Document of The World Bank Report No: ICR00002434 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-38020; IDA-H4460; TF-95057) ON A CREDIT IN THE AMOUNT OF SDR 7.2 MILLION (US$ 9.90 MILLION EQUIVALENT) AND AN ADDITIONAL FINANCING GRANT IN THE AMOUNT OF SDR 6.8 MILLION (US$ 10.0 MILLION EQUIVALENT) AND A POLICY AND HUMAN RESOURCES DEVELOPMENT GRANT IN THE AMOUNT OF US$ 0.50 MILLION TO THE LAO PEOPLE’S DEMOCRATIC REPUBLIC FOR THE SUSTAINABLE FORESTRY FOR RURAL DEVELOPMENT PROJECT June 28, 2013 Southeast Asia Sustainable Development Department Southeast Asia Country Management Unit East Asia and Pacific Region CURRENCY EQUIVALENTS Currency Unit = Lao Kip (LAK) At Appraisal LAK 10,770 = US$ 1.00 At Completion (December 12, 2012) LAK 8,000 = US$ 1.00 FISCAL YEAR October 1 – September 30 ABBREVIATIONS AND ACRONYMS AAC Annual Allowable Cut FSC Forest Stewardship Council ADB Asian Development Bank GFTN Global Forest and Trade Network AF Additional Financing GoF Government of Finland ASEAN Association of Southeast Asian GoL Government of Lao PDR Nations ASEAN- ASEAN Wildlife Enforcement GVFC Group of Village Forestry WEN Network Committees CARs Corrective Action Requests HCVF High Conservation Value Forest CAS Country Assistance Strategy IBRD International Bank for Reconstruction and Development CMU Country Management Unit ICRR Implementation Completion and Results Report CoC Chain of Custody IDA International Development Association CSO Civil Society Organization IFC International Finance Corporation DAFO District Agriculture and Forestry IOIs Intermediate Outcome Indicators Office DGM Dedicated Grant Mechanism ISR Implementation Status and Results Report DIMEX Department of Import and Export LEAP Laos Extension for Agriculture Project DMS Document Management System LNFC Lao National Front for Construction DoF Department of Forestry LWU Lao Women’s Union DoFI Department of Forest Inspection M&E Monitoring and Evaluation FAO Food and Agriculture MAF Ministry of Agriculture and Organization Forestry FCPF Forest Carbon Partnership MDTF Multi Donor Trust Fund Facility FIP Forest Investment Program MoF Ministry of Finance FIPD Forest Investment and Planning MoIC Ministry of Industry and Department Commerce FMA Forest Management Area MRV Monitoring Reporting and Verification FOMACOP Forest Management and NAFES National Agricultural and Conservation Project Forestry Extension Services NBCAs National Biodiversity QAE Quality At Entry Conservation Areas R-PIN Readiness-Plan Idea Note NPMO National Project Management R-PP Readiness-Preparation Proposal Office NRM Natural Resources and SDR Special Drawing Rights Environment NSC National Steering Committee SFM Sustainable Forest Management PDO Project Development Objective VFO Village Forest Organization PP Project Paper Vice President: Axel van Trotsenburg Country Director: Annette Dixon Sector Director : John A. Roome Sector Manager: Julia M. Fraser Project Team Leader: Peter Jipp LAO PEOPLE’S DEMOCRATIC REPUBLIC Sustainable Forestry for Rural Development (SUFORD) Project CONTENTS Data Sheet A. Basic Information …………………………………………….………………………...i B. Key Dates ……………………………………………………………………...……......i C. Ratings Summary ……………………………………………………………………….i D. Sector and Theme Codes …………………….……...………………………………….ii E. Bank Staff ………………………………………………………………………………ii F. Results Framework Analysis ……………………………………….…………………..ii G. Ratings of Project Performance in ISRs …………………………………………….....xi H. Restructuring …………………………………………………………………………..xi I. Disbursement Graph ……………………………………………………………….…..xii SECTIONS 1. Project Context, Development Objectives and Design ............................................... 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 6 3. Assessment of Outcomes .......................................................................................... 15 4. Assessment of Risk to Development Outcome ......................................................... 19 5. Assessment of Bank and Borrower Performance ..................................................... 20 6. Lessons Learned ....................................................................................................... 23 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partner ............ 24 ANNEXES Annex 1. Project Costs and Financing .............................................................................. 25 Annex 2. Outputs by Components .................................................................................... 26 Annex 3. Economic and Financial Analysis ..................................................................... 37 Annex 4. Bank Lending and Implementation Support/Supervision Processes................. 46 Annex 5. Beneficiary Survey Results ............................................................................... 48 Annex 6. Summary of Borrower’s Report ........................................................................ 49 Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders ........................... 53 Annex 8. List of Supporting Documents .......................................................................... 54 MAP ................................................................................................................................. 57 A. Basic Information SUSTAINABLE FORESTRY FOR Lao People's Country: Project Name: RURAL Democratic Republic DEVELOPMENT PROJECT IDA-38020,IDA- Project ID: P064886 L/C/TF Number(s): H4460,TF-95057 ICR Date: 06/28/2013 ICR Type: Core ICR LAO PEOPLE'S Lending Instrument: SIL Borrower: DEMOCRATIC REPUBLIC Original Total XDR 7.20M Disbursed Amount: XDR 13.97M Commitment: Revised Amount: XDR 13.97M Environmental Category: A Implementing Agencies: Ministry of Agriculture and Forestry Cofinanciers and Other External Partners: Finland Ministry of Foreign Affairs B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 03/06/2002 Effectiveness: 02/03/2004 02/03/2004 12/18/2008 Appraisal: 12/13/2002 Restructuring(s): 12/29/2011 Approval: 06/24/2003 Mid-term Review: 10/11/2010 10/11/2010 Closing: 12/31/2008 12/31/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory i Implementing Quality of Supervision: Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No Satisfactory at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Moderately Closing/Inactive status: Satisfactory D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Forestry 100 100 Theme Code (as % of total Bank financing) Land administration and management 50 50 Other public sector governance 50 50 E. Bank Staff Positions At ICR At Approval Vice President: Axel van Trotsenburg Jemal-ud-din Kassum Country Director: Annette Dixon Ian C. Porter Sector Manager: Julia M. Fraser Mark D. Wilson Project Team Leader: Peter Jipp William B. Magrath ICR Team Leader: Peter Jipp ICR Primary Author: Anupam Bhatia F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) To assist achieving sustainable forest management of production forests and to alleviate rural poverty in selected forest areas and to help advance a broad set of forest policy reforms ii Revised Project Development Objectives (as approved by original approving authority) To assist the Borrower to achieve the sustainable management of production forests to alleviate rural poverty in the Project Provinces by implementing the forest policy reform actions and policies set forth in its Letter of Forest Management Policy. (a) PDO Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Policy, legal and incentive framework enables expansion of Participatory Indicator 1 : Sustainable Forest Management (PSFM) throughout the country Annual Government consultations at central and provincial Regulations levels covering all key Regulations determine the aspects of PSFM covering all key conduct of approved and aspects of PSFM logging and applied. approved; Revised Ad-hoc regulations with timber sales Value benefit sharing limited incentives for quantitative or Improved revenue arrangements not participatory sustainable Inter- Qualitative) generation and yet applied. Inter- forest management. ministerial benefit-sharing ministerial agreements for systems providing agreements have competitive incentives of been developed and log sales and PSFM practices in implemented. fair benefit place and used. sharing finalized and applied in all project provinces Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 This indicator was fully achieved. Regulations covering all key aspects of PSFM Comments have been approved and applied. Initial guidelines for revenue generation and (incl. % benefit-sharing were developed and applied but failed to provide incentives for achievement) PSFM. Indicator 2 : Priority natural production forests in the project areas are brought under PSFM Number and area All 16 PFAs in PSFM coverage of 9 provinces implementation management and with approved covers 1.3 million Value No Production Forest Annual Operations management ha in 16 PFAs; quantitative or Areas established Plans. plans by 2011, Certified area Qualitative) including expanded and Number and area annual period extended; of forest operational Logging in target iii management units plans for 40% areas controlled fulfilling the of all through remote certification identified sensing analysis criteria & FMAs. and law indicators. enforcement. Independent Reduction in certification illegal land maintained at conversions and least until logging 2011 and operations. number of FSC certified of FMAs increased to 20. Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments This indicator was largely achieved; forest management planning, independent (incl. % certification and assessment of deforestation trends were completed; NTFPs are achievement) included in forest management plans but data not yet available to assess trends. Villagers' well-being and livelihoods improved through benefits from sustainable Indicator 3 : forestry and community development efforts Broad-based participation and Broad-based equitable sharing participation of benefits and equitable Timber Revenue benefit sharing - Increased village Benefit Sharing of forest forest-based approved; 44% of benefits income&employm target villages extended to all ent receive benefits Value Forest managed with project areas: from timber sales; quantitative or limited involvement of - Improved Village Qualitative) local communities -Village household-level development plans development food security completed and plans development grants completed in - Increased disbursed in all 80% of all number of people project villages new project benefiting from villages development projects Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments This indicator was partially achieved. Village development plans and grants were (incl. % delivered beyond target level (125%) however villages receiving timber revenue achievement) was low (44%) when compared to the target (60%). Indicator 4 : Sector Monitoring and Control System Functioning Efficient forest Pilot exercise Prime Ministerial Value No technical framework sector control and completed Decree establishes quantitative or for sector monitoring in monitoring and using new data new institutional Qualitative) place. improved forest sources and mechanism of iv law enforcement technology to Department of systems in place compare most Forest Inspection and operational. recent forest (DoFI) for sector cover changes monitoring; for selected Technical 'hot spot' framework and provinces forest law enforcement in place and operational Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Fully achieved (100%) Satellites used to identify hotspots; forest cover and data Comments systems developed; internal control and reporting systems completed; forest law (incl. % enforcement program developed and implemented; forest certification expanded achievement) and maintained. (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Regulations covering all key aspects of PSFM approved and applied. Annual Government consultations at central and provincial DoF annual levels harvesting based on determine the forest management conduct of plans and pre- Regulations logging and harvest inventories; Ad-hoc regulations with Value covering all key timber sales Annual harvests in limited incentives for (quantitative aspects of PSFM business in PFAs approved by Participatory Sustainable or Qualitative) approved and Lao PDR on National Assembly; Forest Management applied the basis of Regulations and sustainable associated yields as guidelines for determined in timber sales system PFA under review management planning replacing quota system. Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments (incl. % Targets achieved. achievement) Indicator 2 : Improved revenue generation and benefit-sharing systems providing incentives v for PSFM practices in place and used. Inter- ministerial agreements (MAF, MOF, PMO, and Decree on Benefit MOIC) on Sharing endorsed Improved revenue procedures for by National generation and transparent, Assembly; Value benefit-sharing competitive Inter-ministerial No incentives for PSFM (quantitative systems providing log sales and coordination on log in place. or Qualitative) incentives of wood pricing sales operational in PSFM practices in and fair all project place and used. benefit sharing provinces; Revised and transfer benefit shares await systems implementation. finalized and applied in all project provinces. Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments (incl. % Target achieved. achievement) Indicator 3 : Number and area coverage of management and Annual Operational Plans Independent certification Achieved. All 16 Number and area maintained at PFAs have Value coverage of least until Management plans out of approved (quantitative management and 2011 and date management plans; or Qualitative) Annual Operations number of area covered 1.3 Plans FSC certified million ha of FMAs increased to 20 Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments (incl. % Target achieved. achievement) Number and area of forest management units fulfilling the certification criteria Indicator 4 : and indicators Certified area Independent expanded and Number and area certification period extended for of forest maintained at five years; Total Value management units least until area under (quantitative No areas were certified. fulfilling the 2011 and certification 3,378 or Qualitative) certification number of sq. km; Annual criteria and FSC certified audit of existing indicators of FMAs FSC certified areas increased to 20 completed; 30 vi Forest Management Areas certified Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments Target achieved. 30 FMAs (150% of target) covered by Smartwood annual (incl. % reviews of certification compliance. Corrective Actions Requests have been achievement) addressed in a timely manner. Indicator 5 : Reduction in illegal land conversions and logging operations Provincial Pilot analysis level pilot completed for two MAF forest cover analysis provinces. monitoring exercise completed for Monitoring 1992-2002 shows forest Reduction in Value two provinces Reporting and cover loss of up to 1.3 illegal land (quantitative to allow for Verification (MRV) million hectares. Forest conversions and or Qualitative) comparison systems for REDD cover change monitoring logging operations and analysis of are being piloted not linked to forest law deforestation for subsequent enforcement efforts trends 1992- scale-up in Don 2002-2008 Sithuan PFA Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments (incl. % Target achieved. achievement) Indicator 6 : Increased availability of subsistence and economic NTFPs and wildlife resources Community- based NTFP Impact assessment monitoring indicates significant Increased system in opportunities exist availability of place in for NTPFs as Value No formal system of local subsistence and selected livelihood (quantitative monitoring in place. No economic NTFPs PFAs/FMAs enhancing options; or Qualitative) baseline values. and wildlife indicating Net cash income resources. trends in from NTFPs NTFP estimated at US$ 15 abundance and million per year sustainability. Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments Target partially achieved. Project has established groundwork to strengthen (incl. % mechanisms to increase availability of NTFPs and wildlife resources. achievement) Indicator 7 : Broad Based Participation and equitable sharing of benefits Broad-based Broad-based Village participation and participation Development plans Forest managed with equitable sharing and equitable completed in all Value limited involvement of of benefits: benefit sharing 311 project villages (quantitative local communities and no of forest (100%); 44% or Qualitative) formal benefit sharing - Increased village benefits villages receive mechanism in place forest-based extended to all benefits from income & project areas: timber sales; employment Revised benefit vii -Village sharing mechanism development endorsed but not - Improved plans yet applied. household-level completed in food security 80% of all new project -Increased number villages of people benefiting from - Number of development villages projects receiving timber revenues increased to 60% Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments (incl. % Target partially achieved. achievement) Increased participation of women, ethnic minorities, and poor households in Indicator 8 : forest management activities, including paid labor, and in leadership roles in VFOs Participation of ethnic minorities and Increased poor Increased participation of households in participation of women, ethnic forest communities in minorities, and management Communities engaged forest management Value poor households in activities, primarily as paid labor in and related (quantitative forest management including paid forest management/ activities. Notable or Qualitative) activities, labor, VFOs, harvesting operations weaknesses in including paid VFC and engagement with labor, and in GVFC in new ethnic groups leadership roles in project areas, remain. VFOs disaggregated by ethnic group and poverty level Date achieved 12/01/2003 12/01/2003 12/31/2011 12/31/2012 Comments Target partially achieved. Continuing weakness in communication with ethnic (incl. % groups and women. Village development plans provided support for women and achievement) vulnerable groups in proportion to their numbers. Indicator 9 : Increased number of village forestry committees established and functioning VFO, VFC 573 of 573 Village Increased number and GVFC Forestry Value of village forestry established Organizations and (quantitative No committees committees and 573 of 573 Village or Qualitative) established and functioning in Forestry functional all new FMAs Committees viii that will be established; 49 of identified 58 Group Village during forest Forestry management Committees planning formed. Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments Target largely achieved (91%). Group Village Forest Committees (GVFC) (incl. % concept needs to be reconsidered. GVFCs do not function as expected. achievement) Indicator 10 : Forest cover change detection piloted Pilot exercise completed Pilot exercise Efficient forest using new data completed using sector control and sources and new data sources Value MAF forest cover monitoring and technology to and technology to (quantitative monitoring exercises improved forest compare most compare most or Qualitative) carried out periodically law enforcement recent forest recent forest cover systems in place cover changes changes for selected and operational. for selected "hot spot" "hot spot" provinces provinces Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments Target achieved. These areas represent about 1.4 % of the total PFA area under (incl. % SUFORD management. achievement) Integrated forest inventory and cover monitoring and data management system Indicator 11 : developed Development of a comprehensive technical design and field testing for an integrated Efficient forest forest sector control and inventory and Value monitoring and cover No such system exists in System developed (quantitative improved forest monitoring Lao PDR. and operational or Qualitative) law enforcement and data systems in place management and operational. system, including forest cover, quality, biomass, and carbon stocks as required under REDD process ix Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments (incl. % Target achieved. achievement) Indicator 12 : Internal control system completed System developed Completion of and operational; internal Improved reports control and Efficient forest from the forestry reporting sector control and reporting system system Value monitoring and available for covering forest (quantitative Not initiated improved forest selected provinces; management or Qualitative) law enforcement Software for operations, systems in place reconciling data on conduct of and operational. timber quota, timber sales timber harvesting procedures, and timber sales revenue flows available Date achieved 12/01/2003 01/31/2008 12/31/2011 12/31/2012 Comments (incl. % Target achieved. achievement) Indicator 13 : Forest law enforcement program developed and implemented Forest Law enforcement program developed and Long term forest under law enforcement implementatio strategy developed n, including and approved; DoFI intelligence Efficient forest Director General systems Many agencies with sector control and elected chair of Lao development; Value overlapping monitoring and Wildlife interagency (quantitative responsibilities and no improved forest Enforcement agreements or Qualitative) formal agreements on law enforcement Network; and coordination systems in place Provincial staff use operations, and operational. intelligence training and monitoring system; public Inter-agency awareness, and coordination formulation of improved. long-term Forest Law Enforcement Strategy Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments (incl. % Target achieved. achievement) x Indicator 14 : Maintain and expand independent certification of forest under PSFM Independent and internationally Certification recognized coverage and forest duration extended management for five more years certification Efficient forest confirming confirms sector control and sustainability of sustainability Value monitoring and PSFM approach; 30 of PSFM (quantitative No areas were certified improved forest Forest Management approach and or Qualitative) law enforcement Areas certified; One DoF group systems in place controlled wood certificate and operational. certificate maintained suspended beyond 2011 following project and pool of closure pending certified corrective actions FMAs expanded to 20 by 2011 Date achieved 12/01/2003 12/31/2008 12/31/2011 12/31/2012 Comments Target achieved. Maintenance of certification will require continued capacity (incl. % building and establishment of a dedicated unit for forest certification within achievement) DOF. G. Ratings of Project Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 10/08/2003 Satisfactory Satisfactory 0.00 2 06/16/2004 Satisfactory Satisfactory 0.30 3 12/21/2004 Satisfactory Unsatisfactory 0.68 4 05/07/2005 Unsatisfactory Unsatisfactory 1.52 5 12/28/2005 Moderately Satisfactory Moderately Satisfactory 2.96 6 12/29/2006 Moderately Satisfactory Satisfactory 5.58 7 02/26/2008 Satisfactory Satisfactory 8.82 8 06/30/2009 Moderately Satisfactory Moderately Satisfactory 10.72 9 06/29/2010 Moderately Satisfactory Moderately Satisfactory 13.77 10 04/13/2011 Moderately Satisfactory Moderately Satisfactory 16.69 11 12/26/2011 Moderately Satisfactory Moderately Satisfactory 20.07 12 12/26/2012 Moderately Satisfactory Moderately Satisfactory 21.42 H. Restructuring (if any) xi ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions Additional Financing to scale up activities over three years to 12/18/2008 N S S 10.64 enhance impact of well- performing project Extension of closing date and 12/29/2011 N MS MS 20.77 reallocation of grant proceeds I. Disbursement Profile xii 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. Country Context. Laos is a small, landlocked country whose land area is 70% sloping hillsides and mountains and whose forests contain globally significant biodiversity. In 2001, forest cover was estimated between 40.6% to 47%, with annual deforestation rates estimated at 0.8-1.2% annually. The remaining forest areas were degraded. “Scientific� forest management based on inventories and reliable growth data existed only in pilot areas, while the remaining forests were under increasing pressure from the domestic forest industry with serious excess capacity, and demand originating from neighboring countries. Along with the likely loss of production forest resources and associated biodiversity, exploitation had begun to put pressure on the National Biodiversity Conservation Areas (NBCAs). If these trends prevailed, the forest cover, and quality of forests, would have continued to decline contrary to the Government’s objective of increasing forest cover to 60 percent by 2020. 