83168 Nam Theun 2 Board Update: Project Progress during 2012 ADB Nam Theun 2: Making a Difference ​ Nam Theun 2 is a key development project for Lao PDR. By 2035, the project is expected to generate around USD $2 billion in government revenues for poverty reduction and environmental protection through the sale of electricity to Thailand and into the Lao grid. NT2 is jointly implemented by the Nam Theun 2 Power Company and the Government of Lao PDR, and supported by financing from 27 parties including the World Bank and Asian Development Bank. Following extensive preparation and consultations, project construction began in 2005, and Nam Theun 2 started commercial operations in March 2010. Key project features include: • A hydropower facility with the capacity to pro- vide approximately 1000 MW of power for ex- port to Thailand and an additional 75 MW for domestic consumption; ​ • The implementation of ambitious environmen- tal and social programs to mitigate impacts and to benefit project affected people, as well as to protect and manage the 4000 km2 Nakai Nam Theun National Protected Area, which is the project’s watershed; • Revenue Management Arrangements to en- sure that NT2 revenues are applied effectively, with transparency and accountability, to reduce poverty and improve environmental manage- ment, and • Monitoring and evaluation arrangements designed to meet sound engineering practices, fiduciary responsibilities, as well as ensure the compliance with the project’s social and environmental objectives. Direct Benefits of the Nam Theun 2 Project Photo by Bart Verweij/World Bank, 2013 • Major improvements in living conditions for around 6,300 resettled people; • A large development program for villages in the downstream areas of the project; • Contribution of US$1 million per year for the protection of the Nakai Nam Theun National Protected Area during the 30 year construction and operations period; • Project revenues from the sale of electricity are being used to improve living conditions, health care, education, and to provide access to roads and electricity in poor and remote areas, and • Nam Theun 2 also provides a practical demonstration of environmentally and socially sustainable hydropower at a time when the hydropower sector is growing rapidly. Nam Theun 2 will generate US$2 billion for the Lao Government to invest in education, health infrastructure and environmental protection programs, contributing to poverty reduction in Lao PDR. Nam Theun 2 Board Update: Project Progress during 2012 ADB Nam Theun 2 Board Update: Project Progress during 2012 Photo by Stan Fradelizi/World Bank, 2011 Nam Theun 2 Board Update: Project Progress during 2012 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CA Concession Agreement CEMMP Company’s Environmental Management and Monitoring Plan COD Commercial Operations Date DAFO District Agriculture and Forestry Office DSP Downstream Program EdL Electricité du Laos EGAT Electricity Generating Authority of Thailand EMO Environmental Management Office (NTPC) EMU Environmental Management Unit (GOL) GDP Gross Domestic Product GHG Greenhouse Gas GOL Government of Lao PDR GLIP Government Letter of Implementation Policy IFIs International Financial Institutions participating in NT2 KDP-AF Khammoune Development Project, Additional Financing MTR Mid Term Review MOF Ministry of Finance MPI Ministry of Planning and Investment MW Megawatt NGO Non Governmental Organization NSEDP National Socio-Economic Development Plan NT2 Nam Theun 2 Multipurpose Hydroelectric Project NTFP Non-timber Forest Products NTPC Nam Theun 2 Power Company Limited POE Environmental and Social Panel of Experts PDR (Lao) People’s Democratic Republic PPA Power Purchase Agreement PLUP Participatory Land Use Planning PRSO Poverty Reduction Support Operation RFA Reservoir Fisheries Association RMA Revenue Management Arrangements RMC Reservoir Management Committee SEMFOP Social and Environment Framework and Operational Plan VFA Village Forestry Association VFG Village Fisheries Group WMPA Watershed Management and Protection Authority Nam Theun 2 Board Update: Project Progress during 2012 Photo by Stan Fradelizi/World Bank, 2011 Nam Theun 2 Board Update: Project Progress during 2012 Table of Contents: SCOPE OF THIS UPDATE ..................................................................................................................... 8 PROJECT IMPLEMENTATION PROGRESS ...................................................................................... 11 Operations and Maintenance ................................................................................................ 11 Social and Environmental Aspects ...................................................................................... 13 Nakai Plateau .............................................................................................................................. 15 Downstream Areas ...................................................................................................................... 23 Watershed and the Environment ........................................................................................... 27 Revenue Management Arrangements ........................................................................ 29 MONITORING AND OVERSIGHT ARRANGEMENTS ...................................................................... 33 LOOKING AHEAD ................................................................................................................................... 35 Nam Theun 2 Board Update: Project Progress during 2012 SCOPE OF THIS UPDATE 1. This Update reports on developments in the implementation of the NT2 project during 2012. It is based on the findings of ongoing work of the field-based team and a Joint Supervision Mission of the International Financial Institutions (IFIs) supporting the Project undertaken in October 2012 as well as subsequent shorter interactions and field visits. It follows the last Update to the Boards of the World Bank and Asian Development Bank (ADB), covering progress in 2011. This update takes stock of the current status of implementation in relation to the Project’s development objective,1 and draws attention to the opportunities and challenges ahead. 