Greater Mekong Subregion: Northern Economic Corridor Project in the Lao People’s Democratic Republic

8/10/2019 Greater Mekong Subregion: Northern Economic Corridor Project in the Lao Peoples Democratic Republic

1/60

EvaluationIndependent

PerformanceEvaluation Report

Greater Mekong Subregion:

Northern Economic Corridor Projectin the Lao Peoples Democratic Republic


2/60

Reference Number: PPE: LAO 2014-17

Project Number: 34321Loan Number: 1989

Independent Evaluation: PE-776

Performance Evaluation Report

December 2014

Greater Mekong Subregion Northern Economic

Corridor Project in the Lao Peoples emocratic

Republic

This document is being disclosed to the public in accordance with ADB's Public Communications Policy 2011.


3/60

NOTE

(i) In this report, $ refers to US dollars. (ii) For an explanation of rating descriptions used in Asian Development

Bank (ADB) evaluation reports, see ADB. 2006. Guidelines for Preparing

Performance Evaluation Reports for Public Sector Operations. Manila.

Director General V. Thomas, Independent Evaluation Department (IED)Director B. Finlayson, Independent Evaluation Division 2, IED

Team leader S. Palle Venkata, Evaluation Specialist, IEDTeam members F. De Guzman, Senior Evaluation Officer, IED

M. Fortu, Senior Evaluation Assistant, IED

In preparing any evaluation report, or by making any designation of or reference to a

particular territory or geographic area in this document, the Independent Evaluation

Department (IED) does not intend to make any judgment as to the legal or other statusof any territory or area.

The guidelines formally adopted by the IED on avoiding conflict of interest in itsindependent evaluations were observed in the preparation of this report. To theknowledge of the management of IED, there were no conflicts of interest of thepersons preparing, reviewing, or approving this report.


4/60

Abbreviations

ADB - Asian Development BankEIRR - economic internal rate of return

FGD focus group discussion

IED - Independent Evaluation Department

IRI - international roughness indexMPWT - Ministry of Public Works and Transport

PCR - project completion report

TA - technical assistance

VOC - vehicle operating cost


5/60

Currency Equivalents

Currency Unit kip (KN)

At Appraisal

At Project

Completion At Evaluation

(31 October 2002) (30 June 2009) (30 September 2014)

KN1.00 = $0.0001 $0.0001 $0.0001$1.00 = KN10,760 KN8,688 KN8,053


6/60

Contents

Acknowledgement v

Basic Data vi

Executive Summary vii

Chapter 1: Introduction 1

A. Project Description and Objectives 1B. Evaluation Purpose and Process 1

Chapter 2: Design and Implementation 3

A. Formulation 3B. Rationale 3C. Cost, Financing, and Executing Arrangements 4D. Procurement, Construction, and Scheduling 5

E. Consultants 6F. Outputs 7

Chapter 3: Performance Assessment 9

A. Overall Assessment 9B. Relevance 9C. Effectiveness 10D. Efficiency 11

E. Sustainability 12

Chapter 4: Other Assessments 14

A. Impact 14B. ADB Performance 16C. Borrower and Executing Agency Performance 16

Chapter 5: Issues Lessons and Follow-Up Actions 18

A. Issues 18B. Lessons 19

C. Follow-Up Actions 19

APPENDIXES 20

1. Design and Monitoring Framework 212. Project Costs 243. Status of Compliance with Loan Covenants 254. Economic Analysis 30

5. Socioeconomic Impact 41


7/60

Acknowledgement

This performance evaluation report for the Greater Mekong Subregion: NorthernEconomic Corridor Project in the Lao Peoples Democratic Republicwas prepared by ateam led by Srinivasan Palle Venkata, Evaluation Specialist, Independent EvaluationDepartment (IED), under the supervision of Bob Finlayson, Director, Division 2, IED andguidance of Vinod Thomas, Director General, IED.

The report was prepared with support from Franklin De Guzman, Evaluation Officer,IED and Joselito Supangco, consultant, who assisted in the analysis and preparation ofthe report. Chittachone Volasay and Phantong Masisonxay assisted the IED projectperformance evaluation report team with field evaluation, project-related documents,data and information, and socioeconomic field survey. Lawrence Nelson C. Guevaraprovided help in the preparation of the evaluation approach paper. Peer reviewersToshiyuki Yokota and Renato Lumain provided valuable comments to strengthen the

report. The team is grateful to Asian Development Bank staff and officials of theGovernment of the Lao Peoples Democratic Republic for their assistance andparticipation in the interviews. The team would also like to acknowledge valuableguidance received from Hemamala Hettige, Senior Advisor, IED.

IED retains full responsibility for this report.


8/60

Basic Data

Greater Mekong Subregion: Northern Economic Corridor Project in the

Lao Peoples

Democratic Republic

As per ADB

Key Project Data Loan Document Actual

($ million) 1989

Total project cost 95.79 131.90Foreign exchange cost 68.05 125.39Local currency cost 27.74 6.51ADB loan amount utilized 30.00 33.40PRC financing 30.00 38.90Thailand financing 28.50 44.38Lao PDR financing 7.29 3.20Interest during construction

0.70

Additional repairs (Thailand)11.32

Key Dates

Fact-finding 26 April10 May 2002Appraisal 1931 August 2002Loan negotiations 3031 October 2002Board approval 20 December 2002Loan agreement 7 February 2003Loan effectiveness 8 May 2003 9 February 2004

Number of extensions 2First disbursement 10 May 2004Project completion 315 October 2010Loan closing 30 June 2007 30 June 2009

Months (effectiveness tocompletion)

40

Borrower: Lao Peoples Democratic Republic

Executing Agency: Ministry of Public Works and Transport

Mission Data

Type of Mission No. of Missions No. of Person-Days

Fact-finding 1 35Appraisal 1 52Inception 1 15Resettlement review 2 24Midterm review 1 21

Environmental compliance review 1 15Indigenous peoples safeguard review 1 22Special project administration 5 27Review 10 188Project completion 1 39Independent evaluation 1 14ADB = Asian Development Bank.


9/60

Executive Summary

The Greater Mekong Subregion (GMS): Northern Economic Corridor Project inthe Lao Peoples Democratic Republic (Lao PDR) was approved on 20 December 2002with financing of $95.79 million equivalent. The project was funded by Special Fundsresources of the Asian Development Bank (ADB) and bilateral loans from thegovernments of the Peoples Republic of China (PRC) and Thailand on concessionalterms.

The project aimed to accelerate subregional development and reduce poverty inthe Lao PDR by strengthening regional infrastructure linkages between GMS countries.The project road links Chiang Rai in Thailand with Yunnan Province in the PeoplesRepublic of China (PRC). Within the Lao PDR, it links two of its most remote andpoorest provinces, Louangnamtha and Bokeo. It was expected to reduce poverty byincreasing income and employment opportunities and improve access to markets,

agricultural support, health, and education.

Project Outputs

The project had three main componentsupgrading the project road,preparing an area development plan, and building sector and provincial capacity. Theactual output from the project road component is 226.28 kilometers (km) along Route3 upgraded to a sealed two-lane road, a standard consistent with its potential as amajor international link. This comprises 66.43 km from Louangnamtha to Boten fundedby the PRC; 75.85 km from Louangnamtha to Ban Sod funded by ADB; and 84.0 kmfrom Houayxay to Ban Sod funded by Thailand.

Outputs from the area development plan are the incorporation of resettlementplans for 11 road sections (5 in the Thailand section and 3 each in the PRC and ADBsections); and implementation of the social action plan, which comprised eightcomponents: (i) primary health care, (ii) nonformal education, (iii) land zoning andtitling, (iv) income restoration, (v) community rural access roads, (vi) water andsanitation, (vii) community infrastructure, and (viii) road safety awareness. Theseinvolved activities such as training of health care workers, awareness-raising workshopson hygiene and sanitation, prevention of HIV/AIDS, and construction of communityrural access roads.

Outputs from the capacity building component include establishment ofenvironmental monitoring plans and procedures, and capacity building of provincialenvironment authorities and the Environment Research Institute to enable independent

third-party monitoring of the projects environmental aspects, including sensitive issuessuch as protected areas and wildlife trafficking.

Performance Assessment

Overall, the project is rated less than successful. Although the project helpedreduce transport costs and travel time, it was not economically viable for the Lao PDR.A substantial number of the benefits accrued were regional, whereas the maintenancecosts were fully borne by the Lao PDR. Without an agreement on collection of tolls for


10/60

viii Greater Mekong Subregion: Northern Economic Corridor Project in the Lao PDR

transit vehicles, current spending on road maintenance by the Lao PDR is inadequate,putting in doubt the sustainability of the benefits in the long term.

