Document of

The World Bank

FOR OmCAL USE ONLY

Report 1. 9858

PROJECT COMPLETION REPORT

LAO PEOPLE'S DEMOCRATIC REPUBLIC

THIRD AGRICULTURAL REHABILITATION AND DEVELOPMENT PROJECT(CREDIT 1021-LA)

AUGUST 26, 1991

Agriculture Operations DivisionCountry Department IIAsia Regional Office

'lrbis document has a restricted distribution and may be used by recipients only in the performance oftheir offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENT(Kip per US$)

Official PrivateYear Official Commercial Market Remittance

1980 (Appraisal) ±0 14 251981 10 14 601982 10 35 105 -1983 10 35 140 1081984 10 35 250 1081985 10 95 400 1891986 10 95 410 2701987 10 95 380 3801988 400 400 400 4001989 (Completion) 550 550 550 5501990 700 700 700 700

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

ADB - Asian Develooment BankARDP - Agricultural Rehabilitation and Development ProjectDCA - Development Credit AgreementERR - Economic Rate of ReturnM & E - Monitoring and EvaluationPCR - Project Completion ReportRNB - Regional Mission, BangkokSAR - Staff Appraisal ReportTA - Technical AssistanceUADP - Upland Agriculture Development ProjectUNCDF - United Nations Capital Development FundUNDP - United Nations Development Programme

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

Metric System

THE WORLD SANKWashmnton. D.C. 20433

U.S.A.

Ofte of Diu.ctew-G.,wai

August 26, 1991

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on LAO PEOPLE'S DEMOCRATICREPUBLIC - Third Agricultural Rehabilitation andDevelooment Proiect (Credit 1021-LA)

Attached, for information, is a copy of a report entitled"Project Completion Report on Lao People's Democratic Republic:Third Agricultural Rehabilitation and Development Project (Credit1021-LA)" prepared by the Asia Regional Office. The Audit Report ofthis project vas published by the Operations Evaluation Departmentin June i990, Report N°8884.

Attachment

This document has a restricted distribution and maY be used by recipients only in the performanceof their officW duties. Its contents may not otherwise be disclosed without World Bank authorization.

PROJRCT CMePLETION UEPORT olI OFFICAUL ti ONLY

LAO PEOPLE'S DEMOCRATIC REPUBLIC

THIRD AGRICULTURAL RMENBILITATIONAID DEVELOPMENT PROJECT

(Credit 1021-LA)

TAble of Contents

Paeit No.

PRoFACE .... i.......... ....... 1EVAUATON SWMMY .. .................................... .l

PART I

l. Project Iuentd ty . . . . . . . . . . . . . . . . . . . . . l2. Backgroud . . ................................................... * 3. Project Objectives and Description . . . . . . . . . . . . 24. Project Design and Organization . .. . . . . . . . . . . . 35. Project Implementation ... . . . . . . . . . . . . . . . 46. Project Results ... . . . . . . . . . . . . . . . . . . . 67. Project Sustainability .. .... ........... . 78. Bank Performance . . . ....... ... ......... . . * * 79. Borrower Performance .. . . .... ....... . . . . . . . 810. Project Relationship . . . . . . . . . . . . . . . . . . . 9ii. Consulting Services . . . .. .... . .. .. .. ........... . 912. Project Documentation and Data . . . . . . . . . . . . . . 9

PART II

1. Review by the Borrower .... . . . . ................ . 11

PART III

1. Related Bank Credits ................... 132. Projct Timtable ..................... 143. Credit Diabursements *9*999999999*....... 144. Project Implementation . . . . . . . . . . . . . . . . . . 155. Project Costs end Financing . . . . . . . . . . . . . . . . 17

A. Project Costs . . . . . . . . . . . . . . . . . . . . 17B. Project Financing is...... . . 18

6. Project Results . is .......... 1A. Directl Benef;................... 18B. cnaonic Impact . . . . . . . . . . . . . . . . . . . 18C. ineancils Impact ....... .......... e .* 0 0 0 e 19

This document has a restricted distribution and may be used by recipients only in the perfarmanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

7. Status of Major Covent ... . . . . . . . . . . . . . 208. Use of Bank Resourcos . . . . . . . . . . . . . . . . . . . 20

A. Staff Inputs . . . . . . . . . . . . . . . . . . . . 20B. missions . . . . . . . . . . . . . . . . . . . . . . 21C. Costs .................. .. . .. . 22

1. Re-evaluation of Economic and Financial Viability . . . . 23

JUiLLS

1. Economic Pri of Rico ..... . . . . . . .... 272. Incremental Benefits - Rice Millin.' Component . . . . . . 283. Economic Analysis of Rice Milling Component . . . . . . . 294. Form Budget - Coffee Development Component . . . . . . . 30S. Coffee - Economic Prices . . . . . .. . .. . . . . . . . 316. Economic Analysis - Coffee Development Component . . . . . 327. Combined Net Benefits and ERR of Rice Milling

and Coffee Development Components . . . . . . . . . . . 33

WSf IBRD 13979R214763R1 4764R

PROJECT COWPLETION REPORT

LAO PEOPLE'S DEMOCRATIC REPUBLIC

THIRD AGRICULTURAL REHABILITATIONAND DEVELOPMENT PROJECT

(Credit 1021-LA

Preface

This is the P'oject Completion Report (PCR) of the Third AgriculturalRehabilitation and Development Project (ARDP III) in Laos. for which Credit No.1021-LA in the amount of US$13.4 million was approved on May 15. 1980. Thecredit was closed on June 30. 1988. two years behind schedule. It was fullydisbursed and the last disbursment was made an April 3, 1989.

The PCR is based on a draft report by an FAO/World Bank CooperativeProgram mission that visited Laos In February L990. It incorporates informationobtained from the Staff Appraisal Report (2842-LA) dated April 18, 19801 theDevelopment Credit Agreement dated May 22. 1980; the Bank's Supervision Reportsand project files; field visits to selected project sites; discussion with theBorrower's project staffs and interviews with UNDP, FAO end World Bank staffassociated with the project.

The Asia Regional Office vishes to expreas its appreciation to theofficials of the Borrower for their valuable assistance to the PCR Mission.

- iii -

PROJECT COMPLETION REPORT

LAO PEOPLE'S DEHOCRATIC REPUBLIC

THIRD AGRICULTURAL REHABILITATIONAND DEVELOPMENT PROJECT

(Credit 1021-LA)

Evaluation Sumuarv

Objectives

1. The major objective of the project was to assist the Government in itsefforts to achieve self-sufficiency in food production and to increase foreignexchange earnings. This was to be achieved through rehabilitation andconst-"uction of rice milling facilities and provision of transport and storagein the three mijor rice producing provinces; construction of a coffee processingplant; and ti'pport to cooperatives through development of a pilot agriculturalextension service and provision of farm inputs to about 2.000 ha each in twoprovinces. The project also included development of three provincial workshopsand technical assistance to support the above activities, and a study of hydro-electric development and rural electrification in the southern provinces.

Implementation Exgerience

2. Actual project implementation took over eight years compared with theplanned five-year period. The Credit was closed on June 30. 1988. after twoyears' extension. This delay was due to late recruitment of technical advisers;unfamiliarity of implementing agencies with IDA procurement procedures; urclearGovernment intentions regarding coffee and cooperative farm componentsldifficulties in supervising the southern provinces, partly due to the unsattledsecurity situation which prevailed during the early 1980s; and the Government'sinadequate Implementing capacity and time-consuming decision-making processes(including a long procurement approval process). aggravated by the absence of acentral Implementing agency, which was a deficiency of project design.

3. The most significant variation between planned and actualimplementation was the revision of the coffee development component. The plan toestablish a coffee processing plant had to be cancelled since the Governmentinstalled the plant with East German aid. This component was reformulated intoa coffee replanting/rehabilitation and feeder road component and was implementedwith relative success. The rice mill, transport and storage, and workshopcomponents were implemented with some delay. The provision of farm inputs tocooperative farms was not possible until mid-1985 when the Government revised itspolicy of discouraging the use of chemical fertilizers. Thereafter, considerablefarm equipment was procured under the Credit but fertilizers and pesticides wereprocured from other sources; both equipment and inputs were disttibuted to

- iv -

cooperatives without an offective extension service and systematic monitoring andevaluation. The study of rtural electrification was successfully completed and,along with further studies, culminated in the Se-Set hydro-electric scheme inSaravane province. Technical assistance under the project was of variablequality. The cen;ral monitoring and evaluation unit envisaged at appraisal wasnot established. The IDA credit of US$13.4 million was fully disbursed.

