RRP: Lao PDR: Second Private Sector and Small and Medium … · 2014-09-29 · C. de Vera, Operations Assistant, SERD K. Hattel, Financial Sector Specialist, ... V. ASSURANCES 10

Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 44057-013 September 2013

Proposed Policy-Based Loan and Technical Assistance Loan for Subprogram 2 Lao People’s Democratic Republic: Second Private Sector and Small and Medium-Sized Enterprises Development Program

CURRENCY EQUIVALENTS (as of 9 September 2013)

Currency unit – kip (KN)

KN1.00 = $0.000127

$1.00 = KN7843.00

ABBREVIATIONS

ADB – Asian Development Bank CIB – Credit Information Bureau DMF – design and monitoring framework GDP – gross domestic product Lao PDR – Lao People’s Democratic Republic MOIC – Ministry of Industry and Commerce

NSEDP7 – Seventh National Socio-Economic Development Plan P3D – provincial public–private dialogue P3F – post-program partnership framework PSME2 – Second Private Sector and Small and Medium-Sized

Enterprises Development Program RIA – regulatory impact assessment SMEs – small and medium-sized enterprises TA – technical assistance WTO – World Trade Organization

NOTE In this report, “$” refers to US dollars

Vice-President S. Groff, Operations 2 Director General J. Nugent, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector, and Trade Division,

SERD Team leader S. Ismail, Financial Sector Economist, SERD Team members K. Bird, Principal Economist, SERD

C. de Vera, Operations Assistant, SERD K. Hattel, Financial Sector Specialist, SERD

B. Konysbayev, Senior Counsel, Office of the General Counsel P. Louangraj, Senior Economics Officer, Lao Resident Mission, SERD J. Mitra, Associate Project Analyst, SERD

Peer reviewer R. Barreto, Financial Sector Specialist, Central and West 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

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. THE PROGRAM 1

A. Rationale 1 B. Impact and Outcome 3 C. Outputs 4 D. Development Financing Needs 6 E. Implementation Arrangements 7

III. TECHNICAL ASSISTANCE LOAN 7

IV. DUE DILIGENCE 9

A. Economic and Financial 9 B. Governance 9 C. Poverty and Social 9 D. Safeguards 10 E. Risk and Mitigating Measures 10

V. ASSURANCES 10

VI. RECOMMENDATION 10

APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14 3. Development Policy Letter 15 4. Policy Matrix 18

PROGRAM AT A GLANCE

1. Project Name: Second Private Sector and Small and Medium-Sized Enterprises Development Program - Subprogram 2

2. Project Number: 44057-013

3. Country: Lao People's Democratic Republic

4. Department/Division: Southeast Asia Department/Public Management, Financial Sector, & Trade Division

5. Sector Classification: Sectors Primary Subsectors Industry and trade

√ Small and medium enterprise development

6. Thematic Classification: Themes Primary Subthemes Private sector development √ Policy reforms

6a. Climate Change Impact No Climate Change Indicator available.

6b. Gender Mainstreaming Gender equity theme (GEN) Effective gender mainstreaming (EGM) √ Some gender elements (SGE) No gender elements (NGE)

7. Targeting Classification:

General Intervention

Targeted Intervention Geographic

dimensions of inclusive growth

Millennium development

goals

Income poverty at household

level √

8. Location Impact:

National Medium Rural Low Urban Medium

9. Project Risk Categorization: Complex

10. Safeguards Categorization: Environment C Involuntary resettlement C Indigenous peoples C

11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Program loan Asian Development Fund 15.000 Sovereign TA Loan Asian Development Fund 4.378

Total 19.378

12. Cofinancing: No Cofinancing available.

13. Counterpart Financing:

Source Amount ($ Million) Government 0.25

Total 0.25

14. Aid Effectiveness: Parallel project implementation unit Yes

Program-based approach Yes

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed policy-based loan and (ii) a proposed technical assistance (TA) loan, both to the Lao People’s Democratic Republic (Lao PDR), for subprogram 2 of the Second Private Sector and Small and Medium-Sized Enterprises Development Program (PSME2).1 2. Subprogram 2 of the PSME2 and the TA loan support the government's strategy to develop and promote small and medium-sized enterprises (SMEs) and undertake SME trade-related reforms to help achieve sustained and inclusive economic growth—a strategy embedded in the Seventh National Socio-Economic Development Plan (NSEDP7), 2011–2015.

II. THE PROGRAM A. Rationale 3. The PSME2 cluster, which the Board of Directors of the Asian Development Bank (ADB) approved in October 2011, comprises two subprograms implemented from 2009 to 2013.2 Subprogram 1 was approved in the macroeconomic context of the resources boom and the importance of developing the private sector, especially SMEs, to be more competitive.3 Since 2011, gross domestic product (GDP) growth in the Lao PDR has been steady, averaging 7.7% from 2010 to 2012.4 Economic activity remained strong in 2011 and 2012 despite monetary and fiscal tightening and global uncertainty in major export markets. Industry, mainly led by resources, recorded the highest growth rate in 2012, at 13.8%, as foreign investment in hydropower and mining proved to be key engines of growth. Services grew at 8.0% while agriculture’s contribution to annual real growth was the lowest at 2.5%,5 which is consistent with the steady decline of agriculture’s share of GDP, from 61.2% in 1990 to 30.3% by 2010. This pattern of structural change can be expected as an economy grows and develops; resources move from low-productivity activities in subsistence agriculture and traditional services to higher-productivity activities in industry and modern services.6 As a result of this steady growth, the proportion of the population living below the poverty line dropped from 33.9% in 2008 to 27.6% in 2012. 4. The boom in resources has transformed the economy over the past 20 years and will continue to do so in the immediate future. The extent of the transformation and how it will affect the country’s economy will depend on (i) the magnitude, duration, and cyclical pattern of the mineral resources boom; (ii) the extent to which the resource revenue flows appreciate the real kip exchange rate and how that exchange rate appreciation transmits to the tradable goods sector; and (iii) what kind of policies the government implements to promote competitiveness in the non-resource sectors, especially the SME subsector.