The project is assessed relevant. The project was consistent with thedevelopment strategies of the government, and aligned with ADBs strategic agendas ofpoverty reduction and regional cooperation and integration. The northern corridors in the

Lao PDR were given priority ranking in the action plan for GMS investment projects. Theinclusion of the area development component was appropriate, and provided supportinfrastructure and services to communities in the project area. However, project designand implementation were not adequately geared to deal simultaneously with the threefinanciers: ADB, the PRC, and Thailand. The executing agency, the Ministry of PublicWorks and Transport, had difficulty ensuring uniform standards as each of the projectsections had its own design and supervision consultants.

The project is assessed effective. Most of the expected outputs were achieved.Travel time between one border (Boten) to the other (Houayxay) decreased from morethan 9 hours in 2004 to 4 hours after project completion in 2009. Vehicle operatingcosts decreased after project completion. Passenger and freight traffic grew at higherrates than estimated at appraisal. Most of the cargo traffic is transit traffic between the

PRC and Thailand (62% in the case of medium-sized trucks and 83% for heavy trucks).

The project is assessed less than efficient in the use of resources. It is noteconomically viable for the Lao PDR, with an estimated economic internal rate of return(EIRR) of 6.9%. This is partly due to the fact that toll collections from traffic from thePRC and Thailand were not realized as anticipated during appraisal. It is also partly dueto delays in completion and an increase in costs due to reconstruction works. Majorsections of the pavement of the Thailand-funded section failed during the 2008 wetseason due to poor quality work using substandard materials. The consequent repairand reconstruction led to a 25% increase over the costs already incurred at initialcompletion. The PRC-funded section of the road also had many defects requiringrepairs, leading to an increase in civil works costs. Even when benefits to the subregion,comprising the Lao PDR, the PRC, and Thailand, are considered, the projects EIRR of12.8% is only marginally higher than the social opportunity cost.

The project is assessed less than likely sustainable. Currently, costs associatedwith road maintenance are fully borne by the Lao PDR as the governments involvedfailed to reach an agreement on the collection of road charges for transit traffic. TheLao PDRs road maintenance fund, generated from fuel surcharges, is inadequate tomeet the required maintenance expenses, even after it is supplemented with annualbudget allocations. The budgeted amount of $130/km for routine maintenance fallsshort of funding requirements that are in the range of $300$500/km. Moreover, lackof enforcement of vehicle load limits is likely to adversely affect road conditions.

However, the socioeconomic survey shows that the project had significant

socioeconomic impacts. Local communities in the project influence area have improvedaccess to water and sanitation facilities. Living standards of residents along the roadimproved with increased employment opportunities. A greater variety of products atcheaper prices became available due to improved access to markets including those inneighboring countries. The improved road resulted in easier and faster access toschools, hospitals, and other services. However, the project also had some negativeimpacts such as worsening road safety and increased human trafficking.


11/60

Executive Summary ix

Issues

The project demonstrates the uneven distribution of costs and benefits amongparticipating countries, commonly experienced in regional cooperation projects. Thiscan have adverse implications for sustainability of project benefits. Most of the benefitsin the form of savings in vehicle operating costs and travel time accrue to the PRC and

Thailand. However, the Lao PDR shoulders the full cost of maintaining the road inaddition to its share of the negative impacts such as increased risk of road accidents,logging, wildlife trafficking, human trafficking, and spread of HIV/AIDS. Benefits fromtrade and investment were far greater for the PRC and Thailand than for the Lao PDR,as they are able to readily exploit the trade potential between the countries and takeadvantage of investment possibilities in the Lao PDR. The Lao PDR is currently unable tofully access the business opportunities arising from the road due to weak capacity ofhuman resources, technological know-how, and availability of financial capital.

Extending the benefits of the road to local residents is an ongoing challenge forthe Lao PDR. Most of the feeder roads are unpaved and need improvements.

Complementary investments such as improving logistics facilities and developingcapacity of local entrepreneurs are required to overcome existing barriers totransforming the road into an economic corridor.

Road safety also needs to be managed and requires adequate safetyregulations such as checks on speeding and drunken driving. Tendencies for increased

logging and human trafficking will need to be controlled.

Lessons

For a subregional project with multiple financing sources, an effective projectimplementation entity is necessary to ensure uniform standards for the delivery ofproject outputs. For the ADB-funded section of the road, the Lao PDR government wasable to track expenditures and verify if timelines and guidelines were followed.

However, this was not the case for sections financed by the PRC and Thailand.

An agreement on collective maintenance between the parties involved isnecessary to make project benefits sustainable. The countries need to reach anunderstanding to raise funds for recurrent maintenance costs through a source, such astolls or road user charges.

An objective quantitative assessment of benefits and costs would help insetting up a mechanism for the fair distribution of benefits and costs across the threecountries.

Follow up Actions

The Lao PDR government may consider beginning a dialogue with the PRC andThailand on the implementation of tolls for transit traffic within the context of GMScooperation programs and forums. ADB could facilitate this process. The proceeds fromuser charges can be allocated for maintenance and future upgrading of the road sothat project benefits are sustained. The option of introducing public-privatepartnerships to improve road maintenance can be explored.


12/60

x Greater Mekong Subregion: Northern Economic Corridor Project in the Lao PDR

ADB should monitor progress on the cross-border transport agreement and

work closely with the governments to achieve full ratification and implementation ofthe agreement so that regional benefits from the project can be enhanced.


13/60

CHAPTER 1

Introduction

A Project Description and Objectives

1. The Greater Mekong Subregion (GMS): Northern Economic Corridor Project in

the Lao Peoples Democratic Republic (Lao PDR) was designed to support thegovernments efforts to foster regional cooperation and strengthen the countrys roleas a land link at the center of the GMS. The project had three components: (i) projectroad, (ii) area development, and (iii) capacity building. The first component involvedreconstructing and upgrading 228 km of the road from Houayxay in Bokeo Province toBoten in Louangnamtha Province to international expressway standards.1 The road ispart of the GMS northsouth corridor linking the Peoples Republic of China (PRC) and

Thailand. At appraisal, the roadwork was divided into three sections. The PRC fundedthe northern section of approximately 69 km, the Asian Development Bank (ADB)funded the 74 km middle section, and Thailand funded the 85 km southern section.

The area development component included a resettlement plan and a social action planencompassing activities such as training of health care workers, awareness raisingworkshops on hygiene and sanitation, and construction of community rural accessroads. The capacity building component was intended to enable monitoring of theprojects environmental impacts, including sensitive issues such as protected areas andwildlife. It involved building capacity of the Environment Research Institute, which wasset up under the Science, Technology, and Environment Agency in the provinces anddistricts to carry out third-party monitoring.

2. The road, by providing a link between the PRC and Thailand via the Lao PDR,

was expected to reduce transport costs and increase the efficiency of the movement ofvehicles, goods, and passengers in the region. In the region, the project was expectedto accelerate regional development by linking the two rapidly growing economies ofthe PRC and Thailand, and facilitate trade and investment in the subregion. For the LaoPDR, the project was expected to reduce poverty by improving farmers access tomarkets and extension services, increasing income and employment opportunities for

the local population, and enhancing the overall development potential in the roadinfluence area. Prior to project implementation, domestic trade flow between Bokeo

and Louangnamtha provinces was constrained by a single, narrow, unsealed road,which was closed for about 4 months of the year during the wet season. The projectroad is Bokeo Provinces only connection with the rest of the Lao PDR, other thanlimited river traffic along the Mekong River.

B Evaluation Purpose and Process

3. The main purpose of the project performance evaluation report is to assess theperformance of the project and identify lessons for the future. Since it has been morethan 3 years since the preparation of the project completion report (PCR) in 2010,

1 ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to theLao Peoples Democratic Republic for the Greater Mekong Subregion: Northern Economic Corridor Project.Manila


14/60

2 Greater Mekong Subregion: Northern Economic Corridor Project in the Lao PDR

sufficient time has been allowed for project impacts to become apparent, and theoutputs and outcome to be reassessed. The evaluation was included in the 2014 workprogram of the Independent Evaluation Department to provide inputs to a broaderthematic evaluation study on regional cooperation and integration.

4. The project performance evaluation report is based on a review of project-

related documents, and discussions with concerned ADB staff and key informantsduring the Independent Evaluation Mission (IEM).2 Executing and implementingagencies provided traffic count data and other information relating to the project.Information on the projects socioeconomic impacts on local communities wasobtained from focus group discussions (FGDs), conducted by the IndependentEvaluation Department with stakeholders, and the implementation of householdsurveys. The IEM conducted an origin-destination survey to measure changes insubregional and national traffic flows.

