43708 LaoPDRataglance East Key Development Indicators Lao Asia & Low GDP growth (%) PDR Pacific income 10 2007 8 Population, mid-year (millions) 5.9 1,900 2,403 6 GNI (Atlas method, US$ billions) 3.4 3,539 1,562 4 GNI per capita (Atlas method, US$) 580 1,863 650 2 GNI per capita (PPP, international $) 2,378 6,821 2,698 0 01 02 03 04 05 06 GDP growth (%) 7.5 9.4 8.0 GDP per capita growth (%) 5.7 8.6 6.1 Lao PDR EAP LIC Local Prices 2005 2006 2007 160 Inflation (% change) Consumer prices (annual % change) 10.5 6.8 4.5 120 Implicit GDP deflator 8.0 4.7 4.1 80 Exchange rate (period average, kip per 1 US$) 10,636 10,061 9,622 40 Structure of the Economy 0 GDP (US$ millions) 2,887 3,455 4,053 99 00 01 02 03 04 05 06 07 Agriculture (% of GDP) 44.3 42.0 40.3 CPI GDP deflator Industry (% of GDP) 30.0 32.5 34.1 Services (% of GDP) 25.7 25.5 25.6 Current account balance and Balance of Payments and Trade (US$ millions) trade (% of GDP) 40 Exports of goods (fob) 648 1,029 1,053 30 Imports of goods (cif) 1,059 1,397 1,969 20 Exports of goods and services 870 1,269 1,327 10 0 Imports of goods and services 1,120 1,466 2,046 -10 Net trade in goods and services) -250 -197 -719 01 02 03 04 05 06 07 -20 Current account balance (% of GDP) -11.7 -8.8 -19.1 -30 Non-resource current account (% of GDP) -9.7 -7.1 -8.3 CAB (% of GDP) Reserves, including gold 238 335 539 Exports (% of GDP) Government Finance (FY) (% of GDP) Fiscal performance (% of GDP) Total revenue (including grants) 13.1 14.7 15.9 30 Revenue 11.4 12.6 14.1 Tax revenue 9.4 10.8 12.5 20 Current expenditure 8.5 9.3 9.3 10 Overall surplus/deficit -4.4 -3.7 -2.5 0 -10 01 02 03 04 05 06 External Debt and Resource Flows Total debt (% of GDP) 77.1 69.1 64.7 Total revenue Total expenditure Total debt service (% of exports) 7.2 4.0 5.8 Overall surplus/deficit Gross foreign investment (US$ millions) 492 595 950 Debt service (% of gov. revenue) Source: Lao authorities, World Development Indicators and staff estimates. 2007 data are preliminary estimates and projections. Summary LaoPDR'soveralleconomic The external balance continued to outlook remains encouraging, but strengthen, but this could place upward rising inflation poses a risk pressure on inflation in the future. Reserves increased sharply close to the mark of 5 months of non-resource imports in 2007 Lao PDR's economic outlook remains and are expected to rise in 2008, driven by favorable, with continued strong projected high prices for mining and growth. GDP growth remained at above 7 agricultural exports, tourism receipts and FDI percent in 2007. Output expanded in inflows. Imports associated with large mining, newly emerging processing projects in the pipeline will exert pressure on industries, agriculture, new construction of the external current account deficit, which is hydropower projects, tourism and other expected to be nearly 19 percent of GDP. services. Non-resource sectors contributed However, the non-resource current account over 5 percent to this growth, and the deficit will remain relatively low at around 7 resource sector around 2.5 percent. As Lao percent of GDP. PDR is surrounded by some of the fastest growing economies in the world, it has Steady progress was made in the Public benefited from increased demands for its Financial Management reform agenda. products and large FDI inflows from The centralization of Treasury, Customs and neighboring countries, such as China, Tax Departments has commenced, including Vietnam and Thailand. the work on a new revenue sharing mechanism and piloting centralization in The macroeconomic situation remained three pilot provinces (Savannakhet, fairly stable, but is at risk of rising Khammoune and Borikhamxay). inflation. After falling to a record low level Implementation of the revised Chart of of 4.5 percent in 2007, overall inflation Accounts (COA) is progressing well and is climbed to 6.4 percent in February 2008. expected to be deployed by the FY2008/09 High fuel prices pushed up the costs of Budget. An Audit Peer Review by the SAO of transportation for individuals and New Zealand started in February 2008 to households, construction (including strengthen the capacity of the State Audit imported raw materials and other chemical- Organisation (SAO). related products), land clearing and agricultural farming (including processing Although the legal framework is in place materials). The kip nominal exchange rates to support greater international trade appreciated almost by 9 percent against and private sector activity, US$ and was steady against the Thai baht implementation remains incomplete. during the last six months from Oct 2007 to Some progress has been made to help Mar 2008. implement the new Enterprise Law, with approval of the Negative List of Business Activities occurring in November 2007. The government's fiscal position Preparation of new Mining Law and continued to improve. The GOL achieved implementing decree of the Tourism Law are its revenue targets for a second consecutive other important contributions. To facilitate year, increasing from 12.6 percent of GDP cross-border trade, the GOL reduced the in 2005/06 to about 14.1 percent in number of agencies represented at border 2006/07. The overall budget deficit is check points to immigration, customs and expected to decline from 3.7 percent of GDP quarantine. A new Commercial Banks Law in 2005/06 to about 2.5 percent in was endorsed and amendments to the FY2006/07. The GOL's key priority sector Presidential Decree on Foreign Exchange and spending has increased in recent years, Precious Metals were adopted in 2007. especially in education and infrastructure. Improvements also occurred in state-owned External public debts declined to 70 percent banks supervision, including replacement of of GDP, but remain elevated. BOL by MOF on the Board of the Banks to represent GOL's ownership role, reductions in NPLs, and drafting of a progressive financial and banking sector strategy. Contents Summary_____________________________________________________________ 1 1 RecentEconomicDevelopments___________________________________ 3 1.1 Macroeconomic Situation______________________________________________ 3 1.2 Implementation of the poverty reduction strategy__________________________ 10 2 Structuralreforms_______________________________________________ 11 2.1 Public expenditure policy and management_______________________________ 11 2.2 Reform of state-owned enterprises _____________________________________ 13 2.3 Financial sector reform_______________________________________________ 16 2.4 Trade reform ______________________________________________________ 18 2.5 Private Sector Development___________________________________________ 20 3 Donorassistanceonreforms_____________________________________ 23 3.1 Key Donor Assistance to Reform Agenda in Lao PDR________________________ 23 3.2 Increasing the Impact of Development Assistance__________________________ 25 FIGURES Figure 1. GDP growth (%) and inflation (% change) ________________________________________ 4 Figure 2. Growth with and without major projects __________________________________________ 4 Figure 3. Food and nonfood prices (% change) ____________________________________________ 5 Figure 4. Contribution of food and non-food prices to inflation ________________________________ 5 Figure 5. Key products affected by oil and gold prices in recent months (levels, % change) _________ 6 Figure 6. Global food and metal price indices______________________________________________ 6 Figure 7. Lao Food CPI breakdowns (% change) ___________________________________________ 8 Figure 8. Lao exchange rates (Dec 2006=100) ____________________________________________ 8 Figure 9. Current account balance (% change) ____________________________________________ 8 Figure 10. The government revenue performance __________________________________________ 9 Figure 11. Lao PDR's public external debt_________________________________________________ 9 Figure 12. LPI of selected countries (LPI is given on a numerical scale, from 1 (worst) ____________ 18 Figure 13. Lao PDR exports and imports_________________________________________________ 19 Figure 14. Key export commodities (mil. US$)____________________________________________ 19 Figure 15. Key import commodities (% of total)___________________________________________ 19 Figure 16. Exports by country, FY2007__________________________________________________ 20 Figure 17. Imports by country, FY2007 _________________________________________________ 20 Figure 18. FDI in Lao PDR____________________________________________________________ 21 Figure 19. FDI by sector (US$ m)______________________________________________________ 21 Figure 20. ODA disbursements using national procedures in SEA countries (%, FY06)_____________ 25 TABLES Table 1. Import and export decomposition________________________________________________ 7 Table 2. Food share in consumption* and food poverty, %, 2002/03 ___________________________ 7 Table 3. Balance of payments, 2004-07 (mil. of US$) _______________________________________ 8 Table 4. Government Revenues _______________________________________________________ 12 Table 5. Government Expenditures_____________________________________________________ 12 Table 6. GOL's 4 priority sectors expenditures ____________________________________________ 12 Table 7. Recent water tariff change in Vientiane Capital (from May 2007 until now)_______________ 14 Table 8. Lao PDR financial sector profile, 2006____________________________________________ 16 Table 9. Some improvements of financial indicators of Lao PDR banking sector __________________ 17 Table 10. Financial ratios of largest 15 join ventures (2002-06) ______________________________ 22 ANNEXES ANNEX 1 - Acronyms and abbreviations __________________________________________________ 27 ANNEX 2 - Lao PDR export-oriented sectors _______________________________________________ 28 ANNEX 3 - Major foreign investments in Lao PDR ___________________________________________ 29 ANNEX 4 - Donor assistance projects on Lao PDR reform agenda ______________________________ 31 2 1R ECENT ECONOMIC DEVELOPMENTS 1.1 MACROECONOMICSITUATION 1.1 MACROECONOMICSITUATION Inthe1990sandearly2000s,LaoPDR'seconomygrewatanannualaveragerateof6.3percentandpoverty incidence fell from 46 percent of the population in 1992-93 to 33.5 percent in 2002-03. During the Asian economic crisis (1998-1999) inflation climbed to an annual average of 110 percent and growth fell to 4 percent. Resolution of the crisis and Lao PDR's macroeconomic policies helped stabilize the economy and growth resumed at around 6 percent in the early 2000s. The adoption of a stabilization program since 2000 and implementation of several reform programs since 2001 ­ in public expenditure management, banking, SOEs, forestry, trade and the private sector ­ contributed to this improvement. During 2003-06, inflation declined from 15.5 percent to 6.8 percent and real GDP growth accelerated from 6.1 percent to 8.1 percent. ThelargeinflowsofFDIinthehydropowerandminingsectorshavesignificantlycontributedtogrowthinrecent years. However, increasing reliance on natural resources means that growth will progressively be more sensitive to the volatility of commodity prices and could impede development of other sectors. These risks will need to be prudently managed in future. Non-resource sectors (agriculture, manufacturing and services) have also contributed to overall growth and FDI has increased significantly in the last a few years. TheeconomicoutlookforLao PDR remains favorable, but rising inflation poses a risk GDPgrowthremainedstableat over 7 percent in 2007 and this is expected to continue into 2008. However the inflation rate has been climbing in recent months. While it had fallen to 4.5 percent in 2007 (down from 6.8 percent in 2006), inflation rose again to around 7.7 percent in March 2008. The government's fiscal position continued to improve in FY2006/07 owing to higher-than-targeted revenue collection and lower-than- planned expenditures, while implementation of the public finance management (PFM) reform agenda has been steady. Although the legal framework is in place to support greater international trade and private sector activity, implementation remains incomplete. 3 Grroowtth Growth w h Notwithstandingamorechallenging The remaining 5 percent is expected to international economic environment, the come from investments in plantations for Lao economy is expected to maintain a agricultural crops and industrial forestry, rapid growth rate. steadily rising tourism revenues, and newly emerging food and nonfood RealGDPgrowthisestimatedat7.5percent processing industries. As Lao PDR is in 2007 and projected to rise to 7.9 percent in surrounded by some of the fastest growing 2008 (see Figure 1). New hydro and mining economies in the world, it has benefited projects are expected to only contribute from increased demands for its products around 2.5 percent of this growth, including and massive FDI inflows from neighboring from construction of four hydro-power dams countries, such as China, Vietnam and and a large copper plant (see Figure 2). Thailand. Figure 1. GDP growth (%) and inflation (% change) GDP (left axis) Inflation, period average (right axis) 10 28 8.1 23.2 TheLaoeconomy 7.5 24 8 7.1 continued to grow 6.4 20 5.8 5.8 5.9 6.1 quickly and steadily 6 16 10.5 10.6 4 15.5 12 7.2 6.8 8 4.5 2 7.8 4 0 0 2000 2001 2002 2003 2004 2005 2006 2007 Source: Lao authorities and staffs estimates. Figure 2. Growth with and without major projects Without large hydropower and mining projects With large hydropower and mining projects Thenon-resource 9 8 .1 sector contributed 8 7.5 7.1 about 5 percentage 7 6 .4 points to overall 6 .1 5.8 5.9 growth, while the 6 5.8 5.4 remaining 2.5 5.0 5 5.8 5.7 5.8 percentage points 4 .2 6 .1 4 .3 4 came from resources 3 2000 2001 2002 2003 2004 2005 2006 2007 Source: Staffs estimates. Latest projections for 2007 4 Innffllaattiioonn Inflation Having dropped to historic lows in months were: food (mainly sticky rice, meat 2007, inflation picked up to about 7 and poultry); transport (fuel, tickets and percent in March 2008, fueled by high airfares); housing (imported construction global oil prices. Rising inflation was materials, especially various steel products mostly due to: higher oil prices; and timber); personal care; and jewelry. fluctuations in local food prices due to low Although the food prices grew more slowly grain harvests caused by bad weather during Oct-Feb, it has climbed up in March conditions in 2007 and culling of birds due 2008 to about 9 percent, and is therefore to bird flu risk; and rising non-food prices. pushing up aggregate prices. The nonfood In particular, the key product categories prices also grew continuously to over 6 contributing to price increases in recent percent in recent months (Figure 3). Figure 3. Food and nonfood prices (% change) Total CPI Food CPI Non-food CPI 14 12 Havingdroppedto historic lows in 10 2007, inflation 8 7.7 picked up recently to 6.3 5.6 6.1 6.4 6 5.5 5.6 over 6 percent, the 4.9 4.6 4.2 target set by GOL for 4 3.6 3.5 3.5 3.5 3.6 2008. 2 0 07- 70- b 70-r 70-r 7 07 07- 07 07 07 n l- 70- 70- g p t-0c 08- 80- v- b 80-r o ec- Jan Fe Ma Ap May- Ju Ju Au Se O N D Jan Fe Ma Figure 4. Contribution of food and non-food prices to inflation1 Food (40.9%) Transport (25.8%) Household goods (6.0%) Beverages & tobacco (4.2%) High food, transport, Cloths & footwears (3.6%) Recreation & education (5.1%) Medical care (2.5%) Housing (3.4%) housing and personal 9 Personal care (4.4%) Restaurants (4.2%) care prices 8 contributed to rising 7 inflation in Lao PDR in 6 recent months 5 4 3 2 1 0 07-n 70 b- 70-r 7 7 7 -0r 70-y 70 70-l 70 70-p -07 v-0 08-n 80 b- 80-r Ja Fe Ma Ap Ma un-J ug- t-0c Ju A Se O No Dec Ja Fe Ma Source: Lao authorities (NSC) and staff calculations 1 Lao CPI weight distributions (out off 100): food - 40.9 percent of total CPI, Beverages & tobacco - 4.2 percent, Cloths & footwears - 3.6 percent, Housing - 3.4 percent, Household goods - 6.0 percent, Medical care - 2.5 percent, Transport & communications - 25.8 percent, Recreation & education - 5.1 percent, Restaurants - 4.2 percent and Personal care - 4.4 percent. 5 Figure 5. Key products affected by oil and gold prices in recent months (levels, % change) Food,transport, Food Transport Housing Personal care housing and especially personal 16 care (jewelry) prices 14 grew fast in recent 12 months as a result of 10 high fuel and gold 8 prices. Food prices 6 were also vulnerable 4 to seasonality 2 0 -2 07-n 70 b- 70-r 70-r 70-y 70-n 07-l 70-g 70-p 07 07 70-c 08-n 80 b- 80-r -4 v-o Ja Fe Ma Ap Ma Ju Ju Au Se Oct- N De Ja Fe Ma Source: Lao authorities and staff calculations. Givenrecenttrends,theGOLinflation exchange rates; Ministry of Finance (MoF) target of 6 percent will be difficult to is to sustain good fiscal performance and achieve. revenue management; the Ministry of Agriculture and Forestry is to promote Nevertheless,theGovernmenthastasked food and agricultural production; and several agencies to help control inflation. Ministry of Industry and Commerce is to The Bank of Lao PDR (BOL) is to maintain monitor retail prices in the country and tight monetary policies and stable warn of emerging deficits. However, Lao PDR is also benefiting two years, production and exports of Lao from rising raw material export prices. agricultural products (maize, coffee, rice, Lao key raw material exports include metals fruit and vegetables) increased due to (mainly copper, gold and tin), rubber, sugar growing demand from neighboring countries and other agro-industrial products. In the last - see Figure 6. Figure 6. Global food and metal price indices (2003 = 100) Coffee Copper Gold Maize Rice Rubber 450 Laoexportersof 400 metals, grain and 350 other crops benefited from high commodity 300 prices in global 250 markets 200 150 100 50 2004 2005 2006 2007 Source: Lao authorities and staff calculations. 