2. The Lao PDR economy continues to grow rapidly (8.2 percent in 2012), propelled mainly by expansion of the construction, manufacturing and services sectors. 8 In the medium-term, the economy is expected to continue grow at 7.8 percent on average. This depends on the successful operationalization of a number of large power and mining projects which are under construction or in the pipeline. Due to the continued demand for imports driven by strong investments and consumption, a key risk for the economy is the strong pressure on foreign exchange reserves. This calls for a tightening of aggregate domestic demand through fiscal and credit tightening. While Lao PDR is largely sheltered from the direct impacts of the uncertain global economic environment, the economy is subject to secondary effects from the economic trajectories of major regional trading partners. 1 The Project objective is to generate revenues through environmentally and socially sustainable development of NT2’s hydropower potential to finance poverty reduction and environmental management programs in Lao PDR. Nam Theun 2 Board Update: Project Progress during 2012 Overall fiscal performance has slightly improved in the fiscal year 2011-2012 due to faster-than-expected revenue growth. Improved total revenue collection has benefited from grants for the Asia-Europe Forum (which took place in November 2012), higher revenue from mining and hydro sectors, and also non-resource revenues such as the turnover tax and income tax. The fiscal deficit in fiscal year 2012-2013 is projected to marginally widen due to significant increases in public wages and compensation. Debt distress has been reclassified from “high” to “moderate” in August 2012 due to improved policy performance as measured by the joint IMF-World Bank Debt Sustaina- bility Analysis framework. While multilateral creditors still hold the majority of public ex- ternal debt, bilateral creditors have an increasing share in external public and publicly- guaranteed debt. 3. This Update focuses on NT2 project-related matters.2 It is comprised of three parts: the first part of the update assesses project implementation progress, including the status of the physical project and related work. Second, the update reflects on progress towards the project’s social and environmental objectives. Finally, the update looks ahead to key challenges as well as project supervision and monitoring needs, highlighting issues that warrant continued attention during the ongoing commercial operations phase of the project. 9 Photo by Stan Fradelizi/World Bank, 2011 2 The Annex on the Theun Hinboun Expansion project that was included in previous Annual Board Updates has been dropped from this report as that Project has been completed. Nam Theun 2 Board Update: Project Progress during 2012 10 Photo by Stan Fradelizi/World Bank, 2012 Nam Theun 2 Board Update: Project Progress during 2012 PROJECT IMPLEMENTATION PROGRESS Operations and Maintenance 4. NT2 is now in its third year of commercial operations. NT2 construction was completed in October 2010 with the issuance of a Certifi- cate of Completion for the Head Construction Contract (HCC). Residual construc- tion issues have been brought to closure and the Defects Notification (warranty) Period for the Head Construction Contract (HCC) expired on April 4, 2012. NT2 revenues from the sale of electricity to Thailand and domestically are flowing as planned. Annu- al operational targets for supply both to EGAT and EDL were reached in 2010, 2011 and 2012. A total of 5,414 GWh were generated for the Electricity Generating Authority of Thailand (EGAT) and 307 GWh for Electricité du Laos (EDL) in 2012. 5. All six generation turbine units are fully operational. The four Francis Units (for export of power to Thailand) and one Pelton Unit (for domestic 11 power generation) were taken over (by the Operator, from the Head Contractor) before the Commercial Operation Date (April 2010) and the second Pelton Unit was taken over on in September 2010. Water levels were generally lower in 2012 compared to previous years but remain stable. 6. Road repairs have been completed and NTPC is working out arrangements with GOL for the reimbursement of associated costs. In 2009, all project-improved roads were handed over to Government. Maintenance and repair of roads is the responsibility of the Government. However, after the severe rainfall events of 2011, GOL and NTPC agreed that the company would undertake emergency repairs to restore safe passage on critical roads in the shortest possible time. Furthermore, it was agreed that NTPC would act as contractor for the repairs – arranging for the Head Contractor/ITD to undertake repairs – and that GOL would reimburse cost incurred for damages (excluding defects). These repairs have now been completed. NTPC is seeking total reimbursement for US$16 million from the GOL for the road repairs. GOL has agreed in principle to the reimbursement, but is challenging the cost estimates. Discussions are ongoing to reach agreement on reimbursement amount and terms. The risk of reimbursement is borne solely by the NTPC shareholders. Nam Theun 2 Board Update: Project Progress during 2012 7. Protection and Relocation of transmission towers completed following damage sustained in the 2011 extreme weather events. Five towers required protection to stabilize slopes to mitigate the risk of erosion around the legs of the towers. One tower (Tower 4, near the Regulating Dam) had to be replaced and relocated. All works on the towers have been completed. Improvements to the towers include additional drainage features to channel water around the footings, and in some cases concreting of the ground area under the towers to reduce local permeation of water into the soil thus enhancing ground stability. 