5. The PCR rates the project highly relevant, stating it was consistent with therespective strategies of the government and ADB. 3 It rates the project effective inachieving outcomes, as travel time and vehicle operating costs were reduced and trafficgrew at a rate higher than forecasted. However, it rated the project less efficient in

achieving outcome and outputs due to the low economic internal rate of return (EIRR)(7.4%) making it economically unviable for the Lao PDR. The PCR notes implementationdelays and cost overruns. The project reached financial close 2 years later than plannedat appraisal, and total project cost increased by $33.3 million or about 34% from theappraisal estimate of $95.79 million. This inefficiency was partly attributed to the factthat ADB had no leverage over consultant supervision and contractors in the bilaterallyfunded sections. The PCR rates the project less likely sustainable due to lack of tollrevenues from transit traffic between the PRC and Thailand, and inadequate alternativerevenue collection mechanisms for the required maintenance of the project roads. ThePCR notes the government and executing agency generally complied with the standardloan covenants with the exception of a few envisaged outputs.

6. The PCR validation conducted in 2012 gives a lower rating to project relevance,while otherwise agreeing with the other PCR assessments.4It rates the project relevantas opposed to the highly relevantrating given by the PCR, due to poor initial design ofimplementation procedures. Based on the PCR findings that from 2004 to 2008, percapita income increased by 11.5% in Bokeo Province and by 14.1% in LouangnamthaProvince, compared with a 7.6% increase in national gross domestic product, thevalidation rates the projects impact significant.

2 The mission was fielded to the Lao PDR from 16 February to 1 March 2014.3 ADB. 2010. Completion Report: Greater Mekong Subregion: Northern Economic Corridor Project in the Lao

Peoples Democratic Republic . Manila.4 ADB. 2012. Validation Report: Greater Mekong Subregion: Northern Economic Corridor Project in the Lao

Peoples Democratic Republic. Manila


15/60

CHAPTER 2

Design and Implementation

A. Formulation

7. The 1994 Hanoi Meeting of the Transport Ministers of the GMS Programidentified the project road as a high-priority regional road. ADB supportedstrengthening of the road network in the Lao PDR to enhance the countrys linkageswith its neighbors. This provided the basis for the development of the East-WestCorridor Project, linking central Lao PDR with northern Thailand and central Viet Nam.Earlier, ADB provided regional technical assistance (TA) to examine the viability of aproject linking Chiang Rai in Thailand to Kunming, Yunnan Province in the PRC via theLao PDR. Being landlocked, the Lao PDR hoped to reduce its trade costs and improve its

competitiveness through the construction of new roads and maintenance or renewal ofexisting roads connecting to neighboring countries.

8. The Lao PDR government viewed the project road as a means to enhanceoverall accessibility of the two northwestern provinces to central Lao PDR and theneighboring economies. A project preparatory TA was used to assist the government inupdating all project parameters of the prefeasibility study for the existing road in theLao PDR from Houayxay to Boten, and to undertake a pre-investment study on tradeand investment potential for the project.5The government understood the importanceof its role in promoting regional trade and requested project support from ADB. Thisresulted in ADB mobilizing a fact-finding mission during 26 April10 May 2002 and anappraisal mission during 1931 August 2002. ADB negotiated the project loan withthe government on 3031 October 2002 and approved the loan on 20 December

2002.

9. At ADBs initiative, a mechanism of quadripartite meetings was established tohelp prepare the project jointly with the PRC and Thailand. The meeting on 67 August2002 reached a consensus among all parties on matters pertaining to cost-sharingarrangements and scope of work, among other things.

B. Rationale

10. Given this background, ADB support to the project was based on the need topromote regional integration in the GMS and help support economic and socialdevelopment in the Lao PDR by providing an all-weather road link between two of itspoorest provinces. Being landlocked, the Lao PDR was expected to benefit from theproject road through reduced trade costs and increased competitiveness as domesticmarkets are connected to neighboring countries. The project aimed to strengthenregional infrastructure linkages between GMS members, accelerate regionaldevelopment, and reduce poverty in the Lao PDR. Linking the PRC and Thailand via theLao PDR was expected to reduce transport costs; increase efficiency in the movement of

5 ADB. 2002. Technical Assistance (TA 3817) to the Lao Peoples Democratic Republic for Pre-InvestmentStudy to Assess Trade and Investment Potential in the Northern Economic Corridor. Manila.

The Lao PDR

government

viewed the proj

road as a means

to enhance over

accessibility of t

two northweste

provinces to

central Lao PDR

and the

neighboring

economies

ADB support to

the project was

based on the ne

to promote

regional

integration in th

GMS and help

support econom

and social

development in

the Lao PDR


16/60


vehicles, goods, and passengers; increase the volume of interregional trade via theroute; and increase investment in the project influence area.

11. At the time of project preparation, transportation between the two Lao PDRprovinces, Bokeo and Louangnamtha, was constrained by a single, narrow, unsealedroad (Route 3), which was closed for about 4 months during the wet season. The lack

of reliable transport links with the PRC and Thailand, and the rest of the countryhampered economic and social development. Trade flows between Thailand and thePRC relied on one of the following three links, which were restricted and not veryreliable: (i) river traffic on the Mekong River, (ii) Myanmar by road, and (iii) a poorquality road in the Lao PDR.As a result, upgrading the project road was essential tofacilitate efficient transport infrastructure in the northern economic corridor connectingYunnan with the Lao PDR and Thailand; and improving economic and socialdevelopment in the northern provinces of the Lao PDR.

12. In addition to road construction, the project had an area developmentcomponent comprising resettlement and social action plans. The resettlement plan wasto ensure that safeguards were in place to avoid any immediate adverse impact of theproject on communities living along the road, and ensure proper resettlement

procedures were in place. The social action plan was designed to enhance projectbenefits to local communities, especially to ethnic minorities, through the constructionof community roads and provision of water, sanitation facilities, and education andawareness programs. The two plans together were expected to help result in integrateddevelopment of the project area.

13. The project also had a capacity building component. The hiring of consultantservices for third party monitoring of the environmental impact of the road provided anopportunity to build local capacity for carrying out environmental and socialmonitoring. The Department of Roads, provincial divisions of transport, and localgovernment offices dealing with the environment would be trained in areas such asenvironmental impact assessment and project monitoring.

C.

Cost, Financing, and Executing Arrangements

14. The project cost, inclusive of physical and price contingencies, taxes and duties,and interest and service charges during construction, was estimated at appraisal to be$95.79 million equivalent. The foreign exchange cost was estimated at $68.05 millionequivalent, including $1.20 million for interest and service charges during construction.The local currency cost was estimated at $27.74 million equivalent (about 29% of thetotal), which included an estimated $4.51 million equivalent for taxes and duties, andabout $1.0 million equivalent for land acquisition and resettlement.

15. The ADB loan at appraisal comprised $30.0 million equivalent from ADBsSpecial Funds resources to finance about 31% of the total project cost. ADB financing

represented about 35% of the foreign exchange costs and about 22% of the localcurrency costs. Bilateral financing of $58.50 million, or about 61% of total project cost,was envisaged at appraisal. The PRC government was to provide $30.0 million and theThailand government $28.5 million. Total anticipated financing, ADB and bilateral, was$88.50 million, or 92% of the total project cost. The Lao PDR government was toprovide the remaining funding of $7.29 million equivalent.

16. The total cost estimated at project completion was $129.08 million equivalent,with a foreign exchange cost of $122.57 million equivalent and a local currency cost of


17/60

Design and Implementation 5

$6.51 million equivalent. ADB financed $34.10 million equivalent, or about 26% of thetotal. The bilateral financing from the PRC and Thailand accounted for $91.78 millionequivalent, and the government funded the remaining local costs of $3.20 millionequivalent.

17. For the PRC-funded sections of the project road, the civil works cost increased

from $21.60 million at appraisal to an actual cost of $38.90 million, which included$4.07 million for consulting services. The increase was due to the many defectsidentified during the first defect liability period of 12 months, which extended thedefect liability period by another 12 months. Defects included longitudinal cracks onthe pavement along many parts of the road; the Louangnamtha bypass sectionrequired a 3-centimeter asphalt concrete overlay due to the cracking. Landslidesresulted in the need for repairs for some sections.

18. For the Thailand-funded section, the civil works cost increased from theappraisal estimate of $21.44 million to an estimated actual cost of$52.88 million, including the $8.5 million additional financing. The increase was due tothe failure of about 10% of the completed pavement at the end of 2007. Although theworks were completed in February 2008, major sections of the pavement failed again

after the 2008 wet season. The quality of the remedial work completed was of verypoor standard; about 60% of the pavement is estimated to be substandard and needreplacement. The additional cost for repairing the Thailand section at final completionwas $11.32 million.