6 Table 1. Import and export decomposition 2004 2005 2006 2007 Exports(mil.US$) 500 648 1,029 1,053 Agriculture 36 42 65 80 Coffee 15 8 13 31 Exportsof Other crops and livestock 18 30 45 46 agricultural products Non-timber forest products 4 4 7 3 Naturalresources among others are 149 308 631 635 Electricity growing steadily in 91 105 104 99 Mining recent years. Lao 58 203 527 536 Manufacturing PDR remains 300 275 266 291 Garments relatively a net food 155 138 126 153 Woods and wood products 145 137 140 138 exporting country Other 16 21 67 48 Imports(mil.US$) 958 1059 1397 1969 Food products 24 28 40 55 Fuel 95 175 201 250 Resource imports 232 358 431 897 Other investment goods 287 273 344 308 Other consumption goods 157 68.3 223 251 Raw materials and intermediate goods 163 157 157 208 Source: Lao authorities and partner countries and staff estimates Table 2. Food share in consumption* and food poverty, %, 2002/03 Share of food in consumption Lao PDR 74.6 Urban areas 69.6 Foodisthepredominantpartof Rural 76.1 consumption in Lao PDR. The Poorest districts 79.8 food poverty rate was nearly 20 Second-poorest districts 77.3 percent in 2002/03 Other districts 72.2 Food poverty** Lao PDR 19.8 Urban areas 14.3 Rural 21.5 *Note: Consumption is defined as all food consumption including own, plus non-food Rural with all-season roads 16.9 consumption without durable goods (furniture, Rural without all-season roads 27.6 kitchen appliances, sewing and washing machines, Poorest districts 26.9 vehicles, TVs, video or audio recorders, computers, Second-poorest districts 25.9 and housing or rent) Other districts 16.1 **Note: Food poverty is defined as percent of population consuming less than necessary calorie intake priced at average related basket. Source: LECS III Local food prices were more closely agriculture and self-sufficient production in linked with seasonality than global most provinces. For this reason, it is trends. Even though the price of rice expected that increasing inflation and global continued to grow strongly year-by-year, consumption patterns will impact urban aggregated food CPI declined in recent households more than the rural poor. In months to below the 2007 average of 8 addition, natural disasters (flood and percent. This was mostly due to the fact that drought) and other factors have had impacts the economy is based on subsistence on food production and prices - see Figure 7. 7 Figure 7. Lao Food CPI breakdowns2 (% change) Food (40.9%) Meat (11.9) Rice (7.3) Vegetables (4.9%) Changesinthe Fish (4.8%) Poultry (2.3%) 35 price of main food 30 items, such as rice, 25 meat, fish, poultry 20 and vegetables in 15 Lao PDR is driven 10 seasonality, more 5 than global trends 0 -5 07- 70 b- 70-r 70-r 07 70 70- 70 70-p 70-t 70-v 07 08- 80 b- 80-r ay- ug- ec- -10 Jan Fe Ma Ap M un-J Jul A Se Oc No D Jan Fe Ma Source: Staff calculations based on Lao authorities data. Exchangeratesandexternalbalances E The kip exchange rate appreciated in 2007 and are expected to rise in 2008 driven sharply - see Figure 8. Between Oct 2007 and by high prices for mining and agricultural Mar 2008, the kip nominal effective exchange exports, tourism receipts and FDI inflows. rates (NEER) appreciated by almost 9 percent Imports related to large projects in the pipeline against US$. Similar trends are expected in the will exert pressure on the external current real exchange rates. The NEER levels were account deficit, which is expected to be nearly 8,735 kip per US$ and 278 kip per baht at 19 percent of GDP. However, non-resource end-Mar 2008 compared to 9,593 and 282 in current account balance was at around 7 Oct 2007. Reserves increased sharply close to percent of GDP in 2007 - see Figure 9. the mark of 5 months of non- resource imports Figure 8. Lao exchange rates (Dec 2006=100) Figure 9. Current account balance (% change) Kip/USD Kip/Baht Exports (%of GDP) CAB (%of GDP) 120 40 Non-resource CAB (%of GDP) 2 9 .9 110 30 2 6 .3 19 .9 2 2 .4 20 100 10 90 0 80 -10 -7.1 -8 .3 -9 .7 -7.4 -8 .8 -11.7 -13 .5 70 -20 -19 .1 07-n 70-b 07-r 70-r 7 70-l 7 70-p 70-t 70-v 08-n 80-b 08-r -30 ec-06 D Ja Fe Ma Ap 2004 2005 2006 2007 May-07 un-0J Ju ug-0 ec-07 A Se Oc No D Ja Fe Ma Source: Lao authorities (BOL) and staff estimates. Source: Lao authorities (BOL) and staff calculations Table 3. Balance of payments, 2004-07 (mil. of US$) 2004 2005 2006 2007 Current Account -339 -339 -303 -775 Merchandise trade balance -459 -410 -368 -915 Services (net) 132 161 153 196 Income (net) -98 -175 -250 -193 Transfers (net) 85 85 162 138 Capital Account 358 356 403 982 Overall Balance 19 17 100 207 Source: Lao authorities (BOL) and staff preliminary estimates 2Food CPI consists of 12 sub-groups and the top five are meat (11.9 percent of total CPI), Rice and cereals (9.4 percent), vegetables (4.9 percent), fish (4.8 percent), poultry (2.3 percent) and the rest (7.9 percent). 8 Governmentrevenueperformance G The government's fiscal position About 20 percent of GOL's revenue came from continued to strengthen. The GOL the resource sector. The overall budget deficit achieved its revenue targets for a second is expected to be around 2.5 percent of GDP in consecutive year, with budget revenues FY2006/07 (down from 3.7 percent in FY2006), increasing from 12.6 percent of GDP in if expenditure patterns remain unchanged. 2005/06 to around 14.1 percent in 2006/07. Figure 10. The government revenue performance Revenue (%of GDP) Budget deficit (%of GDP) 20 TheGOL'srevenue performance continues 14 .1 15 12 .6 11.4 to improve, while the 10 budget deficit is 5 declining 0 -5 -2 .5 -3 .7 -4 .4 -10 FY05 FY06 FY07 Source: Lao authorities (MoF) and staff estimates. Externalpublicdebt E Lao PDR's external public debt ratios sustainability thresholds for countries with have declined during 2006, but remain comparable CPIA ratings, placing Lao PDR elevated. At end-2006, Lao PDR's stock of in the IDA's "high risk of debt distress" public and publicly guaranteed external debt category. However, debt servicing was equivalent to 70 percent of GDP, indicators remained under indicative comprising 135 percent of exports in NPV thresholds due to high concessionality of terms and 377 percent of fiscal revenues. All debt. Lao PDR is therefore unlikely to face three debt stock indicators exceeded the difficulties in serving its debts, in the indicative absence of the external shocks. Figure 11. Lao PDR's public external debt Percent of GDP (left axis) Debt service (% of exports) Percent of exports (in NPV term, right axis) TheGOL'sexternal 240 public debt has 200 declined steadily in recent years as a 160 percentage of GDP 120 and exports, and does 80 not pose debt 40 servicing difficulties 0 2004 2005 2006 2007 Source: IMF DSA Data and staff recent estimates 9 1.2 IMPLEMENTATIONOFTHEPOVERTYREDUCTIONSTRATEGY 1.2 IMPLEMENTATIONOFTHEPOVERTYREDUCTIONSTRATEGY TheGOLaimstomaintainrapideconomicgrowthinordertoimprovethelivingconditionsofthepoor,graduate from its status as a LDC by 2020 and meet the Millennium Development Goals (MDGs). Lao PDR's first full Poverty Reduction Strategy Paper (PRSP), the National Growth and Poverty Eradication Strategy (NGPES), was finalized in February 2004 and was presented to the Boards of the IMF and IDA in November 2004. The NGPES process was initially launched in parallel to the national planning process and served as a basis for support by donors while introducing key PRSP principles to the national planning process, such as broad participation, poverty focus and result-orientation. Since 2005, efforts have been made to update the PRSP/NGPES and integrate it into the 6th Five-Year National Socio Economic Development Plan (NSEDP) covering the period 2006-2010. The development strategy of Lao PDR was articulated in the NSEDP, which was approved by the National Assembly on June 17, 2006 and presented at the 9th Round Table Meeting on November 28, 2006. The NSEDP incorporates key elements of the NGPES, especially its geographical targeting and overall poverty focus. The NSEDP envisages the achievement of poverty reduction through a combination of broad-based growth and focused poverty-reduction interventions. In addition to maintaining a sound macroeconomic framework, the four key pillars of the plan are i) human-development-driven economic growth; ii) competitiveness, trade and regional integration; iii) social development and focused poverty reduction interventions; and iv) good governance. At the annual Round Table Meeting in TheGOLreportedsomeconstraintsto November 2007, the GoL presented its implementing the NSEDP, including: annual progress report on implementing · structural weaknesses in the economy; the NSEDP to donors and I-NGOs - see it at · little progress in expanding the growth www.rtm.org.la. The report is an improvement base and diversifying economic activities; on former annual progress reports. It · inequalities and disparities of economic prioritizes reporting on key development areas, growth and social development between is consistent with relevant quantitative and different geographic area and groups of qualitative data, and often links targets set and the populations; and met in the previous year(s). Furthermore, it · insufficient natural resource management presents operational implementation guidelines and associated revenue generation. for reaching next year's targets and progress reporting on each MDG goal. It also encourages development partners (DPs) to The NSEDP still lacks a comprehensive provide program aid. M&E framework. The recent annual NSEDP progress reporting would benefit from Progressin2006-07toimplementthe monitoring results within NSEDP specified NSEDP included among several others priority programs, by using reliable data (according to Report): which is linked to NSEDP impact targets. In October and December 2007 the MPI · Passing of the new budget law by the NA; launched two training events for monitoring · Increases in domestic revenues according the NSEDP under the capacity enhancement to targets; program. Continued capacity enhancement · Slow but continued increases in the for monitoring NSEDP implementation will primary education enrolment rate to 87 assist the GOL to engage in the critical task percent up from 84.2 percent in 2005 to elaborate an action plan for developing (target of 90.6 percent for 2010); and and implementing a comprehensive M&E · Reduction of the death rate associated framework for the NSEDP and its successors. with malaria, down from 9 per 100.000 people in 1990 to 0.4 in 2006 (in line to meet the 2015 target of 0.2). 10 2S TRUCTURAL AND POLICY REFORMS TheGOLhasmadesomegoodprogresson framework, but actual implementation of laws reforms in 2007 and early 2008. However, remained slow. Detail on key reform areas, such the pace of reform was uneven across as PFM, SOE restructuring, banking sector, trade sectors. Key achievements related to building and private sector development is below. the legal 2.1 PUBLICEXPENDITUREPOLICYANDMANAGEMENT 2.1 PUBLICEXPENDITUREPOLICYANDMANAGEMENT TheGOLadoptedacomprehensivemedium-termPEMSPinearly2005,focusingonstrengtheningPFMsystems and building the capacity of the MoF and Provincial Finance Departments. To complement this, the GOL promulgated the new Budget Law in February 2007 to address the weaknesses in the intergovernmental fiscal framework that stem from decentralized management of public finances and inadequate monitoring and control mechanisms. Key reforms include centralizing the Treasury, Customs and Tax Departments, developing a new fiscal transfer system, establishing greater control of public finance resources and aligning policies to the budget. The new Audit Law was also promulgated by the NA in July 2007, to allow the SAO to directly report to it instead of the Prime Minister. To succeed, these reforms will require significant capacity increases, continued political commitment, technical assistance, a 3-5 year implementation plan and a revenue sharing framework. Another important issue is the implementation of the Value Added Tax (VAT), which is currently planned for October 2008. Successful implementation will require close coordination between the Tax, Customs and Treasury Departments. Fiscalpolicy Revenues have continued to perform The GOL made efforts to reduce strongly, with higher than anticipated leakages in tax revenue in FY2006/07 by resource revenues flowing from high requiring traders to disclose the identities of commodity prices and non-resource revenue purchasers and introducing an electronic tax and gains from tax changes in 2005. Revenue return submission system for large tax collection excluding grants as a share of GDP payers. These measures have increased the is estimated to have risen from 11.4 percent transparency of the tax system and helped to of GDP in FY2004/05 to 12.6 percent of GDP raise tax revenue to well above the 6 percent in FY2005/06 - slightly above budget target during the first 10 months of the fiscal estimates. Revenues are expected to increase year. to 14.1 percent of GDP in FY2006/07. Revenue increases helped reduce the fiscal Expenditures were in line with annual deficit from 4.4 percent in FY2004/05 to 3.7 budget estimates, while external percent of GDP in 2005/06 and an estimated financing and grants were significantly 2.5 percent of GDP in FY2006/07 (Figure 10). below the annual target. Nominal recurrent expenditures, including wages and salaries Recent good fiscal performance have been rising as a reflection of the increase indicates the GOL commitment to fiscal in the salary multiplier from 1500 in sustainability. The deficit, including grants, FY2004/05, to 1800 in FY2005/06, 2000 in declined in the last two years as revenues FY2006/07 and 2500 for FY2007/08. It is have performed above estimates and expected that this trend will continue, given expenditures contained at budgeted levels. the GOL's plan to raise incentives/benefits for The 2007/08 budget includes an increase in staff working in remote areas from overall and non-resource deficits, driven by FY2008/09. It is very important that these higher recurrent expenditures for wages, increases stay within non-resource fiscal allowances and transfers. envelop, to ensure fiscal sustainability of the expenditure policy. The growing trends of wages are also worrisome in the environment of rising inflation. 11 Table 4. Government Revenues Table 5. Government Expenditures FY05 FY06 FY07 FY05 FY06 FY07 (billions of Kip) (billions of Kip) Revenue & Grants 3,886 4,962 6,004 Total expenditure 5,204 6,205 6,985 Revenue 3,387 4,266 5,324 Current expenditure 2,517 3,125 3,511 Tax Revenue 2,803 3,641 4720 O.W. Wages & Salaries 1,058 1,263 1,586 Resource revenue 237 390 868 Capital Expenditures 2,261 2,529 2,870 Non-tax revenue 584 625 604 O.W. Domestically-Financed 468 403 517 Grants 499 696 680 Others 426 551 605 (percent of GDP) (percent of GDP) Revenue & Grants 13.1 14.7 15.9 Total expenditure 17.5 18.4 18.5 Revenue 11.4 12.6 14.1 Current expenditure 8.5 9.3 9.3 Tax Revenue 9.4 10.8 12.5 O.W. Wages & Salaries 3.6 3.7 4.2 Resource revenue 0.8 1.2 2.3 Capital Expenditures 7.6 7.5 7.6 Non-tax revenue 2.0 1.9 1.6 O.W. Domestically-Financed 1.6 1.2 1.4 Grants 1.7 2.1 1.8 Others 1.4 1.6 1.6 Source: Preliminary staff and authorities estimates. Source: Preliminary staff and authorities estimates. Keyprioritysectorspending Socialsectorspendingisincreasing,but declined slightly, from 9.3 percent of total low recurrent spending limits services. budget in 2003/04 to 9.1 percent in 2005/06, Spending in the four priority sectors as a while capital expenditure increased from 35.2 percentage of total government spending has percent in 2003/04 to 43.8 percent in increased since 2003/04. However, recurrent 2005/06 ­ see Table 6. As a percentage of expenditures have been under-funded, total public expenditure, infrastructure particularly in the social sectors. Overall, accounted for the largest share of spending, recurrent expenditures in priority sectors while health expenditure was the smallest. Table 6. GOL's 4 priority sectors expenditures 2003/04 2004/05 2005/06 Overallexpenditure Overallspending (billions of kip) on the four priority Four sectors 1,767 2,452 3,279 sectors has increased Agriculture 286 323 477 in recent years, but Infrastructure 843 1,156 1,551 recurrent spending Education 457 649 1,026 remains low, and Health 180 324 226 even slightly declined (percent of total budget) Four sectors 44.5 47.1 52.8 as share of the total Agriculture 7.2 6.2 7.7 budget Infrastructure 21.2 22.2 25.0 Education 11.5 12.5 16.5 Health 4.5 6.2 3.6 (percent of GDP) Four sectors 6.9 8.3 9.7 Agriculture 1.1 1.1 1.4 Infrastructure 3.3 3.9 4.6 Education 1.8 2.2 3.0 Health 0.7 1.1 0.7 Recurrentspending: (percent of total budget) Four sectors 9.3 9.2 9.1 Agriculture 1.0 1.1 1.0 Infrastructure 0.5 0.5 0.5 Education 6.2 6.0 6.1 Health 1.7 1.6 1.5 Source: Staff estimates based on MoF data 12 Keyreformprogress The GOL continued to implement the Feb 2008, to establish a comprehensive