1 The design and monitoring framework is in Appendix 1.

2 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Program Cluster,

and Loan and Grant for Subprogram 1, to the Lao People’s Democratic Republic for the Second Private Sector and Small and Medium-Sized Enterprises Development Program. Manila.

3 SMEs in the Lao PDR are defined as enterprises with an annual average number of employees not exceeding 99

or total assets not exceeding KN1,200,000,000 or an annual turnover not exceeding KN1,000,000,000. 4 GDP growth was 7.5% in 2010, 7.8% in 2011, and 7.9% in 2012 based on ADB. 2013. Asian Development Bank &

Lao People’s Democratic Republic Fact Sheet. Manila. 5 ADB. 2013. Basic 2013 Statistics. Manila.

6 K. Bird and S. Ismail. 2013. Lao PDR Assessment, Strategy and Road Map, Small and Medium-Sized Enterprises.

Manila: ADB.

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5. Strengthening small and medium-sized enterprises. According to government data, 99% of economic enterprises in the Lao PDR are SMEs. Strengthening the competitiveness of SMEs is important for two main reasons—the transitory nature of the resources boom and the country's accession to the World Trade Organization (WTO) in February 2013. While the resources sector contributes significantly to exports and fiscal revenue, this is expected to decline in the medium term. Non-resource sectors will thus need to expand their contribution to be able to play a pivotal role in employment generation and in making the economic growth of the country both sustainable and inclusive. Second, while WTO membership is a substantial achievement that will help integrate the Lao PDR further into the world economy, such trade exposure can affect industries differently; some will expand due to new opportunities while others will have to undergo substantial restructuring to survive and prosper. Hence, assisting structural adjustment so that SMEs can benefit from the new opportunities is essential. In addition, SMEs also face constraints such as inefficient regulations, poor access to services and finance, non-transparent trade policies which results in low utilization of tariff preferences. 6. The government recognizes the importance of developing SMEs—two of the main targets of enterprise development in the NSEDP7 are: (i) to have 13% annual growth in the SME subsector; and (ii) to have 85% of workers in business overall engaged by SMEs.7 The NSEDP7 is further supported by the national SME Development Plan, 2011–2015. ADB’s country partnership strategy, 2012–2016 is also consistent with government priorities. Private sector development is one of the thematic areas of the strategy, which states that ADB will continue to promote a stronger enabling environment for the private sector. Improving the business environment for SMEs will naturally result in expansion of the SME subsector within the formal sector, and ultimately a more competitive and efficient private sector. 7. ADB’s support. ADB has extensive experience in SME and private sector development in the Lao PDR. The first Private Sector and Small and Medium-Sized Enterprises Development Program was implemented from 2006 to 2009.8 In that program, the government implemented reforms aimed at reducing the cost of doing business in the Lao PDR, including enactment of the Law on Enterprises and establishment of enterprise registry offices; starting the process for regulatory reform; and advancing trade policy reforms. ADB’s completion report rated the first program as successful overall.9 The country assistance performance evaluation prepared by the Independent Evaluation Department concluded that ADB’s programs in the SME subsector were highly relevant, highly efficient, effective in achieving intended outcomes, and likely to be sustainable. 10 This provided strong rationale for ADB’s continued involvement through the PSME2. ADB also works closely with other development partners in developing the sector by coordinating through the trade and private sector working group.11 8. Achievements of subprogram 1. Under subprogram 1 of the PSME2, which ADB financed in 2011 ($15 million), the government carried out reforms through: (i) implementation of

7 Government of the Lao PDR. 2011. The Seventh National Socio-Economic Development Plan, 2011–2015.

Vientiane. 8 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development

Fund Grant and Technical Assistance Grant to the Lao People’s Democratic Republic for the Private Sector and Small and Medium-Sized Enterprises Development Program Cluster (Subprogram 1). Manila; ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant for Subprogram 2 to the Lao People’s Democratic Republic for the Private Sector and Small and Medium-Sized Enterprises Development Program. Manila.

9 ADB. 2011. Completion Report: Private Sector and Small and Medium-Sized Enterprises Development Program in

the Lao People’s Democratic Republic. Manila. 10

ADB. 2010. Country Assistance Program Evaluation for the Lao People’s Democratic Republic. Manila. 11

Development Coordination (accessible from the list of linked documents in Appendix 2).