19. Costs for the ADB section of the project road increased from$18.8 million at appraisal to $26.88 million. The increase was due to greaterearthworks and price escalation of the labor cost, interest, and other minorcomponents. The appraisal estimate for consulting services of the ADB-funded sectionwas $5.84 million, while actual costs were $5.73 million.

20. The implementing arrangements were as envisaged at appraisal. The borrowerwas the Lao PDR and the Ministry of Public Works and Transport (MPWT) was theexecuting agency. The Department of Roads within MPWT was responsible forimplementation and overall coordination. Consultants provided assistance forconstruction supervision responsibilities. The project manager was responsible forimplementation of the ADB-funded section of the project, while two full-time deputyproject managers were responsible for implementation of the PRC and Thailand-fundedroad sections. The departments of public works and transport of Louangnamtha andBokeo provinces provided counterparts to help the project management unit. The teamleader of the supervision consultants acted as the employers representative for theADB-funded civil works and provided support to the project manager to coordinateimplementation of all three sections of the project road.

D.

Procurement, Construction, and Scheduling

21. Procurement of civil works for the project road was carried out in accordancewith ADBs procurement guidelines. Of the 26 accepted applicants, ADB approved 12to be prequalified to bid for the civil works. Bids were opened on 14 October 2003 andADB approved the contract award on 7 April 2004. The civil works contract for the ADBsection was signed on 4 May 2004 with a contract period of 34 months; constructioncommenced the following day.


18/60


22. The civil works contract for the Thailand-funded section was for33 months. Construction commenced on 6 September 2005. About 10% of thecompleted pavement failed at the end of the 2007 wet season, and the work waseventually completed in February 2008. However, major sections of the pavementfailed again after the 2008 wet season. The quality of the remedial work completedwas of very poor standard. On the whole, about 60% of the pavement was

substandard and needed replacement.

23. The civil works contract for the PRC section was for 26 months; constructioncommenced on 10 July 2004. The civil works cost increased due to many defectsidentified during the first defect liability period of 12 months. Landslides had occurredin some locations, road repairs were necessary. However, many of the slopes repairedfailed again late in 2008, causing additional expense.

24. Local competitive bidding was used for the construction of community ruralaccess roads. Several roads were grouped into three packages. Package 1 was for roadsin Houayxay district, package 2 for Vieng Phoukha, and package 3 for Louangnamtha.All three contracts commenced on 15 January 2006. Local competitive bidding wasused for the water and sanitation component. Bids for three contract packages for

Houayxay, Louangnamtha, and Vieng Phoukha districts were submitted to ADB. Thepackage for Houayxay was signed on 9 April 2007, and those for Louangnamtha andVieng Phoukha were signed on 30 April 2007.

25. Direct purchase was used for the installation of vehicle weigh stationequipment, toll system, and forestry checkpoints, instead of national competitivebidding. This was to ensure the equipment was similar to that used elsewhere in thecountry for the World Bank-supported Heavy Transport Management Program. Minorworks and equipment for the toll collection office at Houayxay were paid through avariation order to the community roads package 1 consultant. The contractorimplemented the toll collection and weigh-scale station at Boten under a variationorder to the community roads package 3 contract. Instead of installing forestrycheckpoints, three radio-communication sets were supplied to the existing police andforestry checkpoints to assist in monitoring illegal wildlife hunting, trading, and slashand burn activities.

26. At appraisal, the project was expected to be implemented in 56 months,including preconstruction activities. Completion of civil works was expected by 31December 2006. Actual implementation took approximately 61 months. The PRCsection was completed in May 2006, but, due to defects, additional works wereneeded. The ADB section was completed in September 2007, while the Thailandsection, although completed in February 2008, had to undergo additional major workdue to pavement failures.

E.

Consultants

27. The engagement of consultants followed ADBs Guidelines on the Use ofConsultants. The PCR does not report any irregularities in the hiring of consultants.Also, no pending issues or cases were filed under ADBs Office of Anticorruption andIntegrity concerning this project. No related advisory TA was provided. Consultantservices were divided into six packages: (i) project coordination, constructionsupervision, social action plan, and environmental management plan; (ii) resettlementplanning, implementation, and capacity building; (iii) independent environmentalmonitor; (iv) HIV/AIDS, sexually transmitted diseases, drug and human trafficking


19/60

Design and Implementation 7

awareness, and preventive education program; (v) nonformal education and landtitling; and (vi) independent resettlement monitoring and evaluation.

28. Due to delays in implementing the civil works and changes in projectimplementation arrangements, a time and input extension was required under theconsulting services packages. Actual international consulting totaled 180 person-

months and national consulting 1,834 person-months.

29. The PCR rates the performance of the construction supervision consultants ofthe ADB-funded section of the road highly satisfactory, the PRC section satisfactory,and the Thailand section unsatisfactory. The consultant for the ADB section was alsoresponsible for coordinating the project with the PRC and Thailand consultants. Afterthe completion of civil works in 2008, the consulting supervision team for the Thailand-funded section was replaced by a new consultant and project manager, which helpedimprove the quality of repair works. Performance of consultants under the otherpackages was considered satisfactory.

F. Outputs

30. A discussion of the outputs under each of the three project componentsfollows. The project framework and achievements are given in Appendix 1.

1. Project Road

31. At appraisal, the project road comprised approximately 228 km of road R3from Houayxay in Bokeo Province to Boten in Louangnamtha Province. The civil worksfor the project road comprised (i) reconstruction and upgrading of the entire length toa sealed, two-lane road; (ii) construction of new bridges and widening of existingbridges, as required; (iii) upgrading of ferry facilities at the Mekong River; and (iv)construction of a 7.1 km new bypass around the town of Louangnamtha. Theroadwork was divided into three sections: (i) the northern section comprising

approximately 69 km of road starting from the border between the PRC and the LaoPDR at Boten and funded by the PRC; (ii) the middle section comprising about 74 kmand funded by ADB; and (iii) the southern section covering approximately 85 km fromHouayxay toward the north and funded by Thailand. At project completion, 226.28 kmof the road was upgraded to a paved two-lane highway, comprising 66.43 km of thePRC-funded section, 75.85 km of the ADB-funded section, and 84.0 km of the Thailand-funded section. New bridges were constructed and existing bridges widened. The ferryfacilities across the Mekong River were upgraded and a new bypass was constructedaround the town of Louangnamtha.

2. Area Development

32. Area development included two subcomponents: (i) a resettlement plan, and

(ii) a social action plan. MPWT prepared a resettlement plan in 2002 and updated it inAugust 2004.

33. The social action plan was implemented as envisaged; it comprises eight parts:(i) income restoration, (ii) community rural access roads, (iii) improvement of water andsanitation, (iv) nonformal education, (v) primary health care, (vi) land zoning andtitling, (vii) community infrastructure construction, and (viii) road safety campaign. Inaddition, a related program on HIV/AIDS awareness was undertaken and 16 rural accessroads covering three districts with a total length of 72.51 km were completed. The

At project

completion,

226.28 km of

the road from

Houayxay in

Bokeo Province

to Boten in

Louangnamtha

Province was

upgraded to a

paved two-lane

highway

The

implementation

of the social

action plan

included

community rura

access roads and

improvement of

water and

sanitation


20/60


completed community infrastructure comprised (i) two access roads to schools, (ii) twoaccess roads to shifting cultivation areas, (iii) four roads within the villages, and (iv)leveling of two school yards.

34. Under the water and sanitation schemes, three works packages wereundertaken: (i) package 1 (Houayxay District) installed or renovated gravity-fed water

systems for 12 villages, constructed latrines for schools in nine villages, and 1,239households in 37 villages; (ii) package 2 (Vieng Phoukha District) installed or renovatedgravity-fed water systems for 8 villages, and constructed latrines for 775 households in20 villages; and (iii) package 3 (Louangnamtha District) installed or renovated gravity-fed water systems for 12 villages and constructed latrines for schools in 2 villages andfor 666 households in 18 villages.

3. Capacity Building

35. Capacity building was provided to enable independent third-party monitoringof the projects environmental aspects. The monitoring program was expected tointegrate local capacity building through on-the-job training and formal modules oftraining for the provincial road system. Capacity building encompassed all aspects of

the project, including training on dealing with sensitive issues such as protected areasand wildlife trafficking, using geographic information systems and other informationgathering techniques, gathering technical expertise and advice, and preparing amanual on environmental monitoring plans and procedures. Capacity building of localunits was expected to enhance environmental impact assessment and projectmonitoring. However, implementation of the environmental management plan wasproblematic as the PRC and Thailand contractors failed to follow the plan.

