Doctor of Philosophy in Economics - Effective aid coordination in lao pdr: policy implications for power sector developmen

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MINISTRY OF EDUCATION MINISTRY OF EDUCATION AND TRAINING LAO NATIONALUNIVERSITY NATIONAL ECONOMICS UNIVERSITY Khammany INTHIRATH EFFECTIVE AID COORDINATION IN LAO PDR: POLICY IMPLICATIONS FOR POWER SECTOR DEVELOPMENT Specialty : Investment Economics (Development Economics) Code : 62.31.05.01 Supervisor: Assoc.Prof.Dr. Nguyen Thanh Ha A dissertation submitted to the National Economics University in fulfillment of requirements for the Degree of Doctor of Philosophy in Economics Vientiane, 2013
ii DECLARATION I hereby declare that this dissertation is my own work and effort. The dissertation has not been submitted anywhere for any award. All the sources of information used have been well acknowledged. Date: Signature: Khammany INTHIRATH
iii ACKNOWLEDGMENT I would like to sincerely thank many people whom provided much support into producing this thesis and paving the way for the research topic to be one of the significant findings. I wish to express my profound gratitude to my supervisor Associate Professor Dr. NGUYEN Thanh Ha, National Economics University (Vietnam), for his great support and guidance throughout my study. His encouragement and constant attention contributed significantly to the outcome of this research. I am grateful to my sponsors such as the Ministry of Energy and Mining and the National University of Laos in enabling me to achieve a higher education at National Economics University, Vietnam. Many thanks to all interviewees whom shared knowledge and ideas. My sincere thanks out to the Lao Government officers from the Government Office, Ministry of Energy and Mines, H.E Mr. Soulivong DARAVONG, Minister of Energy and Mines, etc and many other officers whom were involved in my research. The European Commission Lao PDR Office international staff, the World Bank residential office and United Nations Development Programme staff who are involved in the aid effectiveness agenda in Laos and friends from development communities were all of assistance in this reseach. Last but not least, many thanks are due to my wife and my family who provided me endless love with support and strength through out of my life.
iv TABLE OF CONTENTS DECLARATION...................................................................................................... ii ACKNOWLEDGMENT......................................................................................... iii TABLE OF CONTENTS........................................................................................ iv ABBREVIATION ................................................................................................... vi ABSTRACT .................................................................Error! Bookmark not defined. RATIONALE........................................................................................................... xi CHAPTER 1. LITERATURE REVIEW ................................................................1 CHAPTER 2. THEORETICAL FRAMEWORK ON ODA COORDINATION EFFECTIVENESS ....................................................................................................6 2.1. Development Theory..........................................................................................6 2.2. Development Aid ................................................................................................7 2.2.1. Donor Motives ..................................................................................................7 2.2.2. Defining Official Development Assistance (ODA) ..........................................9 2.3. Aid coordination and its effectiveness ............................................................10 2.4. Dimensions of Development Assistance Coordination .................................13 2.5. Sector Wide Approach and Programme Based Approach ..........................14 2.6. Principles of Effective Aid Coordination .......................................................15 CHAPTER 3. KEY LESSONS LEARNT FOR LAO PDR ................................16 3.1. Lesson from Vietnam ......................................................................................16 3.2. Lesson from Timor L’Este..............................................................................20 3.3. Comparative Lessons.......................................................................................23 CHAPTER 4. HOW ODA COORDINATION IMPLEMENTED IN LAO......26 4.1. Millennium Development Goals (MDGs)......................................................26 4.2. Paris Declaration..............................................................................................28 4.3. Vientiane Declaration and Country Action Plan (CAP) .............................28 4.4. The Round Table Meeting/Process (RTM/RTP)..........................................30
v 4.5. Sector Working Groups (SWGs) ...................................................................31 4.6. Critiques............................................................................................................34 4.7. Current ODA in Lao P.D.R. ...........................................................................39 4.8. Effort of Government of Lao PDR.................................................................44 4.9. Coordination in Practice .................................................................................45 4.10. Sectorial Working Groups (SWGs) .............................................................46 4.11. Evolution of Current Coordination System................................................47 4.12. OECD DAC Survey .......................................................................................49 4.13. International Development Agencies...........................................................51 CHAPTER 5. POLICY IMPLICATIONS FOR POWER SECTOR DEVELOPMENT ...................................................................................................55 5.3. Power Sector Policy..........................................................................................74 5.4. Power Sector Strategy towards 2025..............................................................74 5.5. Recommendations ............................................................................................78 5.6. Regional Coordination Effort.........................................................................80 CONCLUSION........................................................................................................82 REFERENCES ........................................................................................................84
