Report No. PID8277

Project Name Lao-La-Social Fund

Region East Asia and Pacific Region

Sector Social Funds & Social Assistance

Project LAPE65884 Public Disclosure Authorized Borrower LAO PDR

Implementing Agency Lao PDR Social Fund

Date PID Prepared October 8, 1999

Projected Appraisal Date January 18, 2000

Board Date June 6, 2000

1. Country and Sector Background

Social indicators in Lao PDR are among the worst in the world, far closer to

Public Disclosure Authorized the average for Sub-Saharan Africa than to the East Asian region. This is demonstrated in two ways: through the indicators themselves (which demonstrate high rates of maternal and child mortality and illiteracy) and through the poor coverage and inferior quality of basic health and education services.

While Government expenditures on education and health have increased, they remain the lowest in East Asia, are heavily dependent upon donor financing, and often have limited impact. Issues of language, culture, gender, ethnicity and residential patterns further complicate efficient and effective service delivery. The recent financial crisis and attendant triple digit inflation have brought further stress to these systems by pushing the salaries of teachers and health care workers below a living wage. Athough the responsible ministries are striving - with IDA assistance -- to reach greater Public Disclosure Authorized numbers with a better quality of service, progress has been slow and the gap between the expressed goal of approaching the ASEAN standard and the extant reality remains large. The private sector has been slow to become involved in service provision and, when they do, the beneficiaries are usually the better- off elements of Laotian society. For the social sectors and the rural poor therefore, fundamental issues remain: access to and quality of services, infrastructure, and clean water, physical wellbeing, food security, and sustainable and appropriate alternatives to subsistence farming.

The Government of Lao PDR has expressed determination to develop an economic and social profile more like that of its ASEAN partners and leave the ranks of the "least developed" nations by 2020. It intends to alleviate poverty through socioeconomic development programs that pay particular attention to rural and multi-ethnic areas, infrastructure, and human resource development. The National Socioeconomic Development Plan for 1996-2000, and the recent Public Disclosure Authorized Policy Framework Paper emphasize eight priority programs that directly support these objectives: (i) food production; (ii) stabilization/reduction of shifting cultivation; (iii) commercial production; (iv) infrastructure development; (v) improved socioeconomic management and foreign economic relations; (vi) rural development; (vii) human resource development; and (viii) service development. Recognizing the importance of local authorities in achieving development impact, the Government also has fostered a stronger role for the provinces and placed greater emphasis on decentralized project implementation.

2. Objectives

Within the overall context of poverty reduction, the main development objective of the Lao PDR Social Fund is changing behaviors among the rural poor. If the project is successful, changed behaviors will result in: (i) improved family health and nutrition practices that especially increase the wellbeing of women and children; (ii) increased primary school attendance and completion; (iii) enhanced village food security; and (iv) enhanced opportunities for income generation among women. The proposed project would be designed as a Social Fund with an accompanying Social Services component. It would combine demand-driven, small scale sub-projects in infrastructure, equipment and skills development (financed through grants from the Social Fund) with mandatory packages of health, education, and nutrition activities (supported through the Social Services component). All project activities, but especially the social services package, target the most vulnerable groups in Laotian society, namely, rural women and children living at or below the poverty line.

The proposed project is innovative in a number of respects. First, it would introduce the concept of a social fund in , where it has never been tried before. Second, it would be based on and expand upon tested and successful family development programs supported by UNICEF since 1992. Third, by combining a social fund with social services, it would attempt a 'dual approach' to channeling resources to and changing behavior at the community level. Given the experimental nature of the project, a Learning and Innovation Loan (LIL) of US$5.0 million equivalent is proposed as the financing instrument.

3. Rationale for Bank's Involvement

Choice of a Social Fund Mechanism. The provision of social and economic infrastructure could be achieved through sectoral ministries using standard sector investment loans. However, to date, Government's poverty reduction efforts have been severely constrained by a complex interaction of social- linguistic, ethnic, and residential factors which inhibit the efficient and effective delivery of social services. Moreover, on account of physical isolation, social exclusion, or gender and ethnic barriers, the poor, and more specifically women and children, are not benefiting from alternative government programs.

There is evidence of both financing and delivery problems in rural areas where public social service programs show major deficiencies in terms of access, utilization, quality, and impact. Rural women -- regardless of their ethnic affiliation or patterns of residence -- are most affected by poverty. The ethnic and cultural diversity characterizing Laotian society indicates the need to move toward a flexible and demand driven approach to community development which emphasizes substantial local participation. The increased village level capacity resulting from social fund activities provides the foundations for future development at the community level.