Capacity

building

component

included

training on

dealing with

protected areas

and w ildlife

trafficking


21/60

CHAPTER 3

Performance Assessment

A. Overall Assessment

36. The project was not economically viable for the Lao PDR as reflected in the lowEIRR of 6.9% estimated by the IEM. The project experienced implementation delays andpoor quality supervision. For the subregion, comprising the three countries, the IEMestimated an EIRR of 12.8%, only marginally higher than the social opportunity cost ofcapital of 12%. The project was effective in reducing transport costs and travel time.However, sustainability of these benefits is in doubt as the Lao PDRs road maintenancefund, generated from fuel surcharges, is proving to be inadequate in fully meeting therequired maintenance expenses. Overall, the project is rated less than successful (Table

1).

6

Table 1: Overall Performance Assessment

Item Weight (%) Rating Rating ValueWeighted

Rating

Relevance 25 Relevant 2 0.50Effectiveness 25 Effective 2 0.50Efficiency 25 Less than

efficient1 0.25

Sustainability 25 Less than likelysustainable

1 0.25

Overall Ratinga Less thansuccessful

1.50

aHighly successful >2.7, successful >1.6 and 0.8 and


22/60


connect key economic centers in the GMS.8 These corridors will connect the Lao PDRwith the rest of the GMS. Better connectivity is expected to accelerate economicintegration and enhance access to basic social services, especially for the poor in borderareas. The Lao PDRs Sixth Five Year National Economic Development Plan , 20062011envisioned transforming the country from a landlocked to a land-linked nation insupport of regional integration. The plan emphasized developing economic corridors;

reducing trade barriers; promoting cross-border investment; and capitalizing on thebenefits that membership of the GMS, Association of Southeast Asian Nations (ASEAN),AEAN Free Trade Area (AFTA), and World Trade Organization (WTO), together withbilateral trade agreements, can bring.

39. The 2006 GMS Transport Sector Strategy Study gave priority ranking to theHouayxay-Chiang Khong Third International Mekong Bridge and the northern corridorsin the Lao PDR as part of the action plan for GMS investment projects. The strategyproposed the theme Towards seamless transport services on a fully connected andintegrated GMS transport network.

40. Project design and implementation arrangements, however, were not adequatein dealing simultaneously with the three financing entities: ADB, the PRC, and Thailand.

The executing agency, MPWT, had difficulty ensuring uniform standards as each of theproject sections had their own design and supervision consultants. Even with MPWToversight, civil works contractors and consultants for these sections reported directly tothe funding country. This arrangement was apparent in the varied design standardsfollowed, and the pavement and road safety markings, which conformed to thefunding countrys standards and not to the uniform standards that were agreed uponinitially. Failure to implement a system of road user charges was not identified as a riskin the project framework. The project is assessed relevant.

C. Effectiveness

41. The project is assessed effective. As envisaged at appraisal, the project road

resulted in reduced transport costs and travel times for road users, thus achieving itsintended regional and national outcomes. The IEM estimates that vehicle operatingcost (VOC) after project completion would be reduced by 14% for motorcycles, 27% forcars, 39% for large buses, and 34% for heavy and/or articulated trucks (Appendix 4).The IEM estimate of travel time savings is based on reducing the internationalroughness index from 8 before the project to 2 after project completion. The projectgenerated travel time savings of 39% for motorcycles, 43% for cars, 45% for largebuses, and 44% for heavy and/or articulated trucks. The IEM travel time delay survey,conducted during the site investigation, resulted in a travel time of 3.83 hours fromone border to another, down from the more than 9 hours before the project, around60% savings in travel time.9

42. At appraisal, passenger and freight traffic were estimated to grow on average

at 5%10% per annum depending on vehicle type. Using MPWTs Public Works andTransport Institute traffic count data and converting these figures into passenger carunits, the IEM estimated the 2002-2008 annual traffic growth rates between Houayxayand Viang Phouka at 11%; Viang Phouka to Louangnamtha at 17%; andLouangnamtha to Boten at 8%. For 2008-2013, the IEM estimated annual traffic

8 ADB. 2006. Country Strategy and Program: the Lao Peoples Democratic Republic, 20072011.Manila.9 The monitoring framework indicated an expected reduction in travel time of 3 days (from 5 days) for the

river traffic diverted to land transport. The PCR did not indicate if this was achieved.

Project design

and

implementation

arrangements

were not

adequate in

dealing

simultaneously

with the three

financing

entities: ADB,

the PRC, and

Thailand

The project

road resulted

in reduced

transport

costs and

travel times

for road users


23/60

Performance Assessment 11

growth rates at 11% between Houayxay and Viang Phouka; at 29% between ViangPhouka and Louangnamtha; and at 16% between Louangnamtha and Boten. Ingeneral, actual annual traffic growth exceeded the appraisal forecast.

43. The IEM origin-destination survey indicates that a substantial portion of thecargo traffic was between the cross-border stations in Boten and Houayxay. Medium-

sized truck comprised 61.5% of total vehicular border-to-border traffic, heavy and/orarticulated truck traffic 82.9%, light bus traffic 42.1%, and heavy bus traffic 40%.

44. The international transit and cross-border agreements that were expected to bein place by 2005 have not yet been fully achieved. In the absence of these agreements,the smooth flow of passenger and freight traffic at the borders may not be possibleand the Lao PDR cannot be an efficient land bridge connecting the GMS countries.Passenger and freight transport between and the PRC and Thailand through the LaoPDR is not seamless, as PRC and Thailand trucks cannot enter each others bordersandcargo has to be unloaded and loaded at the transshipment facilities at borders withinthe Lao PDR.

D.

Efficiency

45. The project is rated less thanefficient. The IEM reevaluated the economic EIRRat 6.9% for the Lao PDR.10It estimated an EIRR of 12.8% for the subregion comprisingthe Lao PDR, the PRC, and Thailand, marginally higher than the social opportunity costof 12%. Sensitivity analysis shows that a 10% decrease in project benefits reduces theEIRR below 12%. The reestimated EIRRs are both lower than the correspondingestimates obtained by the PCR and those estimated at appraisal.

46. The PCR estimates an EIRR of 7.4% for the Lao PDR and 14.6% for thesubregion. At appraisal, the estimated EIRR for the Lao PDR was 12.8%, with benefitscomprising mostly VOC savings for local traffic. When revenue from forecasted tollcollections from PRC and Thailand traffic was included in the benefit stream, the

estimated EIRR at appraisal was 17.9%. The EIRR estimate at appraisal for the subregionwas 27.0%, with benefits comprising VOC savings for all traffic; savings for regionalfreight traffic shifting from the river to the project road; VOC savings for subregionpassenger traffic; and savings in inventory costs as a result of savings in time. The EIRRvalues estimated by the PCR and IEM are lower than those estimated at appraisal,mainly due to traffic volume being lower than assumed at appraisal and longerconstruction periods due to implementation delays.

47. In the Thailand-financed section of the project road, ADB missions notedserious concerns about the quality of the work, use of substandard materials for thenew pavement, poor pavement compaction and laying techniques, and poor qualitysupervision of the works. Soon after completion in February 2008, major sections of thepavement had failed after the wet season and required major repairs. About 60% of

the pavement or approximately 50 km of the total length of 84 km was substandard;additional financing was required to cover the additional cost. The IEM investigated theroad section and noted the improved and satisfactory quality of the completed works.The reconstruction works were completed in 2012 at an additional cost of $11.32

10 The IEM used the standard methodology for measuring VOC and travel time savings by utilizing theHighway Development and Management software or HDM 4.2 to estimate VOC and travel time with andwithout the project (Appendix 4). It included additional vehicle types that comprise current traffic flows,which were not included in either the appraisal or PCR estimates, such as motorcycles and light trucks.

PRC and

Thailand trucks

cannot enter

e ch others

borders and

cargo has to be

unloaded and

loaded at the

transshipment

facilities

The project was

not

economically

viable for the

Lao PDR as

reflected in the

low EIRR of

6.9


24/60


million or a 25.5% increase over costs already incurred at initial completion in 2008.The contractors warranty period expired in 2013.48. For the PRC-funded section of the project road, the civil works cost increasedfrom $21.60 million estimated at appraisal to an actual $38.90 million. The increasewas due to the many defects identified during the first defect liability period, resultingin its extension by 12 months. Longitudinal cracks on the pavement along many parts

of the Louangnamtha bypass section required the application of a 3-centimeter asphaltconcrete layer. Road repairs were required in landslide areas. The IEM investigated theroad section and noted that most of the sealed longitudinal cracks had widenedfurther, land slips at certain sections resulted in only one usable lane, and numerouspotholes were along the entire road section. The sealing of the longitudinal cracks wasinadequate and further analysis should have been done if these were caused bysubbase or base failure.

