Report and Recommendation of the President to the Board of Directors Project Number: 41376-02 October 2009 Proposed Sector Development Program and Project Asian Development Fund Grants Lao People's Democratic Republic: Health Sector Development Program CURRENCY EQUIVALENTS (as of 5 October 2009) Currency Unit – kip (KN) KN1.00 = $0.0001174743 $1.00 = KN8,512.50 ABBREVIATIONS ADB – Asian Development Bank CDTA – capacity development technical assistance DPF – Department of Planning and Finance EA – executing agency EU – European Union GDP – gross domestic product HRH – human resources for health HSDP – Health Sector Development Program IEE – initial environmental examination JFPR – Japan Fund for Poverty Reduction JICA – Japan International Cooperation Agency Lao PDR – Lao People’s Democratic Republic LARF – land acquisition and resettlement framework LARP – land acquisition and resettlement plan MDG – Millennium Development Goal MICS – multiple indicator cluster survey MNCH – maternal, newborn, and child health MOF – Ministry of Finance MOH – Ministry of Health NCB – national competitive bidding NSEDP – national socio-economic development plan NT2 – Nam Theun 2 PCU – project coordination unit PHC – primary health care PHO – provincial health office PRSO – Poverty Reduction Strategic Operations UNFPA – United Nations Population Fund UNICEF – United Nations Children’s Fund VHV – village health volunteer WHO – World Health Organization NOTES (i) The fiscal year (FY) of the Government ends on 30 September. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 30 September 2009. (ii) In this report, “$” refers to US dollars. Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General A. Thapan, Southeast Asia Department (SERD) Director S. Lateef, Social Sectors Division, SERD Team leader V. de Wit, Principal Health Specialist, SERD Team members I. Ahsan, Counsel, Office of the General Counsel R. Butler, Social Development Specialist (Resettlement), SERD S. Ekelund, Senior Portfolio Management Specialist, Lao Resident Mission (LRM), SERD C. Holmemo, Poverty Reduction Specialist, SERD H. K. Win, Social Sector Specialist, LRM, SERD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page GRANT AND PROGRAM SUMMARY i MAP I. THE PROPOSAL 1 II. THE SECTOR: PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Issues and Opportunities 5 C. External Assistance 9 III. THE PROPOSED SECTOR DEVELOPMENT PROGRAM 12 A. Impact and Outcome 12 B. Special Features 12 C. Program Outputs 12 D. Project Outputs 14 E. Investment Plan 16 F. Financing Plan 17 G. Implementation Arrangements 17 IV. PROGRAM BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 22 A. Benefits and Impacts 22 B. Assumptions and Risks 24 V. ASSURANCES 25 A. Specific Assurances 25 B. Condition for Grant Effectiveness and Disbursements 26 VI. RECOMMENDATION 27 APPENDIXES 1. Design and Monitoring Framework 28 2. Sector Analysis 31 3. Summary of External Assistance and Coordination 41 4. Development Policy Letter and Policy Matrix 46 5. List of Ineligible Items 51 6. Cost Estimates and Financing Plan 52 7. Implementation Schedule 53 8. Procurement Plan 54 9. Summary Poverty Reduction and Social Strategy 59 10. Summary Gender and Ethnic Group Action Plan 63 11. Summary Land Acquisition and Resettlement Framework 67 12. Summary Initial Environmental Examination 73 SUPPLEMENTARY APPENDIXES (available on request) A. Economic and Financial Analysis B. Full Resettlement Framework and Plan C. Initial Environmental Examination GRANT AND PROGRAM SUMMARY Beneficiary Lao People’s Democratic Republic (Lao PDR) Classification Targeting classification: Targeted intervention (TI-M) Sector (subsector): Health and social protection (health systems) Themes (subthemes): Social development (human development), gender equity (human capabilities), governance (public administration [national, decentralized, and regional]) Location Impact: Rural (high), urban (low), national (high) Environment Category B Assessment Program The Health Sector Development Program (the HSDP), consisting of a Description program grant for policy reforms and an accompanying project grant, will support the Government's 7th Health Sector Development Plan, 2011–2015, to improve primary health care (PHC) to achieve the Millennium Development Goals (MDGs). This first-time program support to Lao PDR's health sector will help the Ministry of Health move toward a sector program approach. The combined outputs are (i) strengthened planning and financing; (ii) increased access to maternal, newborn, and child health (MNCH) care; and (iii) improved quality of