Results

4. Overall, the project was unsatisfactory. However, the coffee componentwas successful. The project achieved much in establishing physical facilitiesbut has not achieved its real objectives, largely because of the problemsresulting from a drastic change, which could not have been anticipated atappraisal, in G,vernment policy in the latter half of the 1980s from the onebased on centralized planning and control of economic activities to adecentralized market-oriented economy. For instance, it was expected atappraisal that Government paddy procurement would lncrease from the then12 percent of total production to 35 percent over 4 years. But the deregulationof rice marketing in 1987 led to a marked decrease In the quantity of paddydelivered for milling by the Food Enterprise. which was expected at appraisal tobe the main user of the mills. Financing of paddy purchases has now become amajor problem for the mills because of their large size (2 to 4 tons/hr).extremely high bank interest rates (35 to 40 percent) and the banks' limitedresources. As a result, the capacity utilization of the mills is only 30 percentof that envisaged at appraisal. The workshops are incurring losses in the faceof competition from the private sector. The enterprises are also suffering dueto a lack of direction and uncertainty regarding the future ownership andmanagement structure. The input supply program for cooperative farms wasdiscontinued when the Government dropped its policy of according preferentialtreatment to cooperatives and state farms in 1988. The institutional impact ofthe project was partial, with some transfer of technology through the coffee,rice milling and workshop components.

5. Compared to the overall project economic rate of return (ERR) of32 percent at appraisal, the ERR at project completion is estimated at about8 percent, based on rice milling and coffee development components only, whichaccount for about 64 percent of project investments, and for which adequate datais available for the economic analysir Despite a 19 percent ERR for the coffeecomponent, the overall ERR is low because of a negative (-5 percent) ERR of therice milling component, which in turn is principally due to an extremely lowthroughput of rice mills discussed above. The drastic fall in international riceprices since appraisal is another reason for the unfavorable ERR of the ricemilling component. If the prices projected at appraisal had materialized, theERR of the component would be slightly over 10 percent and the overall projectwould have been economically viable.

Sustainabilitv

6. Overall, the project is only marginally sustainable (the coffeecomponent) under the prevailing circumstances. Support to the coffee industry

- v -

is being continued under the IDA-assisted Upland Agriculture Development Project(Cr. 2079-LA). If the project investments in rice milling facilities andworkshops are to be made fully productive, various privatization options.including sale, lease or joint venture with the private sector, need to bepursued. The Government has already embarked on a privatization program forstate-owned enterprises, assisted by IDA and other external donors.

Findings and Lessons Learned

- While changes in macro policies towards liberalization and marketorientation are potentially beneficial in the long term, the short-term impact on individual enterprises can be adverse in the absence ofplans for their survival in the adjustment phase (PCR, para. 2.3).

- Given the institutional problems as in Laos, the framework for projectmanagement and organization should be clearly defined (PCR, para.4.2).

- It is necessary to keep the project design simple, include componentswhich are related and mutually complementary, and adopt a morerealistic implementation schedule, taking due account of the capacityof implementing agencies (PCR, paras. 5.2 and 8.1).

- For implementing agencies inexperienced in Bank projects, necessarytraining must be given on aspects such as the Bank's procurement anddisbursement procedures, project accounting, and recording of physicalimplementation (PCR, para. 9.2).

- Given difficult country condi.ions as in Laos, intensive supervisiox,is 'Lecessary at all stages. Transfer of supervision responsibility tofield offices, ae was effectively done in this case in 1984, isbeneficial as it facilitates closer and more frequent contact with theimplementing agencies (PCR, para. 8.2).

- Investments are productive and sustainable in activities with whichthe farmers are fami1iar and for which capital is the main constraint(e.g. the revised coffee component) (PCR, para. 5.3).

- Althuugh the decentralization of responsibilities to the provincescreated considerable dislocation, it had its beneficial effects, suchas on the coffee component which benefitted from a strong commitmentby the Saravane prcvincial Department of Agriculture (PCI, para. 5.3).

- Given country conditions as in Laos, bulky investments, as were madein rice milling in particular, should be more carefully dcrutinized.Even with a changed pclitical and economic environment, it would havebeen easier, for example, to utilize more effectively many small ricemills instead of three large mills with the same total capacity (PCR,para. 6.3).

PROJECT COMPLETION REPORT

LAO PEOPLE'S DEMOCRATIC REPUBLIC

THIRD AGRICULTURAL REHABILITATIONAND DEVELOPMENT PROJECT

(Cgteit 1021-LA)

PART I

1. Prolect Identity

Project Name s Third Agricultural Rehabilitation L Development ProjectCredit No. s 1021-LARVP Unit s Asia RegionCountry I LaosSector s AgricultureSubsector s Agro-Industry

2. Background

2.1 At the time of appraisal (1979).]/ agriculture was the main focusof the Government's development policy, which sought to secure food self-sufficiency as quickly as possible. This vas largely a result of the disastrous1977 and 1978 rice harvests, in addition to the previous disruptions inagricultu6al development Irought about by the war. The Government's strategy forthe development of the abricultural sector included: (i) organization ofproduction activities on a cooperative basis; (ii) expansion of irrigated riceland; (iii) development of roads and agricultural support services; and (iv)provision of incentives for production.

2.2 The Third Agricultural Rehabilitation and Development Project (ARDPIII) followed the IDA-assisted First and Second Agricultural Rehabilitation andDevelopment Projects (ARDP I and ARDP II). These agricultural rehabilitationprojects were primarily to support the food self-sufficiency objective of theGovernment and formed an important part of the Government's development effort.ARDP I (Cr. 760-LA) implemented during 1978-86, supported irrigation developmentfor rice production and pig multiplication. ARDP II (Cr. 924-LA) during 1979-87supported development of improved rice seed and foodgrain production. ARDP III,the subject of this report, concentrated more on reducing post-harvest losses byproviding improved rice milling and coffee processing. It also carried theBank's activity outside Vientiane Province for the first time. Theserehabilitation projects, while they were still at various stages ofimplementation, were followed by the Agricultural Production Support Project(APSP, Cr. 1395-LA) in 1983. The APSP was to expand the irrigation developmentprogram implemented under the ARDP I and to support other agriculturaldevelopment programs in which Government was already involved.

1/ The project vae appralsed during an interim development plan period vhile the Government'sFirst Five-Year Plan for 1981-1985 was being formulated.

- 2 -

2.3 Implementation of all these projects was necessarily carried out alonglines consistent with the Government's policy of transforming the economy alongsocialist lines through centralization of planning and management of allsignificant economic activities. In 1985/86 (end period of the First Five-YearPlan), however, sweeping economic reforms began to tak- place. The Governmentintroduced the New System of Economic Management, which is aimed at creating amarket economy and dismantling centralized planning and controls. Keyinstitutional reforms included the decentralization of authority to givefinancial and managerial autonomy to parastatals and provincial agencies, andelimination of central agencies' production responsibilities. Subsequently, thecollectivization of farm holdings was abandoned in 1988. Although these reformsare expected to promote efficient growth of the Lao PDR economy in the long run,they have generated considerable uncertainty and their short-term impact on theenterprises supported or created under the above projects has been adversie in theabsence of a plan for their survival in the transition phase. The adverse impacthas been principally on the financial side as these enterprises are no longersupported by the Government budget and are also unable or unwilling to borrow fortheir working capital requirements from the emerging comnercial banking systemdue to the extremely high bank interest rates (35 to 40 percent) and the bankshaving limited resources. Managerial problems and a lack of direction have alsoemerged as the supervision and control of these enterprises by the Government hasweakened, technical assistance has been discontinued after completion of theprojects named above, and the future ownership and management structure remainuncertain. Competition from the private sector (private rice mills and workshopsin the context of ARDP III) is another unforeseen phenomenon which the state-owned enterprises are having difficulty facing.

3. Project Oblectives and Description

3.1 The major objective of the project was to assist the Government in itsefforts to achieve self-sufficiency in food production (mainly rice) and toincrease foreign exchange earnings. Specifically, the project was to provide for:

(a) rehabilitation of 8 small/medium rice mills; construction of 2 ricemills (2 and 4 tons/hr capacity); additional facilities for a 3 ton/hrrice mill to be constructed under a UNCDF project; electric powersupply to 8 and spare parts to 63 existing small/medium rice mills;transport and storage facilities; and training in the three majur riceproducing provinces of Vientiane, Savannakhet and Champassak;

(b) construction of a coffee mill (3 tons/hr capacity), including storageand transport facilities in Champassak province and training;

(c) rehabilitation and construction of three provincial workshops andtraining for improved maintenance of vehicles and agricultural andheavy equipment;

(d) cooperative farm development in Savannakhet and Champassak provincesthrough development of a pilot agricultural extension service andprovision of farm inputs to about 2,000 ha in each province;

- 3 -

(e) technical assistance (232 man-months), to be funded by UNDP, includingrice milling engineer and technicians, rice agronomist, coffeeprocessing specialist, mechanics, and short-term consultant services;and

(f) a study to prepare a program of hydro-olectric development and ruralelectrification in the southern provinces.

