Report No. PIC3842 Project Name Lao PDR-Third Highway Improvement Project Region East Asia and Pacific Sector Transportation Project ID LAPA4210 Public Disclosure Authorized Borrower Government of Lao PDR Implementing Agency Ministry of Communication, Transport, Post and Construction (MCTPC) Contact: Mr. Math Sounmala Deputy Director of Cabinet Project Management Lane-Xang Ave, P.O. Box 2158 Vientiane, Lao PDR Tel: 856 21 41 41 32 Fax: 856 21 41 41 32 Date this PID Prepared April 1996 Public Disclosure Authorized Project Appraisal Date January 1997 Projected Board Date May 1997 Country and Sector Background 1. General Facts. Lao PDR is poor, landlocked, mountainous and sparsely populated (4.6 million in 1995). Its inadequate infrastructure and communications make for poor physical integration of its 16 provinces provinces (plus the Vientiane Municipality and Special Zone of Xaysomboune). Over half of the Lao population lives in small and scattered villages without regular road transport. Agricultural Public Disclosure Authorized activities generate 56t of GDP and employ 809 of the labor force. With a per capita income of US$ 320, a life expectancy of about 50 years and an incidence of poverty at 46w, the level of economic and social development is among the lowest in the world. 2. Economic Performance. The decade-long involvement in the Vietnam war and its civil war destroyed much of the country's basic infrastructure. Following the unsuccessful implementation of a socialist political philosophy, the Government launched in 1986, the New Economic Mechanism (NEM) to move the economy from a system of centralized planning to one with a market-orientation. Since then, external trade and most prices have been liberalized, subsidies to state enterprises have been largely eliminated, and the exchange rate has been aligned with the market rate. Government's commitment to reform has been generally positive. Strengthened public and private investment and Public Disclosure Authorized economic incentives contributed to a rise in per capita income of nearly 5t per annum in real terms. Inflation fell from nearly 60t in 1989 to single digits in early nineties (6.2w in 1993) and overall fiscal deficit was reduced from 13.4w to 7.8w of GDP between 1990 and 1993. In line with the economic reforms, Government carried out a National Transport Study (NTS) to take stock of the transport sector, set priorities and lay the foundation for the establishment of a transport planning capability within the Ministry of Communications, Transport, Post and Construction (MCTPC). As a follow-up to this new planning orientation, the Government completed a study entitled 'Policy Development for MCTPC and Programs up to the Year 2000,' which has proposed transport investment priorities for the next five years and revised policies for MCTPC. 3. Road Transport. Road transportation is the major mode of internal communication, carrying more than 90% of freight ton-km and 85% of passenger-km. River transport is light, the Mekong and tributaries being considered not navigable by large vessels or barges: freight ton- km and passenger-km are both about 10%. There is no railway system in Lao P.D.R.. The country's road network, totaling some 14,800 km , comprises 4,800 km of national roads, about 5,500 km of provincial and district roads, and about 4,500 km of local roads. National roads are those of strategic importance for national economic development in supporting international and interprovincial trade, tourism, and national security; provincial and district roads are those of strategic importance for regional development in linking to the national road network within each province; and rural roads are those ensuring equitable access to markets and social services and development of natural resources. Most of the provincial and district road networks consist of tracks which are impassable during the rainy season. 4. National Road Network. About 9 of the national roads have adequate surface condition and about % are under construction. The remaining 50%, many of which were constructed more than 50 years ago, are inadequate or do not conform to acceptable design standards. They need to be reconstructed in order to bear the heavy commercial vehicles now in use. A large proportion of these roads are practically impassable during the five-month rainy season and so degraded that normal maintenance is no longer economic. 5. Road No. 13. The spine of the road system is national Route No. 13 (1,260 km), linking Pak Mong located in the North, about 150 km from the Chinese border, with Kong in the South, close to the Cambodian border, and passing through the major urbanized areas of Luang Prabang, Vientiane, Savannakhet and Pakse. It is by far the most important export-import road link of the country. This road facilitates transportation of agricultural products from surplus (southern) to deficit (northern) areas and provides easier access to natural resources, health services, education, employment and other amenities. Government's plan is to restore this important highway to all-weather standards by the end of the decade. The Association's first credit for highways, the Southern Transport Project (Credit 1846-LA), financed the rehabilitation of about 280 km of Road No.13 between Savannakhet and Pakse to gravel standard. The project was successfully completed and closed on December 31, 1994. This was followed by the Highway Improvement Project (Credit 2218-LA), which involves rehabilitation and upgrading of the Nmakading - Savannakhet section of Road 13 (270 km) to paved standards, and the Second Highway Improvement Project (Credit 2606-LA), which includes the upgrading of about 50 km of Road No.13 between Savannakhet and Pakse to paved standards, as well as providing assistance to road maintenance throughout the country. Since the rehabilitation, the traffic level on this road stretch has increased by -2 - % per annum and varies from 170 to 0 vehicles per day depending on the location (1994 survey). Heavy vehicles constitute 50% of this daily traffic, buses 20%, cars 16% and others 16%. 6. Organization and Management of Road Sector. The delivery and management of the road and river transport systems and improvement of traffic safety is the main responsibility of the Communications Department of MCTPC. This department is responsible for administration, planning, construction and maintenance of the national roads and for overseeing construction and maintenance of the provincial roads through the provincial Department of Communications, Transport, Post and Construction (DCTPC) in each province. Technical assistance and support to the provinces is provided by three regional organizations under the Road Administration Division (RAD). Government has undertaken a review and assessment of the organization and management structure of MCTPC. In the coming years, further changes are expected in the tasks and functions of the Communication Department and RAD. Responsibility for programming, budgeting and execution of road programs is expected to be delegated to the provinces under supervision of MCTPC. Project Objectives 7. The principle objectives of the project are: (a) reduced transport costs through reconstruction and upgrading of the southern leg of Route 13; (b) improved institutional capacity for management of road maintenance; and (c) improved efficiency and effectiveness of construction and maintenance activities through increased use of contracts based on competitive bidding procedures. Project Description 8. The project components are: (a) Road Improvement. Reconstruction of Route No.13 between Savannakhet and Pakse - about 230 km would be improved to a bituminous surface standard including rehabilitation of about 40 bridges; (b) Road Maintenance. Spot improvement of about 2,000 kms, periodic maintenance of 700 kms, and routine maintenance of about 2,600 kms; (c) Institutional Strengthening. This component would finance (i) technical assistance to the MCTPC's Road Administration Division (RAD) which has to manage an expanded road network on an annual basis. This would include measures to sustain RAD's capability to plan, budget, implement and supervise road maintenance works, enhance its use of bridge maintenance management system and introduce a basic pavement management system; (ii) technical assistance to the Transport Planning Unit (TPU) to further develop its capability in medium and long term transport planning; (iii) technical assistance to MCTPC for project implementation, coordination and supervision; (iv) consultant services for feasibility, design, engineering and local transport sector studies including development of long term strategy for dealing with institutional and financial issues (para. 18); and (v) training of engineering and management staff through fellowships, conferences, study tours and short term courses in-country and abroad. Project Cost and Financing 9. The total project cost is anticipated to be US$ 65 million of which -3 - IDA is expected to finance US$ 40 million and Government about $5.0 million. Co-financing may be available from the Nordic Development Fund (NDF) amounting to about $7.0 million. This would leave a financing gap of $13.0 million which may have to be provided through increased IDA funds. Project Implementation 10. The project will be implemented by MCTPC which is also the implementing agency for the two ongoing highway projects financed by IDA. In order to help MCTPC with this task, the Project Coordination Unit (PCU) and