vi ABBREVIATION ADB Asian Development Bank AI Avian Influenza AIDS Acquired Immune Deficiency Syndrome AP Action Plan CAP Country Action Plan CAW Country Analytic Work CDF Capacity Development Framework CPI Committee for Planning and Investment DAC Development Assistance Committee DIC Department of International Cooperation (MoFA) DP Development Partner DSA Daily Subsistence Allowance EC European Commission FAO Food and Agriculture Organization FY Fiscal Year FW Framework GoL Government of Lao PDR HCS Hanoi Core Statement HIV Human Immunodeficiency Virus INTOSAI International Organization of Supreme Audit Institution Lao NCAW Lao National Commission for the Advancement ofWomen LWU Lao Women’s Union MAF Ministry of Agriculture and Forestry
vii MCTPC Ministry of Construction, Transport, Post and Communications MDG Millennium Development Goals MoE Ministry of Education MoF Ministry of Finance MoFA Ministry of Foreign Affairs MoH Ministry of Health MoU Memorandum of Understanding MTEF Medium Term Expenditure Framework NGO Non-Government Organization NSEDP National Socio-Economic Development Plan ODA Official Development Assistance OECD Organization for Economic Cooperation and Development PACSA Public Administration and Civil Service Authority PBA Program Based Approach PEMSP Public Expenditure Management Strengthening Program PFM Public Financial Management PGAE Partnership Group on Aid Effectiveness PIP Public Investment Program PIU Project Implementation Unit PMU Project Management Unit PrMO Procurement Monitoring Office RTIM Round Table Information/Implementation Meeting RTM Round Table Meeting SIDA Swedish International Development Agency
viii STEA Science, Technology and Environment Association SWG Sector Working Group TC Technical Cooperation TSA Treasury Single Account UNCT United Nations Country Team UNDP United Nations Development Program UNFPA United National Population Fund UXO Unexploded Ordinance VD Vientiane Declaration (on Aid Effectiveness) WB World Bank WHO World Health Organization
ix ABSTRACT Lao PDR has a lengthy history, abundant and natural-resource-rich country with plenty of minerals, rivers and creeks which are seen to be hidden strengths for the development of power, particularly hydropower, thermal, wind power, and solar energy. Total energy demand of the Lao People's Democratic Republic was 2.4 million tons of oil equivalent (Mtoe) in 2010, with an annual increment of 3 to 4% in parallel.with stable economic growth. Therefore, it is estimated that total energy demand in 2025 will be 6.4 million tons, approximately 2.6 times current demand. In terms of sector-wise demand, the industrial sector accounts for about 31%, the transportation sector for about 29%, the residential sector for about 29%, the commercial sector for about 10%, and the agricultural sector for about 1%. Among these, the industrial sector and the transportation sector, in particular, show higher annual increases of l5% and 8%, respectively. These are sectors where remarkable growth of demand is expected. Currently, the major energy supply sources are firewood/charcoal (about 47%), petroleum (about l9%), and hydropower (about 19%). However, in view of a sharp rise in energy consumption in the transportation and the industrial sectors, it is thought that the petroleum contribution of overall energy sources will be about 60% in 2025. In addition, the share of electricity is expected to grow substantially as the electrification rate increases from the current level of abofi 70% to 90% in 2020, and electricity consumption will increase sharply due to increasing use of home appliances. The Government of Lao PDR is expected to establish institutions to secure energy efficiently by making reliable energy demand forecasts and formulating an appropriate energy policy and supply pian. The purpose of this research is to find what is “effective aid coordination” particularly drawing from the case study of Lao PDR and lessons from successful cases
x and what possible recommendations for power sector development are. The study explore extensive literature in aid effectiveness, with an in-depth interview with the managers, leaders, practitioners etc. Information synthesis is used in to analyze the data. It is proposed that a solution to the problem of poor delivery of ODA is that the Lao PDR governement, in general and power sector, in particular must improve its ODA spending systems and incorporate aid budgets into the national budget and development plans. It is vital to encourage the Government of Lao PDR to lead their own development agenda and support development according to local priorities. The results suggest that it is not just a matter of coordinating aid effectively, but the aid industry needs the right capacity and people to be involved. Capacity building is much needed within the recipient national offices as well as many of the international donor agencies. This would allow the local government to take the lead and prioritize the commitments signed in the Paris Declaration, the Vientiane Declaration and the Millennium Development Goals. It is recommended by many practitioners that the number of agencies working in decision making processes in the aid effectiveness agenda in Lao PDR should be limited to reduce transaction costs and promote clear communication within the development community. However different environments such as Timor L’Este, suggests that civil society should be involved more and that donor agencies should not take the lead in aid delivery. The key point to be learnt is that ODA needs to enhance its efficiency through the best use of limited resources, aligning with national planning, programming, monitoring and reporting processes, strategic documents, and priorities. There should be flexibility to establish and abolish donor coordination groups, avoiding administrative overburden of public administration staff, while attempting to comply with donor requirements, established systems and procedures for programming of donor’s funds. The effective use of existing national planning, monitoring structures, equipped with national leadership and ownership in aid coordination should be taken into account.