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an SME policy and access to services; (ii) promotion of regulatory efficiency; and (iii) strengthening of the trade policy to support SME growth. Some tangible achievements include: (i) national rollout of a fully web-based enterprise registry system in the provinces, development of a web-based Credit Information Bureau (CIB-online), (ii) establishment of the regulatory impact assessment (RIA) pilot unit in the Ministry of Industry and Commerce (MOIC); and (iii) focus on trade policy measures that directly benefit SMEs, including preparation of a geographical indication strategy and passing of decrees on rules of origin and import and export of goods consistent with WTO requirements. 9. Lessons. Notwithstanding the achievements above, lessons from subprogram 1 include the need for additional capacity building to mainstream reforms and make them sustainable, and a more direct and comprehensive approach to gender mainstreaming to promote women entrepreneurs. First, in subprogram 1, capacity building and implementation support were provided through TA and the government’s budget allocation. While this was sufficient to complete the reforms for subprogram 2, institutionalizing them and making them sustainable requires more resources. Second, policy measures that promoted women entrepreneurs were limited to only the first output (implementation of SME policy and access to services). These lessons have been incorporated in the design of subprogram 2. In addition to the government’s budget allocation, subprogram 2 includes a TA loan with more resources for capacity building to help make the reforms sustainable. This reflects government's commitment to the sector and to meet all performance targets in the DMF including those with slow progress. Subprogram 2 also includes policy measures to promote women entrepreneurs that cover all outputs. 10. Subprogram 2. The proposed modality combines a policy-based loan designed to build on government reforms under subprogram 1, and a TA loan to build capacities and make the completed reforms sustainable. The implementation period for the policy-based loan is October 2011–September 2013 and the implementation period for the TA is January 2014–December 2017. A post-program partnership framework (P3F) has also been agreed with the government, which provides an opportunity for ADB to continue working with the government in SME development to achieve the medium-term direction and expected results. The policy actions in the policy matrix cover both supply- and demand-side reforms. On the supply side, subprogram 2 reforms inefficient regulations that hinder SME growth and competitiveness through the RIA system introduced by ADB. On the demand side, subprogram 2 focuses on improving access to services and finance, and dissemination of trade-related information to help SMEs benefit from trade policies. Subprogram 2 will be in line with ADB’s Strategy 2020 focus on gender empowerment and is classified as effective gender mainstreaming by including gender-responsive measures in the policy matrix and using gender-related indicators in the DMF. B. Impact and Outcome 11. The impact of the program will be expansion of SMEs in the formal sector by 100% from the 2009 baseline. This is important, as registration allows SMEs to get access to services such as bank loans. In 2009, about 45,000 enterprises were registered and by the end of 2012, this number had increased to 91,077. The performance target for this impact has thus been reached 3 years ahead of the timeline set in the DMF. The outcome of the program will be a more conducive business environment for SMEs based on two indicators in the DMF. The updated DMF (Appendix 1) contains an additional column with figures for 2012.

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C. Outputs 12. Subprogram 2 continues to support the government’s efforts to develop the private sector and SMEs through: (i) implementation of an SME policy that widens SMEs’ access to services; (ii) improvement of regulatory efficiency; and (iii) strengthening of the trade policy to support SME development. When subprogram 1 was approved in 2011, eight triggers were set for subprogram 2. An additional trigger was added in 2012. The nine triggers are reinforced by 10 other accomplishments that are considered policy measures. 13. Out of the original eight triggers, three exceeded expectations, four were completed as anticipated, and one was refined to reflect practical realities and the government’s priorities. The trigger related to setting up a pilot online enterprise registry in one province was refined because internet infrastructure in the provinces is not sufficiently developed to support online registration. Instead, the government has decided to decentralize enterprise registration by setting up registry offices in 51 districts, which will achieve the same objective as online registration. Realization of an online registry will take more time and, as a first step, ADB helped the government develop an appropriate strategy. The strategy looked at ways to overcome inadequate internet access in some provinces and develop an online payment system.12

1. Output 1: Implementation of Small and Medium-Sized Enterprise Policy that Widens Access to Services

14. Coordination of policy development. SME development, which cuts across several line ministries, requires an anchor document as a reference point to formulate strategies and plan activities. The SME Development Plan 2011–2015 defines targets and measures and is incorporated in the government-approved NSEDP7. Key features of the plan include promoting women entrepreneurs and RIA to improve the business environment for SMEs. Approval of the plan as part of the NSEDP7, rather than as a standalone document, reinforces coordination of SME development with the government’s overall priorities. In addition, the SME monitoring unit continues to publish updates on the implementation of the SME Development Plan and, as of 2013, all activities are on track. 15. To further strengthen SMEs, government also enacted the SME Law. It upgraded the Small and Medium-Sized Enterprise Promotion and Development Office to a department of MOIC with enhanced responsibilities such as promoting and supporting the development of women entrepreneurs. Effective policymaking should always include engagement with the private sector. The government continues to do so through the Provincial Public–Private Dialogue (P3D) Forum. The P3D in Luang Prabang was institutionalized and the Ministry of Planning and Investment initiated phase 3 of the P3D in expanding it into Xiengkhouang. The P3D is coordinated through the Lao National Chamber of Commerce and Industry. 16. Wider access to business services and finance. SMEs’ access to services and finance is predicated on registration. The government has made great strides in simplifying enterprise registration. By 2011, 70,000 enterprises had registered, compared with about 35,000 in 2008. During implementation of subprogram 2, and by the end of 2012, the number of enterprises registered exceeded 91,000. Decentralizing registration offices into the provinces has also had a positive impact on women entrepreneurs—more than 50% of registered individual enterprises are owned by women. Despite this success, government is committed to

12

Policy matrix (Appendix 4); Assessment of Original Triggers (accessible from the list of linked documents in Appendix 2).

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further progress. The Department of Enterprise Registration and Management, with ADB support, undertook a thorough review of the registration system and based on the findings will consider recommendations for: (i) decentralizing registry offices into districts; (ii) ensuring their financial sustainability; and (iii) reaching out to women entrepreneurs. 17. Access to finance remains a problem. The GIZ Enterprise Survey of 2011 reported that 26.6% of enterprises cited lack of capital as a “very big” problem. When broken down by size, 57% of micro businesses and 45% of small businesses said that lack of capital is a significant constraint.13 In response, the government: (i) developed and launched a web-based credit information system (CIB-online); and (ii) approved the implementing decree for the Secured Transaction Law. Under subprogram 2, CIB-online has been made fully operational. All banks are required to provide credit information of customers to the online system and all queries for credit information now occur through the online system. As of March 2013, CIB-online received an average of over 3,000 queries per month. Further, all new loans above KN50 million require credit reports. The government also made progress in the secured transaction registry. The Ministry of Finance agreed to host the registry and assigned a team to implement it. Apart from widening access to finance, the government also recognizes the need for SMEs to access business development services, and for these services to be led by the private sector for the private sector. According to the GIZ survey, only 7.9% of enterprises surveyed received business development services from the private sector. In subprogram 2, the Department of SME Promotion launched the network of service providers that had been piloted in subprogram 1. It has been expanded to cover services like accounting, marketing, and business advice. The network also facilitates vocational training for women entrepreneurs.