human resources for health (HRH). Rationale Starting from a low base, the country’s health indicators still lag behind those of most other countries in Asia and the Pacific. Challenges include widespread poverty, isolated populations, limited public sector capacity, and low public financing. The sector will remain dependent on external funding until domestic revenues from Nam Theun 2 and other sources become substantial, around 2020. A PHC network has been put in place, and access to basic health care has been substantially improved through a network of district hospitals, health centers, and village health volunteers with drug revolving funds. However, health services are seriously underfunded and often lack skilled personnel, high out-of-pocket fees deter the poor from using services, and appropriate services for women and some ethnic groups are often lacking. The Government is committed to reducing poverty and achieving MDGs, and has identified the health sector as one of four priority sectors. The 7th Health Sector Development Plan is to be supported by a results-based sector program approach and will focus on eight priority areas, including the model healthy village, safe motherhood, child survival, nutrition and emerging diseases, HRH, management, financing, and aid coordination. In line with the Lao PDR country partnership strategy, the Program consolidates ADB’s past investments in PHC in eight northern provinces and provincial health management countrywide, and ii responds to the Government's efforts and ADB's commitment to implement the Vientiane Declaration on Aid Effectiveness. The Program will provide a platform for the sector program approach for support from other partners. The sector development program modality provides support for policy reforms and technical and financial resources to implement reforms. In addition, ADB will provide capacity building technical assistance for financial management in the health sector to help implement the sector program approach. In public administration, ADB will also continue to support the preparation of Lao PDR's medium-term expenditure framework and public expenditure management. Impact and The impact of the HSDP will be reduced maternal and child mortality Outcome and malnutrition by 2015. The outcome will be improved use of PHC, in particular for the poor, women and children, and ethnic groups. Program Grant The program grant supports reforms for (i) strengthened provincial planning and financing, including an increase in nonsalary recurrent budget, standards and guidelines for hospitals, a national health information system, and rolling out health equity funds; (ii) increased access to MNCH care through a national MNCH strategy, and rolling out mother- and child-friendly health services and model healthy villages; and (iii) improved quality of personnel through a national HRH policy and skilled birth attendance plan. The Government is committed to releasing the equivalent of program funds to the provinces for nonsalary recurrent budget support for operation and maintenance; outreach; staff improvement; and for rolling out mother- and child-friendly health services, model healthy villages, and health equity funds. Grant Amount, ADB will provide a program grant of $10 million from its Special Funds Terms, and resources to be released in two tranches ($5 million each), subject to Tranching compliance with grant conditions as provided in the policy matrix, with the first tranche to be released upon grant effectiveness and a second tranche within 24 months post-effectiveness. Counterpart Funds The size of the program grant is based on the medium-term costs of proposed policy actions with an estimated adjustment cost of $15 million for the reforms. The Government will pass on the equivalent of the program funds from the Ministry of Finance to the provinces using a program fund mechanism. Program Period 1 January 2010–30 June 2012. Procurement The program grant proceeds will be used to finance the foreign exchange cost of items produced and procured in ADB member countries, excluding items included on a list of ineligible items and imports financed by other bilateral and multilateral sources. The grant iii recipient will certify that the volume of eligible imports exceeds the amount of ADB's projected disbursements under the program grant in a given period. ADB will have the right to audit the use of grant proceeds and to verify the accuracy of the recipient's certification. Project Grant The project grant will support the program outputs through specific investments and assistance for the