new Budget Law. Piloting of centralization audit capacity building program to assist of the Treasury, Customs and Tax is the SAO to carry out external audits more occurring and a new revenue sharing and effectively. The APR report will be distribution framework is being developed. submitted to SAO by March 2008. Some changes in revenue assignments are expected to occur in FY2008/09. An Steps are being taken to improve international fiscal advisor is being recruited timeliness of civil servants' salaries and to design a revenue sharing mechanism and strengthen public sector performance. help establish budgetary norms. Progress has To improve timeliness of salary payments, been made to implement the PEMSP, the GOL is piloting an electronic salary including developing a 2007/08 work plan payment system to replace manual cash and a multi-donor trust fund to provide payment. If successful it intends to extend financial support. to all provinces. A Prime Minister's Decree to recruit and retain staff in remote areas and TherevisedChartofAccounts(COA)is to manage contract staff is being developed progressing well, as are audit reforms. and a review of civil servants' job Once finalized, ministries and provinces will descriptions is nearing completion. Four be required to use the new COA to prepare provinces and two ministries have been budget estimates (likely to be introduced for selected to pilot the new instruction to the 2008/09 Budget). An Audit Peer Review improve the performance management (APR) of the SAO was conducted by the SAO system. of New Zealand during the first half of 2.2 REFORMOFSTATE-OWNEDENTERPRISES SOEreformsimplementedintheearly1990sreducedthesizeofthesectorbyclosingdown,leasing,merging and selling a large number of SOEs. The SOEs today are not only fewer in number, but play a significantly smaller role in Lao's economy in terms of GDP share and total employment. Nevertheless, during the second half of the 1990s, several large SOEs generated a large share of non-performing loans (NPLs) in the state-owned banking system. The NPLs put the banking system at risk of instability and were ultimately funded by Government revenue. ThecurrentroundofSOEreformswereinitiatedin2001andhasthreeobjectives:(a)improvingtransparency and governance of the state enterprise sector; (b) restructuring the larger SOEs whose losses and accumulated debt to banks were undermining both the budget and the financial sector; and (c) rationalizing the regulatory and pricing environment for infrastructure SOEs through tariff policy reform. Progress over the last few years has been uneven, but the GOL has improved SOE monitoring and reduced NPLs originating from the SOE sector (a much larger share of NPLs over the last 3 years have been private sector based). The pace of progress during 2005 was slow and uneven, but gained significant momentum in 2006. Many SOEs still take action that is inconsistent with commercial viability objectives. Performance assessments of 70 Phase I SOEs (BPKP, NPNL and PF3) are enterprises for 2002 to 2006 have near completion. Findings and been conducted by BPO. Key findings recommendations of the audits will assist include: restructuring of Phase I and II further restructuring in the coming months. SOEs has been slow, however overall performance has gradually improved3; 48 The Business Promotion Office (BPO) is of the 70 enterprises do not maintain an likely to be upgraded to become better adequate accounting system as required by equipped to lead SOE reform. With Accounting Law; and compared to 100% support from JBIC, the BPO is conducting SOEs, joint ventures generally have much preliminary assessments of Phase III SOEs, better business performance. which is expected to be completed this month. Primary objective of the assessment Independent external financial audits for is to review the current status and suggest 2005 and 2006 for the Phase II SOEs and 3 directions for reforms of Phase III SOEs. 3 Current SOE restructuring is divided into 3 phases. Phase I started in 2004 and consists of 4 large SOEs (BPKP, Lao Airline, Nam PaPa Nakhoneluang and Pharmaceutical Factory No.3 (PF3)); Phase II started in 2005 of 4 medium SOEs (Agriculture Industry Development Import-Export State Owned Enterprise, Lao State Fuel Company, Societe Lao Import-Export, and Road Construction Company); and Phase III started in 2006 for 5 SOEs (DAFI, LXP, LVSVT and LVKK). 13 TariffpoliciesforinfrastructureSOEs Most infrastructure and services in Lao PDR are provided by SOEs, although private providers deliver a high proportion of telecommunications. Despite significant recent adjustments, tariffs lagged behind inflation and remain below full cost-recovery levels. Low and complex tariff structures have led to inefficient energy and water use, and reduced the resources available for further investment. Major arrears are owed to utilities, including from the GOL budget, and now the utilities themselves have fallen behind on servicing their debts to the GOL. Cognizant of the need to reduce budgetary subsidies and tap into the private financing, the GOL has been moving to more appropriate tariffs and prices, including more competitive pricing in telecommunications and airline services. The GOL is implementing a strategy to lift utility tariffs to cost-recovery levels, minimize cross- subsidy among consumer categories, reduce budgetary subsidies, improve their business performance and increase private participation and investment. Achievements of cost recovery targets were ahead of schedule in the electricity sector. Telecom tariffs (wireless) and airfares are set on a commercial basis to reflect market demands and competition. Watersector The GOL continued to improve water Vientiane Capital; full depreciation recovery tariff structures. The GOL (MPWT) finalized in 6 provinces and 50 percent to just under its tariff 2008-2010 review and expected to 100 percent depreciation levels in the achieve: positive (5%) returns on capital by remaining 8 provinces. 2010 in Champasak, Luangprabang and Table 7. Recent water tariff change in Vientiane Capital (from May 2007 until now) Water users Q/ty Old tariff Current tariff Vol.(m3) Kip/m3 Kip/m3 % change Group 1: 0 - 5 350 420 20 Households, Thewater government offices 6 - 30 526 685 30 tariffs in > 30 706 1,060 50 unweighted average 527 722 33 Vientiane Capital City Group 2: 0 - 10 1,210 1,575 30 Commercial and 11 - 50 1,720 2,670 55 has increased industrial >50 2,364 4,140 75 substantially unweighted average 1,765 2,795 54 in 2007 Group 3: 0 - 10 5,260 5,685 8 Embassies and foreign 11 - 50 5,620 6,745 20 residential > 50 6,180 8,655 40 unweighted average 5,687 7,028 23 Source: WASA, MTPW GOL is promoting private sector water The Water Supply Law is due to be supply concessions for small operators in submitted to the NA in 2008, to provide a six new sites in Vientiane and Bolikhamxay. legal framework for the sector and improve Three private sector water supply concessions construction and regulation of water supply have been commissioned, of which two have systems, water quality controls and promote been working since April 2006. private participation. Electricity ElectricitéduLao(EdL)washitparticularlyhardbytheAsiancrisisandensuinginflationinthelate1990'sduetoa currency mismatch: its revenues are largely in kip while costs of debt servicing are mainly in US$. A financial recovery plan was implemented in subsequent years, including converting government debt to equity and annual tariff adjustments of 25-50 percent. EdL is now reasonably stable and has been able to pay annual dividends to the GOL in the order of $3-5 million since 2003. Profits from EdL's export operations cover the losses it incurs on the domestic market. The average domestic tariff rate is about 10 percent below the rate required for full cost recovery. Further inefficiencies are created by cross subsidization of residential and agricultural consumers by other consumer categories. In late 2005, the Action Plan for Financial Sustainability of the Power Sector was signed to increase tariffs to cost-recovery levels, eliminate the stock and avoid future additions to the GOL's payment arrears to EdL. 14 The Government and EDL continue to EdLisatthecentreofaparadigmshiftin implement the Action Plan for Financial energy sector which is highly favorable for Sustainability4, although some the Lao hydropower potential. Surging challenges remain. Tariff adjustments costs for fossil fuel sources has led to strong slightly exceed target values, with the latest demand in export markets (Thailand, Vietnam adjustment taking effect on January 1, 2008 and Cambodia) driven by an interest in fuel (with an average increase of 1.8 percent but diversification oriented towards renewable with varying rates for different consumer energy options. Favorable market conditions groups to gradually reduce cross- have attracted regional and overseas investors subsidization). Operational efficiency has who are willing to finance network and capacity improved, with losses falling to less than 17 expansions of the EdL system. Domestic percent in 2007. Settlement of government demand is on the rise, spurred by the arrears is progressing, and the MoF observes emergence of heavy industries, which are the agreed settlement plan of arrears accrued mainly found in mining and construction up to September 2005. Payment discipline for operations. Consequently, EdL, as well as billed current consumption has improved and independent power producers, are engaging in the level of bill payments by government ambitious investment plans. Market demand agencies is approaching actual annual and investment requirements have consumption. 2007 was the first year where fundamentally changed the sector context in there was a net reduction in government which EdL operates. In response, an update of arrears as the combined payment of current the electricity tariff study will be conducted bills and transfers of arrears settlement during 2008 to reassess the cost of supply as exceeded annual consumption. well as the impacts of new large-scale Improvements are projected to continue in customers. 2008. Telecommunications Availability of telecommunications services in Lao PDR is increasing, particularly mobile voice services, with GSM services now available in most of the country. Tele-density is steadily increasing and is currently above 20 percent. However, the current market structure and GOL's ownership stake in multiple companies is inefficient and leads to unnecessary duplication of investments by the public sector. Despite the sub-optimal policy and regulatory regime, private investors appear to be willing to invest in Lao PDR. However, investments are primarily focused on Vientiane and major urban centers. Regulatory adjustments are needed to develop the sector through sustained private sector investments. Fixed-line tariffs were revised upwards in early 2004 to bring tariffs closer to real costs. Mobile rates are set competitively by operators and a sharp decrease in connection fees and per minute call charges were noticed after the market entry of Millicom. However, rates are almost identical across companies, signaling limited price competition. The Lao telecommunication sector with 1,598,775 lines being used. Telephone continues to grow in terms of service density in Lao PDR rose to 285 per 1000 providers and the number of users. As of inhabitants by December 2007, up from 210 December 2007 total capacity of telephone in 2006 (a 36 percent increase). Tariffs did lines (including fixed line, mobile and not change in 2007. CDMA/WILL) was 1,711,850, TariffsofLaoAirlines Since 2002 Lao Airlines has been adjusting its air travel tariffs on a quarterly basis to cope with seasonal patterns of the tourist market. Air fares were first raised in June 2002 and again by more than 50% in September 2002. The tariffs for most routes remained unchanged in 2003 due to a sharp decline in overall sales (given the large shift from air travel to road transport). Recently, routes have been rationalized and domestic air tariffs adjusted according to market demands seasonal flows of travelers and competition from other transport services. 4 The Government of Lao PDR, EdL and the Bank agreed on an Action Plan for Financial Sustainability of the Power Sector in 2005 in order to ensure continued strong performance by EdL. The plan includes four main components: 1) Tariff adjustment, with tariffs being restructured and increased by an average of 1 percent per year in real terms to achieve full cost recovery in 2011; 2) Settlement of accumulated arrears from Government to EDL, along with agreement on a settlement schedule; 3) Timely payment of future government electricity consumption; 4) Operational efficiency improvement by EDL, with overall system losses reduced from about 20 percent in 2004 to around 13 percent in 2011. 15 The current capacity of Lao Airlines (5 and to expand and improve services. To small commercial aircrafts) is too small to improve its business performance, Lao meet the domestic needs of a road- Airlines recently moved to a fully commercial challenged country. Business and tourist tariff setting mechanism without GOL traffic between Lao PDR, Vietnam, Cambodia, intervention. In February 2008 a single and Thailand is expected to continue its rapid uniform system of air fares was introduced for growth. To cater for this, the GOL intends to all travelers (both domestic and introduce private investment to increase the international). Lao Airlines is also in active company's competitiveness within the region, search for a join partner. 2.3 FINANCIALSECTORREFORM ThelatestbankreforminLaoPDRbeganin2001torestructurestatebanks,improvebankingregulationand supervision and open up the banking system to private and foreign investors. Progress has been slow and SCBs' financial condition remains weak. Organizational structures are inadequate and lack checks and balances from external board members. Supervision and enforcement of prudential regulations by the BOL remains slow and it is limited in capacity and tools. Positive signs of change include significant reductions in NPLs and strengthened regular monitoring. SCBs have been susceptible to pressure to engage in non-commercial lending, which burdens the loan portfolio overtime. While poor credit culture and capacity constraints in credit analysis have progressively improved, SCBs remain fragile. International banking advisors in the two SCBs under the ADB's banking reform project are an important support to transition to a more independent management system. Whilethefinancialsectorisgrowing,it amongst the lowest in the region. Deposits remains small and dominated by banks. exceed loans in the banking system by Assets in the financial sector at end-2006 approximately 2:1 and loans are a small share were 25 percent of estimated GDP, which of aggregate banking sector assets (see Table represents a very small increase in recent 8). Non-bank financial institutions constitute years. Savings in the formal sector as a less than 5% of total financial sector assets percentage of GDP (about 18.3 percent) are (estimated). Other than a Social Security low by regional standards and credit provided Fund for GOL employees, there is no pension by the banking sector, scaled against GDP, is and contractual savings system. Table 8. Lao PDR financial sector profile, 2006 Assets Deposits Loans Share of assets (%) (in billion of Kip) 2003 2006 2003 2006 2003 2006 2003 2006 State-owned banks (SCB) 2,844 4,886 3,331 5,077 1,456 1,703 55.2 54.5 BCEL 1,618 2,965 2,014 3,069 993 715 31.4 33.0 LDB 946 1,475 1,098 1,563 225 542 18.4 16.4 APB 281 446 218 446 238 446 5.5 5.0 Private & joint venture banks 2,107 3,388 1,223 2,573 910 1,471 40.9 37.8 Totalbanks 4,951 8,275 4,554 7,650 2,366 3,174 96.1 92.2 Micro-finance (MFI) 56 125 14 80 56 125 1.1 1.4 Non-bank intermediaries 72 267 - - - - 1.4 3.5 Insurance (AGL) 32 267 0.6 3.1 Social security 40 40 0.8 0.4 Totalnonblankfinancialinstitutions 200 699 14 80 56 125 3.9 7.8 Totalfinancialsystem 5,151 8,973 4,568 7,730 2,422 3,299 100.0 100.0 In million of US$ 492 926 436 797 231 340 In percent of GDP (%) 22.9 26.9 20.3 23.2 10.8 9.9 Source: Lao authorities (BOL) 16 SOCBs have been under strenthening percent in 2006, and to only 1.6 percent for plans for several years, leading to the two state banks that hold most assets performance improvements in 2007. The (data for 3d bank not yet available). BCEL and banking sector remains dominated by three LDB have been allowed to recapitalize from State Owned Commercial Banks which net profits, alongside the ongoing account for approximately 50 percent of recapitalization from the budget. Although banking sector assets. Governance serious challenges remain, such as agreements are now in place for each SOCB, considerable loan concentration, the which have placed a greater emphasis on percentage of the largest bank's top 20 reporting key performance indicators. Based borrowers of three SOCBs have declined from upon data provided by the BOL, the level of 56 percent in 2006 to 34.5 percent of its loans overall NPLs dropped considerably from in 2007. around 49 percent in 2005 to about 21 Table 9. Some improvements of financial indicators of Lao PDR banking sector 2006 2007 OverallNPLsin M2 as a % of GDP 20.0 26.0 Saving % of GDP 22.0 27.0 Lao banking Domestic Credit 10.0 11.0 system declined Loan/Deposit Ratio 42.0 38.0 in 2007 while Capital / Assets Ratios