xi RATIONALE As a country condition of mountainously and rich of water resources, Lao PDR is having 23,000 MW exploitable hydro power potential. With a quick development of economic and government policy on attraction of the foreign investment, those hydropower potential has been step to step developed for both domestic consumption and export for country income generation. Continue of economic growth is needed to alleviate poverty and achieve social development goals but the policy options for achieving this are constrained by the small domestic economy and limited trade opportunities. Therefore, hydropower projects are a development opportunity for both local and central of Lao PDR in overall development. The power policy of Lao government aim to establish a priority policy of developing the country’s potential energy resources to provide a low cost source of energy that can meet export and domestic policy objectives and promotion of sustainable development. The country now has installed power generation capacity of over 3,000 MW, of more than 13 hydro power projects or about 6,000 MW are under construction and more than 6,000 MW are under various stages of development by 2025, it is expected that export would be 80-85% of developed capacities. To transmit of those power there are a strategy of domestic and international grid development where it can be divided into domestic interconnection (connection of Northern to Southern part of Lao PDR) and regional interconnection (connection of Lao PDR to neighboring countries for power exporting). The Memorandum Of Understanding (MOU) was signed for supply of power between Lao and Thailand are 7,000 MW and 5,000 MW between Lao and Vietnam by 2020. For Lao PDR, Official Development Assistance (ODA) is very important mechanism to promote the potential of investment fund, technology, marketing, management experiences, take part of job creation, increase of income level, upgrade of country development level. Therefore, promotion and attraction of ODA
xii and FDI is become one of priority policy of party and government of Lao PDR. Promotion of the ODA into Lao for development of important sectors; potential sectors are essential necessary for current situation, especially for development of energy sectors because this sector is an major part of country socio-economic development; it is a necessary of living condition of the people, generate income from export of surplus power from domestic use to neighboring country, creation for income from job opportunity for workers. Together with those, it is also a factor contribute to promote other sector development as well. Currently in the world, there are many type of energy; for Law PDR, with geographic condition, we are having of river which is potential of hydropower development. According to survey, Lao PDR is potentially of 23,000 MW of energy can be developed, in there; 13,000 MW could be generate from development of potential from Mekong river tributary and another 8,000 MW are from Mekong river tributary and 2,000 MW is from the other type of energy potential. At the moment, Lao is having 14 officially hydropower plants with generating of 2,558 MW, in their Electricite Du Laos (EDL) is direct managed of 9 hydropower plants with 385 MW installed capacity and there could generate of 1,700-1,800 million KWh. Now; every provincial city; district are already electrified and more than 72% of households are also electrified. EDL is also supply power to irrigation project for more than 24,000 projects which is further supply of water to production area of 200,000 hector and supply of power to heavy and light industries of more than 30,000 Unit. In the past five years, revenue of EDL business operation could reached 1,600-1,800 Billion Kip; where increased 20-36%. From 1988-2007 Foreign Investment is approved of 1,800 projects with total fund of 9.2 Billion US Dollars, particularly in year 2006 is a year that development of hydropower is highest with 13 projects and 1.7 Billion US Dollars fund. In the past 20 years from 1988 to present implementation of foreign investment policy in Lao PDR were approved from more than 9.2 Billion US Dollars and in there total investment of energy sector are 4 Billion US Dollars covered very high proportion compare to the other investment sectors. From 2007-
xiii 2010 EDL are working with other foreign business investment partners of 5 projects with total capital investment cost of 1.8 Billion US Dollars. However, for promotion of the ODA are still having several limitation for example: understanding of the ODA is still different, recent year Lao PRD is announced for use of the Investment Promotion Law and many other legal documents concerning ODA and how to use such aid effectively. In the same time management, selection, approval and opening of the investment form, investment form of the government into different sectors in particular for the join investment of the government into energy sector is not yet having a proper package system, thus this make a difficult to prepare a policy, policy and detail implementation, this become a limitation of the research on ODA, therefore it make an investment environment is complicated, legal system, policy is not yet in a one full set system. There are many policies concern with ODA are regularly adjusted, not clear and thus this impact to business operation. Further to that policy system on the ODA, foreign direct investment, etc. between government, ministries and local authority is still not harmonized and break through, This make difficulty to donors and investors. Those limitations are