3.2 The project, phased over a five-year period, was estimated to costUS$18.8 million. An IDA Credit of US$13.4 million was negotiated in March 1980.The Credit Agreement was s..gned in May 1980 and became effective on September 30,1980.

4. Proiect Design and Organization

4.1 Following an IDA economic mission in 1978, which identified a possibleagro-industry project for IDA financing, Government requested IDA assistance toprepare a project dealing with rice milling and the coffee processing industryas ARDP III. In 1979, the IDA project preparation mission laid the conceptualfoundation for the project, which was in general shared and understood by bothIDA and the Government. The design of the engineering aspects of the project isgeneral"- considered satisfactory. However, the institutional arrangements forproject implementation and also for the operation and management aspects of ricemills. workshops and the coffee mill to be established under the project, appearto have been inadequate.

4.2 The proposed project was to be the first IDA-assisted agro-industryproject and also the first project covering two southern provinces in additionto Vientiane province. There was, therefore, some element of risk in projectimplementation involving several ministries inexperienced in IDA projects. Infact, the project preparation mission pointed out the need to establish a singlelead agency responsible for implementation of all project components, which wereunder the responsibility of several ministries, including the Ministry ofIndustry and Commerce for the agro-industrial component and the ruralelectrification study, the Ministry of Public Works for the workshopa and cargoboats, and the Ministry of Agriculture for cooperative farm development.However, the staff appraisal report (SAR) failed to define clearly the location,powers and staff of the central lead agency which would be responsible forday-to-day manageme.t of the project. The SAR provided for a projectcoordinating committee chaired by the Vice Minister of the Ministry of Industryand Commerce, the lead ministry, but omitted to create a central operating unitwith appropriate authority to channel the funds to provincial agencies and togroup all procurement requirements. In retrospect, it is evident that thisabsence of a central project management unit greatly affected project imple-mentation and resulted in a considerable workload for the Bank's supervisionmissions, which assumed many of the functions which should have been performedby a central project management unit.

-4-

5. Prosect Implementation

5.1 The Credit was closed on June 30, 1988, after two years' extension.The project suffered delays due to late recruitment of technical advisers,unfamiliarity of the Ministry of Industry and Commerce with IDA procurementprocedures, difficulties in supervising the southern provinces, inadequateimplementation capacity of official agencies, and the need to redesign the coffeecomponent. By June 1986, the original credit closing date, only 28 percent ofthe Credit had been disbursed. The project was put on the problem project listby the September 1984 supervision mission. The rating improved by September1985. Significant variances between planned and actual project implementation,which are discussed in some detail below, occurred with respect to: (i) theimplementation period; (ii) coffee development component; (iii) cooperative farmdevelopment component; and (iv) monitoring and evaluation. In addition, twosilos, not envisaged at appraisal, were installed in 1989 at Savannakhet andPakse rice mills to improve the productivity of the mills as manual handling ofbags (not appropriate for high capacity modern mills) slowed down output.2/A ferry for Pakse was also added to the rice barge component in 1988 tofacilitate goods and passenger transport across the Mekong river.

5.2 implementation Period. Compared with the planned five-year period,the actual implementation took almost eight years. Implementation of the ricemill and workshop components, though slower than expected due to delays inprocurement of equipment, proceeded relatively well. However, almost nothinghappened to the coffee and cooperative farm components up to mid-1985, theplanned completion date (see paras. 5.3 and 5.4). The reasons for the delay arewell described in the September 1984 supervision report: "This project is facingserious implementation delays. In addition to the problems mentioned (i.eunclear intentions regarding coffee and cooperative farm components, longintervals between supervision missions and the inaccessibility of some projectsites for supervision partly due to security reasons), unclear projectresponsibility, the weakness of implementing agencies, the variable quality oftechnical assistance and the generally very difficult operational conditions inthe country have been major constraints."

5.3 The coffee grocessina component was in jeopardy in early 1983 as EastGerman aid provided the coffee processing plant.V/ Consequently, FAO/CP Wasasked to assist Government to reformulate this component as a "Coffee DevelopmentSubproject" including coffee replanting and rehabilitation, and feeder roadimprovement for coffee marketing. The scope was also extended to include theSaravane province, which had previously not received IDA assistance. In June1985, the Government submitted a formal request to IDA for the substitution of

2/ As of late 1990, these ailos were still not in operation due to mechanical defects and wereawaiting commissioning. The Hungarian company, which had installed the silos, had agreedto visit the site by early 1991 and try to rectify the defects.

3/ The background to this is not clearly recorded in the project files. The appraisal missionwas aware of East Germany's interest but was informed by the Government that this would notmaterialize.

the coffee processing component by the reformulated component. IDA concurred withthe substitution and amended the Development Credit Agreement (DCA) accordinglyin November 1985. The revised component started in 1986 and was completed in1989. The coffee development component exceeded the target with regard to newplanting area (accual 2,947 ha compared to the reformulation target of 700 ha).However, the rehabilitation target (300 ha) was not achieved (actual 5 ha) dueto farmers' unfamiliarity with the new stumping technique introduced under theproject. This technique is only now being adopted by farmers. The relativesuccess of the coffee component is due to a strong Government commitment to therevitalization of the coffee industry, careful project preparation focusing onthe real needs of coffee growers and attractive producer prices which increasedsteadily from 80 Rip/kg in 1986 to 380 Rip/kg in 1989. The access roadsconstructed for coffee marketing also allowed for a larger number of farmersplanting coffee than expected. It is interesting to note that while thedecentralization of responsibilities to the provinces (para. 2.3) createdconsiderable dislocation, the coffee component of this project benefited from theprocess due to a strong commitment by the Department of Agriculture of Saravaneprovince.

5.4 The cooperative farm development component experienced a long delay.For the first five years of the project, this component did not make any progressfor the following reasons: (i) most of the inputs which were to be provided forcooperative farms became available to the Government through grants from othersources; and (ii) the Government promoted the use of organic fertilizers ratherthan chemical fertilizers. In mid-1985, following revision of its fertilizerpolicy, the Government requested IDA for procurement of chemical fertilizers andother inputs under the Credit. A bid was invited in 1987 but was cancelled bythe Government after evaluation had been completed due to disagreement within theGovernment on the evaluation procedure adopted. Inputs used under the projectwere procured from other sources. However, considerable farm equipment wasprocured under the Credit.

5.5 Adequate data is not available regarding the hectarage covered by thecooperatives benefitting from the component. In any case, the input supplyprogram did not continue as the Government abandoned its policy of accordingpreferential treatment to cooperatives and state farms in 1988. In retrospect,it is questionable whether the Bank should have proceeded with this componentsince effective agricultural support services were lacking and no M&E system wasin place (see para. 5.6).

5.6 Monitoring and evaluation (M & E) of project implementation was to beconducted by an M & E unit to be established not later than October 31, 1980,comprising staff of the three ministries involved. In actual practice, this wasnot done and each agency did its own monitoring, following its own procedures andrequirements. As a result, systematic records on project progress are notavailable and no evaluation has been undertaken by the project implementingagencies, other than the technical reports produced by TA experts which wereconfined to their terms of reference. The IDA appraisal mission appeared to havebeen unduly optimistic regarding the Government's capacity to undertake H & E andthe SAR failed to specify the scope and objectives of M & E.

6. Proiect Result6

6.1 Overall, the project was unsatisfactory. However, the coffeecomponent was successful. The project achieved much in establishing the physicalfacilities: the rice mills, other than the two silos which have not yet beencommissioned, are in good working order; the quality of construction of thebuildings for rice mills is satisfactory; and the access roads for the coffeecomponent have been satisfactorily constructed and adequately maintained.However, the project has not achieved its real objectives, largely because of thedrastic changes in the political and economic environment (see para. 2.3). Thesechanges have been the main reason for a gross underutilization of the rice mills(para. 6.3 below) and the workshops, except for the Savannakhet workshop. Eventhe Savannakhet workshop, which is fortunate in having a very good management,and has a brisk business, is profitable only because of a diversified operationwhereby the profits from goods and passenger transport services (undertaken byanother enterprise, which was unrelated to the project but was combined with theSavannakhet workshop in the late 1980s) offset the losses from the repairbusiness. The institutional impact of the project was partial, with sometransfer of technology through the coffee, rice milling and workshop components.

