project is aimed at securing additional longer term financing for the operation of the protected areas. 9. Lessons Lear-ned from Previous IDA Onerations. The first four agricultural projects supported by IDA were implemented under a centrally-planned economy. They were constrained by a weak institutional framework, unclear or inappropriate sectoral policies, and lack of production incentives. The PCRs and PPAR of these projects highlight the importance of good technical preparation and the critical role of IDA supervision as Lao project skills are limited. Grant funding was thus obtained from the Japan Policy and Human Resources Development Fund to support detailed project preparation, and intensive IDA supervision would be undertaken during project implementation. For sustainable resourc- management, a system based on adequate resource planning and management and on adequate incentives to all resource users needs so be established and sustained. The project is designed to achieve these objectives. 10. Rationale for IDA Involvem-ent. Since 1986 Lao PDR has beer moving from a centrally-planned to a market-oriented economy and implementing structural reforms. Macroeconomic stabilization measures, such as restoration of monetary and fiscal control and price and exchange rate stabilization, have been very successful. Emphasis is now being placed on longer run institutional development measures, such as legal, public administration, and state enterprise reform, and on the sustainable devulopment of its natural resource base. The Government remains committed to these reforms and to the development cf basic physical infrastructure, and social and support services. 11. The objectives of IDA's country assistance strategy, as discussed by the Board on October 6, 1992, are to support: (a) Government efforts to move to a market economy and maintain macroeconomic stability; (b) development of the physical capital needed to expand production; (c, sustainab.e use of the country's natural resources; and (d) human resource development, both to increase labor productivity and alleviate poverty. This project is a key component of the Bank's overall assistance strategy as it will help to implement key reforms in the forestry sector necessary to attain sustainable forest management, and develop and strengthen sector institutions and the human resource base to implement this strategy. IDA has mobilized substantial cofinancing for the proposed project, and has sought to coordinate its activities with other multilateral and bilateral donor agencies to help ensure a sustained and coordinated development effort in the sector. 12. Agreed Actions. Conditions for Credit effectiveness include: (a) the Forestry Decree shall have become effective; (b) establishment of the Project Coordination Committee; and (c) the FINNIDA Cofinancing and the GET Grant -4- Agreements shall have become effective. Covenants in the Development Credit Agreement include: (a) award of a minimum of two forest management contracts incorporating sustained yield and conservation practices by competitive bidding by Mar-7h 31, 1996; (b) presentation of satisfactory land and forestry legislation to the National Assembly by September 30, 1997; (c) issuance of implementing regulations to the Forestry Decree is a condition of disbursement for incremental operating costs (on declining basis) of salaries and other allowances; (d) establishment of a uniform pricing and taxation system to ensure parity pricing for the sale of logs for both the domestic and export markets by June 30, 1995; (e) forming of an advisory Consultative Forum by the Project Coordination Committee not later than December 31, 1994; (g) carrying out of a mid-term review of the project by MAF and IDA not later than October 31, 1997; and (h) cross- default conditionality in respect of the FINNIDA Cofinancing and the GET Grant Agreements. 