Report and Recommendation of the President to the Board of Directors

Project Number: 42203-025 Grant Number: 0235-LAO April 2017

Proposed Grant for Additional Financing Lao People’s Democratic Republic: Northern Rural Infrastructure Development Sector Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 22 March 2017)

Currency unit – kip (KN)

KN1.00 = $0.000122 $1.00 = KN8,200.00

ABBREVIATIONS

ADB – Asian Development Bank EIRR – economic internal rate of return FPG – farmer producer group ha – hectare Lao PDR – Lao People’s Democratic Republic MAF – Ministry of Agriculture and Forestry NPMO – national project management office O&M – operation and maintenance PAFO – provincial agriculture and forestry office PAM – project administration manual PPO – provincial project office PRI – productive rural infrastructure WUG – water user group

NOTES

(i) The fiscal year (FY) of the Government of the Lao People’s Democratic Republic

ends on 31 December. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2016 ends on 31 December 2016.

(ii) In this report, “$” refers to US dollars.

Vice-President S. Groff, Operations 2 Director General J. Nugent, Southeast Asia Department (SERD) Directors J. Zhang, Environment, Natural Resources and Agriculture Division,

SERD Y. Negishi, Lao People’s Democratic Republic Resident Mission, SERD

Team leaders S. Phanouvong, Senior Project Officer, SERD D. Salter, Senior Natural Resources and Agriculture Specialist, SERD

Team members S. Aman-Wooster, Principal Social Development Specialist (Safeguards), SERD V. Inthavong, Associate Project Officer (Infrastructure), SERD L. Leung, Natural Resources and Agriculture Economist, SERD S. Kawazu, Senior Counsel, Office of the General Counsel P. Phanvongsa, Project Analyst, SERD E. Quisumbing-Battung, Project Analyst, SERD C. Ramiro, Senior Operations Assistant, SERD T. Saphakdy, Social Development Officer (Gender), SERD S. Schipani, Senior Portfolio Management Specialist, SERD

Peer reviewer T. Ueda, Senior Natural Resources Economist, East Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1

B. Impact and Outcome 3

C. Outputs 3

D. Investment and Financing Plans 4

E. Implementation Arrangements 5

III. DUE DILIGENCE 6

A. Technical 6

B. Economic and Financial 7

C. Governance 7

D. Poverty and Social 8

E. Safeguards 8

F. Risks and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

APPENDIXES

1. Revised Design and Monitoring Framework 11

2. List of Linked Documents 16

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 01112016140637931393 Generated Date: 07-Apr-2017 16:38:12 PM

1. Basic Data Project Number: 42203-025Project Name Northern Rural Infrastructure

Development Sector Project - AdditionalFinancing

Department/Division

SERD/SEER

Country Lao People's Democratic Republic Executing Agency Ministry of Agriculture and ForestryBorrower Lao People's Democratic Republic

2. Sector Subsector(s) ADB Financing ($ million)Agriculture, natural resources and rural development

Agricultural production 4.00

Irrigation 22.00

Land-based natural resources management 4.50

Water-based natural resources management 4.00

Transport Road transport (non-urban) 1.10

Total 35.60

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 2: Access to economic opportunities, including jobs, made more inclusive

Environmentally sustainable growth (ESG)

Global and regional transboundary environmental concernsNatural resources conservation

Adaptation ($ million) 5.00Climate Change impact on the Project

Medium

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacitydevelopment (GCD)

Civil society participationInstitutional development

Knowledge solutions (KNS)

Knowledge sharing activities

Partnerships (PAR) Civil society organizationsImplementationPrivate Sector

Private sector development (PSD)

Promotion of private sector investmentPublic sector goods and services essential for private sector development

Effective gender mainstreaming (EGM)

5. Poverty and SDG Targeting Location ImpactGeographic TargetingHousehold TargetingSDG Targeting

YesNoYes

Rural High

SDG Goals SDG2, SDG8, SDG9

6. Risk Categorization: Low.

7. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: B.

8. Financing

Modality and Sources Amount ($ million)

ADB 35.60 Sovereign Project grant: Asian Development Fund 35.60

Cofinancing 0.00 None 0.00

Counterpart 2.00 Government 2.00

Total 37.60

9. Effective Development CooperationUse of country procurement systems YesUse of country public financial management systems Yes

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed grant to the Lao People’s Democratic Republic (Lao PDR) for the additional financing of the Northern Rural Infrastructure Development Sector Project.1 2. Inadequate productive rural infrastructure (PRI) is a critical constraint, limiting agricultural and rural development in the northern provinces of Bokeo, Louang-Namtha, Oudomxai, and Phongsali. In 2010, the Asian Development Bank (ADB) approved a $23 million grant to finance the Northern Rural Infrastructure Development Sector Project.2 Based on the current project’s good performance and solid achievements, the government and the ADB project team concluded that PRI investments should be scaled-up to broaden the benefits of increased rural incomes and economic development. The additional financing will enable the continued improvement of PRI, consisting of small and medium-sized gravity-fed irrigation schemes and rural access to and within the schemes. It will support the implementation of 22 new PRI subprojects, in addition to the 26 subprojects already completed in the current project. With the additional financing, the overall project will strengthen the (i) water user groups (WUGs) to manage PRI and the associated watersheds, and (ii) farmer producer groups (FPGs) to coordinate with markets. The inclusion of women, poor people, and ethnic groups will remain a priority. Consistent with the current project, the additional financing will lead to increased agricultural productivity, diversification, and commercialization, resulting in higher incomes in the subproject areas. Moreover, PRI is essential to counter the impacts of climate instability on agricultural production. The current project’s approach and structure remain valid.3