2. At the time of project design, the forestry sector in Lao PDR was in disarray. Sector work undertaken by the World Bank in conjunction with Finland and Sweden highlighted the importance of “putting order� to the commercial exploitation of forests. Several key areas of weakness were identified, including a legal framework that narrowly restricted participation in forest management and did not provide the rights and incentives needed for villagers to be involved in the management of production forest (especially in log sales and sharing of financial benefits); the capacity of forests to provide benefits and services was reduced by wasteful, unplanned logging and conversion of forests to other land uses; harvesting quotas were not calculated based on annual allowable cutting levels and guidelines for sustainable forestry operations were largely missing; the extent and location of forests with potential for sustainable management was not known; the treasury was realizing only about one third of estimated market value of harvested timber in part because the royalty system was based on administrative price setting which did not reflect international market prices; forestry organizations were geared towards regulating and controlling rather than providing services and supporting management of forests by local communities; monitoring and control systems did not provide timely and reliable information on forest sector performance; and finally, the installed and operating sawmill capacity in Lao PDR far exceeded the sustainable supply of timber. 3. Government Strategy. At a forestry donor roundtable meeting in September 2000, the Ministry of Agriculture and Forestry (MAF) presented its Forestry Vision for 2020, which recognized the need to reverse the negative forestry trends. The Sustainable Forestry and Rural Development Project (SUFORD) was designed to address several key concerns of the Government of Lao (GoL) as expressed in its Letter of Forest Management Policy in 2003. GoL recognized in particular the need to improve the performance of its wood industry, including restructuring the sector to align processing capacity with sustainable raw material supply, revise the system for harvest determination based on sustainable supply, promote tree planting and management, control unsustainable harvest and export of non-timber forest products (NTFPs), and prevent 1 encroachment and biodiversity degradation by law enforcement, capacity building and assisted participation of villagers in poverty eradication and conservation activities. 4. Rationale for Bank Engagement. SUFORD’s design which invested in both rural development and natural resource management was well aligned with the Lao PDR Country Assistance Strategy (CAS, 2000-2002) and the Sixth National Socioeconomic Development Plan (NSEDP, 2006-2010). In the natural resource sectors, the CAS aimed to assist in removing distorted policies, improving technology, and ensuring appropriate forest management practices to achieve environmental sustainability. Given the inherent complexity this sub-sector it was unlikely to attract support from other donors so the focus on Production Forests was seen as an important strategic choice. Key expectations from SUFORD were to help demarcate and introduce sustainable forest management in Production Forest Areas; create sustainable forest management plans for these areas; enable people to directly participate in and benefit from forest management; support efforts to monitor and control forest sector activities; ensure adherence to GOL policy and improve responsiveness to the rights of local stakeholders. 5. Higher Level Objectives to which the Project Contributed. Forest resources play a central role in the Lao economy in supporting rural livelihoods and the national economy. The project design recognized the high dependence of the Lao population on forest and natural resources and the central role of the forest industry as a major employer. Rural people comprised 80% of the population and were generally highly dependent on forests as a source of food, raw materials, traditional medicines, and as a source of revenue. In many areas, villagers obtained half of their income and protein from NTFPs. The PAD recognized that it is often the poorest, who are dependent on the NTFPs and for whom forests act as a safety net. 1.2 Project Development Objectives and Key Indicators 6. The Project Development Objective (PDO), as stated in both the PAD and the legal agreements, was to assist the Borrower to achieve the sustainable management of production forests to alleviate rural poverty in the Project Provinces by implementing the forest policy reform actions and policies set forth in its Letter of Forest Management Policy. The specific project objectives were to: (a) improve the policy, legal and incentive framework enabling the expansion of Participatory Sustainable Forestry Management (PSFM) throughout the country; (b) bring the country’s priority natural Production Forests Areas (PFAs) under PSFM; and (c) improve villagers’ well-being and livelihoods through benefits from sustainable forestry, community development, and development of viable livelihood systems. 7. The original project design included three Key Performance (Output) Indicators as listed below. The PAD did not include PDO indicators and the indicators listed in the main text and the results framework of the PAD differed from one another.  Number of village forestry committees established and functional; 2  Number and area coverage of forest management and annual operational plans; and  Increased participation of women, ethnic minorities, and poor households in forest management activities and in leadership roles in Village Forestry Organizations (VFOs). 1.3 Revised PDO and Key Indicators, Reasons/Justification 8. No changes were made to the PDO; however based on implementation experience, adjustments were made in the project indicators. For clarity purposes, the specific project objectives from the SUFORD PAD were slightly revised and adopted as PDO indicators and a fourth PDO indicator related to Component 3 was added. Revised PDO Indicators were revised and adopted as follows (for details see PAD Annex 1 and Project Paper Annex 4): PDO Indicator 1: Policy, legal and incentive framework enables expansion of PSFM throughout the country; PDO Indicator 2: Priority natural production forests in the project areas are brought under PSFM; PDO Indicator 3: Villagers wellbeing and livelihoods improved through benefits from sustainable forestry and community development efforts; and PDO Indicator 4: Forest sector monitoring and control system functioning. 1.4 Main Beneficiaries 9. Main project beneficiaries were to include about 100,000 villagers involved in field implementation and GOL through improved quality of forest management and improved rent capture and revenue collection. Other direct beneficiaries were to include district, provincial and national forestry, rural development, and other government staff, who would receive support and training. Out of 354 villages, an estimated 190 would be directly involved with forest management. The other villages were adjacent to the production forests and would very likely be involved in forest protection activities. In areas, where these adjacent villages have traditionally enjoyed access to natural forests in other village territories, ways of allowing this system to continue would be promoted. In addition, villages that did not have good access to natural forests would receive special benefits through targeted support through the Village Development Sub-component. 1.5 Original Components 10. The project had four components with the following baseline costs (including contingencies): 3 Component 1: Support Services for Sustainable Forest Management (US$ 0.99 million, 6% of baseline cost). This component was to provide support for policy development, systems and guidelines development, remote sensing assessment of forest areas, setting up databases, mapping, planning, field demarcation, and training facility and capacity development. It was divided into four sub-components: a) Sectoral Policy Reform Support. This was to assist GOL in implementing its Letter of Forest Management Policy and in developing the remaining regulations and instructions covering the principles for PSFM; establishment of the PFA and benefit-sharing and conflict resolution mechanisms. It would disseminate relevant laws and regulations and provide related training at all levels. b) Establishment of the PFA System. Work under this subcomponent would build on efforts to administratively define PFAs as part of the permanent National Forest Area. The main activities were to include finalizing methodologies, criteria and processes and developing related systems manuals, guidelines and procedures; preparing detailed implementation plans for identifying PFAs; staff training; demarcating and mapping of PFAs; program monitoring and preparation of a phased national program to bring production forest under sustainable forest management. c) Forest Management Guidelines and Procedures. This would help develop technical guidelines for planning, implementing and monitoring PSFM by developing a national Code of Forest management Practice, and helping introduce third party certification and enhancing awareness about chain of custody operations. d) Strengthening Sustainable Forest Management Capacity. This would support organizational development and capacity building of the National and Provincial Agricultural and Forestry Extension Services (NAFES/PAFES), Department of Forestry (DOF) at Provincial (PAFO) and District (DAFO) levels. It would also support development of a long-term training strategy. Component 2: Sustainable Forest Management and Village Development (US$ 11.04 million, 67% of baseline cost). This component was to support implementation of sustainable management practices in selected production forest areas, and improve village livelihoods in the project area. It had two sub-components: a) Participatory Sustainable Forest Management: This would support implementation of sustainable management practices in production forest areas in the Central and Southern Provinces (see Map). It would provide training for Forest Management Unit staff and villagers in sustainable forest management planning and implementation covering timber, PTFP and biodiversity resource inventories; forest land-use zoning and preparation, implementation and monitoring of forest management and annual operation plans. b) Village Development. This would help villagers in project areas to plan, implement, monitor and evaluate their own development projects financed initially through the project, but later from revenues based on sustainable forest utilization. Main activities were revision of guidelines and procedures, training in village organization and development; creation and strengthening of village 4 forestry committees; village development planning and financial management, and development plans and projects. The subcomponent included a village development fund initially set at $8,000 per village, to fund village development investments. It also financed studies to increase the participation of women, ethnic minorities and the poor, and adopt the project methodology to their specific needs. Component 3: Forest Sector Monitoring and Control (US$ 2.56 million, 16% of baseline cost). This component was to cover four areas: (a) internal forest control, (b) forest law enforcement monitoring and reporting (also referred to as external control), (c) forest cover monitoring, and (d) independent monitoring and management audits. This component would install the capacity for the forest administration to have current and reliable data on key developments and trends in the sector. Goods and services to be included were acquisition of computers, mapping facilities, satellite imagery, and independent monitoring services. Component 4: Project Management (US$ 1.86 million, 11% of baseline cost). This component was to facilitate efficient project implementation and coordination with various government agencies at central, provincial, and district levels. It would also ensure effective collaboration and cooperation with relevant projects, donors and non- governmental organizations. 