13. Environmental Asnects. The environmental impact of the project would be positive due to improvements in sustainable resource management and biodiversity conservation. The strengthening of the resource data base and management planning, the implementation of sustainable forest management and conservation practices, the enforcement of a regulatory system, and the establishment of protected areas would. reduce deforestation and the destruction of wildlife habitats, biodiversity, and watershed values. Environmentally sound village development activities would assist in reducing unsustainable exploitation of forest resources. 14. Proctram Obiective Categories. The project would support the development of forest communities, which are among the poorest segments of the Lao population. It also addresses the Bank's other program objectives, including sustainable resource management and conservation, and human resources and private sector development. 15. Proiect Benefits. Only the benefits from improved efficiency in forest management and rent capture can be readily quantified. The Net Present Value of the potential rents that could be captured under a ten-year phased program of improved forest regulation and taxation would amount to US$30.5 million at a 12% discount rate, including US$31.6 million from export parity pricing and taxation, US$8.1 million from reduction in the mis-specification of export logs, and US,5.8 million from reduced log wastage and degradation. Benefits which are difficult to quantify include those from maintaining the integrity of watersheds, biodiversity, non-wood forest products, and from the impact of maintaining forest cover on the potential for hydro-electric development. If the project is not implemented, continued unsustainable forest exploitation will accelerate forest degradation and loss of wildlife habitats, plant and animal species. 16. Risks. The main risks would arise from delays and inadequate implementation of the new system of resource management, including only partial acceptance of the national program approach by provincial governments, slow adoption of community mobilization for resource management, poor application of regulation and control activities, failure to establish and apply the Forest Management Fund appropriately, and administrative weaknesses. The provision of adequate incentives to managers and users of the forest resources for sustainable forest management and conservation is designed to minimize these risks. For the protected areas, shortage of budgetary funds for longer term recurrent cost -5- financing may affect thp sustainability of the system. The establishment of the Forest Management Fund under che Forestry Decree is aimed at addressing the issue of financing of DOF operations. 17. Recommendation. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. February 23, 1994 Schedule A LAO PDR FOREST MANAGEMENT AND CONSERVATION PROJECT Estimated Costs and Finar-inq Plfn (L7S$ millicn) Local Foreign Total Estimated Proiect Cost f Inventory and Planning 0.3 1.0 1.3 Management and Protection 2.1 4.5 6.6 Protected Areas 0.6 1.9 2.5 Human Resource Development 0.3 0.4 0.7 Technical Assistance 1.3 5.0 6.3 Base Cost 4.7 12.8 17.5 Physical contingencies 0.1 0.2 0.3 Price contingenries 0.7 1.8 2.5 Total Protect Cost - 14.8 20.3 Financinc Plan Government 1.0 0.0 1.0 GET 1.2 3.8 S.0 FINNIDA 0.9 4.7 5.6 IDA 2.4 6.3 8.7 Total 5.5 14. 