2. Output 2: Promoting Regulatory Efficiency 18. One of the most effective ways to enhance the competitiveness of SMEs is to promote regulatory efficiency so that regulations do not unnecessarily burden SMEs.14 The objective of the RIA process introduced by ADB in 2010 is to provide decision makers in the government with information on the impact of regulations on the private sector. During subprogram 2, government accomplishments in mainstreaming the RIA system have exceeded initial targets. Most importantly, the government has passed the Law on Making Legislation, which makes impact assessment mandatory for all lawmaking authorities. This is critical as it embeds the RIA process into national legislation. The government also realizes that to implement this law effectively, capacities have to be built in line ministries. The pilot unit in MOIC has led by example and begun implementing its RIA work plan for capacity building by completing two preliminary impact assessments on rice and timber exports. MOIC has published both impact assessments to solicit feedback from the private sector before they are finalized. The government, with the support of ADB, has set up additional RIA units in the ministries of finance, justice, and planning and investment. A unit was also set up in the National Assembly, which needs to understand the process since it will deliberate on legislation that includes impact assessments prepared by line ministries. 19. With impact assessments being made mandatory and now covering several line ministries, it is important that the RIA interministerial task force (set up under subprogram 1 to coordinate RIA implementation) is strengthened. During subprogram 2, government has taken concrete steps by appointing representatives from all RIA units, including representatives from

13

GIZ. 2012. Enterprise Survey 2011. Vientiane. 14

ADB’s Red Tape Study estimates that firms on average incur $483 annually to comply with the three most common licenses. Overall, it costs the business community (those complying) $36 million to comply with the three licenses.

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the Lao Chamber of Commerce and the National Assembly, to be part of the task force, and appointing a secretariat to serve the task force. Such a mechanism will allow more effective deliberation and sharing of information and experience between the RIA units. Another significant achievement in promoting regulatory efficiency is that the government has implemented the prime ministerial decree on the Investment Promotion Law by setting up a one-stop service center in the Ministry of Planning and Investment that is now fully operational. That the RIA unit in this ministry has begun evaluating the one-stop service center is further demonstration of the government’s ownership of the RIA process.

3. Output 3: Strengthening the Trade Policy to Support Small and Medium-Sized Enterprise Development

20. Growth from trade. Research, including that published by ADB, shows that the utilization rates for tariff preferences among SMEs are very low.15 One key reason is SMEs’ lack of information on ways to benefit from preferential trade agreements. In view of the Lao PDR’s accession to the WTO in February 2013, information dissemination becomes more critical so that SMEs can compete within the country’s more open economy. To respond to the needs of the SMEs, government has undertaken two important reforms under subprogram 2. First, MOIC (through its Foreign Trade and Policy Department) drafted trade integration dissemination guidelines to inform SMEs on ways to utilize preferences. The guidelines include outreach activities for the business community, particularly women entrepreneurs. Second, the government (through the Ministry of Science and Technology) issued the Intellectual Property Law and implementing regulations on geographical indications consistent with WTO procedures, which set the stage for SMEs to register their products locally via the geographical indication registration framework. In most cases, these registrations have resulted in premium pricing in international markets, which benefits SMEs along the whole value chain. 21. Greater transparency. Under subprogram 2, the government took three steps toward greater transparency in its trade policy. First, MOIC operationalized the Sanitary and Phytosanitary and Technical Barriers to Trade Notification Unit and published notification on its website. This is consistent with WTO requirements for transparency in trade policies. Second, MOIC developed and implemented the Lao PDR Trade Portal, which provides web-based information systems to assist SMEs on trade-related regulations. The government, with ADB support, developed a database for the notification units which are included in the trade portal. Third, the government institutionalized an information-sharing mechanism between ministries and agencies on trade-related measures. This improves transparency and should enable all line ministries to provide consistent information to SMEs. 22. Post-program partnership framework. Subprogram 2 is followed by the P3F, which illustrates the government's recognition of its partnership with ADB and allows both parties to continue working together in this important area. Most of the actions specified in the P3F will be supported through the TA loan. The medium-term direction and its expected results offer a reference point for targets that can be met through a results-based approach. D. Development Financing Needs 23. To support its reform initiatives, the government has requested a loan of $15 million equivalent to help finance subprogram 2 of the PSME2. The loan will have a 24-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period

15

M. Kawai and G. Wignaraja. 2011. Asia’s Free Trade Agreements. Cheltenham, UK: ADB.

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and 1.5% per annum thereafter, and such other terms and conditions as set forth in the draft financing agreement. The closing date of the loan is 31 March 2014, by which date all proceeds of the loan will have been fully disbursed. Having satisfied all subprogram triggers, the loan will be withdrawn in a single tranche upon loan effectiveness. The proceeds of the loan will finance economy-wide imports from ADB member countries on the basis of the negative list16 and will be disbursed in accordance with the provisions of ADB's policy on Simplification of Disbursement Procedures and Related Requirements for Program Loans.17 24. The size of the loan is based on consideration of a number of factors required to support implementation of program reforms. The key considerations are: (i) the relative importance of the sector to the economy, the weight and benefits of the reform program; (ii) the policy costs incurred by the government and stakeholders in implementing reforms; and (iii) the need to conform to the overall financing requirement from the country partnership strategy period. Subprogram 2 loan proceeds will support key development spending in 2013, including about $1.5 million to institutionalize RIA; $0.3 million for decentralizing enterprise registration via district offices; and other administrative, investment, and fiscal costs to the government in implementing reforms. Paras. 28 and 29 summarize expected costs and benefits, and the program impact assessment provides details.18 E. Implementation Arrangements 25. MOIC will be the executing agency, which is responsible for overall implementation through the program coordination team. The team is chaired by the director general of the Department of SME Promotion and will include the Foreign Trade Policy Department; the departments of import and export, and enterprise registration and management at MOIC; and the ministries of justice, planning and investment, and science and technology, who are implementing agencies for the program. The Ministry of Finance will be responsible for disbursement. The implementation period is October 2011–September 2013.