broad money, SCBs -9.0 -0.3 savings and JV banks 6.0 5.0 credits grew. The Private banks 24.0 24.0 capital/asset Total banking system 2.0 6.0 ratios of SCBs did NPL (% of total lending) SCBs 13.0 5.0 reduce, although JV banks 14.0 14.0 remain negative. Private banks 1.0 2.0 Total banking system 10.0 6.5 Source: Lao authorities (BOL) RecentbankingreformprogressmadebyGOL In 2007, the GOL took measures to process/procedure for establishing a bank. strengthen the banking sector and level (level playing field) for domestic and foreign the playing field. This assisted the entry of banks and there is no discrimination between new private banks and investment in a private private and state-owned banks. Amendments bank (Vientiane Commercial Bank) by IFC and to the Presidential Decree on Foreign ANZ, helping to reduce the dominance of Exchange and Precious Metals in 2007 SOCBs in the future. In March 2007, the GOL eliminates distortions which require mining set the capital adequacy requirement for the companies to open accounts only at state banking sector at 8 percent, which is in line banks, and lift currency exchange privileges. with Basel Core Principles. It gives the same opportunities and provides the same rules In 2007, steps were taken to improve microfinance, although it still remains Banking supervision is improving. Bank underdeveloped. The GOL started a boards no longer include an official from the microfinance working group and drafted BOL, and are chaired by an MOF legislation on deposit and non-deposit taking representative instead. The system still lacks microfinance institutions and credit unions. sufficient experience, training and data, The new regulations do not distinguish resulting in weak enforcement of existing between foreign and local institutions and will rules. The Commercial Banks Law hopefully override an earlier ban on foreign promulgated in early 2007 provides a participation in the sector. transparent, clear and easy licensing 17 2.4 Tradereform LaoPDRhasgraduallybeenintegratingintotheworldeconomysince1989,withaccessiontoASEANandjoining AFTA in 1997. In 2006, the GOL committed to enhancing donor harmonization and implementing a sector-wide approach to trade-related reforms based on the DTIS/IF Action Matrix5. Implementation of the AFTA Common Effective Preferential Tariff (CEPT) scheme started in 1998 and will complete the liberalization schedule by reducing tariffs on imports from ASEAN countries to 0-20 percent by 2005 and 0-5 percent by 2008. The highest current import tariff rate is 40 percent (down from 150 percent in 1995) and is below 20 percent for most product groups. Non-tariff and quantitative import restrictions remain and in several sub-sectors are the primary binding restrictions. The GOL continued to make progress on indicators are tractability of shipment (1.89 on WTO accession, with the third working party the scale of 1 to 5) and quality of transport held in Geneva in November 2007. The and IT infrastructures (2.0). The same study GOL/MOIC updated the legislative action plan rates Lao PDR at 120 out of 150 countries on and discussed the Initial Offer for services with efficiency and effectiveness of Customs and negotiating partners during the working party other border procedures. Lao PDR compares meeting. Work on formal responses to the unfavorably to the average EAP or low income questions raised by bilateral and multilateral country in most aspects related to the negotiating partners are ongoing. investment climate. It ranks 164th of 178 on the 2008 Ease of Doing Business Rank and According to recent Logistics 158th of 178 on the 2008 Doing Business ­ Performance Index (LPI)6, Lao PDR has Trading across borders indicator. This is been doing fairly well on logistics mostly due to very long import and export compared to various aspects of investment processing times. A large portion of the climate. The country ranked 117th out of 150 economy is informal involving unrecorded countries on the 2007 LPI. Its weakest logistics cross-border trade activities. Figure 12. LPI of selected countries (LPI is given on a numerical scale, from 1 (worst) LaoPDR'slogistical Singapore services have been Vietnam improving, but are Cambodia behind neighboring Bangladesh countries, such as Vietnam and Cambodia Lao PDR Uzbekistan Nepal 1 2 3 4 5 Source: WB Global Logistics Performance Index, 2007 On-goingeffortsoftheGOLtomodernize information technology in customs. Logistics customs and improve trade facilitation are services markets should also be reformed to likely to gradually improve its logistics reduce coordination failures, especially those of performance. However, international public agencies active in border control. This experience suggests that policymakers should demands a more integrated, comprehensive look beyond the traditional "trade facilitation" approach to reforms all along the supply chain. agenda that focuses on road infrastructure and 5The action matrix was formulated based on the recommendations of the Diagnostic Trade Integration Study (DTIS) and is implemented under the Integrated Framework (IF). 6 The LPI is the first comprehensive cross-country assessment of logistics performance in 150 countries, based on a worldwide survey completed by more than 800 logistics professionals. It aggregates the performance in seven areas, including efficiency and effectiveness of Customs and other border procedures, logistics costs (including freight rates), and infrastructure quality, the ability to track and trace shipments, timeliness in reaching a destination, and the competence of the domestic logistics industry. 18 TradeDevelopments After a sharp increase by 50 Figure 13. Lao PDR exports and imports percent in 2006, Lao exports are (2004-2007, mil. US$) expected to grow at a moderate rate of 5 percent in 2007 (or by just over one Exports Imports billion US$ - see Figure 13). Apart from 2,000 the mining sector (especially copper, 1,750 which grew by almost 9 percent last 1,500 year), export growth was driven by 1,250 agriculture (mainly coffee and maize) and 1,000 garments, with both of these industries 750 increasing by over 20 percent. The 500 export of electricity and wood products declined marginally (see Figure 14) and 250 gold exports dropped by over 20 percent 0 due to a significant decrease in 2004 2005 2006 2007 production in 2007. Source: Lao authorities and partner countries data. Latest staff estimates and projections (2007) In 2007, Lao imports are expected to processing industries, trade and services. grow strongly, by over 30 percent Capital imports grew quickly by about 50 compared to 2006 (or to around 1.9 percent and constituted almost 70 percent of billion US$). This increase is largely driven total imports last year (see Figure 15). by increased investment imports for large Imports of raw materials increased by almost resource projects (with mining and 30 percent and consumption products hydropower accounting for about 45 percent increased slightly. of total imports), agriculture (plantations), Figure 14. Key export commodities (mil. US$) Figure 15. Key import commodities (% of total) Electricity Mining Consumer Goods Garments Wood & Wood Products 600 Capital Goods Agriculture 80 Intermediate Goods 500 70 60 400 50 300 40 30 200 20 100 10 0 0 2004 2005 2006 2007 2004 2005 2006 2007 Source: Lao authorities and partner countries data. Source: Lao authorities and partner countries data. Latest staff estimates and projections (2007) Latest staff estimates and projections (2007) LaoPDR'skeytradepartnersremained Vietnam and from five to 11 percent to China). largely unchanged in 2007, and key Recently, Lao exports to the US have export markets included Thailand, Vietnam, increased, but the overall value is low (just Malaysia, China, Australia and the EU (see over 1 percent of total exports). Most imports Figure 16). The share of Lao exports to to Lao still come from ASEAN countries (about Thailand decreased markedly in 2007 (down 68 percent from Thailand and 13 percent from from about 50 percent in FY2006 to around Vietnam), China (7 percent), EU (3 percent) 30 percent). Exports to China and Vietnam and the rest economies (about 9 percent) - see increased rapidly (from 11 to 16 percent to Figure 17. 19 Figure 16. Exports by destination country, Figure 17. Imports by home country, FY2007 FY2007 (mil. US$) (mil. US$) Other Thailand Other Taiwan 10% 30% EU 9% 6% China 3% Malaysia 7% 6% Thailand 68% Australia Vietnam 8% 13% China EU Vietnam 11% 13% 16% Source: Authorities (MOIC) and staff calculations Overall, Lao exporters have performed agriculture, processing and service well in recent years. Many sectors industries increased during the past two expanded their exports to the region and years. Some of the key export-oriented other large markets. In addition to mining sectors are discussed in ANNEX 1. and hydropower, other core sectors, such as 2.5 PrivateSectorDevelopment TheLaoPDRConstitutionof1991protectsstate,collectiveandprivateformsofownership. Duringthe1990s an active legislative program laid the foundations for developing market based rules and institutions to support private sector development. Today, agricultural production and most manufacturing production is in private hands and SOEs only cover around one percent of employment. Nearly 97 percent of manufacturing units are small (less than 10 employees). Of the medium and large units, 35 percent are privately owned by Lao PDR citizens and 55 percent are joint ventures with foreigners. The remainder is owned by government. Foreign investment in-flows have increased rapidly, in both resource and non-resource sectors (mainly hydropower, mining, agriculture, processing industries and tourism). Between FY 2003 to 2005, approvals of investment increased from around US$470m to US$2,700m and actual investment increased from US$70m to about US$500m. The main foreign investors are from Thailand, China, Australia, Malaysia, Singapore, Vietnam (ASEAN), South Korea, Taiwan, France, the Netherlands and the United States. The NSEDP recognizes the need to improve the business environment and promote domestic and foreign private investments to foster growth, reduce poverty and achieve MDGs. A Combined Investment Law is being Approval of the Negative List developed to improve investment (Conditional List) of Business Activities attractiveness. With support from IFC-MPDF under the Enterprise Law in late 2007 is and FIAS of the World Bank Group, the Law is an important step to simplify business expected to incorporate international best entry regulations. It is expected that the practice to improve transparency, GOL will officially issue the Negative List in predictability, certainty for investors; the coming months. An Enterprise differentiate FDI entry and operation, simplify Registration Office has been created to entry procedures and provide investor implement the new simplified business guarantees. The new law is scheduled to be registration procedures. With support from considered by the National Assembly by the the donor community, the MoIC plans to end of 2008. introduce a new business registration system within the next 2 years and to create a national business registry which contains information on all registered enterprises. 20 TheSMEDevelopmentStrategyandthe The Public-Private dialogue continues. Tourism Law are being implemented. The third LBF met on November 5, 2007 and Following the preparation of the first National drew more than 300 participants from the SME Development Strategy, SMEPDO is private sector, government, and donor playing an active role in mobilizing support agencies. A range of issues were discussed from DPs to assist implementation, including including: the Tourism and draft Mining Laws, ADB, EC, GTZ, IFC-MPDF, ILO and India. harmonization of fees for visa on arrival, The implementing decree for the Tourism increased business expenses deductibility Law is expected to be submitted for approval under the Tax Law and greater enforcement of in March 2008 and includes provisions on the third party liability insurance requirements. The role and responsibilities of the LNTA, next Forum is scheduled to meet on June 26, institutional framework and funding, quality, 2008. Regular dialogue between the GOL and and standards and licensing procedures for private sector has also been established in service providers. Champasack, Savannakhet, Luang Prabang and Luang Namtha provinces to discuss solutions A new Mining Law is being developed to issues affecting local businesses. to improve the regulatory environment, for consideration by the NA in the second half of 2008. This is being supported by the World Bank and IFC-MPDF, and involves intensive stakeholder consultation. Key issues to be addressed include the lack of transparency and predictability in granting exploration/mining licenses to investors, unclear regulations regarding the transfer of mining rights and an inconsistent fiscal regime. ForeignDirectInvestment(FDI) Foreign investments in Lao PDR are increase from 2006 (see Figure 18). Growth was expected to be robust in 2007. Although mainly driven by new, large investment projects, the level of approved investments such as mining (a new copper plant by Phoubia (commitment-based) has recently dropped Mining), non-resource industries (food and (to nearly 1.2 billion US$ in 2007 down from beverage, agro-processing industries and about 2.7 billion US$ in 2006), actual manufacturing), agriculture, services, and investments are expected rise due to new ongoing construction of three large hydropower and existing large resource and non-resource projects (NT2, Nam Ngum 2 and Xekaman 3) - projects. In 2007, actual FDI inflows are see Figure 19. estimated at about US$950m - a 60 percent Figure 18. FDI in Lao PDR Figure 19. FDI by sector (US$ m) 1000 Agriculture 900 Services Resource industries 800 900 Non-resource industries 700 800 600 700 500 600 400 500 300 400 200 300 200 100 100 0 0 2004 2005 2006 2007 -100 2004 2005 2006 2007 Source: WB staffs estimates. Preliminary estimates for 2007 21 In2007,theGOLapprovedseveralnew projects). The structure of Lao PDR's large projects worth over one billion US$, in investments continues to diversify, although sectors such as agriculture (plantations and large projects still constitute the predominant forestations), trade, services (shopping part of total FDI. Some of the key ongoing malls, entertainment, tourism and banking projects are described at ANNEX 3. services) and industry (hydropower and mining SuccessfulJointventuresbetweenSOEsandprivateinvestors State-private joint ventures have been Lao Soft Drink Company (70/30), Lao expanding in Lao PDR in recent years. Tobacco Company (53/47), Lao The key joint ventures include Lao Brewery Telecommunication Enterprise (LTE, 49/51), Company (LBC, 50/50 share holding for Lao Insurance Company Ltd (51/49), and a FDI/GOL), Lao Asia Pacific Brewery few other hotel and tourism businesses. (68/25/7), The state-private joint venture is seen to the recent SOE performance assessment be an effective form of business partnership made by the BPO shows that: and · Onaverage,thejoinventureis10timesmore government in the form of dividends and taxes. profitable than 100% SOE; · BasedonBPO'sassessmentofSOEperformance · Joinventures'returnoninvestmentis25times for 2002-2006, every unit of capital invested in higher than that of 100% SOE. joint ventures generates 0.53 units in government · Return on equity of joint ventures is 11 times income. higher, indicating that joint ventures are much · This compares to only 0.05 units of income more efficient in utilizing their asset base. generated by every unit of capital invested in · Compared to 100% SOEs, on average joint 100% SOEs. ventures generate much higher incomes for the Table 10. Financial ratios of largest 15 join ventures (2002-06) 2002 2003 2004 2005 2006 Profitmargin(%) 37.6 32.1 35.0 30.1 29.0 Returnonasset(%) 39.0 33.5 38.3 35.1 40.2 Returnonequity(%) 68.7 65.3 83.6 83.0 111.5 Assetturnover 1.0 1.1 1.1 1.2 1.4 Source: WB staff calculations based on BPO's SOE Assessment Report (2002-2006) Localprivateinvestments The Lao private sector comprises mainly increased in recent years. According to a SMEs and unregistered household 2006-2007 national business survey by businesses. Overall, local investments are GOL/NSC there are about 126,900 expected to expand quickly as the number of business units in Lao PDR. new SMEs and household activities has · Nearly 99 percent were single units operating in · About 97 percent of businesses are locally one location and most did not trade owned and only 40 percent are legally internationally or export. registered. · The majority of businesses are small, household · Only one percent had a comprehensive standard or family-run activities that sell their products accounting system, 20 percent maintained a and services locally. basic accounting system; and about 75 percent · 65 percent were involved in trading businesses, keep records. 19 percent in industry and 3 percent in · Over 50 percent of these businesses are agriculture. concentrated in a few big cities. Source: The national business survey 2006-2007 by NSC. 22 3 D ONOR ASSISTANCE TO REFORMS Lao PDR is highly dependent on external of total government revenue. This Part support, some of which flows into examines technical assistance and other considerable technical assistance. In donor-funded support to the Government's FY2005/06, the donor funding made up 77 policy reform agenda. This information has percent of total capital expenditure (PIP) been provided by donors and has been and grants accounted for about 14 percent collated by the Monitor. 