20.3 a/! Excluding taxes and duties. -7 Schedule B Page ; of 2 LAO PDR FOREST MANAGEMENT AND CONSERVATION PROJECT Summarv of Proposed Procurement Arrangements (US$ million) Procurement Method Total Project Element ICB LCB Other NIF Costs 1. Civil Works - 1.2 4.1 - 5.3 IDA - (0.8) (3.0) - (3.8) GET - (0.4) (1.0) - (1.4) 2. Vehicles and Equipment 3.9 0.6 - 0.4 4.9 IDA (3.1) (0.3) - - (3.4) GET (0.8) (0.3) - - (1.1) 3. Fuel and Materials 0.6 0.4 - 0.5 1.5 IDA (0.6) (0.2) - - (0.8) GET - (0.2) - - (0.2) 4. Salaries and Allowances - - 1.2 - 1.2 IDA - - (0.7) - (0.7) GET - - (0.1) - (0.1) 5. Human Resource Development - - 0.6 - 0.6 GET - - (0.6) - (0.6) 6. Technical Assistance 1.6 - - 5.2 6.8 GET (1.6) - - - (1.6) TOTAL 6.1 2.2 5.9 6.1 20.3 IDA (3.7) (1.3) (3.7) - (8.7) GET (2.4) (0.9) (1.7) - (5.0) Other = Not subject to procurement, or by direct negotiation NIF =Non IDA-finaniced Figures in parentheses are the amounts financed by IDA -8- Schedule B Page 2 of 2 LAO PDR FOREST MANAGEMENT AND CONSERVATION PROJECT Disbursements Amount % of ExDenditures to Category of Expenditure (US$ million) be Financed 1. Civil Works 3.0 100% 2. Vehicles and Equipment 3.0 100% of foreign expenditures for directly imported items, 100% of local expenditures (ex-factory cost) and 80% of local expenditures for other items procured locally. 3. Fuel and Materials 0.8 100% up to September 30, 1997, and 50% thereafter 4. Salaries and Allowances 0.7 100 % up t o September 30, 1997, and 50% thereafter 5. Human Resource Development - 6. Technical Assistance - 7. Unallocated 1.2 TOTAL 8.7 Estimated IDA Disbursements F'Z 1995 1996 1997 1998 1999 --------------(US$ million)------------- IDA Annual 0.4 1.3 2.9 1.7 2.4 Cumulative 0.4 1.7 4.6 6.3 8.7 Schedule C LAO PDR FOREST MANAGEMENT AND CONSERVATION PROJECT Timetable of Key Proiect Processing Events (a) Time taken to prepare the project: 30 months (b) Prepared by: Government with IDA Assistance (c) First IDA mission: June 1990 (d) Appraisal mission departure: 11/91 (e) Negotiations: 02/93; 01/94 (f) Planned date of effectiveness: 07/94 (g) List of relevant PCRs and PPARs: Credit/Loan No. Proiect PCR/PPAR No. (Date) 760-LA Agricultural Rehabilitation PCR No. 7250 and Development Project (May 16, 1988) 924-LA Second Agricultural PPAR NO. 90-1007 Rehabilitation and Develop- (July 27, 1990) ment Project 1021-LA Third Agricultural PCR No. 9858 Rehabilitation and Develop- (August 26, 1991) ment Project 1395-LA Agricultural Production PCR No. 9857 Support Project (August 22, 1991) This report is based on the findings of an IDA appraisal mission which visited Lao PDR in November 1991, and updated by IDA/FINNIDA post-appraisal missions in April and December 1992, respectively. The appraisal mission comprised Messrs. Y. Wong (Mission Leader), J. Blakeney (Forestry Specialist), and D. Hulse (Forest Conservation Specialist, Consultant). Messrs. B. Hurtig (Program Officer), H. Rissanen (Forestry Adviser), and T. Oksanen (Forestry Adviser) of FINNIDA, and Mr. R. Salter (Forest Conservation Specialist, Consultant) participated in the post-appraisal missions. Peer reviewers were Messrs. H. Wagner (AGRNR) and C. Rees (ENVLW). The document was cleared by Mrs. Pamela Cox (Chief, EA1AN) and Mr. C.E. Madavo (Director, EAI) - 10 - Schedule D STATUS OF BANK GROUP OPERATIONS IN LAO PDR A. STATEMENT