6.2 A formal economic reassessment was undertaken only for the two largestcomponents (rice milling and coffee development) accounting for 64 percent of thetotal investment. Rice t"illing alone accounts for 52 percent of the totalinvestment. The economic rate of return (ERR) for these two components combinedis estimated at about 8 percent at project completion compared to the overallproject ERR of 32 percent estimated at appraisal. The difference betweenappraisal and completion results is principally explained by the failure of therice milling component. which has a negative (-5 percent) ERR, compared to theappraisal estimate of 25 percent. The economic and financial re-evaluation isgiven in detail in Annex 1. Re-evaluation of the workshops and cooperative farmscomponents was not undertaken due to lack of adequate data. However, availabledata show that inclusion of these two components will not improve the overallERR.

6.3 Of the two re-evaluated components, the ERR of 19 percent of thecoffee development component is slightly lower than the estimated ERR at the timeof reformulation (22 percent), due to a drastic fall in world coffee prices anda negligible impact from rehabilitation (though partly offset by the increasedarea of new planting). The ERR of the rice milling component is negative,principally due to low throughput of the rice mills (capacity utilization in 1990was less than 30 percent of that envisaged at appraisal). This in turn wasmainly due to the change in Government policy (para. 2.3). which led to thederegulation of rice marketing in 1987 and consequently a marked decrease in thequantity of paddy delivered for milling by the Food Enterprise.g/ Financingof paddy purchases has now become a major problem for the mills, particularlybecause of their large size (2 to 4 tons/hr). Given the country'r technical,

4/ In contrast, it was expected at appraisal that Government paddy procurement would increasefrom the then 12 percent of total production to 35 percent over 4 years.

financial. manpower and managerial situation, smaller mills would have been amore economic investment. The drastic fall in international rice price, sinceappraisal is another reason for the unfavorable ERR of the rice milling componentat completion. If the prices projected at appraisal had materialized, the ERRof the component would be slightly over 10 percent and the overall project wouldhave been economically viable.

7. Proiect Sustainabilitv

7.1 Under the prevailing circumstances, the project is only marginallysustainable (the coffee component). Support to the coffee industry is beingcontinued under the IDA-assisted Upland Agriculture Development Project(Cr. 2079-LA). If the project investments in rice mills and workshops are to bemade fully productive, various privatization options for these enterprises needto be pursued, including sale, lease or joint venture with the private sector.The Government has already embarked on a privatization program and is expectedto accord a high priority for privatization to enterprises created or supportedunder this and other IDA-assisted projects, since these are among the biggestagro-industrial enterprises in Laos. External donors, including IDA, areassisting the privatization program.

8. Bank Performance

8.1 The performance of the Bank in project identification throughappraisal was generally satisfactory with the notable exception of a failure totake due account in project design of the Government's weak implementingcapacity. Apart from lack of design simplicity, the components (rice milling,coffee, workshops, study of rural electrification) were not related and mutuallycomplementary. Both the proposed arrangements for project organization andmanagement and the implementation program were based on optimistic assumptions,which ignored the collective experience of other IDA projects in Laos. The lackof a central project agency at the operational level seemed to be a particularveakness.

8.2 The Bank supervision staff thus faced many difficulties.j/ When thesupervision responsibility was transferred to the Bangkok Regional Mission (RNB)in 1984 and the frequency increased to seven visits a year by 1986, considerableprogress was made in project implementation, which was also aided by an indepthreview in mid-1985 of all IDA-assisted agricultural projects in Laos.Supervision frequency declined to two missions a year after mid-1987, withunfavorable consequences for project implementation, when the responsibility ofsupervision was shifted from RMB to Washington as a result of the Bank'sreorganization. Given the circumstances, the Rank staff performed well,concentrating on procurement and getting all equipment in place before creditclosing. However, from a base in Bangkok and later Washington, they were unable

$/ The Bank supervision missions usually covered three to four projects (ARDP I, II and II1,and APSP), and these projects contained more than 15 discrete components spread over fiveprovince.

to overcome the day-to-day implementation problems. Frequent supervision cannotfully compensate for inadequate project management (see also paras. 4.2 and 5.2).

8.3 From the Bank's point of view, the lessons which can be learned arethe following:

(a) the need to define project management arrangements clearly, whenproject implementation involves several ministries and provincesinexperienced in Bank projects;

(b) the need for intensive supervision at all stages, when countryconditions are as difficult as in Laos, and the beneficial effects oftransferring supervision responsibility to field offices;

(c) the need to provide necessary training to implementing agenciesinexperienced in Bank projects, on aspects such as Bankprocurement/disbursement and accounting/recording of physicalimplementation; and

(d) the importance of keeping project design simple, including componentswhich are related, and adopting a realistic implementation schedule,consistent with the implementation capacity of the borrower.

9. Borrower Performance

9.1 The performance of the borrower prior to implementation is not well -documented in the files. Apparently, there were no major problems duringpreparation. The limited record in the files indicates that the preparationreport was produced by the Bank with very little input from the Government andthe negotiations encountered no major disagreement from the Government.

9.2 There was scope for improvement in the borrower's performance duringproject implementation. Supervision missions repeatedly pointed to weaknessesin Government management and to inadequate coordination among ministries andprovincial implementing agencies. The main problems affecting implementationwere: (i) lack of Government action on approving procurement lists, largelybecause of unclear policies; (ii) time-consuming decision-making processes; and(iii) frequent changes in responsibilities of the project implementing agencies.Besides the borrower's weak implementing capacity, the lack of clarity indefining the project management organization in the SAR aggravated the situation.To help implementation, the project incorporated technical assistance, which,however, was not very satisfactory (para. 11.1).

9.3 The main lessons (apart from those in para. 8.3) that the Governmentcan draw from its experience with the project include:

(a) the need to be cautious in agreeing to the range of components andtheir scale at the time of project formulation, and in particular, tokeep them within the implementation capacity of the Government;

(b) the need for a country with conditions as in Laos. to scrutinize bulkyinvestments, as were made in rice milling in particular, morecarefully. Even with a changed political and economic environment,it would have been easier, for example, to utilize more effectivelysmall (1 ton/hr) rice mills instead of the three large mills with the*ame total capacity;

(c) the wisdom of investing in an activity with which the farmers arefamiliar and for the development of which capital is the mainconstraint (e.g. reformulated coffee development component);

(d) the beneficial effects of decentralization on the coffee component(para. 5.3); and

(e) the need to study the impact of major policy changes at the macrolevel on the operation of individual enterprises and to formulateplans for their survival in the adjustment phase (para. 2.3).

10. Proiect Relationshin

10.1 The Bank-borrower relationship was generally satisfactory. Thefrequent visits by the RMB staff (para. 8.2) particularly facilitated betterunderstanding and closer coordination. Relationship of the Bank and the borrowerwith other relevant agencies including UNDP and FAO were also generallysatisfactory.

11. Consulting Services

11.1 There were problems in recruiting TA experts of the appropriatecalibre. The recruitment difficulties arose mainly because many top specialistswere reluctant to work in Laos. Government policy of approving only nationalsof "friendly" countries also resulted in some low quality candidates beingretained, though this policy has now been changed. The TA provided f c theoriginal coffee processing component, though the component was cancellei, wassuccessful in contributing to its reformulation into a coffeeplanting/rehabilitation and road improvement subproject. The experts recruitedunder the TA component worked in an advisory rather than an executive role andthis sometimes limited their effectiveness.

11.2 The rural electrification study was completed satisfactorily byconsultants in 1983 and led to further studies which culminated in the So-Sethydro-electric scheme in Saravane Province, for which work commenced in 1988 andis expected to be completed in 1991.

12. Project Documentation and Data

12.1 The SAR was sufficiently detailed in engineering aspects. The designof the institutional framework was, however, inadequate for projectimplementation (paras. 4 1 and 4.2). Some of the project conditions were not

- 10 -

realistic for the borrower to fulfil, particularly those relating to projectaccounting and auditing. because of a very low institutional capacity.

12.2 The supervision reports and the relevant project documents availableat the Bank contained generally adequate information for preparation of the PCR.However, some data such as actual costs of components and key indicators requiredto complete Part IIi tables, particularly those relating to financial andeconomic analysis, were not properly and consistently recorded in the supervisionreports and were also not available in the field. Development of adequateproject data bases requires special emphasis in the ongoing and futureagricultural projects in Laos.

- 11 -

PART II

Parts I and III were submitted to the Governmet. No coments havebeen received.

- 13 -

PART III

1. Related Bank Credits

Year ofCredit Title Purpose Approval Status Coments

1. The First To assist Dec. 1977 Closed PCR issuedAgri. Rehabi- Goverment's September may 1988.litation & effort to achieve 1985Development self-sufficiencyProject (Cr. in food760-LA). production /a

2. The Second Same as above lb June 1979 Closed PCR issuedAgri. Rehabi- Decew%er October 1989litation & 1986DevelopmentProject (Cr.924-LA)

3. Agricultural Same as above /c June 1983 Closed PCR underProduction December preparationSupport 1989Project (Cr.1395-LA)

' Cr. 760-LA supported small-scale irrigation development, pig multiplication. and riceintensification.