3.1 KeyDonorAssistancetoReformAgendainLaoPDR Public sector governance. Governance Banking Sector and SOEs. Key donors attracts significant donor assistance, with supporting banking sector reform include more than 20 active projects supported by ADB, IMF, and WB/IFC. Recently the both multilateral and bilateral donors, government has taken several important including ADB, Australia, EC, France, Japan, measures to strengthen legal regulatory New Zealand, Singapore, SNV, Sweden, UNDP, framework for banking and micro finance. and The World Bank. These projects cover However, progress on transformation of various aspects of public sector governance, SOCBs has been slow. In the short to including public administration, capacity medium term more external support will be building, decentralization, PFM, and legal and needed to further strengthen banking judicial reform. In recent years, with donor regulation and supervision, continue on support, GOL has made some improvements in going effort to restructure SOCBs, and public sector governance, including by more improve financial infrastructure including clearly articulating its intended reform agenda. establishing credit information bureau, In late 2006 Government shared its new collateral registries, payment system and Strategic Plan on Governance with DPs. The others. SOE reform outside the banking plan focuses on improving public services, sector has been supported mainly by WB enhancing transparency and public and JBIC. Any substantial progress on this participation in policy-making, strengthening front can't be achieved without adopting a the rule of law, and improving PFM. The Public clear SOE reform strategy, which also Administration and Civil Service Authority clearly defines role and responsibilities of (PACSA) has designed a new national GPAR- relevant agencies. SBSD program as is currently working on an approach to improving domestic civil society. Trade development. Trade development agenda is seen by GOL as the driver for growth and poverty alleviation and regional integration and WTO accession as the driver for economic reforms. To move trade agenda forward, the GoL has recently established very high level National Committee for Economic Integration led by the Standing Deputy Prime Minister. Several donors have committed to support government to implement the DTIS Action Matrix through establishing multi donor trust fund ­Trade Development Facility (TDF) administered by WB. Australia and EC have already contributed. Other donors active in trade related assistance include ADB, Australia, EC, ITC, SECO, UNCTAD, UNDP, US and WB. 23 Private Sector, Tourism Development and Land Reform. Key donors active in PSD include ADB, EC, Germany, Japan, ILO, India, SNV, UNIDO and the World Bank Group (IFC and World Bank). With the assistance of donors, the GOL is simplifying business entry regulations. However to make Laos a better place for doing business, more concerted efforts will be required to further streamline business licensing procedures, improving tax administration, especially for SMEs, improving Contract Law and enforcement, improving competition policy and strengthen commercial dispute resolution. Tourism development. This area received substantial donor support from ADB, Australia, EC, IFC, Japan, Luxembourg, New Zealand and SNV. Donor assistance is targeted at a wide range of areas including strategy development, physical infrastructure, marketing and branding, eco-tourism, community based tourism and skills upgrading for service providers. Land reform. The GOL continues to implement the land reform agenda, particularly under the land titling program. With support from the WB, Australia, and Germany, the GOL is: conducting new land policy studies; drafting decrees and regulations at both central and provincial levels; delivering education programs in the government and private sectors; preparing land title certificates to comply with new laws; successful document trailing which will be introduced to 5 provinces; adjudication of 331,300 land parcels and increasing distribution of land title certification from 58,051 in 2005 to 69,504 in 2006. The government is further expanding the land policy framework into 9 provinces with a total of 278,352 land titles distributed so far. 24 3.2 IncreasingtheImpactofDevelopmentAssistance Promoteaideffectivenessbyusingcountrysystems The Paris and Vientiane Declaration Often, DPs are not able to use existing encourage development partners (DPs) country systems if they are weak; doing to make as greater use of country so can jeopardize the effectiveness of systems in ODA projects and programs as assistance. This is often the case with possible. This contributes to sustainable financial management (FM) and procurement capacity development by eliminating the need systems, as donors need to guarantee to create parallel implementation units and transparent utilization of funds. The Vientiane aligns donor support toward strengthening Declaration includes a comprehensive set of country systems. It also reduces transaction actions to improve FM and procurement costs by not imposing additional systems and DPs have committed to disburse requirements on Government regulations and a substantive proportion of their ODA making enhances Government ownership. use of the strengthened national systems by 2010. Lao PDR needs to strengthen country systems remains low. In addition, the bulk of systems and encourage its utilization by ODA within these percentages corresponds DPs. As seen in Figure 20, the percentage of almost exclusively to the International ODA using FM is slightly below the world Financial Institutions with few other donors average level and the use of procurement making use of country systems. LaoPDRranks Figure 20. ODA disbursements using national below the world procedures in SEA countries (%, FY06) average on the use local financial LAO PDR CAMBODIA VIETNAM WORLD AVERAGE management 50 systems by donors 45 40 35 30 25 20 15 10 5 0 BUDGET FINANCIAL FINANCIAL PROCUREMENT EXECUTION REPORTING AUDITING PROCEDURES PROCEDURES PROCEDURES PROCEDURES Source: Global and Lao PDR OECD/DAC surveys on monitoring the implementation of the Paris Dclaration (FY06) Reforms to improve aid effectiveness are will be asked to follow. Similarly, the underway in some initiatives and sectors. Procurement Monitoring Office will develop The PFMSP now incorporates all FM and standard processes for proposals and the procurement commitments from the Vientiane evaluation of consultants. These initiatives Declaration. The MoF will develop a Mannual will be complemented by capacity for standardizing ODA FM procedures that DPs development at the central and local levels. A description of these and other assistance projects is provided in Annex 4 25 Lao PDR Economic Monitor - APRIL 2008 Lao PDR Economic Monitor - APRIL 2008 Lao PDR Economic Monitor - APRIL 2008 ANNEXES ANNEX 1 - Acronyms and abbreviations_______________________ 27 ANNEX 2 - Lao PDR export-oriented sectors____________________ 28 ANNEX 3 - Major foreign investments in Lao PDR _______________ 29 ANNEX 4 - Donor assistance projects on Lao PDR reform agenda ___ 31 26 ANNEX1-Acronymsandabbreviations ADB Asian Development Bank LPI Logistic Performance Index AFTA ASEAN Free Trade Area M&E Monitoring and Evaluation ANZ Australian and New Zealand Banking Group Limited MDGs Millennium Development Goals APB Agriculture Promotion Bank MFIs Microfinance Institutions ASEAN Association of Southeast Asian Nations MIH Ministry of Industry and Handicrafts ATM Automatic Teller Machine MOE Ministry of Education AusAID Australian Government's Overseas Aid Program MOF Ministry of Finance BCEL Banque Pour Le Commerce Extérieur Lao MOIC Ministry of Industry and Commerce BOL Bank of Lao PDR MPDF Mekong Private Sector Development Facility BPKP Bolisat Phattana Khet Phoudoi MPI Ministry of Planning and Investment BPO Business Promotion Office MPWT Ministry of Public Works and Transport CBTA Cross-Border Transport Agreement NA National Assembly CEPT Common Effective Preferential Tariff NAPPA National Academy of Politics and Public Admin. CIDA Canadian International Development Agency NGPES National Growth and Poverty Eradication Strategy COA Chart of Accounts NHDR National Human Development Report CPI Committee for Planning and Investment NPEP National Poverty Eradication Program CPI Consumer Price Index NPL Non-Performing Loan CPIA Country Policy and Institutional Assessment NSC National Statistical Center DIMEX Department of Import and Export NSEDP National Socio-Economic Development Plan DP Development Partner NT2 Nam Theun 2 Project DTIS Diagnostic Trade and Integration Study ODA Official Development Assistance EAP East Asia & Pacific PACSA Public Administration and Civil Service Authority EC European Commission PEMSP Public Expenditure Manag. Strengthening Program EdL Electricité du Lao PEMSU Public Expenditure Manag. Strengthening Unit EU European Commission PFM Public Financial Management FDI Foreign Direct Investment PRS Poverty Reduction Strategy FM Financial Management PM Prime Minister FY Fiscal Year PSD Private Sector Development GDP Gross Domestic Product SAO State Audit Organization GOL The Government of Lao PDR SCBs State Owned Commercial Banks GSM Global System for Mobile communications SCP Singapore Cooperation Programme GTZ German Agency for Technical Cooperation SDC Swiss Agency for Development and Cooperation ICT Information and Communication Technology SECO State Secretariat for Economic Affairs IDA International Development Association Sida Swedish International Development Association IF Integrated Framework SME Small and Medium Enterprise IFC International Finance Corporation SNV Netherlands Development Organization ILO International Labor Organisation SOE State-Owned Enterprise IMF International Monetary Fund SPS Sanitary and Phyto-Sanitary I-NGOs International NGOs STEA Science, Technology and Environment Agency ITC International Trade Commissions SWAp Sector Wide Approach JBIC Japan Bank for International Cooperation TA Technical Assistance JFICT Japan Fund for Information and Comm. Technology TC Technical Cooperation JFPR Japan Fund for Poverty Reduction TDF Trade Development Fund JICA Japan International Cooperation Agency UN United Nations KOICA Korea International Cooperation Agency UNCDF UN Capital Development Fund LAT Lao Asia Telecom UNCTAD UN Conference on Trade and Development LATA Lao Association of Travel Agents UNDP UN Development Programme LBF Lao Business Forum UNIDO UN Industrial Development Organization LDB Lao Development Bank UNODC UN Office on Drugs and Crime LDC Least-Developed Country VAT Value Added Tax LHSE Lao Holding State Enterprise WASA Water and Sanitation Authority LNCCI Lao National Chamber of Commerce and Industry WB World Bank LNTA Lao National Tourism Administration WBI World Bank Institute LTA Lao Tourism Authority WTO World Trade Organization 27 ANNEX2 -LaoPDRexport-orientedsectors · Garment exports. The Lao · Electricity exports. Electricity exports garment sector includes just over 100 remain unchanged, at around US$100m a companies and employs nearly year for nearly a decade. Its share of total 30,000 workers. Sector exports were exports has dropped to about 10 percent in expected to grow by over 20 percent 2007 from 30 percent in 2000. Currently, in 2007 (or slightly over US$150m). only two main projects export electricity to Key exporters include FDI and JV Thailand (Theun-Hinboun with EDL holding a companies, such as TRIO (Laos) 60 percent share and Houay Ho with EDL EXPORT, GREAT LAO GARMENT, holding a 20 percent share). Several new LANEXANG GARMENT and large IPP projects are currently under WONDERFUL GARMENT (with each construction and will be completed in the employing about 2000 workers). near future, including NT2, Nam Ngum 2 Other large companies are LAO and Xe Kaman 3. Exports from the sector GARMENT (1800 workers), ALPI LAO are expected to jump from 2010 onward. INTERNATIONAL (1400 workers), TRIMAX and KMS (each has about 800 workers). · Wood product exports. Wood exports were estimated at about US$140m in 2006 and are projected to be slightly lower in · Mining exports. So far, there are 2007. Key export products include furniture, two major projects leading the sector: floor tiles, wood accessories, plywood and Lane Xang Mineral Ltd (Oxiana other processed timber products. The key Resources) and Phubia Mining (Pan exporters of the sector are FIRST MAY Australian Resources Ltd). Lane Xang TIMBER PROCESSING, LAO FURNITURE Mineral is the leading mining producer INDUSTRY, KHOUNTA TIMBER and exporter in the Lao PDR. The PROCESSING, KHAMMOUANE company's exports of gold and copper WOODPROCESSING FACTORY and reached about US$500m in 2006 and CHAMPASAK WOODPROCESSING are expected to be slightly over a half INTERPRISE. Vietnam and Thailand remain billion US$ in 2007. Phubia Mining the two biggest importers of Lao wood and (Pan Australian Resources Ltd) is the wood products. The GOL has recently second largest mining investor in the tightened policies to ban exports of low country and will start to produce value-added or semi-processed wood copper concentrates for export from products and promote high value-added mid-2008. The project expects to finished goods for export. However, exports expand its exports from around of logs continued and enforcement of laws US$20-25 million to a few hundred and regulations is still weak. million US$ by 2008/09. The main markets for Lao copper are Thailand, Vietnam, Malaysia and China. ·Exportsofotheragriculturalproducts. Apart from coffee, Lao exports other crops to neighboring countries. Exports to · Coffeeexports.In2007,LaoPDR's Thailand and China have increased during coffee exports increased by over 20 the last a few years (from US$25m in 2005, percent, largely due to improved to US$40m in 2006 and projected at US$50 harvests and favorable global coffee in 2007). Exports of other industrial trees prices. The key coffee exporters are (rubber, eucalyptus and other products) are DAO HEUANG IMPORT-EXPORT CO., expected to climb in coming years. Key PHIDAO CO., AGRO LAO IMPORT- exporters of agricultural products include EXPORT, PHETKHAMSAY TRADING PARXONG DEVELOPMENT EXPORT-IMPORT IMPORT-EXPORT and AGRICULTURAL ENTERPRISE, LAO AGRICULTURAL PRODUCT DEVELOPMENT CO., LTD. PRODUCTION COMPANY, LUANGPRABANG The major export markets of Lao AGRICULTURE DEVELOPMENT, XAYSAVANG coffee are EU countries, Japan, the COMMERCIAL EXPORT-IMPORT and KASET US and some ASEAN neighbors. 2000 COMPANY. 28 ANNEX3 -MajorforeigninvestmentsinLaoPDR Agriculture Majoractiveactivitiesinagricultureinclude concession land. Recently, the GOL has been plantations of industrial trees and cash-crop making an effort to address these challenges contract farming. Leading investors in this by improving concession land granting sector are China, Vietnam, Thailand, Japan, practices and regulation. This is very India, Korea and Malaysia. Thousands of important to ensure that upland farming hectares of long-term concession land were communities and rural poor benefit from granted to investors last year for producing economic growth and environmental rubber, sugar, pulp from eucalyptus and sustainability and social safeguard issues are palm oil. Some difficulties were experienced monitored and managed properly. in allocating and managing · Plantation of rubber trees. Rubber · Sugarcane plantation. Mitr Phol Sugar plantations in Lao PDR have been booming Corporation (the key foreign investor in the over the past few years, with the sector) expanded its investment plan in Lao PDR investment of millions of US$s (how to nearly US$70m (2.3 billion baht) up from the much?). Currently, the most active budgeted US$26m (900 million baht). The investors in rubber plantations are China, project is planned to include a sugarcane Vietnam and Thailand. Major Chinese plantation (about 10,000 ha) in Savannakhet investments are concentrated in the province and has undertaken project preparatory Northern provinces of Lao PDR (Luang work since 2006. The processing of sugarcane is Namtha, Oudomxay and Luang Prabang) scheduled to start by end-2008 or early 2009. In down to Vientiane province. Vietnamese addition, many Lao farmers in the Northern investments are focused in the South provinces, such as Phongsaly, Luang Namtha and (Champasack, Saravan, Sekong and Oudomxay continue to grow sugarcane for export Attapeu). Key projects include DAKLAK to China. RUBBER, VIETNAM GENERAL RUBBER, LAO-THAI HUA RUBBER, JUNNAN POWER BIOLOGICAL PRODUCTS GROUP. In 2007, the GOL approved new rubber projects, includeing QUANG MINH RUBBER (worth nearly US$15m), LAO-QUASA-GERUCO JOINT STOCK (about US$19m) and DAU TIENG VIET LAO RUBBER JOINT STOCK Company. · Pulp tree plantations (eucalyptus and acacias). There are currently two main active projects: OJI LAO PLANTATION FOREST Company and ADITYA BIRLA Group (India). OJI LAO project has been expanding its eucalyptus plantations in Farming of cash crops (maize, soyabean, Borikhamxay and Khammouane provinces · cassava, tea, starchy roots, vegetables and other over the past few years, with (how many crops). Thailand, China and Vietnam are the main thousands ha of trees planted. ADITYA investors in Lao PDR, through projects and BIRLA Group (an integrated project: a contract farming in border provinces, such as large wood pulp mill integrated with Sayaboury, Bokeo, Luang Namtha, Oudomxay, 50,000 ha of wood pulp plantations, Phongsaly, Houaphanh and other Southern predominantly Eucalyptus) recently provinces. Local border traders also play a very commenced its plantation work, important role in promoting the business. During completing about 1,600 ha in 2007. This the past two years, two Thai farming projects year, about 5,000 ha is expected to be have been established: CP Group (maize planted under the project, but is plantation in Sayaboury province) and River Kwai dependent on the availability of requisite International Food Industry (organic farming in land to be provided by GOL. The project Paksong, Champasack province). In addition, requires about 7,500 ha every year to some Chinese and Vietnamese farming projects generate a sustainable supply cycle of for starchy roots, maize, vegetables and other wood to the pulp mill (which is planned to crops were approved by the GOL in 2007. be constructed in 2012). 