II. THE PROJECT

A. Rationale

3. Some 70% of the Lao PDR population continues to be engaged in agriculture, and over 50% of households are smallholder farmers. The average poverty rate in the four project provinces is 26%. Significantly, 73% of the residents are from ethnic groups that have little opportunity to integrate into the market economy. The northern region is still dominated by subsistence production on rain-fed lowlands, as well as upland shifting cultivation. The poor quality and inadequate coverage of PRI constrain agricultural production, especially in the dry season, resulting in limited areas being planted, low yields, limited diversity of produce, high production and marketing costs, and consequently, low rural incomes.4 4. Developing PRI is a high priority of the government’s Five Year National Socio-Economic Development Plan VIII, 2016–2020 and Agriculture Development Strategy to 2025 and Vision to the Year 2030 because (i) it is crucial to reducing the risk associated with rain-fed agriculture, (ii) it enhances productivity, and (iii) it provides options for diversifying into new

1 The design and monitoring framework is in Appendix 1. 2 ADB. 2010. Report and Recommendation of the President to the Board of Directors: Proposed Grant to the Lao

People’s Democratic Republic for the Northern Rural Infrastructure Development Sector Project. Manila. 3 ADB provided project preparatory technical assistance for Preparing the Northern Rural Infrastructure

Development Sector Project—Due Diligence of Additional Financing (TA 8882-LAO). This was complemented by resources from the current project which were used to carry out subproject impact studies and two feasibility studies.

4 Sector Assessment (Summary): Agriculture, Natural Resources, and Rural Development (accessible from the list of linked documents in Appendix 2).

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crops with higher potential for profit. 5 Given the importance of PRI, the government’s last irrigation diagnostic study completed in 2008, needs to be updated immediately.6 Improving rural access to and within the irrigation schemes facilitates the mobility of the local population, and the movement of agricultural inputs and outputs, increasing production efficiency. Investments in PRI have enhanced agricultural productivity by securing supplementary water supplies through the wet season and, where possible, providing water for dry season cropping. ADB has supported the development of transport corridors and regional economic integration in the Greater Mekong Subregion, which has increasingly made markets accessible for Lao PDR produce and will be further enhanced by the Association of Southeast Asian Nations Economic Community. The overall project remains consistent with the midterm review of ADB’s Strategy 2020, as well as the operational plans for agriculture and natural resources, and water.7 5. Strong positive impacts and key lessons. Socioeconomic impact studies on the first three completed subprojects showed year round increased areas under cultivation, with significant cropping diversity, especially during the dry season. WUGs are providing the backbone for PRI sustainability through organized operation and maintenance (O&M) and are evolving into FPGs that can negotiate production contracts with traders for more commercially oriented production. Market demand for the crops produced is high in Lao PDR and neighboring countries, especially the People’s Republic of China. These developments have underpinned economic internal rates of return (EIRRs), which average 22%, and from 2010 to 2015 a 92% increase in average annual household incomes of $1,320 in the subprojects areas.8 6. Project performance. The current project is performing well and is on track, as recorded in all project progress reports, review mission aide-mémoire, and as measured by ADB’s performance indicators. 9 The Ministry of Agriculture and Forestry (MAF) has demonstrated the capacity to implement ADB-financed projects effectively. As of 31 January 2017, the current project has achieved (i) good construction quality and the completion of all 26 PRI subprojects, within budget, and well before the project closing date; 10 (ii) 99.6% implementation progress against the elapsed grant period of just over 91.4%, with cumulative contract awards at $20.54 million (89%) and disbursements at $20.84 million (91%); and (iii) effective management of identified risks, and timely and satisfactory compliance with all grant covenants, including those concerned with financial management and safeguards. 7. Significant benefits in excess of those originally predicted have led to strong demand by the government and beneficiaries for additional financing—first recorded during the midterm review in April 2014. The importance of this well-performing project is shown by the government’s prioritization of this project for ADB’s resources, which will be used to scale up the 5 The Government of Lao PDR, Ministry of Planning and Investment. 2015. Five Year National Socio-Economic

Development Plan VIII (2016–2020). Vientiane; and Government of Lao PDR, Ministry of Agriculture and Forestry. 2015. Agriculture Development Strategy to 2025 and Vision to the Year 2030. Vientiane.

6 Ministry of Agriculture and Forestry, 2008. Irrigation Diagnostic Study. Vientiane 7 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila; ADB. 2014. Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific. Manila; ADB. 2015. Operational Plan for Agriculture and Natural Resources: Promoting Sustainable Food Security in Asia and the Pacific in 2015–2020. Manila; and ADB. 2011. Water Operational Plan, 2011–2020. Manila.

8 MAF. 2015. Socio-Economic Impact Study of Nam Dai Irrigation Subproject in Sing District, Louang-Namtha Province. Vientiane; MAF. 2015. Socio-Economic Impact Study of Nam Haad Right Bank Irrigation Subproject in Pha Oudom District, Bokeo Province. Vientiane; MAF. 2015. Socio-Economic Impact Study of Nam Lan Irrigation Subproject in Bountai District, Phongsaly Province. Vientiane. (accessible from the list of supplementary documents in Appendix 2).

9 The Ministry of Planning and Investment and ADB’s Lao PDR Resident Mission ranked the current project first in good project implementation practice in 2014 through the annual recognition award.