/b Cr. 924-LA supported improved rice seed and foodgrain production.

/c Cr. 1395-LA supported mainly small-scale irrigation development. farm inputs provision,animal feed processing, sugar production and processing, varehousing and feeder roadImprovement.

- 14 -

2. Protlect Timetable

Date Date DateItem Planned Revised Actual

Identification na. na. NoW. 1978Preparation n.a. na. Apr. 1979Appraisal Sept./Oct. 1979 n.a. Oct. 1979wegotiatious March 1980 - March 1980board Approval June 1980 May 20, 1980 May 15, 1980Credit Signature na. n.a. May 22, 1980Credit Effectiven es Aug. 20, 1980 Sept. 10, 1980 Sept. 30, 1980Credit Closing June 30, 1986 June 30, 1988 June 30, 1988Credit Completion - - Apr. 13, 1989

Comments

Major issues raised at the identification, preparation and appraisal stages are as follows:

(a) Identification

Identification mission's BTO dated December 12, 1978 does not refer to any project relatedissues.

(b) Preparation

- How to secure an adequate supply of paddy for the proposed govern nt-controlled ricemLlls In view of the low official paddy price.

- Unsuitable location of Pakae coffee miul to be rehabilitated due to high humidity in thearea.

- geed for a single lead agency responsible for Implementation of all project components.

Cc) Aporaisal (Issues Paper)

- Capitalisation of recurrent foreign exchange cost over the Initial five years.

- Effect of goverment paddy pricing and procurement policy on the financial and economicvlability of rice mills rehabilitated or created under the project.

3. Credit Disbursements

Cumulative Estimated and Actual Disburements

FY81 FY82 FY83 FY84 FY85 FY86 PY87 FY88 FY89(USmillion)

Appraisal Estimate 0.8 7.3 9.6 11.2 12.8 13.4 13.4 13.4 13.4

Actual - 0.4 2.3 3.0 3.1 3.7 7.4 8.6 13.4

Actual as 2 of Estlmte - 5 24 27 24 28 55 64 100

Date of Final Disbursements April 13. 1989

- 15 -

4. Prolect Iunle entation

AppraisalKey Indicator. Unit Eetin te Actual

A. Rice Milliun Comionent La

Nov Hills No. 3 3Rehabilitated Hills No. 8 4

lll Electrification No. 8 2Collecting Storea (Paddy) Tons 18,500 20,500Operational Stores - shead (Paddy Tous 6,800 5.250

- silos & rice) Tons 0 5,000Security Stores (Paddy) Tons iS, 11.900

Total 40,300 42,650

Transport - truck. No. 34 59- rice barges No. 26 24 + 1 ferry lb

Training - local m/m 225 m 138- overseas m/m 30 see item F

T.A. - Rice milling engineer m/M 32 48- Rice mill technician m/m 62 86

B. Coffee Develoomant (revised component) /c

Nurseries Ha 2 2Coffee - rehabilitation Ha 300 5

- new planting Ha 700 2,947Transport Truck 3 5Training - local n/M 108 n.a.

- overseas m/m 24 see item FRoad Conattuciton Equipment US$ 162,000 146.300 /dRoad Upgrading & Nev Construction Km 68 60.5 laConstruction of Bush Tracks Km 30 0T.A. - Coffee technical advisor m/m 30 30

C. Workshon Develooment lf

Neo Workshop No. 1 1Rehabilitated Workshops No. 2 2Local Trainng m/m 360 >'125T.A. - Mechanical engineer m/m 28 27

- 16 -

Apprais2lKey Indicators Unit Estimate Actual

D. Coop. farm Develonment

Savannakbht Provinces- vet season paddy Ha 7,500 ) n.a. L8- dry season paddy Ha 2,500 )Chmpassak Provinces- vat season paddy Ha 4.700 ) nU. La- dry season paddy Ha 55 )

E. Rural Electrification Study /h US$ 400,000 438.000 /i

F. Overseas Trainint US$ 100.000 92.000 /LI

/a Sources: Data compiled for the PCR mission by rice milling expert and data obtained by themission on site.

i At Government's request Bank agreed in 1988 to finance a cross-river ferry at Pakse, notincluded at appraisal.

ic Sources: FAO/World Bank Coop. Program Preparation Report of 08/02/84 on Coffee Developmentsub-project and data obtained from site visit. Actual area planted includes 1.200 ha plantedin 1989.

Ld ALl items procured (6-No).

/e 15 km of original target already constructed under ADB finance for Se-Set hydro-electricscheme.

if Sources: site visits and UNDP records.

LZ See paras. 5.4 and 5.5 of Part I.

ih See Section 6. Project Results.

/i. Bank disbursement records.

- 17 -

S. Prolect Coste and Financint

A. Proiect Costs

Item Ahipralsal Estlmate /s ActualLocal Foreign Total Local Lk Foreign IS Total

---- (USS million)

Ricta Milling Component 4.67 5.87 10.54 1.00 6.05 7.05

Coffee Den. 0.81 1.76 2.57 0.40 1.89 2.29

Workshop 0.25 1.54 1.79 0.10 1.67 1.97

Cooperative Farms 0.04 2.03 2.07 0.02 2.37 2.39

Technical Assistance 0 1.42 1.42 0 2.39 2.39

Rural Elec. Study !d 0 0.40 0.40 0 0.53 0.53

Total 5.77 13.02 18 .79 1.52 15. 10 1662

A As per SiR (Annex 2, Table 1), including both physical and price contingencies. The localcost figures for appraisal should be interpreted with caution as they are based on theofficial exchange rate of Ylp 10 - US$1.

e Estimates are highly tentative since consistent Government data are not available.

tL Goverment records of foreign spending supplied to the PCB mission.

id An amount of US$100,000 for overseas training was added to this category In Schedule 1 of theDC&. See items E and F of Project Implementation for actual breakdown.

S. Pro1ect WfnsncinE

Sourcc Planned Excected Final(USS million) (US$ million)

IDA !3,40 13.40UNDP 1.42 2.39Domestic 3.97 0.83 /a

Total 18 79 1662

/ This figure derives from estimates of local costs (see footnote /b of Project Costs tableabove).

6. Ptolect Results

A. Direct Benefits

Full DevelovmentAppraisal PCR La

Indicators Estimate Estimate

1. Rlice Milling Components- Beneficiaries 80.000 farmers cannot be aacertained- Ineremental rice output 5.600 ton/year 2,440 ton/year

2. Revised Coffee Development Components- Beneficiaries 2,000 farmers approx. 3,000 farmers- Incremnatal output 713 ton/year 2,360 ton/year

3. Cooperative Farm Development:- Beneficiaries 2.400 farmers cannot be ascertained- Incremental paddy output 4,000 tons cannot be ascertained

4. Direct Employment from the 800 full-time cannot be ascertainedProject jobs

la See Annex 1 for details.

B. Economic Impact

Appraisal PCR LaEconomic Rate of Return Estimate Estimate

1. Rice Milling Component 25 Negative (-5)2. Revised Coffee Development Component 22 b 193. Workshop Component 31 cannot be ascertained4. Coop. Farm Development Component 54 cannot be ascertained

/a See Annex 1./b At reformulation in 1984.

- 19 -

C. Flnancial IMDaCt

Full DveloamentAppraisal PCR La

Impact an Pam r u te letQte Estimto

1. Rice Mlling Component 312 to 382 tb cannot be ascertained

2. Cooperative Farm Component 352 to 45! La cannot be ascertained

3. Revised Coffee Dev. Component 1168 per 11,540 perfamily labor day family labor day

La See Annex 1.

la Frm Income gSain (2) when moving from hand-pounding/huller mill. to new or rehablitatedmills.

{ nlcreaoe due to project.

D. Studies

Purpose as Definedat Appraisal Status Impact

To Identify learn cost mothods Commenced 1981 Excellent (seefor development of electricity Completed 1983 Section 11 -supply for articulture and rural Consulting Serviceaneeds. To ewplor, fasibility of of Part 1)wbaeling' am Mgu power through

Tball- nd trandmission networkto Senth Leo.