making investment climate and environment are liquidity. Official Development Assistance (ODA) has a long history, yet its effectiveness and efficiency has always been a concern of both the donor and the recipients. In order to enhance the efficiency and effectiveness of ODA, the Paris Declaration has been identified as the key development frame work in leading the aid effectiveness agenda. It is a contract between members from various developed and developing countries in an effort to reduce poverty. This dissertation draws attention on the aid effectiveness agenda and the search for better ways to use such aid most effectively. Effective Aid Coordination, as the topic suggests, is all about how to bring development communities together as one and propose that poverty reduction work should be incorporated into one master plan. When development institutions work independently, projects are duplicated and already limited resources are wasted. With aid coordination, the local government can monitor and outline the priorities
xiv needed for Lao PDR and allow interested parties to contribute to the government plan. However the aid coordination system in Laos is not working well at present. Examples from case studies drawn from Vietnam and Timor L’Este may provide some useful lessons. The author has been working in the energy sector for a long time. Through out the working live, from being a provincial staff on electricity supply management, to being the Director of Electricity Du Laos State Enterprises, and currently the Deputy Minister of the Ministry of Energy and Mines, I have seen and dealt with several aid programs through out the country. The author also has an extensive network in the ODA administrators and the receipient organizations. Therefore, the inspiration for this topic was driven by personal experiences. During my work life, I was overwhelm by the enormous amount of ODA in flows in to Laos. Observing the aid industry I can see the benefits that aid does for the local people, at both the central government and provincial government levels, as well as for expatriates working in development agencies, donors, NGOs and particularly the poor whom ideally are beneficiaries, which is the prettier side of aid. The down side of aid is “the operation of aid.” Within the UN agencies themselves, aid money is not entirely spent for its best use. There are duplications of projects within the UN system, as well as the entire aid industry. Some projects adversely affected the beneficiaries more than benefited them. The capacity of development experts locally and internationally are not always competent to deliver. The local government is often puzzled but takes aid with open arms. Since the Millennium Development Goals (MDGs) were set for the year 2015, Laos has signed up to commit to meeting the deadline. There is however, very little optimism regarding meeting the commitment to aid coordination in Laos. If only aid could be coordinated and allocated correctly the output of aid could yield favorable outcome. Research Aims and Objectives The aim of this dissertation is to investigate a working model of aid coordination for Lao PDR with a focus of the country’s ODA status. This will provide a better understanding of how the aid environment system operates within
xv the country. In addition to Lao PDR, lessons from Timor L’Este and Vietnam will be discussed to briefly outline what these countries are doing with regards to harmonizing ODA and what best practices could be suggested for Lao PDR. It is assumed that coordination is the key approach for aid effectiveness. The dissertation objectives are: 1. To evaluate the current working model for aid coordination efforts in Lao PDR. With this model it can be analyzed whether the current existing approach is effective or not. 2. To find alternatives for aid coordination for Lao PDR for improvement. 3. To recommend possible policies and solutions to promote effective use of external aid in the field of power sector development. Research Questions 1. What is the aid effectiveness agenda in Lao PDR? Which institutions are involved? 2. What are the local efforts from international agencies and donor communities for aid effectiveness efforts in Laos? 3. Does the local development community support the local government in aid coordination? 4. What lessons Lao PDR could learn from successful cases of ODA harmonization and coordination? 5. What are the alternatives for Laos to improve aid coordination and harmonization in order to promote power sector development? Research Methodology To achieve the above objectives this dissertation follows three steps of research: Collecting data. (i) Primary data were collected from different aspects regarding power sector. The samples from each view were taken from different sides of the sector. The author had deep personal interviews with different managers, leaders, practitioners of related institutions/ organizations within the Ministry of Energy and Mines, MPI, international offices, etc. (ii) Secondary data were obtained from different sources (Office of the
xvi government of Lao PDR, international sources, etc) but mostly from research work done by international offices from which I myself had been involved to some extent. Some relevant literature were also reviewed. Data and information analysis. Data and information obtained are used to analyze current situation of ODA use in Lao PDR. Recommendations. Possible policies and solutions regarding the development of the power sector of Lao PDR in years to come will be outlined in the last chapter based on previous analysis.
