Effective and coordination in Lao PDR Policy Implications for power sector development.PDF

This would allow the local government to take the lead and prioritise the commitments signed in the Paris Declaration, the Vientiane Declaration and the Millennium Development Goals.. He

RATIONALE

As a country condition of mountainously and rich of water resources, Lao PDR is having 23,000 MW exploitable hydro power potential With a quick development of economic and government policy on attraction of the foreign investment, those hydropower potential has been step to step developed for both domestic consumption and export for country income generation Continue of economic growth is needed to alleviate poverty and achieve social development goals but the policy options for achieving this are constrained

by the small domestic economy and limited trade opportunities Therefore, hydropower projects are a development opportunity for both local and central of Lao PDR in overall development The power policy of Lao government aim to establish a priority policy of developing the country’s potential energy resources to provide a low cost source of energy that can meet export and domestic policy objectives and promotion of sustainable development

For Lao PDR, Official Development Assistance (ODA) is very important mechanism

to promote the potential of investment fund, technology, marketing, management experiences, take part of job creation, increase of income level, upgrade of country development level Therefore, promotion and attraction of ODA and FDI is become one of priority policy of party and government of Lao PDR Promotion of the ODA into Lao for development of important sectors; potential sectors are essential necessary for current situation, especially for development of energy sectors because this sector is an major part

of country socio-economic development; it is a necessary of living condition of the people, generate income from export of surplus power from domestic use to neighboring country, creation for income from job opportunity for workers Together with those, it is also a factor contribute to promote other sector development as well

However, for promotion of the ODA are still having several limitation for example: understanding of the ODA is still different, recent year Lao PRD is announced for use of the Investment Promotion Law and many other legal documents concerning ODA and how to use such aid effectively In the same time management, selection, approval and opening of the investment form, investment form of the government into different sectors in particular for the join investment of the government into energy sector is not yet having a proper package system, thus this make a difficult to prepare a policy, policy and detail

implementation, this become a limitation of the research on ODA, therefore it make an investment environment is complicated, legal system, policy is not yet in a one full set system There are many policies concern with ODA are regularly adjusted, not clear and thus this impact to business operation Further to that policy system on the ODA, foreign direct investment, etc between government, ministries and local authority is still not harmonized and break through This make difficulty to donors and investors Those limitations are making investment climate and environment are liquidity

Research Aims and Objectives

The aim of this dissertation is to investigate a working model of aid coordination for Lao PDR with a focus of the country’s ODA status This will provide a better understanding of how the aid environment system operates within the country In addition

to Lao PDR, lessons from Timor L’Este and Vietnam will be discussed to briefly outline what these countries are doing with regards to harmonizing ODA and what best practices could be suggested for Lao PDR It is assumed that coordination is the key approach for aid effectiveness The dissertation objectives are:

1 To evaluate the current working model for aid coordination efforts in Lao PDR With this model it can be analyzed whether the current existing approach is effective or not

2 To find alternatives for aid coordination for Lao PDR for improvement

3 To recommend possible policies and solutions to promote effective use of external aid in the field of power sector development

Research Methodology

To achieve the above objectives this dissertation follows three steps of research:

Collecting data (i) Primary data were collected from different aspects regarding

power sector The samples from each view were taken from different sides of the sector The author had deep personal interviews with different managers, leaders, practitioners of related institutions/ organizations within the Ministry of Energy and Mines, MPI, international offices, etc

(ii) Secondary data were obtained from different sources (Office of the government

of Lao PDR, international sources, etc) but mostly from research work done by international offices from which I myself had been involved to some extent Some relevant literature were also reviewed

Data and information analysis Data and information obtained are used to analyze

current situation of ODA use in Lao PDR

Recommendations Possible policies and solutions regarding the development of

the power sector of Lao PDR in years to come will be outlined in the last chapter based on previous analysis

CHAPTER 1 LITERATURE REVIEW

Official Development Assistance (ODA) has a long history, yet its effectiveness and efficiency has always been a concern of both the donor and the recipients In order to enhance the efficiency and effectiveness of ODA, the Paris Declaration has been identified

as the key development frame work in leading the aid effectiveness agenda It is a contract between members from various developed and developing countries in an effort to reduce poverty This thesis draws attention the aid effectiveness agenda and the search for better ways to work in the development field, including governments and development professionals

1.1 According to A McCarty and A.Julian [1], (Bilateral) ODA to Lao PDR

originated in the early 1960s, and multilateral ODA was first recorded in the late 1970s Since then, total ODA has shown a strong increasing trend up to the present, although there has been some fluctuation year on year, with bilateral donors traditionally contributing the larger proportion of ODA Total ODA in 2007 stood at US$ 280 million, which is approximately 7% of GDP - a large percentage relative to other aid recipients Japan, France, and Sweden are Lao PDR’s largest bilateral donors, contributing respectively 40.1%, 16.8% and 11.8% of total bilateral aid between 2005 and 2007