- 20 -

7. Status of Covenants

Deadline forSection No. Covenant Compliance Status

3.01 Provision of local funds for - Compliancepurchase

3.02(a) Establishment of a Project - ComplianceExecutive Committee in eachprovince

3.02(b) Establishment of a Project - ComplianceCoordinating Committee inthe Ministry of Industry andCommerce

3.03(a) Employment of experts in - Partial Compliancespecialized fields

3.04 Provision of annual work 31 Oct. each year Partial Complianceprogram to IDA

3.06(b) Maintenance of records for - Partial Compliancemonitoring of project andprovisLon of information onproject progress

3.06(c) Prepare a Project Completion Not later than 6 Not complied withReport months after

closing date

4.02 Auditing by State Auditors Annually Not complied with

4.05 Review of farmgate prices Annually Partial compliancefor major crops to maintain (Review on an adfarmers' incentives and hoc basis)appropriate rice millingcharges

8. Use of Bank Resources

A. Staff Inputs

Stage of Project Cycle rlanned Revised Final------ (man-veeks)--- -

Preappralsal /a n.a n.a. 25.0Appraisal n.a. n.a. 32.9Negotiations n.a. n.a. 5.1Supervision n.a. n.a. 104.1PCR n.a. n.a. 18.3

Total n.a. na. 185.4

la Including Identification and preparation.

- 21 -

B. Missions

Stage of Month/ No. of Days in Specialization P vformance Type ofProject Cycle Year Persons Field /a Represented Lb Status /c Problem Ld

Identification Nov.78 4 10 AG. AG, EC, ENG -Preparation Apr.79 2 20 AG, ENG. RH, CPR -Appraisal Oct.79 4 20 AG, ENG, EC, RM -Supervision I Dec.80 4 3 AG. ENG, ACT, AG I MSupervision 2 May 81 4 4 AG, ENG. EC. AG 2 H. TSupervision 3 Nov.81 2 2 AG. AG, EC, ACT 2 M, TSupervision 4 May 82 1 2 AG 2 M, TInterim Supervn. Aug.82 2 1 AG, AG n.S. n.e.Supervision 5 June 83 3 2 AG. EC. EQ 2 M, TInterim Supervn. Nov.83 2 2 AG. EC n.e. n.a.Supervision 6 Feb.84 6 6 AG. AG, EC, ENG,

EQ, AG 2 M. F. TInterim Supervn. May 84 2 3 AG, EC n.s. n.a.Supervision 7 Sept.84 4 3 AG. EC. AEC, AG 3 M, T, PInterim Supervn. Dec.84 1 2 AG n.a. n.a.Supervision 8 Feb.85 4 4 AG,AEC, PRQ. ENG 3 M. T, PInterim Supervn. June 85 2 3 AG. PRQ n.a. n.a.Supervision 9 Sep.85 3 6 AG. AEC. ENG 2 n.a.Interim Supervu. Nov.85 1 1 AG n.s. n.a.Interim Supervn. Jan.86 1 3 AG n.a. n.a.Interim Supervn. Mar.06 1 3 AG n..a. n.a.Supervision 10 Apr.86 3 6 AG, AEC. ENG 2 n.a.Interim Supervn. June 86 1 2 AG n.a. n.a.Interim Supervn. Sept.86 1 2 AG n.s. n.a.Supervision 11 Oct.86 2 5 AG. ENG 2 n.a.Interim Supervn. Dec.86 1 3 AG n.a. n.a.Supervision 12 Mar.87 3 7 AG. EC. ENG 2 n.a.Interim Supervn. Apr.87 1 3 AG n.s. n.a.Supervision 13 Sep.87 2 8 AG. ENG 2 n.a.Interim Supervn. De-.87 2 7 AG, EKG n.a. n.a.Supervision 14 Apr.88 2 7 AG, ENG 2 n.a.Completion Feb.90 3 11 AG, EC, ENG -

/a Estimated by PCR mission based ou records available in the Bank's project files. Allmissions including identification, preparation, appraisal and supervision were under tAkentogether with supervision of other ongoing IDA-assisted projects. No. of days in field foreach individual mission after Feb. 85 mission were not recorded because of change inreporting format.

lb Specialization: AG - Agriculturist; EC - Economist; ENG - Engineer;RM - Rice Mill Specialist; CPR - Coffee Processing Specialist;ACT - Accounting Specialist; EQ - Equipment Specialist;AEC - Agric. Economist; PRQ - Procurement Engineer.

/c Performance Rating: 1 - Problem-free or minor problems; 2 - Moderate problems;3 a Major problems.

Ad Types of Problems: F - Yinancial; M - Managerial; P - Political;T - Technical; 0 - Other.

After February 1985 supervision, types of problems according to the aboveclassification were not recorded in supervision reports because of change in reporting format.However, managerial and political problems were almost always reported until the last supervisionmission.

- 22 -

C. Colt

No data available on cost of staff Inputs broken down by each stage of the projectcycle.

- 23 -

Page 1 of 4

PROJECT COMPLETION REPORT

LAO PEOPLE'S DEMOCRATIC REPUBLIC

THIRD AGRICULTURAL REHABILITATIONAND DEVELOPMENT PROJECT

(Credit 1021-LA)

Re-evaluation of Economic and Financial Viability

A. Introduction

1. The formal re-evaluation of the project has been conducted on thebasis of the results of only two components, namely: rice milling and coffeedevelopment. They together account for 64 percent of the total investment. Ofthis, rice milling alone accounts for 52 percent. Because of the relatively largesize of these two components, an assessment of the results of the whole projectis possible. The combined ERR of the two components is about 8 percent (Table 7),because of the success of the coffee development component which has an ERR of19 percent. Thus, despite the success of coffee development, the project as awhole is a failure due to a negative ERR of rice milling. The data from othercomponents, although inadequate for a formal analysis, are enough to indicatetheir low profitability. Thus, their results would not change the aboveconclusions.

2. Because of incomplete data, a formal assessment of the viability ofthe workshop component has not been attempted. Similarly, the results of thecooperative farms component have not been assessed due to lack of adequate data.In any case, because of farmers' resistance and the Government's policy toincrease the role of the private sector, the Government dropped its policy ofaccording preferential treatment to cooperatives and state farms in 1988. Themain report treats the status of this component more fully (see paras 5.4 and 5.5of Part I).

B. Economic Analysis of the Rice Hillinx Component

3. Costs. Though foreign exchange costs of investment are readilyavailable, local costs had to be estimated on the basis of data supplied by theGovernment. The cost of the building and the milling equipment of Pakse millfinanced under the UNCDF has been included in the analysis (foreign exchange costis US$874,000). Also included are costs of Savannakhet and Pakse silos (foreignexchange cost US$787,000), even though they had not been included at appraisaland were not operating by end-1990, and costs of technical assistance (rice millengineer and technicians) of about US$497,000. The only cost that has been

- 24 -

Page 2 of 4

excluded is that of Pakse ferry boat, since it is generating benefits in additionto paddy transport which cannot be quantified. Conversion factors were used toconvert local costs into US dollars and all costs were converted to 1989 constantterms using the MUV index.

4. The cost of replacements has been assumed at 10 percent of investmentevery five years. The operation and maintenance expenses of the mills,buildings, trtucks and boat. have been estimated from the annual accounts of Pakseand Savannakhet rice mills.

5. Benefits. Benefits from the rehabilitation of diesel mills have beenexcluded, since no estimates are available. Similarly, the benefits from privatemills to be supplied with spares have been excluded as this part of the componentwas not implemented. The implementation schedules and the annual throughputfigures are given in Table 2. The increase in rice output due to the higher riceyield of the new mills is taken, as in the SAR, to be 14.5 percent of throughput(see SAR, Annex 9, Table 3). The increase in rice output due to prevention oflosses from improved storage has been taken as 50 percent of the SAR estimatesfor the operational storage because of the considerably lower than capacityoperation of the new mills. The benefits from the other storage have beenassumed to be the same as in the SAR (see SAR, Annex 9, Table 4).

6. The component has been analysed on the assumption that the amount ofpaddy milled would gradually increase from the 1990 level of about 6,000 tons to10,000 tons in 1993 and onwards. Under present conditions, a higher projectionwould be unrealistic. Even the projected increase in throughput is optimisticas it is based on the assumption that the Government will make headway inprivatizing the three rice mills and resolving their working capital problem.If this does not materialize, the throughput is likely to remain at about 6,000-7,000 tons.

7. The analysis has been conducted on the basis of the actual 1980-90prices and the December 1990 World Bank projections, both converted to 1989constant prices (Table 1).

8. On the basis of the above assumptions, the ERR of the rice millingcomponent (Table 3) is negative (-5 percent).

C. Financial Results of the Rice Milling Component

9. The financial benefit of the component to the paddy farmers, envisagedin the SAR, can be considered negligible under the present regime of theoperation of the new mills. Consequently, economic rent and cost recovery cannotbe calculated.