OF DEVELOPMENT CREDIT /a (As of December 31, 1993) Amount (US$ million)/b Loan or (less cancellations) Credit Fiscal Number Year Borrower Purpose IDA Undisbursed Eight IDA Credit credits fully disbursed 136.75 Of which SALs, SECALs and Program Loans 2037 1989 Lao PDR Structural Adj. Credit 40.00 2304 1992 Lao ?DR Structural Adj. Credit II 40.00 80.00 1826 1987 Lao PDR So. Prov. Electrification 25.80 1.33 1846 1988 Lao PDR Southern Transport 14.10 1.66 1947 1989 Lao PDR Industrial Credit I 10.00 3.52 2001 1989 Lao PDR Polytechnic 3.50 3.17 2079 1990 Lao PDR Upland Agric. Development 20.20 18.60 2101 1990 Lao PDR Telecom II 24.50 15.63 2218 1991 Lao PDR Highway Improvement 45.00 32.99 2425 1993 Lao PDR Prov. Grid Integration 36.00 34.72 2488 1993 Lao PDR Education Development 19.00 18.92 Total 334.85 130.55 Of which has been repaid Total Now Held by IDA 333.06 Amount sold 0.0 Total undisbursed 130.55 130.55 /a The statui of the projects listed in Part A is described in a separate report on all IBRD/IDA-finished projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. /b Principal amounts in US$ equivalent at date of negotiations, and undisbursed amounts in equivalent are valued at exchange rate applicable on the date of this statement. * Indicates SAL/SECAL Loan and Credits. B. STATEMENT OF IFC INVESTMENTS None < lor CHINCHINA CHINA M y. ' MX kNA VIET NAM K PH-ONG LY , MYANMAR LUANG ,~~~~~~~~~~~~~~~~~~~~~,,, ~~~~~~~~~~THAOLAND N -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~CHINA a_ 0 SEA 0~~~ SAYABOURY . / X H N i ) ~~~~~~KHOUANG THIAILAND f sVle4A; t' - 9SOUTH CHINA SEA /_ 2 VlEF~VIECTURE OF IE } S > ~~~~~~VIENTIANE aNA \ LAO PEOPLE'S DEMOCRATIC REPUBLIC FOREST MANAGEMENT AND CONSERVATION PROJECT PRIMARY FOREST AREAS DEGRADED FOREST AREAS NON FOREST AREAS O PROVINCE HEADQUARTERS * NATIONAL CAPITAL - PROVINCE BOUNDARIES i , SEKOG - INTERNATIONAL BOUNDARIES C', MP:AS,SAKC . -_ OlLOOlrflS 0 0 100 100 ( 0 -5=U /v i 0 I i~~~~~~~~~~3AM I 0,4 Groop 7hPl .o dr,,, ofpo .,dondth,bdaI,00 rsho,rrlon, . ~ i,'' C A,npIrrsp/r.r,plppr,h.n,o,IY7Wo,,00,,,Gn'Ao, J "px 1'1Z} ,,0roro,Or0,IrpAr.=no'pIrr,,ropo,rrro,,rrr,,n CAMBODIA ? ' , rn ,o,ro. rb1 J d,,pr 1' rCT tt,I EHtA CHINA CHINA 2 MYANMAR 0 ~~~~~Gulfof PH VIET NAM N kLn MYANMA PHONGSL NAM TIG THAILAND HAM ~~~~~~~~~~~~~~~~~NA ~~~~~~~~~South Cia / BOKEO HA NAN A NR A SI UUDOMSAI 3 so L=t. >) < , WANG < HOUAPHAN Gv(tof r %SSt) U^NG f JV t ~~~~~~~~~~~~~~~~~Thnil~ndit)\1 a SAYABOURY oS; PPR ANG Guf 5,?ofv | ,,0_ w_ 49 t 45 XIANG l t Oab 2 ~~~42 KHOUANG 9Itt 2't Of { / SKHO~~UANG c THAIllAND 0 sININ "o o 100 ISO HONGS > JPA1<5~13FAKANE mnuX SOUTH LAO PEOPLE'S STHAKHEK C i DEMOCRATIC REPUBLICI\ FOREST MANAGEMENT AND |;JTq CONSERVATION PROJECT F31 1 \ PRIORITY FOREST CONSERVATION AREAS SAVANNAKHEI SAVANAKHET PRIORITY CONSERVATION AREAS: 59 FOR FURTHER STUDY ' 43 -6 RECOMMENDED FOR DEVELOPMENT UNDER PSARAVANE | oA w FOREST RESOURCES CONSERVATION PROJECT gi TO BE CONSIDERED FOR DEVELOPMENT UNDER THIS PROJECT e PROVINCE HEADQUARTERS 6 NATIONAL CAPITAL Ee BIOGEOGRAPHIC BOUNDARIES OF THE INDO-MALAYAN REALM: 2 PROVINCE BOUNDARIES SKO ANNAM (ANNAM TRUNG SON MOUNTAIN CHAIN) INTERNATIONAL BOUNDARIES SEKONG HI-AMPASSAK CENTRAL INDOCHINA (TROPICAL LOWLAND PLAINS) PAK 33 NORTHERN INDOCHINA (HILLY SUSTROPICAL SECTOR) 7 ,'ATTOPEU INDOCHINA TRANSITION ZONE (MONTANE TEMPERATE SECTORI 38 ATTOPEU Softerr nd Phanthavong (tUCN, 1989) J ,n ' MaccKinnon and McKinnon (IUCN 19861 / ?0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 2,2~ ~ ~ ~ ~~~~~~0 Mo lo7 g lo- vst {qs~~~~h-