1.6 Revised Components 11. GOL requested Additional Financing (AF) to finance the geographic expansion of the project over three more years. The Board approved an IDA Grant of SDR 6.8 million (US$10 million) on December 18, 2008. The AF extended SUFORD coverage to eight additional Production Forest Areas (PFAs) in five new project provinces, covering an additional 1.3 million hectares (40% of all production forests). The Government of Finland (GOF) also provided additional Technical Assistance (TA) of EUR 9 million during the extension period. Additional activities were incorporated into the implementation plan under appropriate components as follows: Component 1: Support Services for Sustainable Forest Management (US$ 0.3 million), to allow GOL to build on and expand the PSFM approach and refine the national forestry sector policy and regulatory framework. Component 2: Sustainable Forest Management and Village Development (US$ 7.5 million), to cover expanding field implementation and capacity building to five new provinces and a limited number of selected PFAs. Component 3: Forest Sector Monitoring and Control (US$ 0.7 million), to support new activities for (a) the new Department of Forest Inspection (DoFI), Ministry of Agriculture and Forestry (MAF) and for (b) extending forest cover monitoring and change detection and, including forest biomass and carbon stock monitoring in support of Government’s working group on Reduced Emissions from Deforestation and Degradation (REDD+). 5 Component 4: Project Management (US$ 1.5 million), to support increased incremental operating costs associated with expansion of the project area. 1.7 Other Significant Changes 12. As noted above Additional Financing (AF) was requested to finance a three-year extension and geographic expansion of the project. 13. In response to a request from GoL, and following a mid-term review of the AF, an additional one-year extension was granted, postponing the closing date to December 31, 2012. The additional year was necessary to provide more time to complete ongoing activities, especially those related to ethnic community group activities following the resettlement of a large number of Hmong who returned unexpectedly from Thailand to Laos in December 2009. (See Key Factors in 2.2 below.) 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 14. Soundness of the background analysis. The preparation of SUFORD was based on detailed forestry sector research and analysis undertaken in partnership with the Swedish International Development Cooperation Agency (SIDA) and GOF (See Lao PDR: Production Forest Policy, Status and Issues for Dialogue, June 11, 2001). This provided a solid basis for understanding the broader dimensions of the policy and legal framework of the forestry sector in Lao PDR, its contribution to poverty reduction and economic growth, organizational and management issues, and sector monitoring challenges. 15. Lessons incorporated. The design of SUFORD built on lessons from the designs of the Forest Management and Conservation Project (FOMACOP, closed FY2001), from the Nam Theun 2 Hydroelectric Project (approved in FY05 and ongoing) as well as from related logging survey technical reports, and the previously mentioned joint analytical work. Many lessons were drawn from FOMACOP such as: (a) government policy framework and institutional arrangements need to be analyzed to fully understand the implications of any proposed model development and to ensure willingness to reform; (b) villagers must be involved in decision-making; (c) benefit-sharing arrangements must be negotiated and agreed by all parties; (d) all parties must understand the nature of the approved forest management plans and agreements to reduce conflict; and (e) compliance monitoring programs that can neutrally evaluate performance should be established. (SUFORD’s design incorporated specific lessons which are detailed in the PAD on pages 16-18). 16. Project objectives. The project objectives were clearly articulated and well aligned with the Borrower’s priorities and the CAS in effect at appraisal. The first project development objective, relating to sustainable forest management with strong community participation, focused on outcomes for which the operation could reasonably be held 6 accountable given the project duration, resources, and approach. However, the second objective relating to poverty alleviation was substantially broader and overly ambitious. This second objective highlighting potential forest contributions to poverty alleviation depended critically on efforts to achieve economic integration of target areas into the national economy, and these efforts fell outside the scope and duration of the project. The goal also depended on a more uniform distribution of timber across participating villages than was encountered during implementation. 17. Project components. The preliminary analytical work identified key sector constraints elaborated in Section 1.1 above. These were addressed through specific project investments and design elements, including mapping and demarcating PFAs; expanding the scope of community involvement; supporting timely data collection; improving forest management planning, introducing harvest levels in PFAs based on annual allowable cut estimations and strengthening both internal and external controls. The scale and geographic distribution of PFAs selected at appraisal were appropriate considering the relatively large size of each production forest area, the total number of anticipated beneficiaries (100,000) and the untested capacity of implementing agency staff. Design for the use of village development funds had one key weakness. The village development component stated that project funds would not be used to establish revolving funds but left open the possibility of villagers creating such revolving or micro- credit schemes and assumed that the necessary technical assistance and training would be provided if required. 18. Project institutional arrangements. The organizations chosen to play key roles in project implementation were correctly identified, but the institutional arrangements were complex and the number of organization involved exceeded the borrower’s coordination capacity. The roles and responsibilities of the various actors could have been further clarified as well. Furthermore, the project management unit was located in an agency responsible for extension services, rather than mainstream forest management. The project’s slow start-up can be attributed in part to limitations in the capacity of project management, but the acceleration of implementation following the 2005 mid-term review and a change in project leadership suggest that the design was correct if overly ambitious. 19. Substantial TA from Finland was established to support capacity building at both national and subnational levels. This support was well aligned with the project objectives and components and facilitated extensive capacity building, timely support for policy making and provided key inputs to monitoring and evaluation during implementation. 20. Government commitment and participatory processes. Early in project design GoL committed to adopting policies to support village participation in forest management. In December 2001, MAF agreed on the “main principles for village participation� in the sustainable management of production forests. On May 22, 2002, the Prime Minister’s Office issued Decree No. 59 on sustainable management of production forests incorporating these principles. From the outset the project was designed to support increased stakeholder involvement and to mainstream participatory 7 processes in production forest management. FOMACOP had raised expectations that were ultimately not fulfilled at the village level, so challenges inherent in participatory approaches to forest management were understood and recognized by GoL. 21. Assessment of Risks. The PAD assessed project risks as “substantial� which was correct. The risks identified during project design were relevant and considerable. The PAD classified the project as safeguards Category “A� based mainly on concerns related to the sector’s disarray noted above and a recent history dominated by unsustainable logging and associated negative impacts on local people who depended directly on forests for subsistence (both as safety net and for expansion of rotational agriculture). 22. The one risk rated “high� in the PAD focused on GoL’s continuing commitment to sector reforms. This risk was mitigated both before and during implementation through the establishment of a meaningful dialogue on forest policy based on sector work, policy dialogue and a sustained engagement with GoL officials. Another risk was inadequate consultation and participation with vulnerable groups, especially ethnic groups and women. Risk mitigation measures outlined in the PAD were effective overall, though as mentioned in Section 2.2 below there were a couple of important exceptions. 23. Quality at Entry. Based on the analysis above, the ICR rates Quality at Entry as moderately satisfactory. The PDO and design were well aligned with GOL policy and with the CAS and the analytical research supporting the project was solid. Lessons from previous and ongoing projects in the country and sector and from other forest projects were thoroughly incorporated in the design. However, as noted above, and institutional coordination challenges were underestimated and the risks and capacity issues were not adequately identified. The Results Framework included weaknesses as detailed in Section 2.3 below. The Bank’s Quality Assurance Group formally reviewed this project as part of its sixth Quality at Entry Assessment cohort, and rated the project “Satisfactory� both overall and in all its dimensions except for the risk assessment which was rated “marginally satisfactory�. 2.2 Implementation 24. SUFORD became effective in February 2004 but supervision reports consistently pointed out slow project progress. A comprehensive mid-term review undertaken in September 2005 led to important changes that included the appointment of a new project director, simplification of government financial management and procurement procedures, and improvements in annual planning and coordination between the central government agencies and the provinces. These actions brought the project back on track and the project rating was upgraded to Moderately Satisfactory in December 2005. Ultimately the accelerated pace of implementation was sustained, and it eventually supported the Bank’s decision to scale up the project with AF of SDR 6.8 million (US$10 million equivalent), approved on December 18, 2008. As mentioned in Section 1.7 above, an additional one-year extension was approved to allow extra time to consolidate ongoing activities to assist ethnic groups in Bolikhamxay Province. 8 25. A number of factors affected implementation as summarized below: (a) Slow project start-up – Limited capacity and inter-departmental coordination challenges resulted in slow progress and low disbursements during the first two years of project implementation. This was reflected at national and sub-national levels including in financial management and procurement. A change in leadership and streamlined implementation procedures following the 2005 mid-term review led to improved project performance; (b) Overlapping development activities – Given the large area covered by the project and the decentralized nature of land allocation decisions in Lao PDR, there were a number of overlaps between Production Forest Areas (PFAs) financed by the project and competing land uses. Identifying and addressing these overlaps consumed a significant amount of supervision time and resources. Details of two high profile cases are included in the next full paragraph below; (c) Developing skills and experience for working with ethnic groups and women – Participatory approaches in forestry were introduced but the shift from a top-down command-and-control model to a more balanced collaborative approach was delayed as implementing agency staff acquired new skills and gained experience necessary to engage effectively with ethnic and female beneficiary groups. More information on efforts with ethnic minority groups is provided in section 2.4 below; (d) Inter-agency coordination and partnerships – Efforts to develop smooth working relations among government departments and between government agencies and civil society organizations were only partially successful. The implementing agency’s ability to plan and coordinate field visits and deliver resources to partner organizations in a timely manner slowed implementation considerably. (e) Poverty reduction – Poverty reduction impacts were lower than expected in part because harvestable timber resources were not uniformly available among communities. Grant support for village development partially offset these differences but future projects will need to focus on balancing sustainable livelihood alternatives from both forest and agricultural resources. (f) Revolving funds – During the initial phase of implementation, most communities decided to use village development funds to establish revolving funds and to finance livelihood activities. However, there was limited capacity within the implementing agency at the time to support the effective management of these funds. Project reports also noted that repayment rates under these schemes were low. Ultimately it was decided that the AF would preclude establishment of new revolving funds (see Financing Agreement Schedule 2 Section 1, para 14 (d) (iv)). (g) Technical assistance –TA financed by Finland throughout project implementation provided analytical rigor and crucial support for monitoring and evaluation. TA also helped to identify emerging issues, supported policy dialogue, and provided learning opportunities for senior government officials and key implementing agency staff both 9 within the Southeast Asia region and across regions with south-south exchanges with Africa and Latin America. 