49. As indicated in the PCR, the project experienced implementation delays, whichresulted in slow disbursement of the loan. Selection of the contractor was delayed forthe Thailand section. Significant delays were experienced in implementation of theresettlement plan. The project reached financial close 2 years later than planned atappraisal, and the total project cost increased by $33.3 million from the appraisal

estimate of $95.79 million, an increase of about 34%. This inefficiency was partly dueto MPWTs lack of control over consultant supervision and contractors in the bilaterallyfunded sections of the road.

E Sustainability

50. The project is assessed less than likely sustainable. To ensure the project roadreaches its full economic life, maintenance is essential. Under the loan agreement, theLao PDR government committed, through the Department of Roads, to provideresponsible operation and maintenance of the project road with proper technicalsupervision and adequate allocation of funds. A road maintenance fund made up offuel taxes was established in January 2001. The amount collected from fuel taxes has

grown steadily, but is considered insufficient to cover the maintenance costs of all LaoPDR roads, even with supplementary allocations from the annual budget. Routinemaintenance costs for paved roads in the Lao PDR are in the range of $300 $500/km,but the budgeted amount received only up to $130/km. Thus, the long-termmaintenance of Lao PDR roads in general becomes questionable. On the other hand,periodic maintenance averages $14,000$16,000/km for paved roads, and dependsmostly on foreign financing sources. The financial internal rate of return was notcalculated due to the lack of revenue from tolls and transit charges.

51. The need for adequate resources for maintenance was evident during the IEMfield investigation. The PRC-funded road section was already in fair to poor condition,badly in need of routine maintenance. It required significant repair works, includingresealing of longitudinal cracks and restoration of road sections in areas where slips

had occurred. Road safety accessories such as center and edge lines and barriersneeded to be restored. Though the ADB-funded section was in good condition overall,several potholes and road depressions were in need of repair. The Thailand-fundedsection appeared in good condition as it was completed as recently as 2012.

52. Road damage is likely due to overloaded trucks as enforcement of weight limitson the project road has not been consistent. The PRC and Thailand have higher legalaxle-load limits than the Lao PDR, making enforcement complicated. While the fixed

he project is

assessed less

than likely

sustainable


25/60

Performance Assessment 13

and portable weigh scales provided by the project are fully operating, fines are smalland few offenses are recorded.

53. At appraisal, the project was expected to require road charges from regionaltraffic of $20/passenger car unit at each border crossing or $40 in total to cover debtservice, road maintenance, and other related costs. The Lao PDR government had

agreed that determining the actual road charges for different vehicle types, rules,implementing regulations, and other institutional arrangements would be preparedand mutually agreed with ADB within 18 months of loan effectiveness so that revenuecould be collected as soon as a section of the road was complete. The report andrecommendation of the President to the Board of Directors indicates that anagreement has been reached with the governments of the PRC and Thailand that asystem of road charges for vehicles and passengers will be in place so as to generateadequate resources for the Lao PDR to cover debt service and road maintenance (footnote 1) However, the expectation that tolls (user charges) would be collected frominternational transit traffic via the project road failed to materialize as both the PRC andThailand resisted the tolls. While the Lao PDR, the PRC, and Thailand are part of theGMS, the GMS countries do not have a toll agreement. MPWT was not confident aboutthe implementation of tolls anytime soon.

The

expectation

that user

charges would

be collected

from

international

transit traffic

via the project

road failed to

materialize as

both the PRC

and Thailand

resisted the

tolls


26/60

CHAPTER 4

Other Assessments

A. Impact

54. The overall project is assessed to have had a significant impact. Thesocioeconomic impacts were significant for communities in the project influence area.Regional trade and tourism increased significantly.

1. Impact on Institutions

55. The project was expected to develop and implement a system of road usercharges that can help the Lao PDR generate revenue from infrastructure services.

However, this did not materialize as the governments involved failed to reach anagreement on this issue. The project helped develop local institutional capacity formonitoring the use of natural resources and checking on vehicle load limits. However,there were indications that the agencies have been weak in implementing these checks.

2. Environment and Resettlement

56. The project is classified category A. The project was expected to require theacquisition of 122 hectares (ha) of mainly rice land and 1.7 ha of residential land,affecting 2,550 people in 502 families, 543 dwellings, 61 small retail shops, and 133rice storage bins, all requiring relocation. The PCR indicates that resettlement planswere incorporated into 11 road sections (five in the Thailand section and three each inthe PRC and ADB sections). During project processing it was agreed that a single set of

resettlement and environmental management plans and design standards would applyto the whole project. It was the project coordination consultant s task to ensure thatthese plans and standards were implemented. However, communications with the PRCcontractor were difficult and neither the consultant nor the MPWT representative couldenforce compliance with project requirements. Environmental management was aproblem because neither the PRC nor the Thailand contractors followed theenvironmental management plan. The MPWT representative did not have much controlover the contractors of the PRC and Thailand-funded sections as they were reportingdirectly to their respective governments.

3. Gender Impacts

57. The socioeconomic survey and focus group discussions reveal that women

benefited from better access to markets and increased access to water supply andsanitary latrines. The project also had negative impacts on women. The project roadfacilitated sex trade, which carries the risk of the spread of HIV. A recent ADB reportnotes that women hired by food and drink shops established in villages along the roadwere sexually exploited by owners and customers.11The fact that most of these women

11ADB. 2009. Build It and They Will Come: Lessons from the Northern Economic Corridor: Mitigating HIV andOther Diseases. Manila.

Women

benefited

from better

access to

markets and

increased

access to

water supply

and sanitary

latrines


27/60

Other Assessments 15

were socially disadvantaged with no access to literacy activities and weak negotiatingability for safe sexual relations made them vulnerable to HIV risk.

4. Socioeconomic Impacts

58. A key benefit from the project has been the improved access of local

communities to basic social services (Appendix 5). People in the project influence areahave better access to water and sanitation facilities, and easier and faster access tohealth and education services. Improved access to markets in neighboring countriesimproved livelihood opportunities and living standards for residents along the road. Agreater variety of products at cheaper prices became available due to improved marketaccess.

59. An ADB impact evaluation of the project reveals that households living in theproject area earned about 67% more on average per year relative to comparablehouseholds in the nonproject area.12 Significant differences were noted in assetownership, housing quality, and time saved in accessing various services.

60. The economic analysis, which determined the EIRR, considered the first-order

outcomes directly linked to the project road such as savings in travel cost and time. Inaddition, project benefits include second-order outcomes such as increased cross-border trade and investment. For example, tourism-related businesses (resorts,restaurants, and local tour operators) benefitted from the road. Although not entirelyattributable to the project road, trade between Thailand and the Lao PDR and betweenThailand and the PRC increased at a much higher rate after 2008 than in earlier years.Tourist arrivals at the two borders, Boten and Houayxay, increased rapidly after 2008.Lao PDRs exports to the PRC as a proportion of its total exports increased from 3% in2005 to 21% in 2012. Lao PDRs imports from the PRC as a proportion of total importsincreased from 9% in 2005 to 16% in 2012.

5. Regional Distributional Impacts

61. Ensuring a fair distribution of benefits and costs across participating countriesis important for the success of regional projects. The project road, though locatedentirely in the Lao PDR, provides substantial benefits to the neighboring countries ofthe PRC and Thailand fostering cross-border trade and regional integration. This is whythe latter two countries financed their respective sections of the road. The IEM origin-destination survey indicates that a large proportion of the cargo traffic on the road istransit traffic between the border posts with the PRC and Thailand. About 83% of totaltraffic in the case of heavy and/or articulated trucks and 62% in the case of medium-sized trucks is transit traffic (Appendix 4, Table A4.6). Thus, a greater share of projectbenefits in the form of reduced VOC and travel time go to the PRC and Thailand. Whenit comes to the distribution of costs, the Lao PDR government alone bears the full costsof the recurrent and periodic maintenance of the project road. During the design of the

project, revenue collected from transit traffic tolls was assumed to be partly used tofund road maintenance. In practice, implementation of tolls did not materialize.