III. TECHNICAL ASSISTANCE LOAN

26. The government has requested a TA loan of $4.378 million equivalent. The TA serves three purposes: (i) to mainstream the reforms completed in subprogram 2, including by setting up institutions to make these reforms sustainable; (ii) to provide capacity building support to the government beyond 2013; and (iii) to help the government accomplish the P3F actions. The loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions as set forth in the draft TA loan agreement. The TA will have five outputs (i) enhanced enterprise registry; (ii) RIA institutionalized; (iii) geographical indication system established; (iv) SME e-commerce and export development project established and (v) project management unit established. The TA is estimated to cost $4.628 million. ADB will finance $4.378 million equivalent from ADB's Special Funds resources (Asian Development Fund), including applicable taxes, duties, and bank charges. The government will provide $0.25 million equivalent through in-kind contributions (counterpart staff and various facilities) and financing of interest during implementation. The project administration manual outlines the proposed activities under the TA, and will be further refined before implementation.19 The TA financing plan and investment plan are summarized in Tables 1 and 2. 16

List of Ineligible Items (accessible from the list of linked documents in Appendix 2). 17

ADB. 1998. Simplification of Disbursement Procedures and Related Requirements for Program Loans. Manila. 18

Program Impact Assessment (accessible from the list of linked documents in Appendix 2). 19

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

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Table 1: Investment Plan

Item Amount ($ million)a

A. Base Cost 1. Consultants 2.654

2. Equipment and vehicles 0.751 3. Training and workshops

0.491

4. Surveys and studies 5. Miscellaneous administration and support costs

0.110 0.204

6. Office and facilities support (government in-kind)b 0.142

Subtotal (A) 4.352 B. Contingencies

0.168

C. Interest Charges b 0.108

Total (A+B) 4.628 a.

Includes value-added tax to be financed from Asian Development Bank loan proceeds. The basis for this financing of taxes and duties is the country partnership strategy, 2012–2016 for the Lao People’s Democratic Republic.

b. Government contribution.

Source: Asian Development Bank

Table 2: Financing Plan

Source Amount ($ million)

a Share of Total (%)

Asian Development Bank 4.378

94.60

Governmentb 0.250

5.40

Total 4.628 100.00

a. Includes value-added tax to be financed from Asian Development Bank loan proceeds. The basis for this financing of taxes and duties is the country partnership strategy, 2012–2016 for the Lao People’s Democratic Republic.

b. In-kind contribution and interest during implementation.

Source: Asian Development Bank.

27. Consultant inputs for the TA will total 276 person-months (international, 117 person-months; national, 159 person-months), from a combination of consulting firms and individual consultants. The consulting firms will be selected through the quality- and cost-based selection method, with a 90:10 ratio in the case of component 3 (due to its technical requirements) and an 80:20 ratio for the other two components. At the request and on behalf of the government, ADB will assist in the selection of consultants while MOIC will sign and administer their contracts according to ADB’s Guidelines on the Use of Consultants (2013, as amended from time to time). The loan proceeds for financing activities under the TA loan will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2012, as amended from time to time). The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual.

Table 3: Implementation Arrangements Aspects Arrangements

Implementation period January 2014 – December 2017

Estimated completion date 31 December 2017

Management

(i) Oversight body Project steering committee, chaired by the vice-minister of MOIC and consisting of representatives from the implementing agencies.

(ii) Executing agency MOIC (DOSMEP)

(iii) Key implementing agencies DERM and DIMEX (MOIC), MOJ, and MOST

(iv) Implementation unit Project management unit at MOIC (DOSMEP)

Procurement Shopping 1 contract $108,000

Consulting services ICS 147 person-months $739,700

QCBS 129 person-months $3,425,800

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Aspects Arrangements

Disbursementa The loan proceeds will be disbursed in accordance with ADB's Loan

Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

DERM = Department of Enterprise Registration and Management, DIMEX = Department of Import and Export, DOSMEP = Department of SME Promotion, ICS = Individual Consultant Selection, MOIC = Ministry of Industry and Commerce, MOJ = Ministry of Justice, MOST = Ministry of Science and Technology, QCBS = Quality and Cost-Based Selection Source: Asian Development Bank.