Other developing countries faced with similar problems have successfully

-2 - adopted a social fund financing approach to local development. Social funds can channel large amounts of resources to depressed rural communities and do so with greater speed, efficiency and impact than traditional channels. Social funds have been highly successful in reaching the poor as well as physically or socially isolated communities. In addition, a well-designed social fund allows fine-tuned targeting of population groups that may not have access to services or credit due to gender or ethnic barriers. Alternative Institutional Frameworks. Alternative institutional frameworks for the Project have been considered. For purposes of benefiting from existing institutional capacity, the possibility of selecting a Ministry to be responsible for project implementation has been considered. However, World Bank global experience with social funds reveals the importance, in terms of success, of establishing an autonomous institution. Another alternative considered was the establishment of a social fund at provincial levels in one or several targeted provinces, (depending on their capacity) and jointly responsible for project implementation. Other alternatives, mainly variations of the above, were considered, but final preference was given to an autonomous national institution under the Prime Minister's Office due essentially to the pilot nature of the Project and potential for future expansion of activities to all provinces. Alternative Project Designs. In terms of design, two options were considered: (i) expanding the UNICEF program to additional provinces; (ii) following the example of other countries in the region (i.e., Thailand and ), and replicating the Social Fund I project. However, two factors guided the design of the Project and its dual approach (i.e. combining a social fund with a social services component): (i) poverty indicators for Lao PDR stress the critical importance of addressing illiteracy and the causes of malnutrition and mortality; and (ii) the complementary nature of the services to be provided by the social fund sub-projects (e.g., access to safe water, sanitation, increases to food security) and the benefits of the health, education, nutrition compulsory packages.

4. Project Description

Component I: Health, Education, Nutrition Prototype Packages This component will provide a set of mandatory health, education and nutrition prototype packages to accompany sub-projects financed by the Social Fund. The primary purposes of these packages are to: (i) reinforce good nutritional, early child development (ECD) and health practices in villages where capacity already exists; (ii) create awareness of a need for such practices in villages with a weak knowledge base; and (iii) build capacity and technical competence of village and district workers in these areas. The prototypes would be developed on the basis of ongoing assistance by UNICEF in these areas and beneficiary assessment conducted in cooperation with local technical staff during project preparation.

Component II: Demand-Driven Sub-Projects This component will create a Social Fund to provide grant financing for small- scale, community-based and demand-driven sub-projects in the areas of social and economic infrastructure. Initial targets for Social Fund grants will be rural poor, especially village women and children. Financing will be provided on a grant basis to applicant villages or groups meeting eligibility criteria and submitting applications responsive to the initial menu of activities financed by the Social Fund. One of the eligibility criterion is willingness to participate in the social services component outlined above. The initial

-3 - menu will cover inputs (infrastructure, equipment, services) in areas of: a) health and safe water; b) nutrition; c) education; d) food security; and e) income generation for women. The component will build on community development and village planning activities initiated by the Government of Lao PDR and supported by UNICEF since the early 1990s. The number and profile of villages likely to benefit from the Social Fund will be clarified through beneficiary identification and social assessments conducted during project preparation.

Component III: Institutional Support This component will support the costs of staffing, managing, monitoring, reporting, and operating the Social Fund project. There will be two groups of technical staff requiring support: (i) Operating Departments of the Social Fund involved with administering the small-grants program, and (ii) Cooperating Departments of line ministries and mass organizations involved with the social services component. Operating Departments of the Social Fund, which will be created during project preparation, will be staffed to undertake the following responsibilities: Promotions, Finance and Administration, Appraisal, and Supervision. Costs incurred will include: salaries and fees of social fund staff who -- given the temporary and institutionally independent nature of a social fund and the experimental thrust of the project -- will be retained as consultants under contract for the duration of the project only; office equipment, vehicles, and motorcycles needed to carry out operational work; minor civil works as required; operating costs not covered by Government counterpart funds; and technical assistance in the areas of monitoring, MIS, accounting, technical and beneficiary assessments, legal services and other specialist areas. UNICEF already works closely and cooperatively with Cooperating Departments of relevant line ministries (Health, Education, and Agriculture) and the Lao Women's Union, supporting development of technical skills of provincial and district staff to work effectively at the village level and administer social welfare activities. It is anticipated that UNICEF will stay involved by being sub-contracted by the Social Fund to administer the Social Services Component. Financing to sub-contract UNICEF is expected to come from bi-lateral grant aid.

5. Financing Total ( US$m) Government 0.5 IBRD IDA 5.0 Total Project Cost 9.2

6. Implementation

The Social Fund will be established as an autonomous public institution under the Office of the Prime Minister, with the organization and staffing necessary to maintain the high performance, cost effectiveness, accountability, and transparency of well-run Social Funds elsewhere. The local UNICEF office in Lao PDR is being considered to manage implementation of the Social Services component under contract to the Social Fund. This would include procurement of inputs for social service packages, training and skills development of ministry staff and village participants, and monitoring social indicators. UNICEF already has a strong working relationship with Government entities and considerable experience delivering health-education-nutrition inputs to the

- 4 - village level.