10. The rice mills are running considerably below the break-even level,and, as a result, incurring heavy losses, if interest obligations and truedepreciation charges are taken into account. This low capacity utilization hasbeen an indirect result of the Government policy of liberalization, including

- 25 -ANNEX 1Page 3 of 4

abolition of compulsory paddy procurement. This has resulted in a drastic fallin the paddy deliveries for milling from the Food Enterprise, which was expectedto be the main user of the mills at the time of appraisal. The mills are nowunable or unwilling to borrow for their working capital requirements from thebanking system due to the extremely high interest rates (35 to 40 percent).

D. Economic Analysis of the Coffee Development Component

11. Costs. The investment costs have been estimated on the same basis asfor the rice milling component (para. 3) and converted to 1989 constant termsusing the NUV index. The farm operating costs per hectare are shown in the farmbudget in Table 4. They have been aggregated on the basis of the actual phasingof planted areas given in the following para. The shadow wage rate is estimatedat R 400/manday.

12. Benefits. There was insignificant progress in the coffeerehabilitation program (5 ha only) on account of the farmers' reluctance to adoptnew practices of stumping. The benefit from the areas under new planting hasbeen calculated on the basis of the actual phasing of the areas and the estimatedaverage yields given below:

1986 1987 1988 1989----------------------(ha)----------------------

Annual Planted Area 281 881 585 1,200

Planting Years: 3 4 5-20

Average yield (kg/ha) 100 350 800

There is expected to be a wide range of yields in the field from 1,900 kg/ha to400 kg/ha. The likely average yield would be around 800 kg/ha as against 830 kgestimated at the time of reformulation. The component has also been analysed ata conservative average yield of 500 kg/ha.

13. The project benefits have been calculated on the basis of actualprices and the December 1990 World Bank projections, converted to 1989 constantprices (Table 5). They are appreciably lower than the prices used in the CoffeeComponent Reformulation Report (PAO/CP 1984) due to the sharp fall in worldcoffee price in recent years.

14. Economic cashflow is shown in Table 6. Despite the fall in worldprices, the component yields an IRR of 19 percent with a full development yieldof 800 kglha. With a yield of 500 kg/ha the IRR would fall to 9 percent.

- 26 - A_X IPage 4 of 4

E. Financial Results of the Coffee Develovment Cowponent

15. The project's impact on farmers is shown in the farm budget in Table4. Returns to the farmers are K304,000 and K190,000, respectively, for the fulldevelopment yield of 800 kg/ha and 500 kg/ha. This implies a correspondingincome of K1,540 and K780 per day of family labor. The return to family laborof K1,540/man-day at a yield of kg 800/ha is nearly the same as in thereformulation report and about four times the current daily wage rate ofK400lmanday.

- 27 -

TABLE 1s

Economic Price of Rice(Import Parity, 1989 Constant Prices in US$/ton)

1982-84 1985-88 1989 1990 1991-95 1996-2005

Projected FOB price.Bangkok La

1985 - 100 270 198 231 195 171 1851989 - 138.49 374 274 320 270 237 256

Quality adjustment forglutinouc rice (85S) 318 233 272 230 201 218

Transport and handling 60 60 60 60 60 60

CIP Thanaleng 378 293 332 290 261 278

Conversion of dry paddyto milled rice (571) /b 215 167 189 165 149 158

Transport and handlig £ 20 20 20 20 20 20

Economic farm5atepaddy price 195 147 169 145 129 138

jg World Bank Commodity Price Forecast (December 1990) for Thai 51 broken inconstant 1985 prices adjusted to 1989 constant prices by applying MUV index(1985-1003 1989.138.49).

1k Processing costs are assumed equal to the value of by-products.

/c Nt figure for all internal transport, storage, and handling costs.

TB 2

Incremental Denflts - pice 1insi Ccaomnet

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993-94 19951996-99

Ouantlty of Paddy Processed (ton) /

Et Dlesel Mill - Sanakh m - - - - 1,O0 2,50 2,000 2,000 2,C00 2,000 2.000 2,000 2.000

Mme Electrified WIle

- Savannakbet - - - - 7.000 1.800 2,100 168/ 2.0O0 2,000 3.000 4,000 4,0004.000

- P ke 1.350 2,950 4,200 1,500 3.900 4,100 2,200 200jo 2,000 2,000 3,00 4,000 4.O004,000

Increase In Rice (atut (ton)

mem Diesel 10.1 1 - - - - 145 363 290 290 290 290 290 290 290290

Nev Electrified Milla b 196 428 609 218 1.581 856 624 53 580 580 870 1,160 1,1601,160

Increase frin Storage /c 232 573 867 990 990 990 990 990 990 90 990 990 990990

Total 428 1.001 1,476 1,208 2,716 2.209 1,904 1,333 1.860 1,860 2,150 2.440 2,4402,440

Price US$/ton rice / 378 378 378 293 293 293 293 332 290 261 261 261 261278

Total Valu US$ million 0.16 0.38 0.56 0.35 0.80 0.65 0.56 0.44 0.54 0.49 0.56 0.64 0.640.68

A Baed on flgurea supplied by the mdlls and PCI missions estimtes and projections. The capacity of the mills is:Sanabhm - 2 tons/hr; Savannakhet - 4 tons/br; Wd Pake - 3 tons/hr. SAR asued annual operation of 2,400 hours.

/b SAR estmate of 14.5Z of througbput (frm SAR. Annex 9, Table 3).A s50 of SAR estimte for operational storage; 1002 of BAR estimte for the rest (from SAR, Anex 9, Table 4).

Frm Annex 1. Table 1.Throughput extremely lo due to drought in the southern princes.

TABLE 3

Economic Analysis of Rice Millinft Component

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 la*' 1993 1994 1995 1996-99(US$ dillion) -

Costs

Total Incrementallavestment J 0.13 0.79 2.34 0.48 0.34 0.60 0.91 1.04 1.42 0.02 - - - - - - -

Replacements /b - - - - - 0.01 0.08 0.23 0.05 0.03 0.07 0.17 0.33 0.19 0.10 0.10 0.10

Operation andMaintenance /c - - 0.08 0.08 0.10 0.10 0.15 0.15 0.15 0.05 0.15 0.15 0.18 0.20 0.20 0.20 0.20

Total 0.13 0.79 2.42 0.56 0.44 0.71 1.14 1.42 1.62 0.10 0.22 0.32 0.51 0.39 0.30 0.30 0.30

Denefita /d - - 0.16 0.38 0.56 0.35 0.80 0.65 0.56 0.44 0.54 0.49 0.56 0.64 0.64 0.64 0.66

let Benefits (0.13) (0.79) (2.26) (0.18) 0.12 (0.36) (0.34) (0.77) (1.06) 0.34 0.32 0.17 0.05 0.25 0.34 0.34 0.38

ER - Cegative (- 52)

A Based on actual foreign exchange disbursements and estlmated local coats, converted to 1989 conatant term using the MPY Index. Cost of buildingand millng equlpant for Pak"e mill flnanced by UNCDF bha been incladed In the economic analysis (USS874,000 over 19b0-85). Also US$497,000 forT.A. (Rice Kil Engine r and Technicians) over 1984-89 hbs been licluded.

/b 102 of Investment, evey five years.

/c gEstimtes based on 1989 dml expenditure records.

d From Annex 1, Table 2.

- 30 -

TABLE 4

Farm Budget - Coffee Develo,m.nt Component (New PZlntina)

Planting YearsUnit 1 2 3 4 5-20

Total Labor Input Man-days 300 169 93 136 150(all family labor)

Costs: K'000

Land Preparation 35.0Seedlings K R20/seedling 13.2 1.4Rice Seeds & Fertilizer 27.6 27.6Tools and Materials 15.0 10.0 5.0 5.0 7.5Fertilizer @ K168/kg 21.1 14.0 7.1 7.1 10.5Processing @ K50/kg - - - 17.5 40.0Agricultural tax La _ g. 15.0

Total 111.9 53.0 12.1 36.6 73.0

Value of Production:

Coffee Yield kg/ha 100 350 800Value @ 1380/kg K'000 38.0 133.0 304.0Paddy Yield kg/ha 1800 1800 - -Value @ K60/kg K'000 108.0 108.0 - - -

Net Income K'000 (3.9) 55.0 25.9 96.5 231.0

(A) Return to Labor jK K/man-day - 325 278 713 1540

(B) Return to Labor _ K/man-day 2- 35 278 713 780

/ 52 of gross value.

/b Yield of 800 kg/ha.

jc Yield of 500 kg/ha.