10 Summary of Project Performance (accessible from the list of linked documents in Appendix 2).

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outputs so that the overall project (i) remains technically feasible, economically viable, and financially sound; (ii) fulfills the high priority that the government accords PRI; and (iii) is consistent with its development objectives and ADB’s country partnership strategy, 2012–2016 for the Lao PDR.11 The overall project will continue to use a sector modality, which has proven to be efficient and effective. Based upon the provincial development plans, candidate subprojects have been identified, screened against eligibility criteria and prioritized, have been agreed among MAF, the participating provinces, and ADB, for inclusion in the overall subproject, contingent upon successful feasibility study confirmation. B. Impact and Outcome

8. The impact of the overall project will be improved rural household incomes in the four northern provinces of Bokeo, Louang-Namtha, Oudomxai, and Phongsali. The outcome will be increased agricultural productivity in the four northern provinces of Bokeo, Louang-Namtha, Oudomxai, and Phongsali. The impact and outcome remain unchanged from the current project, but the aggregated impacts and outcomes of the overall project will increase as the geographic coverage has been expanded to 22 new subprojects and 5,100 additional households. A total of 9,100 households will benefit directly from the project. C. Outputs

9. The current project’s four outputs will be scaled up as described below. 10. Output 1: Production and productivity-enhancing rural infrastructure constructed and/or rehabilitated. The implementation of PRI subprojects represents the bulk of the project investment. The current project completed 26 subprojects covering 5,300 hectares (ha), which is a much greater area than the target of 2,900 ha. An additional 22 subprojects covering about 6,800 ha will be implemented through the additional financing. The 48 total subprojects will comprise about 12,100 ha of irrigated command area and 225 kilometers of rural access road.12 PRI subprojects will be extended to three new districts in the overall project. 13 Subproject feasibility studies on two representative subprojects in the new districts were carried out during project preparation and confirmed subproject viability.14 11. Output 2: Productivity and impact-enhancing initiatives adopted. Initiatives to enhance the impact and sustainability of investments in PRI will continue. They will be identified in a participatory and gender-sensitive manner from options developed with stakeholders and beneficiaries, including (i) strengthening technical extension services to WUGs; (ii) establishing 48 FPGs to coordinate supplies of agricultural produce to markets and/or processors; (iii) supporting contracted agricultural production; and (iv) implementing initiatives to secure land tenure for 5,000 WUG members and to protect the health of 48 watersheds. Capacity building will continue to ensure that women and vulnerable ethnic groups have the necessary skills to participate fully in, and benefit from, project activities.

11 ADB. 2011. Country Partnership Strategy: Lao People’s Democratic Republic, 2012–2016. Manila. The additional

financing is presented as firm for 2017 in ADB. 2016. Country Operations Business Plan: Lao People’s Democratic Republic, 2017–2019. Manila.

12 The ongoing project consists of 26 subprojects, amalgamating 38 sub-schemes. The additional financing will support 22 subprojects, amalgamating 73 sub-schemes.

13 The subprojects are and will be implemented in the districts of (i) Houayxay, Paktha, and Pha-Oudom in Bokeo province; (ii) Long and Sing in Louang-Namtha province; (iii) Beng (new) and Houn (new) in Oudomxai province; and (iv) Boun-Nua (new), Boun-Tai, and Gnod-Ou in Phongsali province.

14 Subproject Feasibility Study for Nam Beng; and Subproject Feasibility Study for Nam Oun (accessible from the list of supplementary documents in Appendix 2).

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12. Output 3: Capacities of national, provincial, and district agencies strengthened to enable a sector development approach. Capacity building in MAF—as well as improving implementation capacity for staff at the national project management office (NPMO), provincial project offices (PPO), and district coordination offices—are largely completed but will be continued to target the three new districts. An irrigation subsector review will also be carried out. 13. Output 4: Project managed and subprojects delivered efficiently and effectively. The NPMO and the PPOs will continue to manage the project. Regular ADB review missions confirm that established financial, administrative, procurement, and reporting systems are effective and will be continued. Consulting services for implementation support and technical expertise will be extended or recruited as required. D. Investment and Financing Plans 14. The overall project is estimated to cost $62.2 million (Table 1).

Table 1: Project Investment Plan ($ million)

Item Current Amounta

Additional Financingb Total

A. Base Costc 1. Rural infrastructure development 16.2 29.1 45.2 2. Productivity and impact enhancement 1.4 3.1 4.5 3. Institutional capacity building 2.8 2.1 4.9 4. Project implementation and management 2.7 2.5 5.3 Subtotal (A) 23.1 36.8 59.9 B. Contingenciesd 1.5 0.8 2.3 Total (A+B) 24.6 37.6 62.2 a Refers to the amount of the original project. Includes taxes and duties of $2.2 million financed from the Asian

Development Bank (ADB) grant. b Includes taxes and duties of $3.4 million, of which $3.3 million will be financed by the ADB grant and the rest from

government contributions. c In mid-2016 prices. d Physical contingencies computed at 5% for consulting services, and 10% for resettlement, training, and project

management operation costs. No physical contingencies are provided in the civil works contracts of the current project. All contract variations, when needed, will be done within the contract amount. Price contingencies computed at 1.4% in 2017 and 1.5% in 2018 and thereafter for foreign currency costs; 3.5% in 2017 and 2018, and 4.0% in 2019 and thereafter for local currency costs; and includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

Source: Asian Development Bank estimates.