8. New communications protocols have been developed learning from the experiences gained through the 2011 extreme weather events. A safeguard compliant dam safety and communications protocol was put in place at time of project preparation. In the absence of national policies and procedures for such matters, and building on the lessons learned from the 2011 flooding events, NTPC has further strengthened dam safety measures with the development of a Water Release Warning Communication System (WRCS) in cooperation with the National Disaster 12 Management Office (NDMO). NTPC and NDMO are constantly monitoring water levels and weather forecasts. In the event a water release becomes necessary, the WRCS contains a simple and clear protocol for: (a) NTPC to communicate directly with the District Government Officers of Khamkeut (for Nakai Dam) and Gnommalat (for Regulating Dam); and (b) the respective Districts’ Officers to alert villages’ designated coordinators, who will in turn inform all affected villagers. Threshold and classifications of water release events have been established in order to trigger the appropriate action. In order to inform communities of the new protocol, specific leaflets describing water release protocol for the Nakai Dam and the Regulating Dams have been designed and distributed in relevant villages. Flood Foreman (On-Duty at Reg. Dam) Flood Manager (On-Call Manager on Site) 1 2 NTPC Responsibility NTPC noti es Gnom malath Headquater Management District Coordinator 1 ? NTPC CEO GOL Responsibility 2 ? NTPC Manager On-Call Gnom malath District Coordinator noti es Downstream Village Coordinators Nam Theun 2 Board Update: Project Progress during 2012 Social and Environmental Aspects 9. Programs in support of achievement of the environmental and social objectives continue. On the Nakai plateau, progress towards achievement of the resettlement objectives is broadly on track and is being monitored regularly. In the Watershed, protection of biodiversity and local development of communities resident in the Watershed remain a challenge and support will continue for the lifespan of the Concession Agreement. In the downstream area, impacts continue to be assessed, and Government has assumed full responsibility for implemen- 13 tation of remaining support activities. Nam Theun 2 Board Update: Project Progress during 2012 14 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 Nakai Plateau 10. Monitoring data continue to suggest that villagers are better off following resettlement. Analysis of the 6th round of the Living Standards Measurement Survey (LSMS), conducted during 2011, indicates that most resettlers have met the income targets specified in the Concession Agreement. The reasons for a small number of resettlers not reaching the target tend to be structural, including old age, disability and/or a lack of available labor in the household. The data also suggests that resettlers are benefiting from a variety of income streams, that they are gradually building up their assets, and that they are not assuming unreasonable levels of debt.3 Figure 1: Mean Value of Household Assets by Wealth Group 35,000,000 Mean household asset value (kip) 30,000,000 25,000,000 July/Sept 2006 May/July 2007 15 20,000,000 Jan/Feb 2008 15,000,000 Sept/Oct 2008 10,000,000 May/June 2009 May/June 2011 5,000,000 e r e ch bl o ag Po Ri ra er ne Av l Vu Source: LSMS, rounds 1 to 6. These data include vehicle assets and are expressed as a mean rather than a median. Round 1 = July/Sept 2006; Round 2 = May/July 2007; Round 3 = Jan/Feb 2008; Round 4 = Sep/Oct 2008; Round 5 = May/June 2009; Round 6 = May/June 2011. 3 The Concession Agreement specifies the targets for household and village incomes as follows: a. Household Income Target means the yearly target for the income of Resettler households, including income in cash and in kind, to be reached at the beginning of year five of the Resettlement Implementation Period, being for each Resettler household in the Resettlement Area, the greater of: a) the then current National Rural Poverty Line, multiplied by the number of persons in the household; and b) Lao PDR Kip 1,420,800 per person, multiplied by the number of persons in the household; b. Village Income Target means the yearly target for the income of Resettler villages, including income in cash and in kind, to be reached at the end of the Resettlement Implementation Period, being for each village in the Resettlement Area, the greater of: a) the then current Average Rural Income Per Person, multiplied by the number of persons in the village; and b) Lao PDR Kip 2,131,200 per person, multiplied by the number of persons in the village (this being the equivalent of USD 1200 per average household in June 2002, using the exchange rate of Lao PDR Kip 9,800 = USD 1 and the average household size being 5.518 persons). Nam Theun 2 Board Update: Project Progress during 2012 11. Emphasis on livelihood development continues. The various livelihood options (i.e., agriculture, fisheries, forestry, livestock and off-farm activities) are used dynamically and differently by the various resettler households, who try to optimize the economic opportunities available to them through better access to the area and surrounding markets, within a broader context of rapid national economic growth and regional integration. A microfinance program launched by NTPC in the Nakai Resettlement Area in 2011 is now fully functional. This fund has been endowed with the cash value of non-issued agriculture and forestry entitlements. Each household has been entitled to a share in one of the 16 membership-based Village Committee Funds (VCFs). All shareholders of the VCFs are also eligible to participate in the micro-credit program, provided that they meet the selection criteria (carrying no debt and having an income generating activity). While the resettlement targets are focused on livelihoods, important progress is also being made in improving access to basic services (health, education and water) on the Nakai Plateau, which are benefiting all residents of the plateau. 