1 CHAPTER 1. LITERATURE REVIEW Official Development Assistance (ODA) has a long history, yet its effectiveness and efficiency has always been a concern of both the donor and the recipients. In order to enhance the efficiency and effectiveness of ODA, the Paris Declaration has been identified as the key development frame work in leading the aid effectiveness agenda. It is a contract between members from various developed and developing countries in an effort to reduce poverty. This thesis draws attention the aid effectiveness agenda and the search for better ways to work in the development field, including governments and development professionals. 1.1. According to A. McCarty and A.Julian [1], (Bilateral) ODA to Lao PDR originated in the early 1960s, and multilateral ODA was first recorded in the late 1970s. Since then, total ODA has shown a strong increasing trend up to the present, although there has been some fluctuation year on year, with bilateral donors traditionally contributing the larger proportion of ODA. Total ODA in 2007 stood at US$ 280 million, which is approximately 7% of GDP - a large percentage relative to other aid recipients. Japan, France, and Sweden are Lao PDR’s largest bilateral donors, contributing respectively 40.1%, 16.8% and 11.8% of total bilateral aid between 2005 and 2007. Lao PDR is classified as an LDC and is, therefore, covered by the 2001 DAC Recommendation to untie aid. Between 2005 and 2007 DAC donor countries formally untied over 70% of their ODA commitments to Lao PDR (CRS). Meanwhile, for the same period, 22% of bilateral ODA remained unreported with regard to tying status. The process of untying aid has improved over the last decade, despite the hesitation of some donors to move to non-project based aid modalities, such as budget support and pooled funding, which are often associated with untying. Lao PDR receives largely grant aid as an instrument (98% of DAC ODA in 2007) and project based aid modalities. Several donors also provide project based or free-standing technical co-operation, in many cases alongside grant funding for projects, which is often tied. For example, grants which involved no free-standing technical cooperation (FTC) reported a 96.8% untied share, whereas grants which
2 had a whole FTC component reported an untied share of just 27.8% (CRS, 2005- 07). The three largest DAC donors to Lao PDR; Japan, France and Sweden, all reported a high proportion of their ODA as untied for 2007: 68.9%, 62.3% and 98.5% respectively. Lao PDR also receives substantial aid from non-DAC donors that is considered to be largely tied and not necessarily conforming to OECD definitions of ODA. The aim of the econometric analysis is to determine whether ODA, the tying status and the instruments by which aid is provided (loans and grants) have any significant impact on aggregate donor export flows to the recipient, in this case to Lao PDR. Overall, the results show that aggregate ODA, and grants in particular, have significant trade distorting effects through the increase in donor-recipient exports. This empirical evidence suggests that aid flows could be informally or de facto tied, when analysis of data from a cross section of donors to Lao PDR is performed. However, as outlined in the econometrics investigations this analysis has some caveats. 1.2. Soudalie Silaphet [81] conducted a study to find out solution to the problem of poor delivery of ODA is that the development industry must improve its ODA spending systems and incorporate aid budgets into the national budget and development plans. It is vital to encourage national governments to lead their own development agenda and support development according to local priorities. He found that it is not just a matter of coordinating aid effectively, but the aid industry needs the right capacity and people to be involved. Capacity building is much needed within the recipient national offices as well as many of the international donor agencies. This would allow the local government to take the lead and prioritise the commitments signed in the Paris Declaration, the Vientiane Declaration and the Millennium Development Goals. He also recommended that the number of agencies It is recommended by many practitioners that the number of agencies working in decision making processes in the aid effectiveness agenda in Laos should be limited to reduce transaction costs and promote clear communication within the development community. However different environments such as Timor L’Este, suggests that