29 Processingindustries Construction of several processing projects brewery factory in Champasack province) is continued in 2007. Khammoune Cement also expected to be completed this year. The plant (the largest cement plant in Lao PDR) construction of a new sugar factory (to produce was constructed and commenced production 60,000 tons of refined sugar per annum, the of cement products in early 2007. The largest in the country) in Savannakhet by Mitr construction of the second largest brewery Phol Sugar Corporation (Thailand) is ongoing plant (Tiger Beer) by Lao Asia Pacific Brewery and is scheduled to be completed by end-2008. is due to be completed by mid-2008. The Other agro-processing industries, such as expansion of production by Lao Brewery rubber processing and wood pulp plants are Company (through construction of its second expected to be established in the future. Tradeandservices Key achievements made by foreign investors in the services sector during the past two years include the completion of hotels and an entertainment center under the Golden Boten City project in Luangnamtha (located on the Lao-Chinese border), shopping malls in Vientiane Capital by China and Singapore and ongoing construction of a golf course by Korea. A few other hotel and resort projects are being developed in Luangprabang, Savannakhet and Champasack provinces. Naturalresourcessector(hydropowerandminingprojects) In 2007, FDI in the natural resources projects and the expansion of Phubia Mining. sector continued to grow quickly, mainly The sector accounted for almost 90 percent of due to ongoing construction of key total foreign investment last year. hydropower · Major hydropower projects. In addition · Key mining projects in Lao PDR. In 2006- to the two existing IPP hydropower plants (Theun 2007, the GOL made an assessment of sector Hinboun and Houay Ho), three other large projects performance (quality of investments) and reviewed are being constructed in Lao PDR: Nam Theun 2 mining licenses to streamline procedures and promote (NT2), Nam Ngeum 2 and Se Kaman 3. So far, the quality investments in the sector. Based on the three projects have made good progress and are outcomes of the review, the GOL recently reduced the on schedule for completion (when are they due to number of concession agreements (given out to the be finished?). Some new hydropower projects in investors early) to 112 from about 140 in 2006 (most the pipeline are expected to begin construction small concession projects (nonperforming) were phase year and be completed by 2012-2013. abolished in 2007). Within the existing projects, 64 These include Theun Hinboun Expansion (EDL are foreign-owned (of which 15 are working mines, holds 60 percent of total share), Nam Ngum 3 22 are at the exploration phase and 27 feasibility (GOL/LHSE holds 23 percent), Nam Ngiep 1 studies). Among the working mines, Sepon and (GOL/LHSE holds 20 percent) and NT1 (GOL/LHSE Phubia (owned by Australian international operators) holds 20 percent). There are two other are still the largest projects in the country and the hydropower projects to be constructed by China main drivers of the sector. So far, over US$700 from 2008 on a construct-run-transfer basis to sell million has been invested in the two projects. Phu Bia electricity to EDL, such as Nam Ngum 5 and Nam Mining will start to produce and export copper Lik (1-2). The construction is expected to be concentrates in 2008. There are also many other completed by 2012. small and medium working mines run by China, Vietnam, Thailand, Australia and Korea for various minerals. 30 ANNEX4 -DonorassistanceprojectsonLaoPDRreformagenda 1-PUUBBBLLLIIICCCSSSEEECCCTTTOOORRRGGGOOOVVVEEERRRNNNAAANNNCCCEEE 1-PU ADB Public Expenditure Planning for National Growth and Poverty Eradication Strategy ($0.7 million, 2005-2007). The TA provides capacity building and advisory services aimed at: (i) improved and effective allocation of public resources according to the Government's development and poverty reduction policy objectives; and (ii) improved quality of fiscal planning. Improved Public Financial Management Systems ($0.85m, 2007-2008). The TA aims to improve the quality of public financial management for higher levels of efficiency, accountability and transparency. The TA will support "Component B: Budget Execution, Accounting and Financial Reporting" of the PEMSP. Australia/AusAID Asia Regional Trafficking in Persons Project ­ ARTIP (A$21m for Lao PDR, Cambodia, Myanmar, Thailand and Indonesia 2006-2011). Working with the General Police Department of the Ministry of Public Security, the goal of the project is to contribute to the prevention of human trafficking in the Asia region. The purpose of the project is to facilitate a more effective and coordinated approach to people trafficking by criminal justice systems of governments in the Asia region. ASEAN-Australia Development Cooperation Program ­ AADCP (A$45m, 2002-2008). The Regional Partnerships Scheme component supports the governance sector in areas of taxation, banking, enforcement of intellectual property rights and program and project design. The Program Stream component has a governance focus on standards and conformity assessment, customs capacity building, legal infrastructure for E-commerce, foreign direct investment data collection and reporting, private sector competitiveness and trade-related aspects of SPS. European Commission (EC) Poverty Reduction Support Operation 3 ­ PRSO3 (A one-year single tranche operation, Euro 3m, 2008). The main objective is to provide budgetary funds to the Government to support NGPES/NSEDP implementation and associated policy reforms. Program coordinated with WB and Japan. France Strengthening the Capacity of the Ministry of Finance (US$0.78m and one advisor, 2005-2008). The project aims to improve budgetary mechanisms, capacity to implement a computerized custom instrument (ASYCUDA/Sydonia), strengthen the monitoring and control of budgets as well as training civil servants in every department in the Ministry of Finance, training of trainers and creating an on-going training center within the ministry. Capacity building in the rule of law and in international relations (US$1.6m and one technical assistant, 2003-2007). The purpose of the project is to strengthen the capacity of the Ministry of Justice (MoJ), the Ministry of Foreign Affairs (MoFA) and the Office of Public Prosecutor in the field of governance and reforms in the rule of law. Preventing human trafficking in Lao PDR (US$0.0975m, 2006-2007). Through seminars and capacity building training, the project seeks to raise awareness of policemen and reinforce trans-national cooperation on the issue of human trafficking. Strengthening the capacity of the Mekong River Commission - MRC (US$0.975m, 2007­2011). This project provides two advisors on the implementation of the sector based approach programs for the secretariat of the MRC. Japan Project for Capacity Building for Public Investment Program Management (US$3m, JICA: Technical Cooperation Project 2004-2011). This project aims to improve overall management of the domestic Public Investment Program (implemented by the Lao PDR budget) in cooperation with the Ministry for Planning and Investment (MPI). Local Administration Capacity Building Support to PACSA (US$0.3m, JICA: Advisor, 2007-2008). This technical cooperation mainly aims to assist the review of central ­ local relationships and to ensure structural improvement of local administration. Phase 3 SOEs Reform Study (US$0.03m, JBIC: 2007-2008). TA is provided to support the GoL to stock- take and identify restructuring directions of the four selected SOEs (So-called "Phase 3 SOEs") and contributes to the GOL's effort to achieve the policy reform agenda under PRSO framework. New Zealand English Language Training for Officials (US$0.284m, Ongoing). ELTO is a long standing project that is providing English language training to mid level officials. The project moved into a new phase at the beginning of 2003. 31 Singapore Human Resource Capacity Building Programmes (US$10.3m, ongoing since 1992). Lao PDR has been an active participant of the Singapore Cooperation Programme (SCP). As of September 2007, a total of 5,100 Lao PDR officials had been trained under the SCP in fields such as English language, IT, trade promotion and hospitality. The Lao-Singapore Training Centre (US$2m, 2001-2008) provides in-country courses for Lao PDR officials in areas such as IT, health, economic and finance policy planning, English language training, avian flu management, advanced productivity tools, effective negotiation, IT security, and PC networking and maintenance. Train-the-trainers courses were also held for IT managers and teachers. Singapore Cooperation Programme (Ongoing since 1992). More than 49,000 government officials from 166 developing countries have attended the SCP programmes spanning various fields such as IT, trade facilitation, health, port management, civil aviation and disaster management. Sweden/Sida Institutional capacity building for National Statistical Centre ­ (US$3.2m, 2005-2008). The project objective is to provide users with reliable and relevant statistical information. Specific outputs to be achieved by NSC are to have: 1) regular statistical production program within its area of responsibility, 2) an efficient organizational structure and working methods to manage its regular statistical production, 3) sufficient professional capacity to produce statistics that meet the defined quality, 4) efficient organization in terms of financial management, and 5) the main coordinator of the National Statistical system. Provincial Radio ­ (US$1.6m, 2005-2009) The project objectives are: 1) enhanced ability of management and staff of Lao PDR National Radio and five provincial radio stations to deliver good quality interactive, public service radio, 2) sustainable training capacity built to ensure continued support in interactive public service radio broadcasting, and 3) improved institutional framework for the media sector through exchange views on the role of the media in society between Lao PDR and Sweden. Faculty of Law ­ (US$4.5m, 2003-2009). The specific objectives are to improve technical capacity and pedagogical knowledge among teachers faculty, to improve capacity in management and administration, and to improve students' motivation. National Agriculture and Forestry Research Institute, NAFRI - (US$12m, 2007-2012) The objectives are to develop productive and sustainable upland technologies and land management recommendations for poverty alleviation and to generate socio-economic knowledge relevant for national level policy making; to strengthen NAFRI to fulfill its mandate through capacity development encompassing institutional development; and to improve management, sharing and dissemination of information to researchers and other stakeholders, particularly National Agriculture and Forestry Extension Services (NAFES). Strengthening Environment Management (SEM) ­ (US$8.7m, 2005-2010). The project objective is to strengthen STEA's position to fulfill its mandate to implement laws and regulations, with particular regard to environmental and social impact assessment. The project also focuses on implementation and enforcement at national and provincial level of Environment Impact Assessment and Environmental Education and Awareness raising activities. Forestry Strategy 2020 Implementation Promotion Project, FSIP ­ (supported by Sida and JICA for 2006-2011. Sida's contribution: US$1.2m). This support aims to strengthen MAF's capacity to carry out and coordinate Forestry Strategy 2020 implementation together with its partners (line ministries, donors, investors, provincial and district governments and civil society). SNV Netherlands Development Organization SNV supports the UNDP project "Gender Empowerment for Poverty Reduction" to build capacity for stronger policy practice. The has the medium term goal of building pro-poor and gender sensitive advocacy, planning and resource allocation skills within the Lao PDR Government in support of decision making processes, policy formulations and planning forums. Switzerland (SDC) Lao Poverty Mapping and Socio-Economic Atlas (US$ 0.297m, 2006-2008). Supports the Lao National Mekong Committee Secretariat (LNMCS) and the Lao National Statistical Centre (NSC) to produce a new Socio-Economic Atlas and Poverty Maps based on the most recent national socio-economic and environmental data sets. Support the establishment of the UXO National Regulatory Authority (NRA) and support the Operation of the UXO Lao Programme (US$3.9m, 2006-2009). Supports the National Regulatory Authority (NRA) to strengthen the coordination and management of the UXO Sector, and supports the National UXO Lao clearance operator to further expand its operations and increase overall organisational efficiency and productivity. UNDP and co-financing Donors (EC, Finland, Luxembourg, SDC, Sida, and SNV) Governance and Public Administration Reform Programme: Support for Better Service Delivery (GPAR: SBSD) (US$10.343m: UNDP - US$0.99m; UNCDF ­ US$0.7m; SDC ­ US$3.5; and Luxembourg ­ US$4m; Funding shortfall ­ US$1.153m). The programme delivers multi-donor funding. The new SBSD 32 programme will strengthen capacity for strategic planning, financing, management and monitoring of governance reform for more effective, accountable and transparent delivery of services. The GPAR: Luang Prabang Pilot Phase II (Total US$3.098m: UNDP-US$ 0.59m; Sida-US$2.5m, 2005- 2009). The purpose is to assist the Luang Prabang authorities in the design and implementation of a rights- based local governance system. It supports the design and implementation of governance and public administration reforms related to the functioning of provincial departments so as to improve delivery of selected basic services for rural households (primarily in the health and education sector) and facilitate entrepreneurship and pro-poor business development. The GPAR: Xieng Khouang Pilot (Total US$2.0m: SDC-US$1.5, UNDP-US$0.5m and SNV; 2005-2008). The project will pilot governance and public administration reforms with emphasis on more effective and participatory services in the agricultural sector and strengthen financial management and accountability. The project will facilitate institutional change to create an enabling environment especially for farmers and local entrepreneurs, notably by enhancing people's greater involvement and ownership. The GPAR Saravane project - Saravane Governance, Public Administration Reform and Decentralised Service Delivery Project. (Total US$2.8 million; UNCDF US$1.9, UNDP US$0.2, EC US$0.6, 2005-2009) This project supports six main areas: (i) inclusive and pro-poor planning and budgeting at local levels; (ii) effective and transparent implementation of local infrastructure and service delivery; (iii) financing and financial management of local public service delivery functions; (iv) organizational strengthening at provincial, district and sub-district levels; (v) human resource management and capacity development; and (vi) informing national policy-making on the basis of project experience in Saravane Province. The GPAR Sekong Project (Total US$1.7m, 2007-2010; UNDP 0.7m, other sources: US$1m) ­ is to improve people's access to public services in the largely multi-ethnic province of Sekong. Through the introduction of District Development Funds (DDF), aims in particular at developing strong decentralized governance systems at district, cluster and village levels. Khoun Radio Support Project (Total US$0.2m, 2006-2007) ­ The project seeks to increase access to information, in particular for ethnic people and vulnerable groups in rural areas. It will also increase the voice and participation of local communities in the production of relevant information for their own community. Strengthening the National Assembly of Lao PRD (US$1.5m: EU ­ US$1.12m and UNDP - US$0.41m, 2004-2007). This project takes a longer-term strategic look at the areas of assistance needed to help the National Assembly implement its constitutional mandate. Strengthening International Legal Instruments in Lao PDR, Phase II (US$1.26m: Finland­ US$0.65m, EU­US$0.39m and UNDP ­ US$0.08m, 2005-2008). The project aims to strengthen the capacity of the Department of Treaties and Legal Affairs in the Ministry of Foreign Affairs in particular to