7. Sustainability

Sustainability of the Lao PDR Social Fund. The Social Fund itself will be established as an agency with a 3-year (renewable) lifespan, and consultants will be hired to staff it. As such, therefore, it is not expected to be sustained over the longer term or become an additional burden for the public sector. If it is demonstrated to be a useful vehicle for resource transfer to rural poor and an effective mechanism for introducing behavioral changes and improved wellbeing at the village level, it may be extended beyond the initial period. Sustainability of sub-projects. A main challenge for social funds is assuring financing for maintance and recurrent costs of the sub-projects they finance. The Lao PDR Social Fund incorporates lessons from previous Bank- financed social funds, including: (i) pre-requisite of a Village Development Plan as an expression of felt community need; (ii) an assessment of capacity and commitment at the community level during project preparation; (iii) propotional activities informing communities of future responsibilities; (iv) an assessment of capacity as an element of sub-project appraisal; and (v) putting a maintenance clause in the contract that beneficiary villages will sign.. Sustainability of the social services packages. The project expands on community development programs supported by UNICEF which have demonstrated their sustainability, even under the harsh circumstances of the recent financial crisis. Participating villages have been maintaining changed behaviors such as growth monitoring of children, maintance of drug cabinets, and improved nutritional practices - even without follow-up visits by UNICEF - - because they noticed that their children were healthier, a greater number were surviving past infancy, and the general wellbeing of villagers had increased. Provincial and District Health and Education workers continued to interact effectively with these villages because an effective working relationship had developed and villagers were interested in the technical knowledge provided by these staff.

8. Lessons learned from past operations in the country/sector

Since the first Social Fund in 1987, the Bank has accumulated considerable knowledge and experience through over 50 social funds supported in Latin America, Africa, the Middle East, eastern Europe and East Asia. The design of the proposed Project incorporates lessons from these operations. To ensure the transfer of experience and knowledge to Government decision makers, and especially to social fund staff, the project team will provide technical assistance and advice from Bank staff working on a variety of Social Funds as well as non-Bank Social Fund Specialists involved in designing social funds in all regions.

Lessons learned at a more conceptual level are that: (i) social funds should not be considered as a universal remedy for poverty alleviation, but rather as one element of a much broader poverty reduction strategy; (ii) while it is essential to design a social fund with its primary objective in mind, experience shows that social funds serve a variety of purposes simultaneously (i.e., decentralization of service delivery, building capacity at the community level). It is worth noting that, in transition economies social funds may assist the Government in its transition process, by increasing local

- 5 - level capacity to make development decisions and project implementation, and by developing the private sector as it increases the turn over and capacity of small and medium sized enterprises, particularly those involved in civil works.

The main lessons learned from the operations of other Social Funds and incorporated in the design of the Lao PDR Social Fund are: (i) The importance of institutional autonomy and freedom from political interference; (ii) the need for transparency and accountability ensured by: a comprehensive operational manual, an effective MIS, standardized and frequent reporting; independent audits; technical and beneficiary assessments; (iii) the need to attract high caliber, motivated staff by maintaining a non-bureaucratic environment and providing competitive remuneration incentives; (iv) coordination mechanisms with line ministries to ensure autonomy and efficiency of the social fund; (v) the need for close involvement of provincial and district governments, and community ownership to ensure sub-project maintenance and sustainability; (vi) the importance of outreach and promotional activities for reaching the poor, the geographically, ethnically, or culturally isolated, or targeted communities or subgroups, and the importance of using a simple and monitorable targeting mechanism to reach the desired communities; (vii) the need for simple sub-project cycle procedures and timely payment of contractors; and (viii) strong managerial and sub- project supervision.

9. Program of Targeted Interventions (PTI) Y

10. Environment Aspects

The social services component of the project will not have any environmental impact. The scope of the sub-project financing component of the Social Fund is limited to the rebuilding or rehabilitating of existing rural infrastructure sub-projects and services such as rural water supply and sanitation, small schools and health clinics. These activities are not expected to compromise the environmental quality or destroy natural habitats. The Social Fund's sub-project appraisal criteria will involve an environmental assessment designed to exclude funding sub-projects with substantial negative environmental impact.

11. Contact Point:

The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500

Task Manager Kathryn T. Johnston The World Bank 1818 H Street, NW Washington D.C. 20433

Note: This is information on an evolving project. Certain activities and/or

- 6 - components may not be included in the final project.

Processed by the Infoshop week ending October 22, 1999.

The immediate social impact of the financial crisis on Laos was less noticeable than elsewhere in the region because of the limited real sector effects combined with the high percentage of population already living outside the monetized economy at the subsistence level. Adverse impacts were noted both in real wages and -- in some cases -- meeting the minimum food requirements. However, whereas other regional economies had begun to stabilize and even recover within two years on the onset of the crisis, this was not the case for Laos, which still suffered from spiraling inflation and macro-economic unrest. The long term impact of a protracted economic down turn on the nascent social services sector (in terms of wages, infrastructure and consumables - like drugs) would be to set it back even further.

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