IV. DUE DILIGENCE

A. Economic and Financial 28. Subprogram 2 will generate economic gains through successful implementation of medium-term policy actions. The estimated benefits exceed the loan amount. The policy costs to the government are conservatively estimated as a discounted present value lump sum of $9.3 million. These costs include the administrative, investment, and fiscal costs to the government in implementing the reforms—e.g., activities under the SME Development Plan; the investment cost to set up the one-stop service center, to make CIB-online fully operational, and to launch the network of service providers; and the investment costs to set up RIA units 29. ADB estimates the direct benefits of the reform program over the program period (2009–2015) at approximately 0.3% of GDP, or a discounted present value lump sum of approximately $27 million. These economic benefits include the gains to the economy from a reduction in business costs through RIA, efficiency gains for the private sector through the one-stop service center, potential growth and development of SMEs through better access to finance, and a premium to SMEs involved in export of geographical indication products. B. Governance 30. The government is committed to strengthening its public financial management system through the Public Financial Management Strengthening Program. A new procurement decree, implementing rules and regulations, a standard procurement manual, and standard bidding documents have improved procurement practice. The government has taken credible measures to strengthen key oversight agencies such as the State Audit Organization, and has adopted the Law on Anti-Corruption, Law on State Inspection, Law on Complaints and State Audit, and Law on State Accounting. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government. C. Poverty and Social 31. Reforms under subprogram 2 are expected to lower the incidence of poverty through two channels—(i) accelerating, broad-based, and sustainable growth, and (ii) lower prices for goods and services.20 Reducing business compliance costs will increase the number of SMEs in the formal sector, thereby supporting inclusive economic growth. By improving transparency in the trade policy and supporting integration in the region and the rest of the world, economic efficiency will increase and domestic prices will fall. The PSME2 will have a positive impact on achieving the goal of gender equality through the SME Development Plan, 2011–2015, the approved SME Law, the network of service providers, and the regulatory review process.

20

Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2).

10

D. Safeguards 32. In compliance with ADB’s Safeguard Policy Statement (2009), the program is classified category C for impacts on the environment, involuntary resettlement, and indigenous peoples.21 E. Risk and Mitigating Measures 33. The risk for subprogram 2 is assessed as medium to high. Major risks include procurement, corruption and threat to economic growth. Mitigation measures to address these risks include support through ADB’s public financial management strengthening program and implementation of legislations such as Law on State Inspection and Law on State Accounting. These laws seek to strengthen public financial management practices, and minimize discretionary exercise of power. The risk and mitigating measures are described in detail in the risk assessment and risk management plan.22

V. ASSURANCES

34. The government has assured ADB that implementation of subprogram 2 of the PSME2 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 project administration manual and the loan agreements. The government has agreed with ADB on certain covenants for subprogram 2, which are set forth in the loan agreements.

VI. RECOMMENDATION

35. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve:

(i) the policy-based loan in various currencies equivalent to SDR9,890,000 to the Lao People’s Democratic Republic for subprogram 2 of the Second Private Sector and Small and Medium-Sized Enterprises Development Program, from ADB’s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 24 years, including a grace period of 8 years; and

(ii) the technical assistance loan in various currencies equivalent to SDR2,887,000 to the Lao People‘s Democratic Republic for subprogram 2 of the Second Private Sector and Small and Medium-Sized Enterprises Development Program, from ADB‘s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years including a grace period of 8 years,

and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement and technical assistance loan agreement presented to the Board.

Takehiko Nakao President

9 September 2013

21

Ibid., p9. 22

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

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and Indicators with Baselines

Updates on performance targets and indicators

(subprogram 2)

Data Sources and

Reporting Mechanisms

Assumptions and Risks

Impact Expansion of SMEs in the formal sector

By end of 2015: Number of SMEs registered in the enterprise registry system increased by 100% (2009 baseline: 45,000 registered SMEs)

Number of SMEs registered as of 2012 is 91,077, (exceeded expectations)

DERM statistics

Assumption No major disruption to economic growth of Lao PDR, e.g., global financial crisis

Outcome More conducive business environment for SMEs

By end of 2013: (i) Number of newly registered enterprises report that operating licenses to start business were obtained in less than 15 days, increased by 5% per year. (2009 baseline: 55%) (ii) Share of registered SMEs owned by women increased to 48% of total enterprises registered. (2009 baseline: 43%)

(i) 71% of medium-sized businesses completed registration in less than 30 days (65% in 2009) (mixed result) (ii) Over 53% of individual enterprises registered are owned by women (on track)

GIZ Enterprise Survey DERM completion reports

Assumption Government stays on course to implement key regulatory and trade-related reforms Risk Legislative process to improve business environment may be slow

Outputs 1. SME policy implemented, which includes widening SMEs’ access to services

By end of 2013: (i) At least 90% of measures in SME Development Plan implemented by 2015, with at least 80% of activities fully or partially achieving expected results and impacts, including measures and activities related to empowerment of women entrepreneurs (2009 baseline: Nil) (ii) Government institutionalized the P3D in six provinces (2009 baseline: P3D institutionalized in one province) (iii) 350 bank inquiries per day made to CIB online (2009 baseline: Nil) (iv) Number of banks using CIB online credit report for loan approvals is 100% (2009 baseline: Nil)

(i) All activities for 2013 are on track. Quantitative assessment to be completed by end 2015 (ii) P3D was rolled out in six provinces. (on track) (iii) average 124 bank inquiries per day to CIB online (slow progress, initial estimates too high) (iv) All banks use CIB online credit report for loan approval (exceeded

ADB TA, review missions, and Monitoring Unit reports ADB TA, review missions, and GIZ Monitoring Unit report CIB online report DOSMEP report and GIZ SME Monitoring Unit report

Assumption CIB online is managed efficiently so that there is free flow of information between CIB and commercial banks Risk Capacity of agencies to implement reforms may be constrained by resources and other emerging priorities

12 Appendix 1

Design Summary



(subprogram 2)

Data Sources and



(v) 500 SMEs use network of SME service providers, 40% of which are owned by women (2009 baseline: Nil)

expectation) (v) Network launched in 2013 with 23 members registered (slow progress)

2. Regulatory efficiency improved

By end of 2013: (i) Reduce the cost of business compliance with regulations by 15% (2009 baseline: $483 per firm annually) (ii) 35% of consultations on measures related to RIA are with women stakeholder groups (2009 baseline: Nil) (iii) 20 preliminary impact assessments completed and published by three line ministries (2009 baseline: Nil)