Lao PDR is classified as an LDC and is, therefore, covered by the 2001 DAC Recommendation to untie aid Between 2005 and 2007 DAC donor countries formally untied over 70% of their ODA commitments to Lao PDR (CRS) Meanwhile, for the same period, 22% of bilateral ODA remained unreported with regard to tying status The process

of untying aid has improved over the last decade, despite the hesitation of some donors to move to non-project based aid modalities, such as budget support and pooled funding, which are often associated with untying Lao PDR receives largely grant aid as an instrument (98% of DAC ODA in 2007) and project based aid modalities Several donors also provide project based or free-standing technical co-operation, in many cases alongside grant funding for projects, which is often tied For example, grants which involved no free-standing technical cooperation (FTC) reported a 96.8% untied share, whereas grants which had a whole FTC component reported an untied share of just 27.8% (CRS, 2005-07) The three largest DAC donors to Lao PDR; Japan, France and Sweden, all reported a high proportion of their ODA as untied for 2007: 68.9%, 62.3% and 98.5% respectively Lao

PDR also receives substantial aid from non-DAC donors that is considered to be largely tied and not necessarily conforming to OECD definitions of ODA

The aim of the econometric analysis is to determine whether ODA, the tying status and the instruments by which aid is provided (loans and grants) have any significant impact

on aggregate donor export flows to the recipient, in this case to Lao PDR Overall, the results show that aggregate ODA, and grants in particular, have significant trade distorting effects through the increase in donor-recipient exports This empirical evidence suggests

that aid flows could be informally or de facto tied, when analysis of data from a cross

section of donors to Lao PDR is performed However, as outlined in the econometrics investigations this analysis has some caveats

1.2 Soudalie Silaphet [84] conducted a study to find out solution to the problem of

poor delivery of ODA is that the development industry must improve its ODA spending systems and incorporate aid budgets into the national budget and development plans It is vital to encourage national governments to lead their own development agenda and support development according to local priorities He found that it is not just a matter of coordinating aid effectively, but the aid industry needs the right capacity and people to be involved Capacity building is much needed within the recipient national offices as well as many of the international donor agencies This would allow the local government to take the lead and prioritise the commitments signed in the Paris Declaration, the Vientiane Declaration and the Millennium Development Goals

He also recommended that the number of agencies It is recommended by many practitioners that the number of agencies working in decision making processes in the aid effectiveness agenda in Laos should be limited to reduce transaction costs and promote clear communication within the development community However different environments such

as Timor L’Este, suggests that civil society should be involved more and that donor agencies should not take the lead in aid delivery

1.3 According to OECD [61], Lao PDR, in 2006, had a gross national income (GNI)

per capita of USD 2050 (in purchasing power parity terms) Lao PDR is a low-income country with high poverty rates The most recent poverty survey, conducted in 2002, estimated that 27% of the population lived below the dollar-per-day international poverty line, with 74% living below the two-dollars-per-day line The country is on track to meet three of the eight Millennium Development Goals (MDGs): MDG 2 on universal primary education; MDG 4 on reducing child mortality; and MDG 5 on improving maternal health In

2006, total net official development assistance (ODA) amounted to USD 364 million, with the Asian Development Fund (ADF), Japan and the World Bank were the top three donors for

2005-06 Lao PDR was not included in the 2006 Baseline Survey for the Paris Declaration Thus, the country’s 2010 targets will be based on the results of the 2008 Survey

Sixteen donors responded to the 2008 Survey, with their aid constituting 75% of total ODA provided by members of the OECD Development Assistance Committee (OECD-DAC) Aid accounts for some 12% of GNI in Lao PDR; thus, it is vital that government and donors work together to enhance aid effectiveness

In order for aid to be effective, it must be aligned with national development strategies, institutions and procedures The Paris Declaration envisions donors basing their support fully on country partner aims and objectives Indicators will examine several dimensions of aid to assess the degree to which partner countries and donors achieve alignment The data for Lao PDR suggest that there is substantial room for progress for most indicators, especially with regards to improving the reliability and use of country systems, for which the baseline is very low Although reforms are being made, there is a lack of financial and human capacity to implement and reinforce these reforms, which calls for long-term commitment from donors The limited use of these systems also contributes to low levels of aid reliability which further lowers aid effectiveness