15. The government has requested a grant not exceeding $35.6 million from ADB’s Special Funds resources as additional financing to finance the increased scope of the overall project. The grant will fund PRI subprojects (including associated initiatives), capacity building, project management and consulting services, and applicable taxes and duties.15 The government will finance the equivalent of $2 million for the salaries of full-time permanent counterpart staff, office space, land acquisition and resettlement costs, the clearing of unexploded ordnance and 15 ADB will finance taxes and duties for the expenditure items it covers, operating costs (i.e., incremental project

management costs but not salaries or remuneration other than travel costs and daily subsistence allowance for government officials who work for the project), transportation costs, and interest and bank charges related to the imprest account. The following principles were followed in determining taxes and duties to be financed by ADB: (i) the amount does not represent an excessive share of the project; (ii) the taxes and duties apply only to ADB-financed expenditures; (iii) the amount is within the thresholds identified during the country partnership strategy preparation process; and (iv) financing of taxes and duties is material and relevant to project success.

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land mines, and applicable taxes and duties on items paid for by the government. The government will make the grant proceeds available to the executing and implementing agencies on a grant basis. The financing plan is in Table 2.

Table 2: Financing Plan

Source

Currenta Additional Financing Total Amount ($

million) Share of Total (%)

Amount ($ million)

Share of Total (%)

Amount ($ million)

Share of Total (%)

Asian Development Bank 23.0 93.4 35.6 94.7 58.6 94.2 Special Funds resources (grant) 23.0 93.4 35.6 94.7 58.6 94.2

Government 1.2 4.8 2.0 5.3 3.2 5.1 Beneficiaries 0.5 1.8 0.0b 0.0 0.5 0.7

Total 24.6 100.0 37.6 100.0 62.2 100.0

Note: Numbers may not sum precisely because of rounding. a Refers to the amount of the original project. b For the additional financing, the estimated beneficiary contribution for productive rural infrastructure maintenance is

not included in Table 2 since it is in-kind contribution but is estimated to be worth $0.4 million. Source: Asian Development Bank estimates.

E. Implementation Arrangements

16. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM). 16 The implementation arrangements follow the successful structure established in the original project.

Table 3: Implementation Arrangements Aspects Arrangements

Implementation period August 2017–December 2021 Estimated completion date 31 December 2021 (grant closing date: 30 June 2022) Management

(i) Oversight body National steering committee, chaired by a MAF vice-minister, with representation from relevant MAF departments, CAWA, LWU, MOF, MOFA, MOIC, MONRE, MPI, and the provincial vice governors from the participating provinces

(ii) Executing agency MAF (iii) Key implementing

agencies Bokeo, Louang-Namtha, Oudomxai, and Phongsali provincial agriculture and forestry offices

(iv) Implementation unit NPMO 18 staff, PPOs 52 staff, and DCOs 72 staff Procurement NCB (works) 22 contracts $24.26 million

NCB (goods) 1 contract $0.60 million Shopping 9 contracts $0.30 million

Consulting services GIC contract variation 414 person-months $4.00 million CQS (14 contracts) 430 person-months $2.53 million

FBS (1 contract) About 14 person-months $0.40 million Advance contracting Advance actions include negotiating with the GIC for a contract variation for the

additional scope, and recruiting the detailed design and engineering consultant. Disbursement The grant proceeds will be disbursed in accordance with ADB’s Loan

Disbursement Handbook (2015, as amended from time to time) and detailed arrangements agreed between the government and ADB.

ADB = Asian Development Bank, CQS = consultants qualifications selection, CAWA = Committee for the Advancement of Women’s Affairs, DCO = district coordination office, FBS = fixed budget selection, GIC = grant implementation consultant, LWU = Lao Women’s Union, MAF = Ministry of Agriculture and Forestry, MOF = Ministry of Finance, MOFA = Ministry of Foreign Affairs, MOIC = Ministry of Industry and Commerce, MONRE = Ministry of Natural Resources and Environment, MPI = Ministry of Planning and Investment, NCB = national competitive bidding, NPMO = national project management office, PPO = provincial project office. Source: Asian Development Bank estimates.

16 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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17. The national steering committee will continue to ensure interagency cooperation at the national level, and will be chaired by a MAF vice-minister with representation from concerned ministries and provincial vice governors. ADB project team confirms that existing implementation arrangements are effective and will be continued. MAF, as the executing agency, will have responsibility for overall project coordination and management. The NPMO will be responsible for day-to-day operations, will report to MAF and ADB, and will carry out all major recruitment and procurement activities with the current staff. 18. The established provincial steering committees will continue to be responsible for project coordination within each province. The provincial agriculture and forestry offices (PAFOs) will continue to be the implementing agencies, with responsibility for reporting to the provincial vice-governor and the NPMO. PPOs established within the PAFOs will continue to provide day-to-day support for the implementation of project activities and facilitate inputs from relevant provincial line departments for subproject design and implementation. PPOs will be managed by a provincial project coordinator from the PAFOs and one full-time deputy coordinator. The established district coordination offices will ensure that consultations are carried out with provincial and district stakeholder agencies and village authorities. Meetings will be arranged with WUGs, FPGs, village leaders, and poor households to identify their needs and raise awareness to enable access to benefits, including training and village-level participation in subproject planning and implementation. 19. Project management has been supported by an implementation consulting firm recruited under the current project. MAF confirmed that the firm provided highly satisfactory services, which are still needed to support the additional financing. Continuing the firm’s consulting services is in the overall interest of the project implementation and enhances economy and efficiency. Therefore, the firm’s contract will be extended to cover the new project scope, through a contract variation.17 Separate consulting packages will be procured for engineering design and construction supervision, through advance actions, to prepare the detailed designs and contract documents for the two representative subprojects.