62. To assess the distributional effects across the countries, the net benefits fromthe project are estimated not only from the borrower country point of view, but alsofrom the lending countries of the PRC and Thailand. Since the PRC and Thailand loansare concessional, an equivalent grant value can be assumed to accrue as a benefit for

12 ADB. 2014. Assessing Impact in the Greater Mekong Subregion: An Analysis of Regional CooperationProjects. Manila.

A greater

variety of

products

became

available at

cheaper prices

and household

earnings

increased in the

project area

A greater share

of project

benefits go to

the PRC and

Thailand

whereas Lao

PDR alone bears

the

maintenance

costs of the

project road


28/60


the Lao PDR.13 Even after taking this benefit into account the net present value at a12% discount rate is negative for the Lao PDR. Correspondingly, even when the grantequivalent values are considered as cost items for the PRC and Thailand, the net presentvalues at a 12% discount rate turn out to be positive. Assuming the equivalent grantelement is 30% of the loan amount, the estimated EIRR for the Lao PDR is 8.7% and thecorresponding EIRR for the PRC is 74.3% and for Thailand 40.4% (Appendix 4).

Simulations revealed that the Lao PDRs EIRR can be brought above 12% if the grantelement is increased to 70%. The corresponding EIRR for the PRC would be 45% and forThailand 25%.

6. Other Social Impacts

63. Some of the social costs borne by the Lao PDR due to the project include theincreased risk of human and wildlife trafficking, spread of HIV/AIDS, and roadaccidents. Better accessibility provided by the transport links, along with the regionshigh biodiversity, makes illegal trade in wildlife attractive. The project road alsofacilitates sex trade with the associated risk of the spread of HIV.

64. Other negative impacts identified during the focus group discussions include

increased risk of road accidents, noise pollution especially during the night, and greaterincidence of theft. The main causes of accidents on the project road are increasedpedestrian and motorcycle traffic, and absence of brake-paths for trucks inmountainous areas. Due to the steep slopes and curves in many parts of the road,drivers of heavy trucks are forced to apply brakes hard; over long distances this practicecreates a risk of brake failure.

B.

ADB Performance

65. In general, ADBs performance is assessed satisfactory. ADB diligentlyconducted resettlement missions, an indigenous peoples safeguard review mission, andan environmental safeguard review mission; and fielded regular review missions and

special project administration missions. It fielded 10 review missions to monitor projectprogress and resolve implementation issues, and 5 special project administrationmissions. These missions included visits to the project site and to MPWT in Vientiane,where coordination meetings were held to discuss and solve problems. ADB missionsadvised MPWT on technical issues, and the preparation and evaluation of biddocuments. Project formulation appeared to be fast-tracked, taking less than 4 monthsfrom appraisal to Board approval. This could have resulted in inadequate attention toensuring an agreement between the governments on road user charges, which wasvital for the maintenance of roads.

C.

Borrower and Executing Agency Performance

66. The performance of MPWT, as the executing agency, is assessed satisfactory.Despite the difficult institutional environment, it coordinated well with ADB staffduring project implementation and in reviewing project progress. MPWT implementedthe project diligently, despite considerable delays in the implementation of civil works.

13According to the report and recommendation of the President, the terms of the bilateral loans from thePRC and Thailand are more concessional than the ADB loan, which was at the Asian Development Fundterms. The Government of Thailand provided 30-year maturity funds, including a 10-year grace period anda 1.5% interest charge and about 10% of the principal interest free. The PRC agreed to provide an interest-free loan with a 20-year maturity, including a 10-year grace period and about 20% of the principal asgrant.


29/60

Other Assessments 17

The quality of the completed works for the ADB section was satisfactory. However, theMPWT representative assigned for supervision of the PRC- and Thailand-funded sectionsof the road did not have much control over the contractors since they reported directlyto their respective governments. The governments compliance with covenants wasgenerally satisfactory. It complied with 27 of the 33 loan covenants. Of the remaining6 covenants, only 1 was not complied with, while the rest were assessed either partially

satisfactory or partially complied with. The only covenant that was not complied withpertained to toll collection.


30/60

CHAPTER 5

Issues, Lessons, and Follow-

Up Actions

A. Issues

67. Distribution of costs and benefits.The issue of equitable distribution of projectcosts and benefits among participating countries is important for regional cooperationprojects. Uneven distribution of costs and benefits can have adverse implications forproject sustainability. In the case of this project, a major proportion of the benefits inthe form of savings in VOC and travel time accrue to the PRC and Thailand. Since road

user charges have not been implemented, the Lao PDR bears the entire maintenancecost of the road. Moreover, the Lao PDR has to deal with negative impacts of the roadsuch as management of road safety issues, controlling of logging, wildlife trafficking,human trafficking, and spread of HIV/AIDS.

68. Being middle-income countries, the PRC and Thailand are in a better position torealize the trade potential between the countries and take advantage of investmentpossibilities in the Lao PDR. In comparison, the Lao PDR has less capacity to realize thispotential due to weak capacity of human resources, technological know-how, andavailability of financial capital. Inadequate logistics capacity and infrastructure, such asdry ports; technical know-how; and financing for entrepreneurs are some of thebarriers preventing the realization of the full potential of the road infrastructure.

69. Complementary investments and capacity development. For the Lao PDR tofully benefit from the project, complementary investments would be required toovercome existing barriers in transforming the road into an economic corridor.Investments would be required to improve logistics facilities and develop the capacityof local entrepreneurs to identify specific industrial or agricultural products that havetrade potential. Extending the benefits of the road to local residents would requireimprovements to feeder roads, most of which are currently unpaved.

70. Transport and trade facilitation efforts have a critical role in realizing andmaximizing the benefits of connectivity. The goal of regional integration can be fullymet only when there is free movement of trucks and buses across borders. Both timeand costs can be saved if cargo can be transported without transshipment at theborders. Manual loading and unloading of cargo at the transshipment facilities at

borders carry the risk of damage to cargo, and breaks the cold chain for fresh andfrozen products. Lack of competition in the logistics sector also makes transshipmentservices expensive. Myanmar and Thailand have not yet ratified some of the annexesand protocols of the cross-border trade agreement for the GMS countries. Progress isneeded in different aspects of the agreement, like implementation of traffic rightsamong the PRC, the Lao PDR, and Thailand; and customs cooperation facilitationrelated to single-stop inspection and single-window clearance mechanisms.

Inadequate

logistics

capacity and

infrastructure

such as dry

ports are

some of the

barriers

preventing

Lao PDR from

realizing the

full potential

of the road

infrastructure


31/60

Issues, Lessons, and Follow-Up Actions 19

71. Road safety. Improved roads make travel easier and faster, but at the sametime, the risk of accidents with severe damage and fatalities is increased. Therefore,pursuing ways to mitigate this risk and foster safety on the project road is important.Steps required to improve road safety include posting and enforcement of speed limits,checks on drunken driving, adequate shoulder widths for vehicular stops and parking,introduction of speed bumps to reduce the speed of traffic entering villages and small

towns, and installation of entry barriers for pedestrians along road sections passingthrough villages and towns.

B.

Lessons

72. An effective project implementation entity is important when multiplefinanciers are involved, in order to ensure uniform standards in the construction of theproject road. For the ADB-funded section of the road, the Lao PDR government couldkeep track of expenditures and verify if timelines and guidelines are followed. This wasnot the case with the PRC and Thailand financed sections. For example, the PRC used itsown design standards for the road without conducting any dialogue with the Lao PDRgovernment.

73. An agreement for collective maintenance is an essential element for thesustainability of subregional road projects, such as this project. A mechanism needs tobe devised for the costs to be shared in proportion to the benefits received by thestakeholders.

74. Objective quantitative assessment of benefits and costs may help in the settingup a mechanism for fair distribution of costs across countries. The IEM economicanalysis indicates that the net present value of the project for the Lao PDR could bemade positive if higher grant elements were used in the financing by the PRC andThailand.

C.

Follow-Up Actions

75. The Lao PDR government may consider a dialogue with the PRC and Thailandregarding the implementation of tolls for transit traffic within the context of GMScooperation programs and forums; ADB could facilitate this process. Being a landlockedcountry, the Lao PDR depends on its more powerful neighbors to access their ports fortrade with other countries and does not have much negotiating power. ADB could helpthe countries realize it is in their interest to maintain the road in good condition andagree on a framework for sharing road maintenance costs. An understanding that theproceeds from tolls on transit traffic would be exclusively used for road maintenanceand future upgrading may help in this regard. The use of public-private partnershipscould be explored as an option for better road maintenance.

76. ADB should closely monitor progress on the cross-border transport agreementand work closely with the governments to achieve full ratification and implementationof the agreement. The agreement has an important role in enhancing regional benefitsfrom the project through smoother trade flows.

An agreement

for collective

maintenance is

an essential

element for the

sustainability of

subregional

road projects


32/60

Appendixes


33/60

Performance Indicators

Project Achievements

(as in PCR) PPER Update

Impacts:

1. Accelerate regionaldevelopment by linking tworapidly growing economies ofThailand and the PeoplesRepublic of China (PRC) byfacilitating trade and investment

in the region.