Capacity constraints significantly undermine the ability of partner countries to capture, co-ordinate and utilise aid flows more effectively Under the Paris Declaration, donors committed to providing technical co-operation in a manner that is co-ordinated with partner country strategies and programmes This approach aims to strengthen capacities while also responding to the needs of partner countries Likewise, there is greater

recognition that successful capacity building is endogenous – e.g is led by the partner

country

To this end, the partner country defines clear objectives to ensure that existing capacities are used effectively and that external support is harmonised within this framework Some indicator focuses on the extent to which donor technical co-operation – an important input into capacity development – is moving towards this country-led model It measures the degree of alignment between donor technical co-operation and the partner country’s capacity development needs and strategies The Paris Declaration 2010 target is that 50% of technical co-operation flows are implemented through co-ordinated programmes that are consistent with national development strategies Data for 2007 shows that 54% of technical co-operation to Lao PDR was co-ordinated with country programmes This is encouraging The remaining gap may be the result of the NSEDP’s overall lack of an articulated strategy for dealing with capacity bottlenecks The Vientiane Declaration has given attention to this issue and has formulated capacity development frameworks for the

NSEDP’s priority sectors Co-ordination of technical co-operation is now taking place in the education sector and is an important component of the PFMSP

The Paris Declaration 2010 target is that 50% of technical co-operation be co-ordinated with country programmes The data suggest that Lao PDR has already exceeded this target although further progress can be made A government-commissioned report on the impact of technical co-operation was recently conducted: the lessons learned from this report will provide

a platform for further improvement

On aggregate, 38% of scheduled disbursements in 2007 were accurately recorded by the government, although only 65% of scheduled aid was actually disbursed For the average donor, the ratio was an even less encouraging 24% These gaps can result from several factors: inconsistencies and gaps in the legal and institutional framework for managing ODA; weak co-ordination between donors and the government in preparing realistic disbursement plans; and donors and government using different PFM and procurement systems The government is taking steps to improve the predictability of aid by establishing a comprehensive ODA database and by working with donors to develop ways

to improve overall project and financial management

1.4 According to Travis Harvey [87], the government of Lao PDR and donor

counterparts have a good understanding of the steps required for success and ownership of the process DG’s experiences have taught us to adopt a collaborative approach in designing and implementing processes for aid management, and to ensure they build on existing ones rather than seeking to replace them Regular introductory and refresher user training for key staff has proven critical, as has the identification of advanced users who can play a role in supporting others in the future During this mission the team conducted group training for desk officers and one-on-one training for senior government officers

Connectivity between government offices and the AMP server has been an issue over the past few months because the government data center was being moved into a new building During this time DG hosted the system off-site to maintain access for users This issue was resolved during the mission by re-establishing a stable hosting arrangement and fiber-optic connection to the Ministry Development partners will access the system via the internet when they begin using it later this year

Broad stakeholder buy-in is key to success in AMP country programs During this mission the team held a workshop to sensitize other government agencies and development partners to the program and the workplan This will be especially important in the lead up to the national Round Table Meeting (RTM) to be held in October The RTM will be a major

opportunity to raise awareness of the program, and DG will be there to support MPI in preparing and demonstrating the AMP system

1.5 According to Australia Aid Development Agency [109], a key feature of

governance in Laos is the relationship between the national and provincial governments Policy is centrally determined but provincial governors have significant autonomy which at times hampers national policy implementation While Laos has made significant gains in poverty reduction, progress with legislative and institutional reform in support of comprehensive human rights has been slower

Regarding the Aid effectiveness, Donors to Laos have performed poorly on aid

effectiveness A large number are engaged in many sectors through many stand-alone projects Some donor programs are managed remotely, creating difficulties with coordination and responsiveness Excessive use of parallel aid-delivery systems; insufficient joint analysis and programming; and inadequate performance assessment are some of the issues needing attention Despite this, progress is being made The Vientiane Declaration on Aid Effectiveness, a local version of the Paris Declaration on Aid Effectiveness, adopted by the Government of Laos and donors in 2006; has a companion document setting out implementation; and several joint government-donor working groups have been created to support improved policy discussion and programming Further improvements in aid effectiveness needs to be a priority of all donors to Laos

1.6 Also, UNDP in an assessment [110] remarked that Lao PDR also faces

challenges in improving governance to ensure effective service delivery to its population; to develop sound fiscal/revenue collection systems; and to ensure a stable, transparent and predictable environment for national and international investment Good governance will also help to maintain donor confidence, which is important given that aid accounts for 18 percent of GDP and more than 80 percent of public investment Given the importance of aid and the number and variety of donors, there is increasing recognition by both donors and the government of the importance of coordination and harmonization On the donor side, there has been highly effective coordination through the RTM process led by the UNDP As a result, the government has increased interest in improving its mechanisms for streamlining aid coordination The government made institutional adjustments for aid coordination in

2004, transferring the function to the Ministry of Foreign Affairs The Department of International Cooperation will also be strengthened in its role of monitoring ODA A Country Action Plan on Harmonization and Alignment is under preparation and a first joint review was conducted by the Government with the ADB, World Bank and SIDA The government recently established a parallel structure to the donor working groups in the form

of sector working groups to facilitate better aid coordination at sector and thematic area levels The organization stressed that ODA efficiency in Lao PDR needs to be improved and although efforts have been made to improve management and mainstreaming of ODA, challenges that may hinder the effective use of ODAfor development still exist These include:

 Interconnections of ODA allocations and the national plans and contribution of ODA

to national priorities

 Donor driven versus nationally driven development agenda Implementation of ODA projects and balance between recurrent and capital expenditures

 Implementation of mechanisms for aid coordination and institutional capacity

 Aid dependency and diversification sources of funding

 Existence of different modalities among donors and impacts on government allocation of time and human resources

Moreover, monitoring and reporting ODA figures is currently based on a database system that has limitations in coverage, timeliness and accuracy The data is used to produce the Foreign Aid Reports The government intends to develop an improved ODA database system that will improve both the accuracy of data and the aid coordination process and policy dialogue

1.7 In Vientiane Declaration on Aid Effectiveness [111], the Government of the Lao

PDR also stressed that it seek to take appropriate monitorable actions to make aid more effective and assist the country in achieving the Millennium Development Goals (MDGs)

by 2015 and the long-term development goal of exiting the status of least developed country

by 2020 (the 2020 goal) The Government recognise that while increased volumes of aid and other development resources are devoted to achieving the MDGs, aid effectiveness also needs to increase significantly to support the efforts to strengthen governance, improve development performance, and enhance development outcomes And the Declaration represent a shared recognition between the Government and the Partners to enhance the effectiveness of aid in the Lao PDR They will be implemented to the extent possible

CHAPTER 2 THEORETICAL FRAMEWORK ON ODA COORDINATION

EFFECTIVENESS

2.1 Development Theory

2.2 Development Aid

2.2.1 Donor Motives

2.2.2 Defining Official Development Assistance (ODA)

2.3 Aid coordination and its effectiveness

Aid coordination comprises activities of two or more development partners that are intended

to mobilize aid resources or to harmonize their policies, programs, procedures and practices

so as to maximize the development effectiveness of aid resourcesi

This definition focuses on the two long-standing goals of aid coordination: resource mobilization and increased development effectiveness The literature distinguishes several levels of aid coordination:

- Information sharing and consultation, to understand the activities, plans, and

perspectives of other actors

- Strategic coordination, to reach a consensus on policies, strategic objectives, and

key procedures and practices

- Operational coordination, to reach agreement on a common program or project to

be carried out and financed jointly ii

While level one can be viewed as the precursor to aid coordination, it lacks the active harmonization element embodied in the definition adopted above A key distinction between the second and the third levels os aid is that under startegic coordination, projects continue

to be financed by separate donors (although in a manner better integrated with national priorities), while under the latter, donors and the recipient country pool resources to carry out a joint set of activities or programs Not surprisingly, the literature indicates that aid coordination becomes more difficult for participants as they try to move from one level to the nextiii

2.4 Dimensions of Development Assistance Coordination

International community recognizes different dimensions of development assistance coordination:

• Donor coordination refers to the specific mechanisms and arrangements agreed

within the community of development partners to improve their effectiveness as partners in the development process It is a subset of aid coordination

• Aid coordination refers to the established mechanisms and arrangements that country

governments and their development partners have agreed on in order to maximize the effectiveness of external aid for development at national or sector levels It is a subset of development coordination

• Development coordination (at national or sector levels) refers to the combination of

aid coordination and the national government systems (policy-making and implementation, governance, accountability, etc.) that ultimately deliver development results

2.5 Sector Wide Approach and Programme Based Approach

2.6 Principles of Effective Aid Coordination

CHAPTER 3 KEY LESSONS LEARNED FOR LAO PDR

This chapter will detail lessons for the aid effectiveness agenda from two countries, case studies of Vietnam and Timor Leste Vietnam has been selected as a case simply because it has been an important template for the improvement of aid effectiveness in other nations in the region Vietnam has a model for Laos to be learned since both of the countries have political similarities and are neighboring countries with special relationship agreement

3.1 Lesson from Vietnam

3.2 Lesson from Timor L’Este

The development community seems confused and rather weak in making good aid practice work The important aspect of Vietnam’s successful model is that the government has taken strong leadership within the development community The success factors also involve pushing the development community to cooperate with the government’s agenda Vietnam even has provincial plans beside sectoral plans and consulting with donors to align This is one of the components of aid delivery that still needs improvement from the local Lao government situation Although two provinces have been identified to monitor the projects, the capacity of provincial governments lags far behind and coordination is difficult

to implement This is one of the reasons why aid coordination is still done entirely at the central level Thus, in Laos, capacity still needs to be significantly improved

Vietnam is one of the first countries to get a head start with the localization of the Paris Declaration It became a model, particularly in South East Asia, for how development