III. DUE DILIGENCE

A. Technical 20. PRI uses basic engineering designs and can be constructed by local contractors. Climate instability is anticipated and a number of countermeasures will be taken, including (i) strengthening the weir design to withstand more intense stream flows; (ii) constructing passages to reduce stress on aquatic life by enabling aquatic migration up- and downstream of the weirs; (iii) concrete-lining canals to the extent possible for more efficient utilization of water; (iv) increasing the stability of the PRI and the health of the watersheds through soil and water conservation initiatives; and (v) involving WUGs and FPGs in the implementation of watershed management plans. ADB and MAF prescreened all proposed subprojects for initial technical, financial, economic, and social viability, as well as for safeguard issues.18

17 The terms of reference for the implementation consultants are in the PAM (accessible from the list of linked

documents in Appendix 2). 18 Field Survey Report (Subproject Screening) (accessible from the list of supplementary documents in Appendix 2).

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B. Economic and Financial

21. The representative subprojects in Nam Beng and Nam Oun will rehabilitate PRI to enable year round irrigated agriculture, resulting in increased cropping intensity. The economic and financial analysis considers as benefits only those that are quantifiable and directly attributable to PRI improvement. These include (i) increased yield and cropping intensity, (ii) crop diversification, and (iii) reduced transportation costs from the farm gate to the rice mills or local markets. Benefits that are difficult to quantify include enhanced market integration through PRI development, and associated investments in technical extension services and strengthened FPGs. Through supply contracts with private traders, farmers will gain access to agricultural inputs, credit, and downstream production services. The market risk is reduced since the contracts typically indicate the prices and contracted quantities in advance. This potential source of benefit is omitted in the analysis since the terms of the contracts are not yet specified. 22. The average household farm size in the subproject areas is 0.9 ha in Nam Beng and 1.0 ha in Nam Oun. Based on local prices, yields, cropping intensities and patterns, the economic value of the annual agricultural incomes is computed for both with- and without-project scenarios. The difference represents the incremental project benefit that accrues to the farmers, and is compared with the project costs. On an incremental basis, the estimated EIRR is 18.6% in Nam Beng and 17.0% in Nam Oun; both are above the 12.0% economic opportunity cost of capital.19 Sensitivity analyses show that the representative subprojects are most sensitive to a decrease in benefits, but the EIRRs remain above the economic opportunity cost of capital. 23. The financial analysis indicates that irrigated and diversified farming will generate a high financial rate of return. The average farm should be able to generate a net incremental crop income of KN4.3 million in Nam Beng (267% increase) and KN4.9 million in Nam Oun (328% increase) as a result of completing the representative subprojects.20 This provides a strong incentive for farmers to adopt high-yielding technologies and collectively contribute labor and monetary inputs for the routine operation and maintenance of the subprojects. Meeting recurrent O&M costs continues to be a challenge for the government, so the input of WUGs to O&M will remain essential. C. Governance

24. The financial management assessment indicates that, with the capacity established and with the support of the implementation consultants, MAF is capable of continuing the financial management of the overall project.21 The NPMO will ensure the consolidated project financial statements are audited by an independent auditor acceptable to ADB in accordance with international auditing standards and the government’s audit regulations. MAF will submit the audited project financial statements in English to ADB within 6 months after the end of the fiscal year. The project will continue operating a website for disclosure of implementation progress, bid notifications and results, and a grievance mechanism for corrupt practices and for people who may be negatively affected by the project. 25. MAF has extensive experience and capacity for managing externally funded projects, including those of ADB. All procurement and recruitment of consultants to be financed by the ADB grant will follow ADB’s Procurement Guidelines (2015, as amended from time to time) and 19 Economic and Financial Analysis (accessible from the list of linked documents in Appendix 2). 20 Without the project, annual income is about KN1.6 million in Nam Beng and KN1.5 million in Nam Oun. With the

project, annual income is estimated at KN5.9 million in Nam Beng and KN6.4 million in Nam Oun. 21 Financial Management Assessment (accessible from the list of supplementary documents in Appendix 2).

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Guidelines on the Use of Consultants (2013, as amended from time to time). The government’s public procurement legislation and regulations (as acceptable to ADB) will be applied for packages procured using national competitive bidding and shopping procedures. PPOs will involve district and lower administrative units, and communities to ensure their participation in monitoring PRI subproject design and construction. 26. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and MAF. The specific policy requirements and supplementary measures are described in the PAM and will be posted on the project website.22

D. Poverty and Social

27. The average poverty rate in northern rural Lao PDR is 26%, down from 31% in 2008.23 Rural poverty is close to three times as prevalent as urban poverty. Many of the PRI subprojects are in areas where a significant number of beneficiaries are members of ethnic groups. Poverty is highest among the non-Lao and non-Thai ethnic groups—35% among the Hmong-Lu Mien, 34% among the Mon-Khmer, and 32% among the Chine-Tibet. These three ethnic groups comprise over 73% of the population of the project’s four provinces. Food insecurity rates vary, reaching 22% in rural households classified as having poor or borderline levels of food consumption. The health, nutrition, and literacy indicators of people living in remote areas are also significantly lower than national averages, particularly for ethnic women.