enhance dissemination, enforcement and reporting mechanisms relating to international obligations of Lao PDR. Enhancing Government Partnership with Social Organizations for Poverty reduction (US$1.1m: UNDP). - The project aims to contribute to greater people's participation in public policy, local development and nation building through the project goal of enhanced government partnership with social organizations to deliver services in the public interest towards poverty reduction. Enriching the Round Table Process for Increased Aid Effectiveness and Development Results (US$ 2.5 m; ADB US$ 0.5 m, Luxembourg US$ 0.5 m, US$ 1.5 ­ UNDP). The project aims to help the GOL to exercise a more effective leadership role in coordinating aid at macro, sectoral and cross-sectoral levels, and for aid to be: more transparent and predictable; aligned with and integrated into national planning and budgeting frameworks; and to contribute more effectively to achieving development results. Enhancing Access to Justice (US$1.8m; 2008­2010) The LBA phase II project `Enhancing Access to Justice through the Lao PDR Bar Association' builds on achievements of the previous project. It focuses on three main areas, namely institutional capacity building, education and legal aid. Support for Implementation of the Sixth Five-Year Plan (US$2.4m: UNDP ­ US$0.8m, 2006-2010) ­ The project aims to assist the GOL in the implementation of the Sixth Socioeconomic Development Plan (2006-2010) including the constituent poverty reduction strategy and the MDGs; and in monitoring and evaluating the results. Gender Empowerment for Poverty Reduction (GEPR) (US$1.7m, 2006-2009)- The project aims to 1) build gender equality advocacy and planning and resource allocation skills within Lao Women's Union (GRID), National Commission for the Advancement of Women (NCAW), MPI and the National Assembly 2) enhance capacity for gender mainstreaming in decision-making processes, policy formulations, planning and data- based gendered policy analysis for use by Government decision-makers 3) ensure long term sustainability and capacity of NCAW, and GRID, and 4) build partnerships for gender equality mainstreaming. Strengthening capacity for National Human Development Reporting [NHDR]: (UNDP- US$0.778m; 2004-2009). The project aims to: 1) support capacity development of the national system of statistics to collect and analyze socioeconomic data, 2) produce the fourth NHDR on Employment and Livelihoods in Lao PDR from a human development lens, providing policy recommendations for the 7th Five Year Plan 3) set up an advocacy and dissemination strategy based on the principle of national ownership. The World Bank (WB) Support to PEMSP and Budget Law Implementation (through the Financial Management Capacity Building Project, US$11 million, 2002-2011). The project supports three main areas of reform: financial and banking sector, SOE, and public financial management capacity building. The project assists the GOL in implementing the new Budget Law, specifically on: (i) developing a new revenue sharing framework; (ii) 33 implementation of the revised Chart of Accounts and Budget Nomenclature; (iii) support to Treasury Centralization and (iv) strengthening External Audit capacity. Poverty Reduction Support Operations (PRSO) - The second programmatic series for 2008-2011 (PRSO4, 5, 6, and 7) with yearly financing from the WB of about $10 million, and potential co-financiers, such as EC, Japan, and Australia). The main objectives of this programmatic operation are to support NGPES/NSEDP implementation and provide additional contributions to the government budget and to policy reforms in public financial management, banking and financial sector, SOE reform, health, education, and revenue management. 2-REEFFFOOORRRMMMSSSOOOFFFSSSTTTAAATTTEEEOOOWWNNEEDDEENNTTEERRPPRRISEESSAANNDDFFINNAANNCCIAALLSSEECCTTOORR 2-RE WNED ENTERPRIISSES AND FIINANCIIAL SECTOR ADB Banking Sector Reform Program (US$15m, 2002- 2007). The objective of the program loan is to support the government (BOL, MOF) efforts to foster efficient intermediation of depositors' resources and ensure a sound banking sector capable of supporting private sector growth and extending rural outreach. Strengthening Corporate Governance and Management of SOCBs II (US$0.9m, 2002- 2007). The TA assists the Government to strengthen shareholder oversight of bank restructuring, including (i) strategy development; (ii) human resource (HR) development; (iii) case by case NPL resolution; and (iv) the legal and judicial framework to support NPL resolution, including establishing a commercial division of the court and strengthening the framework for commercial transactions. Banking Automation to Support Outreach, Efficiency and Governance (US$0.65m, 2005- 2007). The grant's development objective is to enable a sustained reduction of poverty in the Lao PDR by reducing the digital divide between the technology deficient Lao PDR banking system and that of other countries in the region, in a sector that is increasingly driven by information and communication technology (ICT). Rural Finance Sector Development Program (US$7.7m, 2006-2009). The Program Loan will support: (i) creating an enabling policy framework for public and private provision of rural and microfinance; (ii) creating a sound prudential regulatory and supervisory environment for public and private rural and microfinance institutions; (iii) transforming the Agriculture Promotion Bank (APB) into a financially self-sustainable, market-oriented rural finance institution; (iv) creating a supportive non-prudential regulatory environment for rural and microfinance. Rural Finance Sector Development Program (US$2.3m, 2006-2009). The Project Loan will support: (i) building the Bank of Lao PDR's (BOL) supervision capacity of microfinance institutions (MFIs), (ii) supporting APB to complete the risk management, accounting, and MIS components of its Restructuring Plan, and (iii) upgrading the ICT system of the Agriculture Promotion Bank (APB). Institutional Strengthening for Rural Finance (US$0.7m, 2007-2009). The TA will assist the GOL to (i) coordinate and integrate rural and microfinance policy reforms and program implementation, (ii) carry through the policy lending phase out plan and performance-based recapitalization of APB to ensure its full transition to a commercially-oriented operations within three years; and (iii) formulate and document a simplified mechanism, policies and procedures for residual on-budget policy lending; and (iv) assist APB to build capacity in its human resources management. Upgrading of ICT and MIS at the Agriculture Promotion Bank (US$0.472m; 2007-2009). The TA will assist APB (i) plan and execute the bidding, selection, and contracting processes to procure IT hard and software systems and communication infrastructure financed under the Project Loan; (ii) strengthen APB's ICT human resources to manage the ICT systems upgrade; and (iii) plan and implement the rollout of ICT systems to the whole APB branch network. Catalyzing Microfinance for the Poor (US$1.980m; 2007-2010). The JFPR TA will assist the development of a network of microfinance institutions (MFIs) in Lao PDR. Particularly, the TA will (i) create a Microfinance Fund (MFF) to provide matching grant funds for MFIs that focus on best practices, sustainability, and poverty reduction that are unlikely to be achieved without the support of the MFF; (ii) assist the Bank of Lao PDR strengthen its capacity in prudential monitoring and supervision of microfinance activities; and (iii) disseminate microfinance best practices through workshops and training activities for MFI practitioners and Government officials. International Monetary Fund (IMF) Annual surveillance reviews (Article IV consultations) and semi-annual macroeconomic assessments (Assessment Letters). Technical assistance in fiscal management (especially customs operations), central banking and statistics. Training. Short-term courses for government officials on economic and financial issues in IMF Institute (Washington, DC) and regional training institutes (Singapore, Vienna), and scholarships in Australia and Japan. Japan Poverty Reduction Support Operation 3 ­ PRSO3 (US$ 4.6m, 2008). The main objectives of this facility are to support NGPES/NSEDP implementation and to provide additional contributions to the government budget by co-financing the PRSO3 with the WB through the yen loan scheme. The loan agreement was signed in February 2008. 34 Fiscal Policy and Financial Statistics Support (US$0.5m, JICA: 2005-2008). This technical cooperation provides an advisor to Fiscal Policy Department, Ministry of Finance, and a series of counter-part training in Japan in order to improve financial statistics and fiscal policy management of GOL. Capacity Building for Public Expenditure Management Strengthening Programme (PEMSP) (JICA: 2008-2011). The objective is to provide assistance to establish a comprehensive human resource development framework in the Ministry of Finance under the framework of PEMSP and to carry out appropriate training based on the model. Luxembourg Banking and Finance Training (EUR 2m, 2008 ­ 2010). The project aims at enhancing the overall efficiency of the banking sector in the Lao PDR in line with goals set out in the NSEDP (2006 ­ 2010). The Lao Banking Institute's physical, managerial and academic capabilities will be strengthened. A modular banking diploma and certification system will be developed to cater for the ambitions and abilities of all banking staff. Sweden/Sida Strengthening Fiscal Management (US$3.20m, 2004-2008). The overall objective is to contribute to poverty alleviation by strengthening Lao PDR's ability to improve revenue collection. The project includes: tax policy and tax administration, human resource development, organization and management and ICT development. The World Bank Group-WBG (WB, IFC-MPDF) Poverty Reduction Support Operations - PRSO (See project description in 3.1 above - World Bank). Financial Management Capacity Building Program ­ FMCBP (See project description in 3.1 above ­ World Bank) Financial Accountability (IDF grant $0.30m). This grant aims at improving Financial Accountability in SOEs and Private Enterprises. The project focuses on capacity building and introduction of international accounting and auditing standards and related training. The project also supports strengthening of LICPA and improvement of legal framework for accounting and auditing particles. IFC-MPDF: Financial Sector Development: (US$0.3m, 2007-2008). IFC-MPDF's Access to Finance Program aims to (i) build strong and diversified financial markets with a range of financial institutions, and (ii) construct the regulatory infrastructure necessary to ensure financial institutions are successful. Under this program, IFC-MPDF continues to assist in drafting implementing regulations for the new Law on Commercial Banks. 3-TRRAAADDDEEERRREEEFFFOOORRRMM 3-TR M ADB Regional TA on Implementing the GMS Agreement on Facilitation of Cross-Border Transport of Goods and People (US$1.8m, 2006-2008): the RETA aims to assist in finalizing agreement on and implementing the GMS Cross-Border Transport Agreement (CBTA) and its annexes and protocols. The TA's particular emphasis will be on supporting the GMS countries to effectively implement the CBTA. Regional TA on Support to Trade Facilitation and Capacity Building in GMS (US$1.5m, 2006-2008). The RETA will primarily provide initial support for the implementation of the strategic framework for action on trade facilitation, such as capacity building for the trade facilitation focal points and the core team at the national level. The project will also provide continuous and practical support to the GMS Trade Facilitation Working Group in the exercise of its functions and responsibilities. Australia/AusAID Support for the Role of Integrated Framework Facilitator (A$1.5 million, 2006-2008). Australia funded an expert to support GOL in implementing the DTIS Action Matrix and continues to work with the GOL's IF Secretariat and Focal Point and other key donors (World Bank, EC, UNDP and others) under the IF framework. Trade Analysis and Reform Project (A$5m, 2005-2008). Project interventions will focus on building analytical and research skills in order to strengthen capacity for trade policy analysis. Sanitary and Phyto-Sanitary Capacity Building Project - SPS CBP (A$3.9m, 2004-2007). The goal of the project is to enhance the capacity of the ASEAN focal countries to meet international SPS standards and the requirements of importing countries consistent with the WTO SPS Agreement. The three components focus on SPS-Trade linkages, Plant Health and Animal Health. European Union (EU) Asia Invest-Open Resource for Commerce in Horticulture aided by species Identification Systems (Orchis) (Euro 0.3m, 2006-2009). The project aims to enhance the export capabilities of Lao PDR and the valuable flora of the country by promoting best practices in trade aided by open source based IT&C tools furthering the integration of Lao PDR in information society. The project also aims to reinforce institutional capabilities of Lao PDR to better adhere to international commitments made in conventions like CITES. 35 EC-ASEAN Intellectual Property Rights Co-operation Programme ALA/96/25 (Euro 0.5m, 2005- 2007). The objective of this programme is to develop a modern intellectual property system in Lao PDR. This includes technical assistance to draft new legislation on Patents, Copyrights, and Industrial Design. Particular attention will be paid to TRIPS compliance, the judiciary and the enforcement. Open Resource on Conservation Agriculture for Trade and Development (ORCATAD) (Euro 0.3m, 2007-2009). The action aims to further the integration of Lao PDR in to the global information society by enhancing the export capabilities of Lao PDR in eco-friendly cash crops by promoting best practices in conservation agriculture aided by modern ICT. The action aims to also reinforce institutional capabilities of intermediary business organisations such as LNCCI by focussing on the niche market and new business opportunities for eco-friendly agriculture related products in the international markets. Trade Development Facility (Euro 4.2m, 2007-2010) ­ Coordinate with World Bank and Australia to set up a structure and mechanism of multi-donor trust fund for the implementation of DTIS Action Matrix (AM). Activities will be identified in consultation with GOL and other donors. EC also finances two studies on import-export procedure review and a capacity assessment for the implementation of DTIS AM to prepare this Facility. France TrainForTrade: Training and Capacity Building in the field of International Trade, FSP 2002-95 (US$2.3m for Lao PDR and Cambodia, 2003-2008). The main project activities include: (1) training of trainers (ToT), (2) use of distance learning, and (3) cooperation between universities of LDCs. Operational changes will be undertaken in the economic sectors identified by decision-makers and authorities of the countries involved. The project is implemented by UNCTAD together with Ministry of Commerce. Japan Investment Promotion Support to MPI (US$0.4m, JICA: Advisor and Training, 2007-2009). This technical assistance aims to promote smooth investment and provide proper advice on the problems of investment situation in Lao PDR. Second Mekong International Bridge Construction Project (US$34m, JBIC: 2000-2008). The bridge construction of this project started in January 2007. Supplementary construction works including Common Control Area (CCA), the facility which enables single-stop inspection by Thai and Lao PDR officials, are currently on-going. The similar construction is also supposed to take place on the Thai side of the river. Trade Promotion Project (US$1.5m, JICA: Technical Cooperation Project, 2008-2011) This is a capacity building project which supports the Department of Production and Trade Promotion (DPTP) in the Ministry of Industry and Commerce to promote trade and eliminate obstacles that hamper trade. Singapore Trade related courses (US$1.4m, ongoing since 1992). During the period, trade/economic courses were conducted at the Lao-Singapore Training Centre in the fields of business communication, international trade finance, consumer protection and export competitiveness strategies. Lao PDR officials also attended other trade related courses conducted in Singapore, including courses in trade and investment promotion, trade negotiation, national payment and settlement systems, and Central Bank accounting. Switzerland (SECO) Support to Trade Promotion and Export Development (US$1.704m, 2004-2008, implemented by ITC). The project is to build up export development capacities of Government, trade support institutions and enterprises by developing (1) export strategies, (2) a trade support network, (3) institutions to train export enterprises, (4) trade information capacity at the national level. The focus in 2008 will be on organic agricultural products, community based tourism and training of counsellors. Lao PDR WTO Accession Support (US$ 0.34m, 2007-2010). The project aims to facilitate timely accession to the WTO through the provision of international level policy advice and negotiating strategy, and through ensuring timely and sequenced internal policy reform coordination, in line with Lao PDR's development policy and Preferential Trade Agreements. UNDP Enabling more effective Integration