(i) survey on business compliance cost to be undertaken by end of 2013 (on track) (ii) 37% of consultations are with women groups (exceeded expectations) (iii) 5 preliminary impact assessments completed by three line ministries (slow progress)

ADB TA and review missions Reports by RIA Interministeri-al Task Force Reports by line ministries undertaking RIA

Assumption RIA momentum is sustainable through expansion of pilot program

3. Trade policy supporting SMEs’ development strengthened

By end of 2013: (i) 3 products locally registered for geographical indication. (2009 baseline: Nil) (ii) No. of days needed for import or export reduced by 20% (2009 baseline: 50 days) (iii) 500 SMEs consulted annually for negotiations of trade agreements and formulation of trade policy, 50% of which are owned by women (2009 baseline: Nil) (iv)30 SPS and TBT notifications made (2009 baseline: Nil)

(i) 4 products are planned to be registered by end of 2014 (slow progress) (ii) No. of days needed for import or export reduced to 26 days, (exceeded expectation) (iii) SMEs consulted through workshop throughout the year (on track) (iv) 54 SPS and TBT notifications made, May 2013 (exceeded expectation)

Geographical indication report published by MOST Doing Business Report FTPD Report FTPD Report

Assumption Government remains committed to reforms as part of WTO accession process Risk Legislative process may be slow and overshoot timeline, and trade reforms may meet opposition from vested interests

Appendix 1 13

Design Summary



(subprogram 2)

Data Sources and



TA Loan (outputs) 1. enhanced enterprise registry 2. RIA institutionaliz-ed 3. Geo-graphical indication system established 4. SME e-commerce and export development project established 5. Project management unit established

By end of 2017: Enterprise registry offices set up in all districts RIA central office/learning center established 2 products registered locally and training sessions for women entrepreneurs e-commerce platform operational and training sessions for women entrepreneurs Monitoring and evaluation framework, including on TA’s impact on women entrepreneurs

DERM report ADB review mission ADB review mission and TA report ADB review mission and TA report ADB review mission and TA report ADB review mission and TA report

Assumptions for TA Loan DERM will have sufficient resources to maintain district-based offices Implementing regulations on location of central office will be drafted and approved Risk for TA Loan Geographical indication registration framework not sufficiently communicated to producers, resulting in poor subsequent product controls

Activities with Milestones (Subprogram 2) 1.1 Drafting of SME Development Plan, 2011–2015 and approval of it through

NSEDP7 (completed) 1.2 Network for SME service providers launched (completed) 1.3 Credit information bureau is fully operationalized (completed) 1.4 P3D in Luang Prabang is institutionalized and meetings with private sector

held to discuss local issues (completed) 2.1 Drafting and approval of Law on Making Legislation, which makes impact

assessment mandatory for lawmaking authorities (completed) 2.2 RIA unit set up in MPI, MOF, MOJ, and National Assembly (completed) 2.3 RIA for export of rice and timber published (completed) 2.4 RIA for Enterprise Law to be completed (by end of 2013) 2.5 Study visit for government on how to set up RIA center (completed) 2.6 One-stop service center established (completed) 3.1 Approval of Intellectual Property Law (completed) 3.2 Draft trade dissemination guidelines to provide information to SMEs

(completed) 3.3 SPS and TBT notifications published on FTPD website (continuous)

Inputs Policy-Based Loan: ADB: $15 million TA Loan: ADB: $4.378 million Government: $0.25 million

ADB = Asian Development Bank, CIB = Credit Information Bureau, DERM= Department of Enterprise Registry and Management, FTPD = Foreign Trade and Policy Department, LNCCI = Lao National Chamber of Commerce and Industry, MOF = Ministry of Finance, MOJ = Ministry of Justice, MPI = Ministry of Planning and Investment, P3D = provincial public–private dialogue, RIA = regulatory impact assessment, SMEs = small and medium-sized enterprises, SPS = sanitary and phytosanitary, TA = technical assistance, TBT = technical barriers to trade. Note: “Nil” baselines refer to actions that are being implemented for the first time so there are no prior figures to be reflected as baseline. Achievements in subprogram 1 may be used as baselines for subprogram 2. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://adb.org/Documents/RRPs/?id=44057-013-3

1. Loan Agreement: Policy-Based Loan

2. Loan Agreement: Technical Assistance Loan

3. Sector Assessment (Summary): Trade and Industry (Small and Medium-Sized Enterprises)

4. Project Administration Manual

5. Contribution to the ADB Results Framework

6. Development Coordination

7. Economic and Financial Analysis

8. Country Economic Indicators

9. International Monetary Fund Assessment Letter

10. Summary Poverty Reduction and Social Strategy

11. Risk Assessment and Risk Management Plan

12. List of Ineligible Items

Supplementary Document

13. Program Impact Assessment

14. Assessment of Original Triggers

Appendix 3 15

16 Appendix 3

Appendix 3 17

18 Appendix 4

POLICY MATRIX Draft Policy Matrix for Second Private Sector and SME Development Program

Triggers (in bold) and Policy Milestones – Revised on 13 May 2013

Policy Actions

Subprogram 2 Accomplishments (2011–2013)

Triggers in bold

Post Program Partnership Framework (2013 – 2015)

Medium Term Direction and

expected results (2013–2017)

1. Implementation of SME Policy and Access to Services

1.1 Coordination of participatory SME Policy development

1) Government (MPI) institutionalized Provincial Public-Private Dialogue (P3D) Forum in Luang Prabang in addition to Champasack and initiated phase 3 by expanding into other provinces (Xiengkhouang).