28. PRI investments have been improving the incomes and food security of beneficiary households. The associated initiatives provide opportunities for rural people to build their capacities to derive improved agriculture-based livelihoods. The project will provide resources for implementing subproject gender action plans and ethnic group development plans. As women are greatly underrepresented in village and community decision-making institutions, interventions will increase their involvement in WUGs and FPGs. Vulnerable groups, mainly ethnic groups and households headed by women, will receive preferential employment opportunities for construction activities. The improved PRI will intensify agricultural activity and increase demand for labor and services, leading to income-generating opportunities. No major negative social impacts have occurred during implementation of the current project. 29. Gender (effective gender mainstreaming). The poverty, social, and gender due diligence conducted for the current project remains valid; and confirms the effective gender mainstreaming classification for the overall project. The gender action plan has been updated based on (i) equitable project benefits and opportunity sharing between men and women; (ii) gender-sensitive approaches to reduce gender inequalities in the project areas; (iii) targeted approaches for training women, including those in ethnic groups; (iv) collection of sex-disaggregated data for benefit monitoring and evaluation; and (v) increased representation of women in decision-making bodies.24 E. Safeguards

30. Involuntary resettlement (category B). The resettlement framework was updated and agreed with the government in accordance with ADB’s Safeguard Policy Statement (2009).25 Resettlement and land acquisition impacts are limited since the subprojects will rehabilitate 22 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 23 Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2). 24 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 25 Resettlement Framework (accessible from the list of linked documents in Appendix 2).

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existing infrastructure, and prescreening ensured that none of the subprojects would entail significant resettlement or land acquisition.26 Resettlement plans will be prepared for minor compensation that may be needed, in accordance with the resettlement framework. 31. Environment (category B). The environmental assessment and review framework agreed by the government and ADB was updated based on ADB’s Safeguard Policy Statement (2009) and resources for its implementation have been allocated.27 Subproject prescreening has eliminated subprojects with significant negative environmental impacts. Minor impacts will be mitigated by implementing the subproject environmental management plans prepared as part of each initial environmental examination. Subproject feasibility studies will ensure that water offtake during the dry season allows sufficient flows to maintain the riparian ecosystem and adequate resources for downstream users. Irrigation weirs may hamper aquatic life migration and stress fish stocks. Aquatic life passages will be made a standard weir design feature. The intensification of agriculture will bring long-term benefits to farmers but may also increase the use of agrochemicals. The environmental management plans will address risks associated with the use of agrochemicals and the promotion of sustainable land-use practices, through awareness raising and training. Supporting WUG and FPG members in obtaining land ownership certificates is expected to catalyze good land and watershed stewardship. 32. Indigenous Peoples (category B). The Indigenous Peoples Planning Framework: Ethnic Groups Development Framework28agreed by the government and ADB was updated, and resources were allocated to prepare ethnic group development plans for potential category B subprojects based on ADB’s Safeguard Policy Statement (2009). 29 The overall project activities will not cause (i) involuntary changes in ethnic groups’ livelihood systems, cultural practices, ancestral domains, food production practices, or cultural cohesion; (ii) unwanted dependence on external market forces; or (iii) the exclusion of any ethnic group. Possible negative impacts will be avoided when possible or will be compensated. Impacts are expected to be overwhelmingly positive since activities are for the socioeconomic improvement of the total population. All data collected will be disaggregated by ethno-linguistic group, age (where appropriate), and gender to allow the monitoring and evaluation of beneficiary inclusion.

F. Risks and Mitigating Measures

33. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.30

Table 4: Summary of Risks and Mitigating Measures

Risks Mitigating Measures Public financial management: weak regulatory systems and skills; inadequate financing of O&M

Training has enabled the project accounting unit to develop sufficient capacity within the NPMO and the implementing agencies. The GIC will provide support as needed. Any financial staff changes will be agreed with ADB. WUGs are effectively carrying out O&M independent of public financing.

26 Based on feasibility studies of representative subprojects and initial prescreening, the total cost of land acquisition

and resettlement is estimated to be $268,000, or 2% of civil works costs. 27 Environmental Assessment and Review Framework (accessible from the list of linked documents in Appendix 2). 28 Hmong, Khmou, and Lao are the major indigenous peoples in the project area; and fall under the ADB Safeguard

Policy Statement (2009) description of indigenous peoples. The government refers to indigenous peoples as “ethnic groups” (Government of the Lao PDR. 2003. Constitution of the Lao People’s Democratic Republic. Vientiane [article 8]).

29 Indigenous Peoples Planning Framework: Ethnic Groups Development Framework (accessible from the list of linked documents in Appendix 2).

30 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

10

Risks Mitigating Measures

Procurement: weak regulatory systems and staff skills

The trained NPMO procurement staff will be supported by the GIC, and any staff changes will be agreed with ADB. ADB will provide prior review for consulting recruitment and NCB contracts according to the procurement plan.

Corruption: high perceived levels

Project accounts will be closely monitored by the resident mission with twice annual reviews. Mechanisms for reporting corruption are in place. ADB will build stakeholder awareness of its Anticorruption Policy (1998, as amended to date).

Environmental sustainability and climate change: increasing stress on water and land ecosystems

The Project will: (i) build capacity and raise awareness of potential climate impacts and introduce farming methods and appropriate crop varieties; (ii) support land tenure and watershed management; (iii) construct climate resilient PRI to enable farmers to better manage water resources; and (iv) carry out an irrigation subsector review to strengthen sector planning, investment and implementation.