16 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 Figure 2: Percentage of Resettlers Reaching Household Income Targets by Wealth Group 100 95 Households above poverty line 90 85 80 Vulnerable Poor 75 Average 70 Rich 65 60 55 50 July/Sept May/July Jan/Feb Sept/Oct May/June May/June 2006 2007 2008 2008 2009 20011 12. Fisheries continue to contribute significantly to resettler livelihoods 17 and remain one of the most important sources of their income. After an initial windfall period, reservoir catches have stabilized at lower levels - although still considerably above levels caught in rivers prior to the project. Regular fish catch monitoring is undertaken, and fish species remain reasonably diverse. The priority now is to strengthen the enforcement of fisheries regulation on the reservoir, a task that requires the collaboration of local communities, local government and the Watershed Management and Protection Agency (WMPA). Fisheries co-management has shown promise through a process of strengthening the capacities of the Village Fisheries Groups (VFGs), as well as creating awareness among VFG members about their legal rights to the Nakai reservoir fisheries. VFGs are beginning to play a more active role in further developing landing site operations, patrolling and enforcement activities. Continued efforts are needed to safeguard fish stocks, preserve fish habitats, and ensure that sufficient institutional capacity is in place to undertake monitoring and enforcement efforts. Further strengthening of fisheries co-management institutions, particularly the VFGs and their apex organization (the Reservoir Fisheries Association) and the Reservoir Management Secretariat (RMS), is being supported by NTPC and district authorities. Nam Theun 2 Board Update: Project Progress during 2012 13. Participatory Land Use Planning (PLUP) has been officially completed and community land titles have been issued. The aim of the PLUP process is to ensure that villages resettled by the NT2 project have permanent access to and use of the designated community land and to preserve the natural resources for long-term development by those villages. The PLUP process has also helped to clarify village boundaries, land zoning and land use rights, all of which are important to livelihoods sustainability and resource protection. In addition to the private land titles for the housing and 0.66ha agriculture plots, community land titles for agriculture and forestry land and community-owned infrastructures were issued to each hamlet by the Khammouane Provincial Office of 18 Natural Resources and Environment in January 2013. In addition, state land titles were issued for state infrastructure such as schools, roads, and dispensaries. These community land titles are among the first of their kind in the Lao PDR. Photo by Stan Fradelizi/World Bank, 2012 14. Work on improving sustainability of the Village Forestry Association (VFA) continues and strengthening its capacity remains a priority so it can continue to contribute to resettler incomes. The Village Forestry Association paid dividends in the amount of US$200,000 to resettler households for 2011. The amounts are paid out to resettler households on a per shareholder basis. The last remaining non-VFA sawmill on the Plateau has been closed. However, the VFA faces continued external pressures which include illegal timber harvesting and slash and burn on its land, as well as high levels of taxation of its timber. Its performance requires significant improvement with respect to community engagement, adherence to financial obligations, accountability and transparency if it is to serve its intended purpose of protecting forest resources and providing long-term dividend income to resettlers. At this stage, a rigorous assessment of the remaining timber resources in the VFA area is necessary to assess remaining forest resources and to inform options going forward. Nam Theun 2 Board Update: Project Progress during 2012 15. Assessment of Achievement of Household and Village Income Targets of Resettlers is planned in 2013. In accordance with the provisions of the Concession Agreement for NT2, Government and NTPC anticipate that the achievement of the Household and Village Income Targets for resettlers will be assessed in 2013, on the basis of the findings of a further round of the Living Standards Measurement Survey (LSMS) planned for early in the year, as well as other monitoring and evaluation data collected by NTPC and other NT2 monitoring bodies during the Resettlement Implementation Period. 16. The NT2 resettlement objectives envisage materially improving resettler livelihoods on a sustainable basis. The achievement of household and village income targets five years after resettlement would go some way towards demonstrating sustainability of livelihoods. The viability of the main income sources in the new environment, and the level of income that they can be expected to provide over the long term, is becoming clearer. The achievement of relatively high living stadards, above the poverty line, therefore provides some insight into the issue of sustainability. However, Government, NTPC and the IFIs understand that achievement of household and village income targets alone is 19 not enough to demonstrate that livelihoods have been improved on a sustainable basis. They are therefore working together to agree upon indicators and measures of sustainability to be applied in the context of NT2, building off the provisions of the Concession Agreement, and in consultation with relevant monitoring groups. 