2) SME Development Plan with defined targets and measures is incorporated into the National Social Economic Development Plan 7 (NSEDP7 2011-2015), approved by the Government. Key features of the strategy include: (i) promoting women entrepreneurs and (ii) Regulatory Impact Assessment (RIA) to improve business environment for SMEs

3) SME monitoring unit continues to publish quarterly updates on the on implementation of the SME development plan (2011-2015).

4) Government enacted the SME law which changed the office of SMEPDO to a department under MOIC’s structure with enhanced responsibilities. The law mandates DOSMEP to support and facilitate development of women entrepreneurs.

1) DOSMEP undertake

comprehensive study on priority areas for SME Development Plan of 2016-2020

2) DOSMEP reviews the structure, financial management and reporting procedures for the SME Fund

1) Number of investment climate issues discussed increase by 10% every year. 2) SME Development Plan at least 90% implemented by 2015 with at least 80% activities (at least partially) achieved

3) SME law

implemented based on focus areas including development of women entrepreneurs

Appendix 4 19

Policy Actions


Triggers in bold




1.2 Improve SME access to business services and finance

5) DERM undertakes a thorough review of the current registration system and considers recommendations for (i) decentralizing registration offices to the district level, (ii) financial sustainability of ERM; and (iii) outreach to women entrepreneurs 6) DERM implements steps to further enhance the enterprise registration system including by developing a strategy for online registration. 7) DOSMEP launched the network of service providers which includes business advisory services including vocational training for women entrepreneurs 8) The CIB-online fully functioning, all queries for credit information utilize the online system and all new loans above 50 million Kip require credit reports

9) The Government decides to host the secured transaction registry at the Ministry of Finance (MOF) and MOF assigns team to work on the registry.

3) DERM implements decentralization of registration offices to the district level. 4) DOSMEP studies ways to improve network of service providers

5) The Ministry of Finance (MOF) establishes the secured transaction registry at the MOF.

4) more than 90,000 enterprises registered and with a target of 48% of women owned enterprises 5) 300 SMEs accessed business development services for the network of expert providers including 40% by women entrepreneurs 6) The CIB made autonomous and at least 350 electronic transactions through the CIB-online made per day 7) A secured transaction registry fully functioning registry with at least 100 securities

20 Appendix 4

Policy Actions


Triggers in bold




registered including 40% by women entrepreneurs

2. Promoting Regulatory Efficiency

10) Government enacted the Law on Making Legislation and included provision requiring law making authorities to provide RIA notes for proposed legislation. 11) The Government strengthened and revised composition of RIA inter-ministerial taskforce to reflect the expansion of RIA in other line ministries 12) Government made substantial progress in implementing the RIA strategy by expanding the RIA units in MPI, MOF, MOJ and the National Assembly in addition to the pilot in MOIC. 30 % of RIA unit members are female staff. 13) MOIC implements its RIA work plan for capacity building and published its first preliminary impact assessments

6)The Government drafts PM instructions on regulatory and budget impact assessment 7) The Government agree on ministry to host the RIA Office/Learning Center 8) Government prepares update on RIA activities and circulates amongst taskforce members. 9) All RIA pilot units complete 1 PIA and publish on their respective websites

8) The Government issues PM instructions on regulatory and budget impact assessment 9) Government establishes RIA Office/Learning Center 10) Government circulates bi-annual report on RIA activities to all ministries and private sector 11) Government continues to implement a transparent regulatory system with at least 25 preliminary impact assessment (PIA) on key legislation or

Appendix 4 21

Policy Actions


Triggers in bold




14) MPI established the one stop service center and initiated evaluation of its effectiveness by using RIA system.

regulation completed 12) The number of enquiries and transaction at one stop service center increases by 10% every year.

3.Trade Policy for SME Growth

3.1 Continue to implement measures to enhance SME growth from trade

15) The Government through the Ministry of Science and Technology (MOST) issued Intellectual Property Law and implementing regulations on Geographical Indication (GI) consistent with WTO procedures 16) MOIC through FTPD drafts trade integration dissemination guideline to disseminate trade information to SME on ways to utilize preferences under trade agreements including outreach activities for business community, particularly women entrepreneurs

10) MOST prepares framework for local registration of GI products and complete registration of 1 GI product 11) FTPD adopts trade integration dissemination guidelines and begin implementation of key areas including outreach activities for women entrepreneurs

13) MOST continue

to register GI products based on Lao national framework consistent with international best practices. 14) Implementation of strategy including outreach activities for women entrepreneurs

3.2 Enhance transparency in trade policy

17) MOIC operationalized the SPS and TBT notification units and published notification on MOIC website.

15) Dissemination of information on trade regulations and SPS/TBT notifications to SMEs.

22 Appendix 4

Policy Actions


Triggers in bold




18) MOIC (through DIMEX) developed and implemented the Lao PDR Trade Portal which provides web based information systems to assist SMEs/exporters obtain information on trade related regulations 19) Government issued decision to implement coordination mechanism on information sharing between ministries and agencies on trade related measures.

12) MOIC considers web based recommendation to implement trade system that facilitates SMEs to sell products to ASEAN partners.

16) MOIC implements web based recommendation to facilitate SMEs to sell products to ASEAN partners. 17) Government implement coordination mechanism

ASEAN = Association of Southeast Asian Nations, BOL = Bank of Lao PDR, CIB = Credit Information Bureau, DIMEX = Department of Import and Export, ERO = Enterprise Registry Offices, FTPD = Foreign Trade Policy Department, GI – Geographical Indication, MOIC = Ministry of Industry and Commerce, MPI = Ministry of Planning and Investment, P3Ds = provincial public-private dialogue, PMO = Prime Minister’s Office, RIA = regulatory impact assessment, SMEs = small and medium-sized enterprises, , SPS = sanitary and phytosanitary, TBT = technical barriers to trade, WTO = World Trade Organization.