Global: vulnerable to external shocks and price fluctuations

Strong demand for food is forecast. The capacity of WUGs and FPGs will be improved to diversify and commercialize production. The project will closely monitor the establishment of FPG supply contracts, land-use maps, and land registration which will contribute to achieving production targets.

ADB = Asian Development Bank, FPG = farmer producer group, GIC = grant implementation consultant NCB = national competitive bidding, NPMO = national project management office, O&M = operation and maintenance, PRI = productive rural infrastructure, WUG = water user group. Sources: Asian Development Bank.

34. With the mitigation measures to be put in place, the overall risk assessment is considered low, and the benefits and impacts of the project will far outweigh the estimated costs. This is demonstrated in the sensitivity analyses in the economic and financial analysis.

IV. ASSURANCES

35. The government and MAF have assured ADB that implementation of the overall project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and grant agreement.

V. RECOMMENDATION

36. I am satisfied that the proposed grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the grant not exceeding $35.6 million to the Lao People’s Democratic Republic, from ADB’s Special Funds resources (Asian Development Fund), for the additional financing of the Northern Rural Infrastructure Development Sector Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant agreement presented to the Board. Takehiko Nakao President 28 April 2017

Appendix 1 11

REVISED DESIGN AND MONITORING FRAMEWORK

Impact the Project is Aligned with:

Current project: Improved rural household incomes in the four northern provinces of Bokeo, Louang-Namtha, Oudomxai, and Phongsali

Overall project: Unchanged and is aligned with Ministry of Agriculture and Forestry’s (MAF) Agricultural Development Strategy to 2025 and Vision to the year 2030

Results Chain Performance Indicators

with Targets and Baselines Data Sources and

Reporting Mechanisms Risks

Outcome Key commercial crop production statistical reports by provincial and district agriculture and forestry offices

Climate change impacts adversely affect crop production and commercialization.

Current project Current project

Increased agricultural productivity in the four northern provinces of Bokeo, Louang-Namtha, Oudomxai, and Phongsali Overall project

Unchanged

Agriculture productivity in rice equivalent increased from 3 tons/ha in 2010 to 5 tons/ha by 2017 Overall project

Agriculture productivity in rice equivalent increased from 3 tons/ha in 2010 to 5 tons/ha by 2022

Outputs

Output 1 1a. 1a–c. NPMO and PPO quarterly progress and monitoring reports; NPMO and PPO consolidated subproject completion reports

1a–1b. Water user groups fail to provide operation and maintenance to the improved infrastructure.

Current project Production and productivity-enhancing rural infrastructure constructed and/or rehabilitated Overall project Unchanged

Current project An estimated 2,900 ha of command area served by rehabilitated gravity irrigation structures by 2017 Overall project An estimated 12,100 ha of command area served by rehabilitated gravity irrigation structures by 2021 1b. Current project 155 kilometers of rural access roads rehabilitated by 2017 Overall project 225 kilometers of rural access roads rehabilitated by 2021 1c. Current project Women have equal opportunity to access employment for construction activities by 2017, with equal

12 Appendix 1

Results Chain Performance Indicators

with Targets and Baselines Data Sources and

Reporting Mechanisms Risks pay for equal work Overall project Women have equal opportunity to access employment for construction activities through 2021, with equal pay for equal work

Output 2 Current project Productivity and impact-enhancing initiatives adopted Overall project Unchanged

2a. Current project 25 producer and water user groups formed by February 2017, with women comprising 30% of their members Overall project 48 water user groups and farm producer groups operating by December 2021, with women comprising 30% of their members 2b. Current project 25 producer groups supply contracts ratified by district agriculture and forestry offices by February 2017 to supply private processors for value-addition through processing Overall project 48 water farm producer groups supply contracts ratified by district agriculture and forestry offices by December 2021 to supply private processors for value addition through processing 2c. Current project 20 catchment management plans with associated land rezoning implemented by 2017 Overall project 35 watershed management plans with associated land rezoning implemented; cadastral maps for

2a. NPMO and PPO quarterly progress and monitoring reports 2b. Accomplishment reports of district registrar of producer cooperatives involved in the marketing of agricultural produce 2c. District governor approvals of land-use and zoning plans; NPMO and PPO training completion reports

2b. Commodity price fluctuations and uncertainty reduce interest in contract farming. 2c. Corrupt practices emerge in the land tenure process.

Appendix 1 13

Results Chain Performance Indicators

with Targets and Baselines Data Sources and

Reporting Mechanisms Risks 48 subprojects irrigation command areas and at least 5,000 water user group members obtain land ownership certificates by June 2022 2d. Current project Extension services designed for and delivered to women, with 30% of extension training for women, by 2016 Overall project Extension services designed for and delivered to women, with 30% of extension training for women, by December 2021

2d. NPMO and PPO quarterly progress and monitoring reports

Output 3 3a. 3a–b. NPMO and PPO quarterly progress and monitoring reports

Current project Capacities of national, provincial, and district agencies strengthened to enable a sector development approach Overall project Unchanged

Current project 33 training courses conducted, with women comprising at least 50% of participants, by December 2014 Overall project 43 training courses conducted, with women comprising at least 50% of participants, by December 2021 3b. Current project Monitoring and evaluation section established in the Department of Planning and Cooperation, with a staff of at least 10 people, by December 2012 Overall project Irrigation subsector review completed by 2017