17. One of key mechanisms to support sustainability, The Social and Environmental Remediation Fund (SERF), is now operational and consistent with Concession Agreement requirements. SERF resources (approximately US$300,000 per annum) are being utilized for the maintenance of community and district infrastructure on the Nakai plateau. A capped budget for maintenance of village access roads was agreed, with a view to ensuring that funds would be focused on village level infrastructure. Nam Theun 2 Board Update: Project Progress during 2012 18. In line with the Concession Agreement and the Financing Agreements with the IFIs, and with a view to sustainability, responsibility for managing the Nakai Resettlement Area will eventually transition from NTPC to Government. In order to prepare for this transition effectively, Government and NTPC have strengthened their collaboration on the Nakai Plateau. The recently formulated Sustain- able Community Development Program (SCDP) has established a joint NTPC and GOL team responsible for coordination of activities, building stronger relationships with communities, and facilitating capacity building for the GOL staff on the Plateau. The SCDP also established a Steering Committee, chaired by the Nakai District Governor, and an Executive Committee that oversees daily work. 19. A small number of vulnerable households will require specialized additional support. This will require close attention for a number of years to come. While the Project’s legal commitments are focused on income targets, it is recognized 20 that a small proportion of households (less than one percent of households at this time), including elderly households with limited family support and persons with disabilities will find it difficult to remain above poverty lines for reasons largely beyond their or the proj- ect’s control. While the proportion of vulnerable households been fairly constant in the past two years, NTPC, Government and the IFIs, with the advice of the social and environ- mental Panel of Experts (POE), will continue to measure vulnerability trends and to iden- tify appropriate long-term and sustainable solutions for vulnerable households, building on traditional family and community safety nets. 20. Water quality monitoring on the reservoir and downstream is ongoing. Water is sampled by NTPC regularly at multiple locations, and selected water quality monitoring data is now publicly available on NTPC’s website. All parameters of reservoir water quality are closely monitored and remain within applicable standards. Levels of dissolved oxygen (DO) in the reservoir continue to vary by area and season. Anoxia (lack of Dissolved Oxygen) can occur in the latter part of the dry season, but this has not impacted the fish populations. In general, the reservoir remains an adequate environment for fish. Downstream, water released from the powerhouse travels across various aerating structures in the Downstream Channel, which helps keep the water oxygenated. Even after large water releases following extreme rainfall events, when reservoir turnover may bring water low in DO to the surface, the water downstream was not found to be anoxic. Nam Theun 2 Board Update: Project Progress during 2012 21. NTPC’s Aquatic Environment Laboratory is measuring Greenhouse Gas (GHG) emissions from the Nakai Reservoir. A comprehensive assessment has been conducted as part of the research partnership initiative between NTPC, EDF and the University of Toulouse (France) to identify net GHG emissions into the NT2 hydro system and develop an emissions model for the entire life cycle of the NT2 Reservoir. The data collected to date indicate that the NT2 reservoir emissions rate is far below alternative thermal power stations. Predictive results of the calibrated GHG model for the NT2 Reservoir are based on data gathered within the first two years of impoundment. The model indicated that peak emissions will occur in the first three to five years after impoundment with a gradual decrease thereafter. Part of the GHG research program was conducted in the reservoirs of Nam Ngum and Nam Leuk in Lao PDR for comparative purposes. The data suggests that after 40 years of impoundment, the Nam Ngum reservoir has evolved into a carbon sink. 21 Photo by Stan Fradelizi/World Bank, 2012 Nam Theun 2 Board Update: Project Progress during 2012 22 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 Downstream Areas 22. The NT2 Downstream Areas remain important, as power generation continues to alter flows into the Xe Bang Fai and the Nam Theun river systems. The NT2 “Downstream Areas” designation covers the following two zones: (a) downstream of the power station, including around 150 villages along the Xe Bang Fai River and in its hinterland which are impacted by increased water flows; and (b) downstream of the Nakai Dam, including 38 villages along the Nam Theun River which are impacted by reduced flows. 23. Xe Bang Fai downstream impacts are less significant than anticipated. The start of commercial operations in 2010 brought with it significant new (and continuing) flows of water into the Xe Bang Fai River. Impacts will continue to evolve over the medium-term, and are monitored regularly. The Project’s grievance mechanism is still active in the downstream area, and Project Affected Persons can submit any complaints they may have to the relevant grievance committees. The following issues on the Xe Bang 23 Fai are receiving attention from the Government, NTPC and the IFIs at the time that this Board Update is being prepared: • Water quality. The quality of water being released into the Xe Bang Fai continues to be one of the key determinants of Project impacts. To date, the water quality monitoring program that is in place indicates that, in general, water quality has been better than anticipated. Two key factors affect the water quality released from the Downstream Channel into the XBF: (a) water quality in the reservoir at the point of extraction to the powerhouse; and (b) the effectiveness of the aeration structures in the Downstream Channel. Water quality data indicate that water quality at the intake point on the Nakai reservoir has been better than anticipated due to: (a) high freshwater inflows and turnover due to spilling events in 2011 and in the rainy season; and (b) strong winds resulting in big waves that oxygenate anoxic water columns in the dry season. In addition, downstream aeration structures are improving water quality after power generation. Monitoring results indicate that water quality meets national water quality standards as well as recognized criteria for supporting aquatic life. However, some characteristics of the water in the XBF have been affected by the project, including volume and flow rates, PH, temperature and color. • Fish catch. Impacts on fish catch have varied along the river. Data from the Fish Catch Monitoring Survey show that the amount of fish consumed by households has increased, though households also report a decline in income from sales of fish. Monitoring suggests