26. Additional Financing. GoL’s commitment to sustainable forestry was evident in decisions to significantly expand the number and area of designated PFAs and create a dedicated Department of Forest Inspection. These decisions plus satisfactory implementation provided the rationale for additional resources to geographically expand SUFORD implementation and extend the implementation period for an additional three years. This allowed GOL to build on and expand the PSFM approach and to further develop and refine the national forestry sector policy and regulatory framework. To align with a Ministerial guidance (September 2008), implementation and administrative responsibilities for the project were transferred from the National Agriculture and Forestry Extension Services (NAFES) to the DoF. DoF also housed the National Project Management Office (NPMO) and experienced staff members previously involved in project implementation were transferred to DoF. 27. This change consolidated and concentrated overall project coordination and implementation responsibilities under DoF and also helped to resolve earlier difficulties stemming from the fact that responsibility for various aspects of forest policy formulation and field implementation had been distributed across different agencies. A similar consolidation was implemented at the provincial level where the Provincial Forestry Service (PFS) took on responsibility for project implementation and coordination at the provincial level. Under the new arrangement, DOF coordinated the inputs from all other agencies, including NAFES, DOFI, Department of Inspection (DOI), National Agriculture and Forestry Research Institute (NAFRI), and the Import and Export Department of the Ministry of Industry and Commerce (MOIC). These agencies continued to carry out implementation based on detailed annual work plans that were developed under the coordination of the NPMO. Project implementation was carried out under the guidance of a National Steering Committee (NSC) that included representatives from all implementing agencies and project provinces. The geographic expansion of SUFORD is detailed in the following table. 10 Table 1. SUFORD - Production Forest Areas Province Production Forest Area Area No. of (1000 ha) Districts Xayabury Phouphadum 95.2 3 AF site Vientiane Phougnuei 100.2 3 AF site Nongpet-Naseng 68.7 4 AF site Bolikhamxay Phoupasang-punghok 47.7 1 AF site Phakbeak 112.8 3 AF site Attapeu Xekhampho-Banbengvilay 37.9 1 AF site Huayvi-Nampa 75.0 2 AF site Sekong Houapen 89.5 2 AF site Khammouane Dong Phouxoi 147.4 3 Initial site Nakathing 105.4 3 Initial site Savannakhet Dongkapho 51.7 3 Initial site Dongsithouane 150.9 2 Initial site Champasack Silivanveuane 37.6 2 Initial site Pathoumphonr 27.0 1 Initial site Saravane LoaNgam 74.6 4 Initial site Phoutalava 61.8 3 Initial site Total 1,283.4 28. A second mid-term review of project progress was undertaken jointly with Finland in October 2010. This review generated several recommendations that included detailed component by component guidance and preparation of a first Operational Risk Assessment Framework for SUFORD. In addition the joint mission team discussed and agreed with the implementing agency that the additional financing period should be seen as a period to consolidate work undertaken during the first phase of SUFORD and to develop the enabling environment for scaling up PSFM to the national level (management planning capacity, field level skills acquisition, regulatory regime particularly for timber sales, and timber benefit sharing incentives to ensure sustainability). The joint mission placed strong emphasis on maintaining SUFORD’s high quality standards for forest management planning and taking as much time as necessary to develop a full understanding of PSFM at the village level, especially in areas dominated by ethnic groups. 29. Despite broad success, the project confronted a number of challenges. In Xekong Province logging associated with hydro and mining developments went well beyond approved areas and overlapped SUFORD financed areas; and in Bolikhamxay Province nearly 3,000 of the Hmong refugees repatriated from Thailand in December 2009 were resettled inside of the project-financed Phak Bueak PFA. The identification and successful resolution of these cases was pursued actively through implementation support missions, follow-up at the technical level, dialogue with other development partners and, where appropriate, involved the Bank’s Country Management Unit (CMU) in direct discussions with top GoL officials. Continuing implementation challenges included slow development of DoF capacity to effectively engage with ethnic groups and women and low levels of timber revenue. Major efforts were made recently to address these issues 11 and the follow-on project, Scaling-up Participatory Sustainable Forest Management (SUPSFM; approved May 31, 2013) will focus additional effort to improve engagement and livelihoods. 2.3 Monitoring and Evaluation Design, Implementation and Utilization 30. M&E Design. The project design included appropriate indicators for monitoring progress toward and achievement of the PDO although there were substantial differences between indicators listed in the main text of the PAD and the project design summary (PAD Annex 1). Efforts to update and improve SUFORD’s performance indicators were made in the AF Project Paper (PP) as targets were updated/scaled-up and PAD outcome/impact indicators were adopted as PDO indicators (see PP Annex4). Nevertheless, some AF targets were still very qualitative and no Intermediate Outcome Indicators (IOIs) were included in the revised Results Framework (RF). In retrofitting the PAD Annex 1 (logframe) and revised RF from the PP into the datasheet of this ICR the authors used PAD outcome/impact indicators (as revised in the PP) as IOI as these were deemed to best demonstrate achievement of the PDO (see also Section 1.3). (Note: Section F in the datasheet does not fully reflect the Results Framework in the PP due to system constraints.) 31. M&E Implementation. Appropriate data collection and analysis were undertaken. Project level monitoring and evaluation were the responsibility of the National Project Management Office (NPMO) with support from the Finnish TA team. NPMO provided regular quarterly updates on project activities and deliveries against an agreed work plan and timeline for completion. The Implementing Agency pursued an opportunity to implement a rapid assessment of forest cover change in an area where harvesting had been authorized to facilitate hydro and mining developments. This assessment provided an innovative and cost effective way to evaluate the impacts of development activities on project PFAs and adjoining forests (see also Sections 5.1 and 6.4). One gap in the M&E implementation was the lack of baseline information to measure project impacts on forest-based income and food security at household level. 32. M&E Utilization. M&E produced several impact assessments and case studies that contributed directly to improved project performance. Project studies were used to evaluate and refine project approach and strategy, e.g. increasing the focus on ethnic group engagement and strengthening outreach to women but this came only during the later stages of project implementation. Forest sector monitoring and data collection have improved substantially; however more training on information systems is needed at sub- national level. 2.4 Safeguards and Fiduciary Compliance 33. Environment and Social Safeguards. Specific attention was given to environmental and social safeguard aspects during preparation and implementation. SUFORD was rightly designated as a Category “A� project and triggered five Bank safeguard policies on Environmental Assessment, Natural Habitats, Forests, Indigenous 12 Peoples and Involuntary Resettlement. To comply with these policies, an Environmental Assessment was conducted and publicly disclosed through the Bank’s Infoshop and in Vientiane in the local language on March 20, 2003. A Resettlement Policy Framework and an Ethnic Group Development Plan were also developed and disclosed. In preparation for the AF, an updated Environmental Impact Assessment and Social Impact Assessment were completed as well an Ethnic Group Participation Strategy and Gender Mainstreaming Strategy. No additional safeguards were triggered. No resettlement occurred during the entire life of the project. In addition, appropriate institutional arrangements through training, orientation and capacity building were developed to ensure ethnic groups in the project areas would receive timely and clear information about project activities. 34. Following approval of the AF, greater emphasis was placed on strengthening extension services to ethnic group communities, women and poor households through additional staff, ethnic group advisors, and building partnerships. To evaluate the success of these efforts, a Social Safeguards Assessment was undertaken by the Bank covering both indigenous people and involuntary resettlement (August 2012). This assessment did not find any examples of material harm or forced resettlement; however the assessment identified continuing weaknesses in the project’s consultations with ethnic communities and women in the study area of 14 villages. The assessment made several recommendations as follows. At the project design stage, the assessment recommended mainstreaming safeguards in project design, building adequate capacity to meet safeguards requirements, and, creating mechanisms for mediation and dispute resolution. To engage ethnic communities the assessment recommended: (i) adopting indicators to evaluate the quality of the consultation process; (ii) offering separate forums for women; (iii) providing more time for ethnic communities to discuss and understand project objectives/alternatives; and (iv) utilizing more culturally appropriate tools and methods for information sharing. Introducing new ways to strengthen land and resource tenure and improve on participatory land use planning were also recommended. The assessment further recommended that future projects incorporate diverse incentives from timber, NTFPs, and payment for environmental services, including carbon. 35. Numerous challenges remained at the time of project closure with regard to inadequate capacity, especially at the sub-national level, mechanisms to efficiently transfer funds from the center to the provinces, and interagency coordination problems. As previously noted DoF capacity to effectively engage with ethnic groups and women remained low, and despite improve guidelines and capacity building efforts, this aspect and compliance with the Indigenous People’s safeguard was rated moderately unsatisfactory at closing. Addressing this gap will require continued efforts consistent with the recommendations detailed in the previous paragraph. These recommendations have already been incorporated into the design of the follow-on SUPSFM project. 