of Lao PDR into the ASEAN Phase II (UNDP ­ US$0.57m, 2006- 2009). The project aims to (i) increase national commitment to the process of ASEAN integration (ii) improve capacity to coordinate ASEAN affairs within the Government of Lao PDR and (iii) enhance national capacity to assess policy implications of regional integration. Capacity Building and Technical support to Lao PDR in the WTO accession negotiation (IF Window II funds - US$0.3m, 2007-2009). The objective of the project is to: (i) Improve capacity of the GOL to prepare and negotiate a pro-poor and pro-growth WTO accession agreement (ii) improve capacity of the GOL to negotiate market access in the goods and services sectors and (iii) ensure WTO accession negotiations are widely disseminated at central and provincial level. Institutional strengthening of the IF coordination and implementation structures (IF Window II funds - US$0.22million, 2007-2008). The key objectives of the project are to enhance (i) institutional capacity to coordinate and implement trade related policies and projects within the GOL (ii) coordination 36 management capacity with relevant line ministries involved in the IF process and (iii) national capacity to assess the policy implication of trade on growth, economic development, and poverty alleviation. Capacity Building for MOIC'S Department of Import and Export (DIMEX) in Rules of Origins (ROO), Product Specific Rules (PSR) and Operational Certification Procedures (OCP) (IF Window II funds - US$0.15m, 2007-2009). The project focuses on building capacity of DIMEX and on strengthening technical capacity on export procedures, specifically on ROO, PSR and OCP. Support the shift of the Garment Industry from contract manufacturing to direct export (Phase 1) (IF Window II funds - US$0.32m, 2007-2008). The project aims to support the Lao Garment Industry to address the challenges that the garment sector is facing in the market and to operate smoothly its shift from contract manufacturing to direct export. The World Bank (WB) Trade Development Facility (TDF) to support DTIS Action Matrix (AM). This is a multi-donor trust fund designed to support the implementation of GOL's medium-term trade-related reform activities under the DTIS AM. The TDF is managed by WB and co-financed by EC and Australia. Other donors are also expected to join. This trust fund has been established and the National Implementation Unit is planning the first year activities. Customs and Trade Facilitation Project (US$4m, 2007-2011). The project is currently under preparation and will support Lao PDR customs in facilitating cross-border trade, modernization and streamlining of customs procedures. In particular, through implementation of a computerized customs system (ASYCUDA), long-term technical assistance, change management, and support for WTO accession related to Customs. 4-PRRIIIVVVAAATTTEEESSSEEECCCTTTOOORRR,,,TTTOOOUUURRRIIISSSMMDDEEVVEELLOOPPMMEENNTTAANNDDLLAANNDDRREEFFOORRMM 4-PR M DEVELOPMENT AND LAND REFORM PRIVATE SECTOR DEVELOPMENT ADB Capacity Building for Small and Medium Enterprises Development ($0.4m, 2007­2008). The TA aims to support the Government to implement reforms in the private sector ­ particularly those related to the implementation of a forthcoming ADB loan on Private and SME Sector Development Program. It provides technical training and inputs to government officials of executing and implementing agencies. Private Sector and Small and Medium Enterprises Development Program Cluster (Subprogram 1) (US$5m grant, 2007-2008). The project comprises two subprograms covering reforms in institutional development in SME policy formulation and implementation, access to finance, investment climate, trade policy and capacity building, and macroeconomic stability. The TA aims to assist, MOIC, MOF, MPI in implementing and monitoring the impact of key policy reforms, broaden and deepen SME, investments, and trade policy reform agenda; and assist with the capacity strengthening in the EA and IA to produce policy for the sector, as well as to participate in the WTO. European Union (EU) Legislation and European experience on the subject of ADR procedures: possible replication model in the Cambodia and Lao PDR (Euro0.31m 2007-2009). This assistance intends to develop the knowledge and application of the Alternative Disputes Resolution (ADR) procedures in Cambodia and Lao PDR, with particular respect to SMEs, in order to more effectively and rapidly settle international disputes that may arise from business relations through training, seminars and study tours. Small and Medium-sized Enterprise Development Programme (Euro3m; 2007-2010). The programme aims to develop national capacity for the implementation of the SME Development Strategy and to support the Government to meet the policy reform requirements under the Private Sector/SME Development Programme provided by the Asian Development Bank (ADB) particularly on regulations concerning business registration and licensing, investment, trade and finance. Germany (GTZ) Human Resource Development for Market Economy (HRDME) Program Phase 2 (June 2007 ­ May 2011: US$ 7.1m) supports MPI, MoE, SMEPDO/MoIC and LNCCI to jointly improve the regulatory, institutional and human resource conditions for private sector/SME development through vocational training; SME promotion; streamlining of investment procedures; support to research; and public private dialogues in 4 provinces. Luxembourg Strengthening of Human Resources in the Hospitality and Tourism Industry in the Lao PDR (EUR5.5m, 2008 ­ 2012). The project aims at strengthening the human resources in the Hospitality and Tourism Industry in the Lao PDR. It will assist the Lao National Tourism Administration to developing and operationalize a long-term HRD Strategy and Action plan to meet the current and future employment needs of the sector. 37 Japan Lao-Japan Human Resource Cooperation Center (LJC) (US$4m, JICA: 2005-2010). In cooperation with the National University of Laos (NUOL), this technical cooperation aims to provide a consistent supply of human resources for a market economy. The main courses and activities which LJC provides are (1) business management, (2) Japanese language, (3) information and cultural exchange between Lao PDR and Japan, and (4) basic computer course. Tourism Development in the East-West Corridor Project (US$1.5m, JICA: 2008-2010). In cooperation with the Lao National Tourism Administration (LNTA) and Savannakhet Province, this technical cooperation project aims encourage tourism development thorough capacity building, in order to contribute sustainability in East-West corridor. ODOP (One District One Product) Project (US$2m, JICA: 2008-2011). In cooperation with the Ministry of Industry and Commerce (MoIC), the objectives of the project are to raise awareness and importance of the ODOP concept, to support relevant exciting products as a pilot product, and to create good practice. SNV - Netherlands Development Organization Private Sector Development Program SNV aims at improving market access in order to create economic opportunities for the rural poor. The program consists of three service market combinations: 1) access to financial services, 2) value chain development (e.g. eco tourism, non timber forestry products and handicrafts) and 3) enabling environment for business development. Non Timber Forest Products: Advisory services in the field of non timber forest products (NTFPs) focus on developing best field practices for sustainable NTFP production and use, NTFP market development (including Marketing Information Systems), human resource development and supporting and institutionalizing networking and information exchange. Switzerland (SDC) Preserving Agro-Biodiversity in the Lao PDR (Inception phase US$0.764, 2007-2008) The overall objective of the program is to support the efforts of the Government of the Lao PDR in preserving agro- biodiversity resources while maintaining agriculture productivity and enhancing the livelihood security of farming communities by means of better access and management of agro-biodiversity resources, particularly in the northern upland areas. Lao PDR Extension for Agriculture Project (Alignment phase US$0.65m, 2008). The overall objective of the project is to assist Ministry of Agriculture (MAF) and National Agricultural and Forestry Ext. Services (NAFES) in developing a sustainable national agricultural extension strategy and to assist an institutional strengthening of NAFES at all levels. The "Lao extension Approach" has been officially introduced by MAF to all 17 provinces (in 2 districts). In the first six months of 2008, the project will align its support to the new structures introduced by MAF. Switzerland (SECO) Promotion of Cleaner Industrial Production in Lao PDR (US$ 0.72m, 2003-2008). The program aims to support the Government of Lao PDR in poverty eradication and environmental sustainability by improving the productivity and competitiveness of its growing industries, as well as its access to international and local markets, through application of cleaner production techniques and technology. UNDP ­UNIDO Promoting Private Sector Development through Strengthening of Lao Chambers of Commerce and Industry and Business Associations (US$2.33m, 2006-2010). The project seeks to support the development of the private sector in Lao PDR, in particular SMEs, by (i) optimising the use of research findings and recommendations in the areas of private sector development (ii) strengthening the capacities of LNCCI and BA's so that they can become independent, self-reliant and self-financing organizations. UNIDO Lao UNIDO Integrated Program (US$5.6m, 2004-2008). The Integrated Program for Lao PDR (phase II) consists of the following key components: - Industrial governance and enabling environment ($0.9m) - Private Sector Development and SME promotion ($0.9m) - Manufacturing productivity and environmental soundness ($2.5m) - Market access, investment and trade facilitation ($1.25m) The World Bank Group (WB, IFC-MPDF) Poverty Reduction Support Operations - PRSO (See project description in 3.1 above - World Bank). IFC-MPDF: Private Sector Development Activities. (US$0.5m, 2007-2009). Following on from the support provided to draft the new Enterprise Law, IFC-MPDF is continuing its technical assistance to relevant agencies to implement the new law, particularly in the areas of enterprise registration and licensing. Recently, IFC-MPDF reached an agreement on the provision of technical assistance to MPI in drafting a unified investment law as well as its implementing regulations at a later stage. 38 IFC-MPDF: Lao Business Forum-LBF. (US$0.6m, 2005-2010). The LBF has proven an effective mechanism for enabling the private sector to raise their concerns to GOL. IFC-MPDF assists GOL to facilitate LBF by providing a secretariat to support its operations. As a result of issues raised through the LBF process, IFC-MPDF also provides TA to support issue development and provide solutions, including support to revise the Mining Law and prepare the implementing decree for the Law on Tourism. The fourth LBF is expected to convene in June 2008. TOURISM ADB GMS: Mekong Tourism Development Project (US$10.9m, 2002-2007). The project aims to promote the development of the tourism sector in the lower Mekong River basin. In Lao PDR, It will improve tourism- related infrastructure, support pro-poor community-based tourism activities, facilitating private sector participation in tourism marketing and promotion, establish mechanisms to increase sub-regional cooperation, and facilitate the movement of tourists across borders. The project's phase 1 implementation has completed and the phase 2 is expected to begin by end 2008. Australia/AusAID Child Wise: Combating child sex tourism in South East Asia (A$0.5m, 2007-2009). The aim of this project is to develop a 5 year plan for a sustainable response to child sex tourism in South East Asia. The plan will determine training needs for national tourism organizations and private sector, help position the ASEAN Tourism Committee to assume responsibility for oversight of anti-CST work, and establish a framework for a public-private partnership. European Commission Asia Invest-Marketing Responsible Tourism in Lao PDR (Euro0.3m, 2006-2009). The project is co- financed with SNV. To enable the Lao Association of Travel Agents and its members to develop and increase the volume and quality of their high yield European sales and to engage more directly and constructively in sustainable tourism policy management and institutional frameworks. NZAID National Tourism Authority of Lao PDR ­ UNESCO Nam Ha Ecotourism Project (US$0.338m, 2004- 2007). Phase II of the Nam Ha project intends to assist Luang Namtha's provincial tourism and protected area managers become more effective stewards of their emerging ecotourism industry. It will also scale-up the core group of national professionals trained by the Nam Ha Project both in numbers and quality. SNV Netherlands Development Organization In the field of pro-poor sustainable tourism, a team of 11 advisors is delivering advice on policy, strategy, management and product development issues to a range of clients. At the national level, these include the Lao National Tourism Administration (LNTA), the National University of Laos (NUOL), and the Lao Association of Travel Agents (LATA). At the provincial level, provincial tourism offices are assisted, as are many other relevant governmental departments (including at district level). The ultimate aim is to promote tourism that benefits livelihood improvements to the poor. LAND World Bank and Australia The Second Land Titling Project (US$23.92m: WB-US$14.82m, AusAID-US$8.85m and GOL­US$2.27m, 2003-2008). The second phase of LTP aims to develop land administration capacity to support the country's economic development and poverty reduction goals. The objectives of the project are to (i) improve the security of land tenure; (ii) develop transparent and efficient land administration institutions at the national and provincial levels; and (iii) improve the government's capacity to provide social and economic services through broader revenue base from property related fees and taxes. Germany Land Policy Development Project (LPDP) (US$1.75m, 2005-2008). This project aims to strengthen the policy and legal framework of land management and land tenure in Lao PDR. The overall objective is to increase land tenure security for individuals, groups and public administration. This project represents the German contribution to the Lao PDR Land Titling Phase II (see above). World Bank (IFC/MPDF) IFC/MPDF: Tourism. (US$0.5m, 2005-2008). The overall objectives of IFC-MPDF interventions are to (i) generate more tourists, especially higher net-value tourists, (iii) encourage longer stays, (iii) achieve higher average spends, and (iv) enhance higher local spends. IFC-MPDF is continuing its activities in this sector which include preparing the "Stay Another Day" booklet, with a second edition launched in late February, assisting NTA in revising the related legal framework and developing branding for Lao tourism, and organizing Business Edge tourism management training for service providers. 39 ACKNOWLEDGEMENT The information presented in the Lao Economic Monitor covers economic developments that have occurred in Lao PDR in the last six months (between October-March 2008). It is issued twice a year (in Spring and Autumn) in both Lao and English by the World Bank team in Lao PDR. It reports on recent economic performance (Part I), progress in the implementation of the Government's policy reform agenda (Part II), and donor activities in the relevant reform areas (Part III). ThisissueoftheMonitorwaspreparedby Somneuk Davading (Task Team Leader) under overall supervision of Ekaterina Vostroknutova (Senior Country Economist), Mathew Verghis (Lead Economist, South East Asia) and Patchamuthu Illangovan (Country Manager). It is based on inputs from Helle Buchhave (Consultant), Jacobo Ruiz de Villa Cacho (Research Analyst), Cayetano Casado (Research Analyst), Mohinder Gulati (Lead Energy Specialist), Motern Larsen (Consultant), Shabih Mohib (Economist), Sengxay Phousinghoa (Private Sector Specialist), Thomas Rose (Adviser), Thomas Meadley (Consultant), Peter Silarszky (Economist), Soudalath Silaphet (Operations Officer), Viengsamay Vongkhamsao (WSP Country Team Leader), Kheungthong Vongsaya (Research Analyst), Saysanith Vongviengkham (Consultant) and comments from other colleagues. WearegratefultotheGovernmentand the donors for providing information and other inputs, as well as for sharing their views with the team. We thank Sarah Murray for editing this issue of the Monitor and Maria Fernanda Miralles Gasparini (Communications Specialist), Viengsamay Srithirath (Communications Associate) and THE WORLD BANK TEAM APPRECIATES Thalavanh Vongsonephet for helping on FEEDBACK ON THE STRUCTURE AND new designs and layouts. Great thanks go to Ruangrong Thongampai (Team CONTENT OF THE MONITOR. Assistant, WB Bangkok Office) for the printing and the staff in the World Bank Vientiane Office for their assistance in dissemination. THE WORLD BANK OFFICE, VIENTIANE Patou Xay Nehru Road Vientiane, Lao PDR Tel: (856-21) 414209, 450010-11 Fax:(856-21) 414210 www.worldbank.org/lao THE WORLD BANK OFFICE 1818 H Street, N.W. Washington, D.C. 20433 U.S.A Tel: (202) 473-1653 Fax:(202) 522-1560/1557 www.worldbank.org LAO PDR ECONOMIC MONITOR