- 31 -

TABLE 5

Coffee - Economic Prices(in 1989 constant dollars)

2000-1988 1989 1990 1991 1992 1995 2004____ --------------------…(USS/ton)…------- --- …

Price /a 3,019 2,390 1,870 1,897 1,939 2.271 2,867

Quality adjustment forRobusta (302) 2,113 1,673 1,309 1,328 1,357 1.590 2.007

Freight and handling 150 150 150 150 150 150 150

f.o.b. Savannakhet 1,963 1,523 1.159 1,178 1.207 1.440 1,857

Transport and handling 180 180 180 180 180 180 180

Green coffee equivalent 1.783 1,343 979 998 1,027 1.260 1,677

Economic farm-gate pricedried cherry lb 1,070 806 587 599 616 756 1,006

/a World Bank Commodity Price Forecasts, December 1990. Average other mild Arabica prices in NewYork and Bremen/Hamburg markets in 1985 constant dollars converted to 1989 constant dollars usingthe MUV index. Economic farm-gate prices of dried cherry not shown above but used in Table 6 for1993, 1994, 1996. 1997, 1998 and 1999 are US$660, 705, 800, 850. 900 and 950, respectively.

/b Conversion ratio for hulling = 602, taxes and duties excluded.

TABLE 6

Economic Analysis - Coffee Development Component

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000-2004------------------------------------------------------ (M US00 --------- - ------- ~~~~~~~~-~~~~~ ~~~~~-~~-~~----------- ----

Costs

Investment /a 278 1.047 319 1,110 - - - - - - - - - - - -

Farm Operating jb - 163 626 643 756 401 350 438 497 497 497 497 497 497 497 497

Total 278 1,210 945 1,753 756 401 350 438 497 497 497 497 497 497 497 497

Benefits L

Paddy - 74 308 388 543 313 - - - - - - - - - -

Coffee /c - - - 30 150 348 752 1,120 1,556 1.662 1,783 1,886 2,004 2,122 2,240 2.372

Total - 74 308 418 693 661 752 1.120 1.556 1,662 1.783 1,886 2,004 2,122 2.240 2,372

Net Benefit (27a) (1,136) (637) (1,335) (63) 260 402 682 1,059 1,165 1,286 1,389 1,507 1,625 1,743 1,875

ERR * 192

La Based on actual foreign exchange diebursements and estimated local costs, converted to 1989 constant terms using the MUV index (0.72 for 1985, 0.85for 1986, 0.94 for 1987. and 1.00 for 1988).

/b Based on farm budget (Table 4), with a shadow wage rate estimated at Kip 400/day and shadow exchange rates of Kip 400 - US$1 for 1986, Kip 380 for1987, Kip 400 for 1988, Kip 550 for 1989 and Kip 700 for 1990 onwards.

/c Based on the phasing of areas and yields (see para. 12) and economic prices (Table 5).

rbr 9 1 w^

Mz _ z1,~0b W

C I - 0

o o e a

X * . X -

1 - -a

lu 0 a

I- _ o a'

I- a

-~ ~~ 0£ -

/~~~~~~~~~~~~~~~~~~~~~~~~~o..o ohl.. wOP , b MYAMR f LA O \ l

22\ CHINA :; .I.o,a ,=00 40| n a 22C<~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 /LA 0,. --d. and fi. Mwil " PhPi.E

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Fnoa C.oaIon any

LAOr .2 .. -d b. P 'S DEMOCRATIC

7-22.\ CHINA Th. -. d-rd rho~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~\ \KIOc4E

THAILAND

VIE NTIAN~~~~~~~~~~~~~~~~~- ~,yVITA

W'an Seng ~ ~ ~ ~ ~ han Ka

THAILAND~~~~~~~~~~~~~~~~~~~~~~~~ALYI

ELEVA:lION IN METERS: 5 l l l I

Pak 02099

0-199~~~~~~~~~~~

EXISTING GRAVEL OR LATERITE ROADS A ts t I ' t .

… ROAS UNDER CONSTRTIN OR BEING UPGRADED

- - INTERNAIONAL. BOUJNDARIES Ba No_g

j,j,1 1 1j FMAIN RICE PRODUCING AREAS .L _ zKhammouan >p _ HEiu

0, a a ILEzas \ _ _ ~ < oJS T (Thakek)

> 0 ~~~~50 100 150 KlLCIMETERS , A .L PE4PS DEMOCRATIC KAMPUCHEA R U

_~~~~~~~~~LVTC IN 2 jMETERS:°_~~~~~~~~~~,0 AN VRSaanh

__________________________ ~~~~~~~~~~~~~~~~~~~~IBRD I1A763R

-~~~~* ) d2~~~~~~~~~17 103, 104'C H I N A LAO PEOPLE'S DEMOCRATIC REPUBLIC

AGRICULTURAL REHABILITATION AND DEVELOPMENT PROJECT mM^YANMIAR I- 0 PROJECT LOCATION

M fY V Vientione ProvinceRICE MILLING INFRASTRUCTURE: - PRIMARY PAVED ROADS

Ii -- 4 \ VIET * BIG SIZE MILLS - GRAVEL OR LATERITE ROADSJ THAILANDM \ \ NAM * MEDIUM SIZE MILLS _ ROADS UNDER CONSTRUCTION OR

} CRATI A, MEDIUM/SMALL SIZE MILLS BEING UPGRADED'&MKAMPIJCHCA) I o SMALL HULLER MILLS V.r* I HIGHLAND AREAS

)S I - - PROVINCE BOUNDARIESZ _ .- INTERNATIONAL BOUNDARIES

RIVERS20. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~201

NME.A A A I A Y S I A | PAAG/ / ff~/2-

101 LUANG ~~~~~PRABANG~~~~~**, ., B~~~~~~~~~~~~~~~~~~~~~~~~~~~~~an a CIvong L. L_

.~ ~~~~ ~ ~~~~~~~~~~~~~ _I Cf o p t

SAN ~ ~ ~ ~ ~ ~ ~ ~ .ziA.EVI E Tf ~~~~M Thode,oAXEG A) < ~~~~~~~~~~~NAM -

a;~XAIGNAOJIph

19~~~~~~~~~~1S

a r~~~~~~~~~~~~~j0~ ~ ~ ~ w,<S t ./ No,t

v I N T I A/ B .S o tOhou. VA KSANE PAK SA r -. )

k P/tLay Hart K rV><N PoP Mom a Kow N

w /;,X5 )SJ~~n4Ai~j PAKMI VI IAN

TA *Ifp~;J Ch.ong Khka THAT BO

\ < i} ~~~~~~~~~~~~~T H A I AN D

0 20 AO 60 MILESCZ=dl,W t' 0 o 20 4b o b 60 o KILOMETERS

101 102' 103- 104-

AUGUSf 1991

IBRD 14764R

%\ B Nak S188 t_ \ ° ° I (, ~~~~~~~~~~C H I N AN,Ah- kh*l ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ O

MYANMAR

-r J Nov g}MgA t ! r uE^

8 0; Non8 T on < < _ < t _1 / T THAILAND VIET

17- NAM~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~AP~T

B _ ng Poboo S 1

z~~~~~~~ p M IOfI A L A Y s I A

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~16' .b 616P~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1

LAO PEOPLE'S DEMOCRATIC REPUBLIC

AGRICULTURAL REHABILITATIONAND DEVELOPMENT PROJECTif

PROJECT LOCATION SSouthern Province of Sovonnokhet

and ChampassokRICE MILLING INFRASTRUCTURE:

MEDIUM S;Z MILLSA MEDIJM/SMALL SIZE MILLSo SMALL HULLER MILLS

15COFFEE ,NDUSTRY'l l5 _ _ COFFEE PRODUCING AREAS 15

| NEW COFFEE PROCESSING PLANT < X pio A P

- PRIMARY PAVED ROADSA- GRAVEL OR LATERITE ROADS B|

TRAILS UNDER CONSTRUCTION ORBEING UPGRADED

| |_ AREASOF 10m. ELEVATIONANDOVER Hwgdo7

| -- PROVINCE BOUNDARIES / C H M A S S A KINTERNATIONAL BOUNDARIES

I \.J \. / S> l°B ~~~~~~~~~~~D E M O C R A T I C I,4- 0X ~ Io_,Ycly kI.oun\ K A M P U C H E A14 W< 1

0 20 40 60 MILES|rhh niop h.. be. pepered by Th. World ton.k. ' off.hwuinly forIh. eooo.i nc of #h-I..

Ardod..nodwIily F.r h. inl wso. o TI Worlod tok ood .h. I onlFi-on,. 20 A 60 80 100 KILOMETERSCorporellon. TI.. dnomo.looin., uod ond 51, bounodorir sheen on thu motp do n0 o.pIy.l non

Th. po .of I. World en!. ond sh Ind o ofone hfnnc. CorporIloo. oy judnwn e she Ikgol hum odwoy lerro eny -ndnd.nt or ae.pionn of inchbocodon,r

105A 060

AUGUST 1991