36. External risks arising from issuance of a salvage-logging contract in Xekong Province, and the resettlement of Hmong returnees in Bolikhamxay Province, were addressed through timely risk management and supervision. Neither the salvage logging nor the resettlement of Hmong refugees was a result of the project, and neither was 13 considered a breach of applicable safeguard policies. Nevertheless the potential impact was promptly assessed and addressed with support from the CMU. The Task Team adopted a ‘proactive’ approach to safeguard management, and engaged actively with the Implementing Agency, provincial authorities and other Development Partners to identify and address the needs of the resettled Hmong. In the case of salvage logging the risk of potential non-compliance with the financing agreement was raised by the Task Team with GoL but a mutually agreed solution was reached with the issuance of a letter from the Prime Minister’s Office providing the necessary assurances and seeking continued collaboration between the Bank and GoL to improve the performance of salvage logging. 37. Procurement. Procurement capacity and associated risks were assessed during both project phases and rated substantial after mitigation measures. These measures included engagement of a qualified international procurement consultant for the Project Management Unit to work with the national procurement staff to implement the Procurement Plan and develop an agreed action plan for strengthening transparency and accountability in procurement. Procurement had been rated satisfactory in complying with Bank guidelines, but was downgraded to Moderately Satisfactory in 2010 as procurement fell behind schedule. The AF mid-term review in 2010 found a number of issues with project procurement and made recommendations to improve procurement performance related to strengthening transparency and accountability, improving the procurement plan and reducing delays in procurement. Adequate systems were in place for effective procurement although sub-national procurement continues to be a challenge. At closing, procurement was still rated moderately satisfactory due to weaknesses in planning procurement, assessing the quality of and adhering to the procurement plan, and contract administration. 38. Financial Management. The financial management capacity at the central and provincial level was duly assessed. Fiduciary risks were rated substantial after mitigation due to the overall weak control environment in the country and low capacity, particularly at the provincial level. During the AF, the same financial management and disbursement arrangements were maintained. Staff in the Finance Management unit had developed good capacity during implementation which was transferred to DoF, and this ensured continuity in both financial management and procurement. In addition, detailed capacity building, supervision, and controls were implemented during the AF period. In addition, integrated procurement and financial management supervision was introduced which provided regular feedback and identified areas for improvement. During the AF, FM performance was rated moderately satisfactory due to delays in advances clearing, the fixed asset register not being up to date, etc. Audits were conducted and submitted to the Bank on schedule and received unqualified results; IFRs were of acceptable quality and were submitted on time. 2.5 Post-completion Operation/Next Phase 39. GoF has extended its TA through September 30, 2013 and a formal request for continued GoL budget support has been prepared and submitted. GoL has finalized its REDD+ Readiness Preparation Proposal (R-PP) and is expected to receive a US$ 3.6 14 million grant from the Forest Carbon Partnership Facility (FCPF) shortly. Lao PDR identified three eligible Forest Investment Program (FIP) projects and received preparation grants in 2012 (totaling US$ 1.3 million). GoL is working closely with the Bank, Asian Development Bank (ADB) and International Finance Corporation (IFC) to prepare FIP operations and all three projects are expected to become operational in FY14. The follow-on SUPSFM project, approved by the FIP steering committee (March 2013) and the Board (May 2013), expands implementation of PSFM into Northern Laos and helps to address previous gaps, including strengthening livelihood opportunities and improving engagement with ethnic groups and women. Substantial Finnish TA support was jointly developed and appraised and is expected to be available throughout the implementation period. In addition, preparations are being made to mobilize funding (US$4.5 million) from the FIP Dedicated Grant Mechanism (DGM) to support community engagement and involvement of ethnic groups and a proposed IDA-financed Natural Resources and Environmental Management Project is being prepared with the Ministry of National Resources and Environment (MONRE) as the implementing agency. All PFAs are expected to have management plans by 2015. GoL plans to utilize its own financial resources to support management plan preparation in Phongsaly, Houaphan and Xiangkhuang Provinces and the Japanese International Cooperation Agency (JICA) is expected to provide support for drawing up management plans for PFAs in Luang Prabang Province. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Rating: High 40. Over its 10-year life, SUFORD’s objectives were strongly linked to the Bank’s assistance strategies. The Country Assistance Strategy (CAS, Report 19098-LA) in effect at appraisal in 2003 focused on poverty reduction, and had two pillars directly supported by SUFORD: (a) deepening structural reforms, part of which was reforming the regulatory environment for the private sector and other sectors such as agriculture and forestry through capacity building; and (b) investing in rural development and natural resource management, by ensuring appropriate forestry management techniques for environmental sustainability. 41. When the AF was approved in 2008, SUFORD’s objectives remained well aligned with the CAS of 2005 (Report 31758-LA). Specifically, CAS objective 1 was to sustain growth through improved management of key drivers, notably rural development and natural resource management. SUFORD contributed toward improving governance and environmental management of natural assets; strengthening the collection and use of revenues from natural resources to help reduce poverty; maintaining productive forest cover as part of rural livelihoods, reducing the deforestation rate and improving rural livelihoods (CAS, p 22). SUFORD contributed, to a lesser extent, to CAS objective 2 by strengthening public financial management for ensuring that public resources would be 15 efficiently and transparently managed so that increased natural resource revenues would be channeled to poverty-reducing services (CAS, p. 26). 42. Upon completion in December 2012, it remained highly relevant to the new Country Partnership Strategy (Report 66692-LA), whose second strategic objective was sustainable natural resource management, particularly outcome 2.3 “Sustainable management and protection of forests and biodiversity� (p. 27). The DoF would continue to develop and expand its program of independent certification through the Forest Stewardship Council and its engagement in Global Climate Change adaptation and mitigation efforts through the Forest Carbon Partnership Facility and Forest Investment Program. 43. The project also remained consistent with GOL strategy. In its Seventh National Socio-Economic Development Plan (2011-15), GOL signaled its intentions to attract significant foreign direct investment and to increase forest cover from 40% in 2010 to 70% by 2020. On May 31, 2013, the Bank approved SUFORD’s follow-on project, “Scaling up Participatory Sustainable Forest Management Project�, which demonstrates GOL’s continued strong commitment to sustainable management of the sector and the importance it places on participatory forest management. 3.2 Achievement of Project Development Objectives (PDOs) Rating: Moderately Satisfactory 44. The PDO was to assist the Borrower to achieve the sustainable management of production forests to alleviate rural poverty in the Project Provinces by implementing the forest policy reform actions and policies set forth in its Letter of Forest Management Policy. The analysis of the ICR focuses on two key elements of the PDO: (i) achieving sustainable forest management; and (ii) project contributions toward poverty alleviation as measured by the available baseline data and project monitoring indicators. 3.2.1 Sustainable Management of Production Forests (Rating: Satisfactory) 45. Policy, legal and incentive framework enables expansion of PSFM. The forestry sector, and more broadly the natural resource sector, has seen significant policy and legal framework improvements to which the project has made both direct and indirect contributions. The PSFM approach introduced by SUFORD has been adopted nationally, attracting financial support from other Development Partners (JICA and FIP) and GoL with implementation in all PFAs expected by 2015. A Presidential Decree (2012) drafted with project support substantially increased timber revenue-sharing (12% of gross revenue) with all communities in PFAs and reinvestment in forest management at local level. Before the project communities had zero entitlement to timber revenue. 46. Priority natural production forests are brought under PSFM. Key targets for this objective relate to: (i) area under sustainable management, (ii) quality and completeness of operational plans, and (iii) an expanding area of forest under certification. SUFORD brought 1.3 million ha (about 40% of the total area) under 16 sustainable forest management and all project PFAs have approved management plans. Management plans no longer focus narrowly on timber extraction but include co-benefits such as improved biodiversity and wildlife conservation values. High Conservation Value Forest (HCVF) areas have been identified and excluded from harvest areas. It is still too soon to measure the impact of co-benefit inclusion on abundance of wildlife but studies elsewhere have demonstrated the positive impacts. Independent Forest Certification has been introduced to Lao PDR with the support of SUFORD. The total area under certification is 3,378 km2, of which the Forest Stewardship Council (FSC) forest management standard is applied in 806 km2, and the FSC controlled wood standard is applied in 2,572 km2. 47. Sector monitoring and control system functioning. Key targets for this objective included: (i) reduction in illegal land conversions and logging operations, ii) forest cover change detection piloted, iii) integrated forest inventory and cover monitoring and data management system developed, (iv) internal control system completed, (v) forest law enforcement program developed and implemented, and vi) maintenance and expansion of independent certification of forest under PSFM. A new Department of Forest Inspection (DoFI) was established in 2008. DoFI received targeted support under SUFORD AF (for vehicles and equipment) and a Japanese PHRD grant (US$ 0.5 million) and has built significant capacity for forest law enforcement. A Forest Law Enforcement Strategy 2020 was developed with project financing and formally approved (2013). 48. Forest resources in project areas have been better protected through the declaration of PFAs, boundary demarcation and local public display of forest maps. DoF and DoFI gained the tools and capacity to manage risks from concessions and minimize unauthorized logging in PFAs. As noted in Section 2.2, despite broad success in forest law enforcement, notable exceptions occurred on two occasions in Xekong and Bolikhamxay Provinces. 49. There was a demonstrated decrease in the rate of deforestation in seven SUFORD financed PFAs compared to outside areas (SUFORD 2012). Deforestation in PFAs is concentrated in degraded forests with limited growing stock. Deforestation in high potential commercial production forests with high canopy cover has declined. Declines are attributed to project-developed PFA rules banning forest conversion and concessions, and formulation of forest management plans that zone forest uses and limit harvest levels. 3.2.2 Alleviate Rural Poverty (Rating: Moderately Unsatisfactory) 50. Villagers’ well-being and livelihoods improved through benefits from sustainable forestry and community development efforts. Key targets were: (i) increased availability of subsistence and economic NTFPs and wildlife resources, (ii) broad-based participation and equitable sharing of benefits, (iii) increased participation of women, ethnic minorities, and poor households in forest management activities, including paid labor, and in leadership roles in VFOs, and (iv) increased number of village forestry committees established and functioning. Overall the project achieved considerable results in broadening the base of participation among communities with important, though 17 partial, increases in participation among women and ethnic groups. Over 700 VFO and committees, and 49 group village forestry committees were established. The PSFM system developed under SUFORD is poised to make a sustained contribution to local livelihoods through implementation of the decree on timber revenue sharing. 