2. Help reduce poverty in the LaoPeoples Democratic Republic (LaoPDR) by providing access tomarkets, extension services,income, and employment

opportunities; and by enhancingdevelopment potential

Economic growth for the impactregions in the immediate planningperiod

Increased tonnage of interregionaltrade via the project road

Increased foreign directinvestment in the road influencearea

Access to health and educationalfacilities

Improved access to wider range ofmarkets

Improved access to employmentopportunities

The gross domestic product of BokeoProvince rose by 11.57% per annumfrom 2004 to 2008 (i.e., the roadconstruction period). The grossdomestic product of LouangnamthaProvince grew by 14.13% per annum

over the same period.

Access to facilities such as healthcare, markets, and schools hasincreased, as noted during theproject completion review missionvisit to various project areas and in

discussions with local residents.

During 20062010, the GDP ofBokeo Province increased by 7.81%;the GDP of Louangnamtha Provinceincreased by 7.65%.

Customs offices at the border

stations could not provide data toindicate performance on tradethrough the project road.Tourist arrivals in Boten increasedfrom around 38,000 in 2006 toabout 118,000 in 2012. Touristarrivals in Houayxay increased from73,000 to 98,000 during the sameperiod.Data was not available oninvestments in the road influencearea.

The socioeconomic survey revealsthat 76% of households had accessto public tap water after the projectcompared with 26% before; traveltime to school was not more than 15

minutes for 88% of households afterthe project compared with 74%before; 68% of households used amotorcycle to go to marketscompared with 20% before theproject; households with monthlyhousehold income greater than KN3million increased from 3% to 10%and those with monthly income lessthanKN0.5 million decreased from 78% to44%. Focus group discussionsrevealed that greater employment


34/60

22

Appendix1



as in PCR) PPER Update

opportunities were available after theproject.

Outcome:

Establish a direct link between thePRC and Thailand via the Lao PDRto reduce transport cost withinthe regional influence area andincrease efficiency of the

movement of vehicles, goods, andpassengers

Reduced transportation costs ofgoods and passenger traffic

Reduced travel time by 3 days(from 5 days) in 2006

Actual vehicle operating cost (VOC)reductions were calculated. For a carthe VOC falls from around $0.37 pervehicle-km to $0.21 (by 43%), for alarge bus from $0.65 per vehicle-km

to $0.56 (14%), and for a heavy truckfrom $1.09 per vehicle-km to $0.86per vehicle-km (21%).

Travel time from Boten to Houayxayduring the rainy season has beenreduced from 9 hours in 2004 (beforeconstruction) to 3-1/2 hours in 2007(after construction).

VOCs decreased as follows:Motorcycles: 14.3%Cars: 26.7%Pick-ups: 35.1%Small buses: 35.8%

Large buses: 38.8%Light trucks: 33.0%Medium-sized trucks: 29.6%Large and/or t Tractor-trailer: 33.8%

Travel time from Houayxay to Botenbased on the travel time and delaysurvey conducted by the IEM was3.83 hours, still a substantialreduction from the time taken beforethe project in 2004.

Outputs:

1. Upgraded 74-kilometer (km)section of Route 3 to a standardconsistent with its potential as amajor international link

Safe, all-weather overland routefrom Yunnan Province, PRC toThailand meeting appropriateroad standards

The actual length of road improvedwas 226.28 km, comprising 66.43 kmfor the PRC section (fromLouangnamtha to Boten, 75.85 km

for the ADB section (fromLouangnamtha to Ban Sod), and 84.0km for the Thailand section (fromHouayxay to Ban Sod).

The actual length of road improvedwas 226.28 km, comprising 66.43km for the PRC section (fromLouangnamtha to Boten), 75.85 km

for the ADB section (fromLouangnamtha to Ban Sod), and 84.0km for the Thailand section (fromHouayxay to Ban Sod).

Rehabilitation of the Thailand sectionwas completed in 2012 aftersubstantial sections of the road failedand were rehabilitated.


35/60

esg

a

d

o

to

g

a

e

o

3



as in PCR) PPER Update

2. Resettlement plan Implementation of right-of-wayacquisition and resettlement plan

Resettlement plans were incorporatedinto a total of 11 sections of road (5in the Thailand section and 3 each inthe PRC and ADB sections).

Resettlement plans wereincorporated into 11 road sections: 5in the Thailand section and 3 each inthe PRC and ADB sections.

3. Social action plan Implementation of the socialaction plan

The social action plan wasimplemented as envisaged andcomprised of eight components,

namely (i) Primary Health Care, (ii)Nonformal Education, (iii) Landzoning and titling, (iv) incomerestoration, (v) community ruralaccess roads, (vi) sater and sanitation,(vii) community infrastructure, and(viii) road safety awareness.

The social action plan comprisingeight components was implementedas envisaged.

4. Environmental managementplan

Implementation of theenvironmental management plan

Environmental management was aproblem because neither the PRC norThailand contractors followed theenvironmental management plan.The contractors did not fully complywith the environmental covenantsuntil after an environmentalcompliance review mission.

Environmental management was aproblem because neither the PRC norThailand contractors followed theenvironmental management plan.The contractors did not fully complywith the environmental covenantsuntil after an environmentalcompliance review mission.

ADB = Asian Development Bank, PRC = Peoples Republic of China, GDP = gross domestic product, IEM = Independent Evaluation Mission, km = kilometer, Lao PDR = LaoPeoples Democratic Republic, PCR = project completion report, PPER = project performance evaluation report, VOC = vehicle operating cost.

Sources: IEM; ADB. 2002. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Lao Peoples Democratic for the Greater MekongSubregion: Northern Economic Corridor Project. Manila; and ADB. 2010. Completion Report: Greater Mekong Subregion: Northern Economic Corridor Project in the Lao PeoplesDemocratic Republic. Manila.


36/60

APPENDIX 2: PROJECT COSTS

Item

Appraisal Estimate Actual

Foreign

Exchange

($)

Local

Currency

(KN) Total

Foreign

Exchange

($)

Local

Currency

(KN) TotalA Base Cost

ADB section1. Land acquisition

and resettlement0.00 1.00 1.00

2. Civil works 17.64 4.41 22.05 24.36 6.51 30.873. Consulting services 3.16 2.67 5.84 5.73 0.00 5.734. Project

management0.00 1.20 1.20

PRC Government section1. Civil works 17.28 4.32 21.60 34.83 0.00 34.832.

Consultingservices

1.37 1.22 2.59 4.07 0.00 4.07

Thailand Government

section1.

Civil works 17.15 4.29 21.44 41.50 0.00 41.502.

Consultingservices

1.36 1.21 2.57 2.88 0.00 2.88

Subtotal 57 97 20 32 78 29 113 37 6 51 119 88

B Contingencies

8.88 2.91 11.79C Taxes and Duties 0.00 4.51 4.51D Interest During

Construction

1.20 0.00 1.20 0.70 0.00 0.70

Total Cost 68 05 27 74 95 79 114 07 6 51 120 58

Additional Thailand Cost 11 32

0 00 11 32

a

Total 68 05 27 74 95 79 125 39 6 51 131 90

ADB = Asian Development Bank, PRC = Peoples Republic of China.aAn additional $8.5 million was estimated for the remedial works on the Thailand section. The Ministry of Public Works and

Transport indicated that the actual repair cost was $11.32 million.Sources: Independent Evaluation Mission; and ADB. 2010. Completion Report: Greater Mekong Subregion: Northern EconomicCorridor Project in the Lao Peoples Democratic Republic. Manila.


37/60

APPENDIX 3: STATUS OF COMPLIANCE WITH LOAN COVENANTS

No. Covenants

Reference in Loan

Agreement Status of Compliance

1. The borrower shall cause the project to be carriedout with due diligence and efficiency and in

conformity with sound administrative, financial,engineering, environmental, road construction,and operations and maintenance practices.

Article 4, Section 4.01 Complied with.

2. The Borrower shall make available, promptly asneeded, the funds, facilities, services, land andother resources in addition to the proceeds of theloan, which are required for the carrying out ofthe Project and for the operation andmaintenance of the Project facilities.

Section 4.02 Complied with.

3. The Borrower shall ensure that the activities of itsdepartments and agencies with respect to thecarrying out of the Project and operation of theProject facilities are conducted and coordinatedin accordance with sound administrative policies

and procedures.

Article 4, Section 4.04 Complied with.

4. The Borrower shall ensure that te

Greater Mekong Subregion: Northern Economic Corridor Project in the Lao People’s Democratic Republic

Documents