3 civil society should be involved more and that donor agencies should not take the lead in aid delivery. 1.3. According to OECD [61], Lao PDR, in 2006, had a gross national income (GNI) per capita of USD 2050 (in purchasing power parity terms). Lao PDR is a low-income country with high poverty rates. The most recent poverty survey, conducted in 2002, estimated that 27% of the population lived below the dollar-per- day international poverty line, with 74% living below the two-dollars-per-day line. The country is on track to meet three of the eight Millennium Development Goals (MDGs): MDG 2 on universal primary education; MDG 4 on reducing child mortality; and MDG 5 on improving maternal health. In 2006, total net official development assistance (ODA) amounted to USD 364 million, with the Asian Development Fund (ADF), Japan and the World Bank were the top three donors for 2005-06. Lao PDR was not included in the 2006 Baseline Survey for the Paris Declaration. Thus, the country’s 2010 targets will be based on the results of the 2008 Survey. Sixteen donors responded to the 2008 Survey, with their aid constituting 75% of total ODA provided by members of the OECD Development Assistance Committee (OECD-DAC). Aid accounts for some 12% of GNI in Lao PDR; thus, it is vital that government and donors work together to enhance aid effectiveness. In order for aid to be effective, it must be aligned with national development strategies, institutions and procedures. The Paris Declaration envisions donors basing their support fully on country partner aims and objectives. Indicators will examine several dimensions of aid to assess the degree to which partner countries and donors achieve alignment. The data for Lao PDR suggest that there is substantial room for progress for most indicators, especially with regards to improving the reliability and use of country systems, for which the baseline is very low. Although reforms are being made, there is a lack of financial and human capacity to implement and reinforce these reforms, which calls for long-term commitment from donors. The limited use of these systems also contributes to low levels of aid reliability which further lowers aid effectiveness. Capacity constraints significantly undermine the ability of partner countries to capture, co-ordinate and utilise aid flows more effectively. Under the Paris
4 Declaration, donors committed to providing technical co-operation in a manner that is co-ordinated with partner country strategies and programmes. This approach aims to strengthen capacities while also responding to the needs of partner countries. Likewise, there is greater recognition that successful capacity building is endogenous – e.g. is led by the partner country. To this end, the partner country defines clear objectives to ensure that existing capacities are used effectively and that external support is harmonised within this framework. Some indicator focuses on the extent to which donor technical co-operation – an important input into capacity development – is moving towards this country-led model. It measures the degree of alignment between donor technical co-operation and the partner country’s capacity development needs and strategies. The Paris Declaration 2010 target is that 50% of technical co-operation flows are implemented through co-ordinated programmes that are consistent with national development strategies. Data for 2007 shows that 54% of technical co- operation to Lao PDR was co-ordinated with country programmes. This is encouraging. The remaining gap may be the result of the NSEDP’s overall lack of an articulated strategy for dealing with capacity bottlenecks. The Vientiane Declaration has given attention to this issue and has formulated capacity development frameworks for the NSEDP’s priority sectors. Co-ordination of technical co-operation is now taking place in the education sector and is an important component of the PFMSP. The Paris Declaration 2010 target is that 50% of technical co-operation be co- ordinated with country programmes. The data suggest that Lao PDR has already exceeded this target although further progress can be made. A government- commissioned report on the impact of technical co-operation was recently conducted: the lessons learned from this report will provide a platform for further improvement. On aggregate, 38% of scheduled disbursements in 2007 were accurately recorded by the government, although only 65% of scheduled aid was actually disbursed. For the average donor, the ratio was an even less encouraging 24%. These gaps can result from several factors: inconsistencies and gaps in the legal and institutional framework for managing ODA; weak co-ordination between donors