that the reduced fish catch is due to a combination of fish being harder to catch in larger amounts of rapidly flowing water, as well as reduced fishing effort. Poorer households have experienced a slight increase in income from the sale of fish, whereas wealthier households have reported a decline. This is most likely connected to the smaller type of fishing gear (e.g., scoop nets, small traps) used among poorer households to catch fish mostly in smaller tributaries and wetlands. Nam Theun 2 Board Update: Project Progress during 2012 • Boreholes. NTPC installed a large number of boreholes in downstream villages to enhance access to potable water. To address groundwater quality problems, sand filters have been put in place where required as a way of reducing naturally occurring high levels of iron, and replacement boreholes have been drilled where necessary to address turbidity or salinity issues. All boreholes were tested by NTPC for water quality prior to handover. NTPC is obliged to continue to test a subset of boreholes as part of the ongoing water quality monitoring system. • Erosion. NTPC has been monitoring erosion along the banks of the Xe Bang Fai since prior to the onset of operations, and the data indicate that the impact so far has not been significant. Prior to the start of operations, the project conducted a thorough inventory of all infrastructure or assets close to the Xe Bang Fai riverbanks that potentially could be impacted by erosion, and consulted with communities and households on whether it made sense to move or monitor those assets that were within five meters of the river bank. Some households requested that cultural assets be moved, which the project has done. There are two important cultural resource sites which cannot be moved, and they are being closely watched. So far, no further action is necessary with respect to these two sites. 24 Photo by Stan Fradelizi/World Bank, 2012 Nam Theun 2 Board Update: Project Progress during 2012 24. In line with the Concession Agreement and the Financing Agreements with the IFIs, Government assumed full responsibility for managing ongoing livelihood programs downstream along the Xe Bang Fai as of January 1, 2013. In accordance with a mutually agreed plan, the implementation of the Downstream Program (DSP) was the joint responsibility of the Government and NTPC until December 31, 2012. The CA provides for the DSP to continue for five years after the Commercial Operations Date (April 2010) or the disbursement of the ceiling of allocated funds (US$16 million).4 Government has assumed responsibility for continuing implementing of key DSP activities through April 2015 in accordance with the respective provisions of its financing agreements with IFIs. A detailed transition strategy was agreed upon with relevant local authorities, NTPC and the IFIs to help ensure an effective transition. The Downstream Program has gradually evolved from a targeted NTPC-managed program focused on mitigating short-term project impacts to a set of mainstreamed Government livelihood programs that foster local socioeconomic development for all residents of these areas. In 2014, NTPC will conduct a final socio-economic assessment of the status of communities affected downstream. The IFIs and other donors are providing complementary support to local development efforts in downstream areas, including 25 with respect to strengthening the capacity of provincial and district authorities. 25. The Government is finalizing its arrangements to allocate budget resources in a timely and predictable manner to implement the Downstream Program. The Government Letter of Implementation Policy (GLIP) along with the Financing Agreements between Government and the IFIs outline GOL obligations to ensure adequate resources for program implementation. Timely and predictable budget availability is essential to enable local government agencies to provide the required support for affected populations. After some delays, the Government has allocated resources for these purposes for the fiscal year 2012/2013, and plans for next year have been submitted in conformity with annual Government budgeting cycles. The IFIs are committed to supporting Government efforts to strengthen institutional arrangements and capacities to complete its obligations in a satisfactory manner. Part of the Additional Financing for the Khammouane Development Project (KDP AF) has been tailored to support the province’s capacity (through provincial and district agricultural offices) to take over and sustain the livelihood achievements of the DSP. The KDP AF became effective in April 2012. 4 In the end, NTPC expended US$18.3 million for the DSP by December 31, 2012. Nam Theun 2 Board Update: Project Progress during 2012 26 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 Watershed and the Environment 26. The Second Social and Environmental Management Framework and Operational Plan (SEMFOP II) was endorsed by the board of the Watershed Management and Protection Authority (WMPA). The SEMFOP II, which guides the second five-year (2012-2017) operating period for the WMPA, incorporates updated approaches for prioritizing enforcement efforts around particularly sensitive areas of biodiversity, and also incorporates the Watershed Access Restriction Framework that was a requirement of the Concession Agreement. The new plan also highlights the changing roles and responsibilities of the WMPA, which were redefined in Prime Ministerial Decree 471 of 2011. 27. Securing the Watershed is a long-term challenge. Protection of the natural resources of the watershed remains challenging. The biodiversity of flora and fauna in the watershed continues to decline due to high demand and prices for hardwood and wildlife products in the region, challenging terrain, the presence of sophisticated regional smuggling networks, and limitations in law enforcement. At the 27 moment, pressure is primarily from those living outside of the Watershed. Ongoing infrastructure development in and near the Watershed represent substantial threats to the protection of this biodiversity area if not managed carefully. A robust effort is needed from the national authorities, provincial authorities and the WMPA to ensure the effective enforcement of existing legislation and the protection of the Watershed. 