Output 4 Current Project Project managed and subprojects delivered efficiently

4a. Current project 5 key implementation consultants mobilized within 3 months of grant

4a. Notice to proceed from NPMO

4a. Shortage of people with the necessary finance and procurement skills leading to poor

14 Appendix 1

Results Chain Performance Indicators

with Targets and Baselines Data Sources and

Reporting Mechanisms Risks and effectively Overall project Unchanged

effectiveness; project performance and monitoring system disaggregated by gender and ethnolinguistic group operational within 12 months of effectiveness Overall project All key implementation consultants mobilized before grant effectiveness 4b. Current project At least 20% of NPMO and PPO staff (excluding secretarial and administrative staff) are women Overall project Unchanged

4b. NPMO and PPO quarterly progress and monitoring reports; staff registry in NPMO and PPOs

financial and procurement practices.

Key Activities with Milestonesa (for additional financing)

1. Production and productivity-enhancing rural infrastructure constructed and/or rehabilitated 1.1 For 2 representative subprojects, completed detailed designs by April 2017 and construction by

June 2018 (overall project, phase 1) (PSD) 1.2 For 7 subprojects, completed detailed designs by June 2018 and construction by July 2019 (overall

project, phase 2) (PSD) 1.3 For 7 subprojects, completed detailed designs by June 2019 and construction by July 2020 (overall

project, phase 3) (PSD) 1.4 For 6 subprojects, completed detailed designs by June 2020 and construction by July 2021 (overall

project, phase 4) (PSD) 1.5 22 subprojects completed and handed over to relevant authorities for operation by July 2022 2. Productivity and impact-enhancing initiatives adopted 2.1 48 water user groups and farm producer groups established and trained in villages benefiting from

rehabilitated infrastructure (26 completed by March 2017 and 22 by September 2021) (PAR) 2.2 Pro forma public–private partnership agreements and associated arrangements prepared by the

end of 2020 (PSD) 2.3 20 watershed management plans and rezoning implementation completed by March 2018 and

12 more completed by September 2021 (GCD) 2.4 Cadastral maps for 48 subproject irrigation command areas completed by June 2021 (GCD) 2.5 Land titling teams equipped and trained by September 2017 (GCD) 2.6 5,000 water user group members obtain land ownership certificates by February 2022 (PSD) 2.7 Ongoing implementation of gender action plan by December 2021 (GEM) 3. Capacities of national, provincial, and district agencies strengthened to enable a sector

development approach 3.1 An additional 10 training courses and 500 people trained by September 2021 (GCD) 3.2 Irrigation subsector review undertaken by the end of 2018 (KNS) 4. Project managed and subprojects delivered efficiently and effectively 4.1 Continue established project management, monitoring, and reporting procedures to June 2022 4.2 Oudomxai PPO staffed and strengthened to implement subprojects by September 2017 (GCD)

Appendix 1 15

4.3 Contract variation for project implementation consulting services completed by March 2017 4.4 Detailed design and contract document for 2 representative subprojects prepared by April 2017 4.5 Overall project completion report prepared by June 2022

Inputs Asian Development Bank: $23.0 million grant (current), $35.6 million (additional), $58.6 million (overall) Government: $1.2 million (current), $2.0 million (additional), $3.2 million (overall) Beneficiaries: $0.5 million (current), $0.0 (additional), $0.5 million (overall) Assumptions for Partner Financing Current project

The estimated beneficiary contribution for productive rural infrastructure maintenance in-kind contribution was estimated to be worth $0.5 million from 25 producer and water user groups.

Overall project

The estimated beneficiary contribution for productive rural infrastructure maintenance for additional financing is not included in Table 2 since it is an in-kind contribution, but is estimated to be worth an additional $0.4 million, for a total of $0.9 million for the overall project from 48 producer and water user groups.

ADB = Asian Development Bank, GCD = governance and capacity development, GEM = gender equity and mainstreaming, ha = hectare, KNS = knowledge solutions, NPMO = national project management office, PAR = partnerships, PPO = provincial project office, PSD = private sector development. a A detailed implementation schedule is in the project administration manual. b For the additional financing, the estimated beneficiary contribution for productive rural infrastructure maintenance is

not included since it is in-kind contribution, but is estimated to be worth $0.4 million. Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=42203-025-3

1. Grant Agreement

2. Sector Assessment (Summary): Agriculture, Natural Resources, and Rural Development

3. Project Administration Manual

4. Summary of Project Performance

5. Contribution to the ADB Results Framework

6. Development Coordination

7. Economic and Financial Analysis

8. Country Economic Indicators

9. Summary Poverty Reduction and Social Strategy

10. Gender Action Plan

11. Environmental Assessment and Review Framework

12. Resettlement Framework

13. Indigenous Peoples Planning Framework: Ethnic Groups Development Framework

14. Risk Assessment and Risk Management Plan

Supplementary Documents

15. Subproject Field Survey – Final Report

16. Detailed Economic and Financial Analysis

17. Financial Management Assessment

18. Procurement Capacity Assessment

19. Climate Risk and Vulnerability Assessment

20. Subproject Feasibility Study for Nam Beng

21. Subproject Feasibility Study for Nam Oun

22. Socio-Economic Impact Study: Nam Dai Irrigation Subproject

23. Socio-Economic Impact Study: Nam Haad Right Bank Irrigation Subproject

24. Socio-Economic Impact Study: Nam Lan Irrigation Subproject