28. Specific wildlife and environmental programs continue to progress satisfactorily. The wildlife rescue efforts and the turtle program have been fully completed. Other programs such as reservoir patrolling, the wetland program and wildlife monitoring have been completed and handed over to Government by NTPC, and now require ongoing support from the GOL to continue. Reservoir wetlands have developed well, and the salt licks built by NTPC, now maintained by WMPA, are being used by elephants and other wildlife. A Wildlife Adaptive Management Committee meets regularly to discuss issues and make recommendations on how to overcome implementation issues. Nam Theun 2 Board Update: Project Progress during 2012 28 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 NT2 Revenue Management Arrangements 29. The reforms achieved through the Government’s Public Financial Management Strengthening Program are improving fiduciary capacity and have facilitated NT2 Revenue Management Arrangements. Implementation of the revenue management arrangements has helped Lao PDR to put in place tools for more transparent and accountable management of public resources. For example, this includes development of a budget classification and monitoring system capable of reporting expenditures on budgetary outlays. The State Audit Organization is building its capacity to conduct performance audits. In April 2011, the State Audit Organization published, in the local press, the summary of findings from the audit of the budget execution reports for FY2008/09 – for the first time in recent history. The Government has also implemented a Treasury Single Account framework managed by the recently-established National Treasury. 30. NTPC has been paying Resource Usage Charges (royalties) and 29 dividends to Government since the onset of commercial operations. The GOL financial year runs from October 1 to September 30, and during the first partial year of operations NTPC paid US$5.4 million to Government in royalties. That amount has steadily increased, and during FY12, NTPC paid around US$27 million in royalties and dividends, and is projected to pay nearly US$36 million during the current financial year. NTPC transfers the funds to the Bank of Lao PDR, which in turn deposits the money into the National Treasury Designated Account. Annual audits on the funds trans- fer to the National Treasury are expected to verify compliance with obligations under the NT2 RMA. Nam Theun 2 Board Update: Project Progress during 2012 31. Government has made allocations for eligible expenditures across health, education, rural roads, rural electrification and environment. Progress has been made on improving budgeting for social sectors. Although the focus thus far has been mostly on identifying projects within the health and education sectors that are eligible for NT2 revenues, for the first time in 2012/13 provincial and district allocations for health and education have been planned centrally and ring-fenced in provincial and district budgets. Agreeing the sector allocations of budgets at the provincial and district level earlier on in the budget process will mean that there is oversight of how the whole government budget is allocated indicatively by sector prior to budget approval. Between 2010 and 2012, NT2 revenue allocations totaling nearly US$28.7 million (of which US$28.25 was spent) were channeled to priority programs - including teacher training, provision of school text books, health services targeting the rural poor, and electrification of rural villages. This represents a nearly three-fold increase, from US$5.4 million in FY 2010 to US$15.0 million for the current FY 2013. During this same period, GOL’s own-source recurrent and local capital allocations for and spending on education, public works and transport, agriculture and other related priority sectors also increased. 30 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 32. With eligible programs identified, the focus continues to be on refining reporting modalities and coordination mechanisms, and fulfilling reporting and financial obligations. Implementation of eligible programs is underway. The involved agencies are maintaining information on the physical progress of the projects. The Ministry of Finance (MOF) provided the financial flows statement for FY2010/11 in late 2012 and work is ongoing to finalize development of the NT2-financed project performance report. It will be important to maintain focus on assuring higher resources are being channeled particularly to social sectors which have historically experienced fluctuations in recurrent budgets as a percent of the total recurrent budget. At the same time, internal coordination mechanisms between the MOF, the Ministry of Planning and Investment (MPI), sector ministries, and the State Audit Organization need to be strengthened further to ensure that all respective agencies remain current on the requirements and commitments within the NT2-RMA. Enhanced coordination across these key agencies is also important for the Government’s own budget and reporting processes. 33. While the Government has made significant progress in allocating NT2 revenues to eligible projects and programs, more work needs to be done to comply fully with financial and reporting obligations. 31 Under the NT2-RMA, progress reports on projects funded by NT2 revenues and accompanying financial reports are submitted to IFIs six months after the end of each Lao Financial year. Audits are to be conducted annually. Although the World Bank has received reports on the allocation and actual expenditure of NT2 revenues by sector and by some projects, the IFIs have not yet received a formal report on the use of revenues since the beginning of commercial operations, and the State Audit Organization has not yet audited the use of NT2 revenues. This is not compliant with the CA. The IFIs will continue to work closely with the respective Government agencies to ensure full compliance with the NT2 RMA requirements. 34. Looking ahead, there is a need to consider measures to further improve general Government budgeting for social sectors as part of the government’s overall budget and planning reforms. These measures include: (a) integrating the capital and recurrent budgets, and focusing on availabilities-based budgeting while moving away from needs-focused budgeting; (b) progressively implementing full, functional classification for social sectors; (c) integrating the recurrent and investment budgets, including the personnel budgets; and (d) developing appropriate monitoring and evaluation tools to ensure the objectives and outcomes can be evaluated. These measures will ensure that, progressively, the focus for NT2 revenue management arrangements would transition from specific projects to considering results at the sector level within the country systems perspectives. Nam Theun 2 Board Update: Project Progress during 2012 32 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 MONITORING AND OVERSIGHT ARRANGEMENTS 35. The World Bank and the ADB continue to provide enhanced implementation support and to monitor project implementation progress. The World Bank and ADB are closely tracking project implementation, as well as helping to build capacity and address challenges as they arise. Annual joint IFI supervision missions are complemented with frequent technical visits by the field-based teams. In addition to project implementation support, the World Bank and ADB teams are also supporting a variety of complementary activities that strengthen Government capacity at both the sector and local levels. 36. Visits of the Environmental and Social Panel of Experts (POE) continue. The POE conducted their 19th and 20th missions in March and December 2012 respectively. The Panel’s mission reports recognized continued progress in implementing the Project while noting a number of concerns, particularly around the need to strengthen 33 protection of the Watershed’s biodiversity from external pressures, securing the sustainability of resettler livelihoods on the Nakai Plateau, as well as further mitigation measures along the Xe Bang Fai (XBF). The POE encouraged the Government, NTPC and the IFIs to work together to realize the broader (beyond NT2) potential of the Xe Bang Fai river basin. All POE reports are available on the Government and NTPC websites.5 37. In addition to its formal oversight structures, the NT2 Project continues to attract attention from international non-governmental organizations. The World Bank and ADB continue to receive feedback from some NGOs that have particular interest in the project. The supervision team follows up on any concerns raised, as appropriate, and conveys replies through meetings, where participants are welcome to exchange opinions on any project implementation matters, and/or written communications. The formal communications exchanges of the World Bank and the ADB with these NGOs are made public through websites. 5 The Government’s website is: www.poweringprogress.org. NTPC’s website is: www.namtheun2.com. Nam Theun 2 Board Update: Project Progress during 2012 34 Photo by Bart Verweij/World Bank, 2013 Nam Theun 2 Board Update: Project Progress during 2012 LOOKING AHEAD 38. In general, NT2 implementation continues to proceed satisfactorily. The ultimate success of the project will be determined when the full set of environmental and social programs has been implemented and their results have been measured. Project revenues are being spent on priority poverty reduction and environmental programs in Lao PDR. Most resettler households are currently significantly better off than they were before the project. Yet it is important to remember that key social and environmental commitments are not yet over, including the measurement of socioeconomic targets in 2013/14 and the completion of the Downstream Program in 2015. The World Bank and ADB remain committed to working closely with the Government, NTPC and local communities over the coming years to ensure that project obligations are met and that both national and local benefits from the project are realized. 39. The focus of the World Bank and ADB project implementation 35 support efforts in the coming years will continue to be on the medium-term social and environmental challenges as well as the Revenue Management Arrangements. These areas include: (a) continued work on achieving sustainable livelihood objectives for resettlers, and preparation for handover of the livelihoods support program to local government; (b) monitoring of the Downstream Program being implemented by the GOL; (c) monitoring the management of the NT2 Watershed by the WMPA, including both the conservation of biodiversity and the appropriate socio-economic development of the people living in the Wateshed; and (d) implementation of the NT2 Revenue Management Arrangements. The World Bank and the ADB will continue to provide regular public reports on the implementation of the project, and to work closely with NTPC and Government to achieve project objectives. Given the advanced implementation status of the project, this Update will be the last formal update submitted to the Boards of Directors of the World Bank and the Asian Development Bank respectively. The Update will continue to be published as part of regu- lar public reporting on project progress, and will be available in print as well as on the World Bank’s website (www.worldbank.org). The World Bank Group The World Bank Lao PDR Country Office Patouxay Nehru Road P.O Box: 345 Vientiane, Lao PDR Tel: (856-21) 266 200 Fax: (856-21) 266 299 Websites: www.worldbank.org/lao www.worldbank.org/laont2 The World Bank 1818 H Street, NW Washington, D.C. 20433, USA Tel: (202) 4731000 Fax: (202) 4776391 Website: www.worldbank.org ADB Asian Development Bank Asian Development Bank Lao PDR Resident Mission Corner of Lanexang Ave. and Samsenthai Road. P.O Box: 9724 Vientiane, Lao PDR Tel: (856-21) 250 444 Fax: (856-21) 250 333 Website: www.adb.org/laopdr Asian Development Bank 6 ADB Avenue Mandaluyong City 1550 Metro Manila, Philippines Tel: (632) 632 4444 Fax: (632) 636 2444 Website: www.adb.org