51. The total disbursement for village development grants was US$ 4.6 million of which US$ 3.4 million was distributed in the original project provinces and US$ 1.2 million in the AF provinces. The timber revenue received by communities by end 2011 was estimated at US$150,000. A time series study was undertaken to assess the impact of village development grants in the original provinces with a baseline in 2009 and a follow up in 2012. In many communities village development grant proceeds were converted to revolving funds and distributed in the form of small loans with low interest targeted to the poorest community members. In 2009, the proportion of poor households was almost the same among households that received or did not receive a loan, 29% and 28% respectively. In 2012, it was found that among those households that had not received loans, the proportion of poor households had dropped to 14%. Among those who had received loans, the proportion of poor households had dropped to 9% suggesting that poverty reduction accelerated among loan recipients. 52. Measured against the key indicators the outcomes of this sub-component are judged to be moderately unsatisfactory given that the impacts in terms of household income and ethnic group engagement and participation were less than expected and important lessons for future design and outcome monitoring must be highlighted. Despite the substantial improvements outlined above, anticipated revenue flowing from timber harvests to participating communities has not yet materialized. This gap is due to the relatively low stocking levels in PFAs, the conservative harvest levels and the uneven distribution of timber across communities. Project data indicate that only 44% of targeted communities in PFA areas were able to receive revenue from harvested timber during the implementation period as against a target of 60%. NTFPs provide sustainable forest based income but significant additional efforts are needed to support the identification and implementation of livelihoods from forestry resources. This will require inter- disciplinary and inter-institutional efforts over a sustained period. 3.3 Efficiency 53. The efficiency of the project, including “value for money� is rated moderately satisfactory recognizing that project costs were reasonable in terms of the benefits generated and outcomes achieved when compared to other forest sector operations both in terms of cost per unit area brought under management plans and number of beneficiaries involved. Incremental operating costs were higher than anticipated but these costs were largely related to mobilizing project staff to meet directly with local beneficiaries in remote field sites and should be considered as supplemental to project training and capacity building costs. Both the Departments of Forestry and of Forest Inspection have been able to increase their efficiency and cost effectiveness by adopting and institutionalizing the use of modern management tools, including internal monitoring and control systems and remote sensing for assessment of forest cover changes. Some 18 inefficiency and delays resulted from the realignment of responsibilities following the establishment of the new Ministry for Natural Resources and Environment. Efficiency can be restored through cooperation/coordination agreements, prompt hiring to fill skills gaps and by improving recruitment and employment conditions. Detailed economic analysis of project costs and benefits is presented in Annex 3: Economic and Financial Analysis. 3.4 Justification of Overall Outcome Rating 54. Based on: (a) Relevance - High; (b) Project Development Objective achievement – Moderately Satisfactory; and (c) Efficiency – Moderately Satisfactory, the project’s overall outcome is rated Moderately Satisfactory due to weaknesses in achievements in poverty alleviation (detailed in section 3.2.2 above). 3.5 Overarching Themes, Other Outcomes and Impacts 55. Poverty Impacts, Gender Aspects, and Social Development. The project has contributed to poverty reduction in two key ways – distribution of village development grants and sharing timber revenue with village communities. Section 3.2 provides an assessment of the PDO related to poverty alleviation. Data for the AF provinces indicates that the proportion of poor households represent 44% of total households. Information from the first quarter of 2010-2011 indicates that women’s share of the work input and wages was 11% and ethnic minority groups received 37%. The share of women remains low but ethnic minority groups have benefitted in proportion to their number in the total population covered by the project. Revenue from timber sales has been utilized mainly for public investments such as roads, bridges, village halls, that benefit the community. 56. Institutional Change/Strengthening. A key outcome of the project from 2003- 2012 was strengthening of the capacity of the DOF and the DoFI. The project has also helped DoF develop a set of comprehensive guidelines for PSFM and use of the village development grants, including guidelines for working with ethnic groups. An impressive number of training courses have been delivered -- 7000 training days for staff -- and this has helped newly introduced approaches find their way into practice. Studies conducted on the performance of government staff show that skills have improved, especially in land use planning, and village development planning although financial skills still need further improvement especially at the sub-national level. SUFORD also assisted in developing a set of management tools, including a national forestry reporting system, internal monitoring system, document management system, budget planning system, and budget monitoring system. The implementation of these systems is under way but mainstreaming their use requires further training which will be delivered under the follow-on project. 4. Assessment of Risk to Development Outcome 57. The risk to Development Outcomes is rated Significant based on the risks below: 19 (a) There is likelihood of negative impacts to sustainable forest management in production forest areas through development of activities such as hydropower, mining, salvage logging, and concessions. Efforts to strengthen forest sector monitoring and forest law enforcement and governance could become weaker in deference to rent seeking unauthorized logging and land conversions outside authorized areas. Forest cover change detection and monitoring may not receive the requisite institutional commitment and financial resources. Rating: Moderate. (b) SUFORD has made an important contribution to help create an enabling environment for Participatory Sustainable Forest Management at the national and sub-national levels. This is by no means a task that is complete, especially in the context of the understanding that state control over management of forests in South East Asia is still dominant. There is a possibility that the forestry sector institutions may restrict the space for participatory forest management, which has been created by SUFORD, as also by other donor and development partners in Lao PDR. Rating: Moderate. (c) Considerable project resources have been invested in capacity building in participatory forest management, technical forest management, and social and institutional methodologies and skills. In the absence of continued development investment, the GoL may not be able to provide finances to continue to strengthen these elements. Mainstreaming and institutionalization of many of these practices and innovations still need time and investment. This could lead to demotivation, loss of skills and attrition that would have a negative impact on already limited capacity within the forestry sector in Lao PDR. Rating: Significant. (d) Climate change presents an unmitigated and unquantifiable risk to the development outcome of this project. Multiple climate related threats including drought, flood, forest fire, and insect and disease prevalence may all impact sustainable forest management in Lao PDR. Rating: Uncertain. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance 58. (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory. The Bank’s preparation team was well rounded with a very senior forestry expert as task team leader, and with specialists in procurement, FM, and safeguards specialists. Together with GOF, SIDA, and the Food and Agriculture Organization (FAO), the Bank team did substantial analytical work which correctly identified the issues and constraints in the country’s forestry sector. The team designed a project whose core objectives and approach responded well to those issues, which was well aligned with GOL’s strategy and the Bank’s CAS, and which incorporated lessons learned from past interventions. The project’s geographical scope was rightly limited to four contiguous provinces in southern Laos rather than having scattered locations around the country. The team assisted the borrower to gain access to project preparation funding from the Japanese Government with a PHRD Grant to prepare a detailed plan for 20 developing and implementing community-based forestry management and for preparing a detailed assessment of the legal and institutional framework for community-based sustainable forest management. The Bank team provided guidance on the preparation of the necessary safeguards documentation. Project preparation from the concept review to approval lasted 16 months, at a cost of approximately $367,000. 59. However, there were some shortcomings related to assessing capacity of the implementing agency, and broader stakeholder capacity weaknesses. Inadequate capacity led to an extremely slow start to the project, and delays in establishing satisfactory management, financial and administrative mechanisms. Appropriate assessment of capacity needs and subsequent adjustments in the project design would have reduced delays in project start-up. As mentioned in Section 2.3, the results framework would have been more rigorous if indicators on poverty alleviation had been included. The risk assessment of Substantial was correct, but risks related to ethnic minorities and women could have been more realistic. The Bank’s Quality Assurance Group assessed the project as Satisfactory overall and in all its dimensions, except for the risk assessment which was rated marginally satisfactory. They expressed concern about upcoming country and sector management changes, and possibility that the incoming management team might underestimate the project’s riskiness and not sufficiently support the team. 60. (b) Quality of Supervision; Rating: Satisfactory. Supervision throughout the project period was satisfactory and highly responsive to project needs. Supervision in the first two years was difficult due to implementation delays, as the implementing agencies struggled with weak capacity especially in procurement and FM and coordination at the different levels – national, provincial, district. The Bank rightly downgraded the project to unsatisfactory in December 2004. The Bank supervision team identified the weakest points as being related to project management, inter-institutional coordination and inefficiencies in fund flows However, significant issues were resolved as a result of changes made during the mid-term review in September 2005 and the project ratings were upgraded to moderately satisfactory by December 2005. Supervision thereafter remained consistent and provided timely technical advice to the borrower. During the last three years of the project, Bank supervision was alert, responsive and, in close coordination with the CMU, addressed external threats to the PDO. These have included issuance of a salvage-logging contract in Xekong Province, and the resettlement of Hmong returnees in Bolikhamxay Province. (Team supervision inputs for safeguards and fiduciary issues is further elaborated in Section 2.2.) 61. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory. The Bank overstated the PDO somewhat by including poverty alleviation, an aspect that was not fully under the control of the project. Furthermore the Bank did not provide monitoring indicators to measure progress toward poverty alleviation, and in the end, this contributed to the overall moderately satisfactory project outcome rating. The Bank also overestimated the capacity of the implementing agencies at appraisal, but the resulting start-up delays were resolved through the mid-term review in 2005. Thereafter the project achieved most of its annual objectives as per plan and budget. The project supervision team allowed for substantial improvements in implementation modalities and recognized the borrower’s commitment and improved capacity to scale up 21 the project and processed AF in late 2008. Along with normative supervision, the Bank also used other tools to remain vigilant, and to take early steps to manage and mitigate likely negative impacts to safeguard project objectives. 5.2 Borrower Performance 62. Government Performance; Rating: Moderately Satisfactory. GoL provided the necessary support including adequate and timely provision of counterpart funding. GOL provided the project with appropriate staff and the National Steering Committee performed its duties with efficiency. Contract processing and financial audits were carried out without any undue delays. Coordination mechanisms between the MoF and MAF were effective in project management. Changes in the supporting legal and regulatory frameworks and policies were implemented despite differing views and incentives among the responsible agencies. GoL ensured compliance with the legal agreements and addressed concerns in a timely manner when issues were raised. During project implementation GoL identified and decreed the formal expansion of Production Forest Areas on two occasions. Decree 29 in 2006 and Decree 270 in 2008 increased total PFA area from an initial 656,000 ha to 2.5 million ha and eventually to 3.1 million ha. While the approval of the Decree for PFAs was timely, there were delays in policy guidance due mainly to the inter-ministerial and inter-agency involvement of multiple agencies. 63. Implementing Agency Performance; Rating: Moderately Satisfactory. Implementing Agency (Department of Forestry, Ministry of Agriculture and Forestry) performance is rated moderately satisfactory based on the following:  DoF was able to address key weaknesses identified in the first mid-term review by introducing significant management and procedural changes;  NPMO maintained an open and frank dialogue with the Task Team and Finnish TA team with respect to implementation challenges throughout the project and this facilitated identification of problems, discussion of proposed solutions and fostered an iterative learning process;  NPMO was also highly persistent in pursuing the resolution of difficult issues through internal and external policy and procedural debates (Hmong resettlement and salvage logging are just two examples); and  DoF played a key role in ensuring that development activity overlaps with PFAs were avoided, minimized and mitigated. Overlapping concessions were requested on numerous occasions but these requests were routinely rejected if they were not compatible with PFA management objectives and the PDO. 64. Despite active and frequent (during AF) supervision inputs, substantial technical assistance from Finland, and flexible programming, the Implementing Agency was still grappling with a number of weaknesses at the end of the project including:  Coordination with partner agencies both in terms of joint planning and timely transfer of financial resources remains as an area for further improvement; and 22  Despite significant investments in financial management and procurement capacity and systems there was only modest improvement in the performance of these functions at sub-national levels. 65. Justification of Rating for Overall Borrower Performance; Rating: Moderately Satisfactory. Government and Implementing Agency performances were rated Moderately Satisfactory as was the overall project rating. Therefore overall borrower performance is also rated Moderately Satisfactory. 6. Lessons Learned 66. SUFORD was successful in achieving considerable results in a challenging institutional and dynamic external environment and contributed significantly to sustainable management of the forestry resources of Lao PDR. Many lessons have been generated for future investments. 67. Institutional Arrangements. One of the key challenges in the original phase of the project was the institutional arrangements did little to clarify the roles and responsibilities of the organizations involved. The project management unit was located in an agency responsible for extension services, rather than mainstream forest management. This was duly addressed through the mid-term review in 2010 which redesigned the institutional framework and moved project management responsibility to the Department of Forests. This brought project management and extension under one institutional umbrella, improved decision-making, reporting, accountability, and implementation. 68. Capacity Assessment. While significant investments and improvements have been made in strengthening capacity of the implementing agency, the importance of accurately assessing capacity during appraisal cannot be overstated. Overestimation of capacity led to establishing project targets that were beyond the capacity of the implementing agency and led to significant delays in project start-up. Overall, the project has been successful in enhancing capacity but it could also have addressed broader institutional capacity requirements, and developed a strategy to meet them within and beyond the project. 69. Community Development Challenges. The complexity of social dynamics and community development was also underestimated, and the diversity of ethnic groups, resource practices, and languages compounded these challenges. These were partially addressed through improved staffing, supervision, and recommendations. However, given the inadequate capacity of the implementing agency in social and institutional aspects, many of these recommendations could not be fully implemented during the life of the project. This problem is not specific to the project, but has been an issue for forestry projects and institutions and requires a long-term commitment to analysis, resources, and iterative learning. 70. Finance and Procurement Arrangements. Although the implementing agency had prior experience of Bank financing and procurement compliance requirements, 23 establishing the required arrangements took longer than anticipated. The project took steps to strengthen capacity by placing financial management and procurement consultants, and by offering training programs to implementing agency staff. A key lesson for the project was the importance of assessing fiduciary and procurement protocols, capacity for compliance and take early steps to mitigate delays. 71. Inclusive Principles and Practice. The project adopted an inclusive approach and prioritized ethnic group communities, but translating these principles into practice remained a challenge. For future projects an important lesson is to ensure that social, equity and community issues are mainstreamed in design, adequate capacity is created through training, orientation and partnerships, and equity issues are monitored through the project cycle. Many positive lessons were also learned from attempts to address gender issues. These have included the importance of having dedicated female staff, and an advisor, partnerships with organizations with extension skills and experience of working with women. In future projects, further analysis is required on barriers to women’s participation, mainstreaming gender issues prominently in project design, integrating women-specific perspectives in forest management plans, improving training of staff, and including processes which enable appropriate outreach to women. In addition, monitoring methods need to be refined, including gender budgeting and social audits. 72. Independent PSFM Monitoring. The project introduced the concept of rapid surveys conducted by professionals both outside and inside line organizations to focus on selected activities. The objective was to provide implementing agencies with timely feedback so that corrective action can be taken while the work was ongoing. This has been a useful tool for DoF managers and needs to be developed and expanded further. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partner 73. No additional comments were received from the borrower/implementing agency on the draft ICRR. The views of the borrower on the SUFORD project are summarized in Annex 6. 24 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) Support Services for Sustainable 0.93 3.86 415% Forest Management Sustainable Forest Management 9.99 22.74 228% and Village Development Forest Sector Monitoring and 2.40 6.31 263% Control Project Management 1.81 7.04 389% DOFI Capacity Bldg. (PHRD) 0.50 – Total Baseline Cost 15.13 40.45 267% Physical Contingencies – 0.74 0.00 Price Contingencies – 0.58 0.00 Total Project Costs 16.45 40.45 246% Front-end fee PPF 0.00 0.00 – Front-end fee IBRD 0.00 0.00 – Total Financing Required 16.45 40.45 246% (b) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) Borrower 0.55 0.55 100% FINLAND: Ministry for Foreign Parallel 6.00 19.50 325% Affairs (original (original and amount) additional amount) International Development IDA Credit 9.90 19.90 201% Association (IDA) and Grant (original (original and amount) additional amount) JAPAN: Policy and Human Resources PHRD Grant 0.50 Development (PHRD) Total 16.45 40.45 246% 25 Annex 2. Outputs by Components 1. SUFORD had four components. In this Annex outputs by component are reviewed against those identified in the PAD and PP. Component 1: Support Services for Sustainable Forest Management 2. Under component 1 expected outputs included:  Sectoral Policy Reform Support  Establishment of the Permanent National Production Forest Area  Forest Management Guidelines and Procedures  Strengthening Sustainable Forest Management Capacity 3. The project paper revised the expected targets under component 1 and included delivery of the following; Annual Government consultations at central and provincial levels determine the conduct of logging and timber sales business in Lao PDR on the basis of sustainable yields as determined in PFA management planning replacing quota system; Policy dialogue on support program for development of a permanent Protection Forest System, including methodologies, criteria and procedures and mapping, developed; and Inter-ministerial agreements (MAF, MOF, PMO, MOIC) on procedures for transparent, competitive log sales and wood pricing and fair benefit sharing and transfer systems finalized and applied in all project provinces. 4. Sectoral Policy Reform Support. Support was provided throughout project implementation and Finnish TA financed many elements of the support for forest sector policy reform. The items highlighted below represent only a sample of key outputs. 5. Forestry conferences were held annually and resulted in concrete recommendations that created a sound basis for improving the policy and legal framework and enhancing the effectiveness of forest operations in the sector. Recommendations from the conferences were often though not always adopted promptly as Presidential Decrees. 6. With support from SUFORD a drafting committee was formed under DOF that included members from the Ministries of Finance and Industry and Commerce. The joint committee prepared draft legislation for timber revenue benefit sharing. The Prime Minister approved a Decree on timber revenue benefit sharing in January 2012. A key element of the new legislation transfers 70% of timber revenue to the Treasury and divides the remaining 30% among other stakeholders/activities, including 12% for communities. The new system makes additional funds available for village development and for implementing PSFM. Although the revised benefit sharing mechanism was endorsed it has not been applied because no quota was approved in the final two years of project implementation. 26 7. The timber industry-restructuring program developed criteria for evaluating the ability of individual forest enterprises to add value and export finished and semi-finished wood products. The criteria were used to determine the eligibility of individual enterprises to participate in timber auctions and secure raw material. More recently there has been a focus on promoting the establishment of Chain of Custody systems (CoC) in wood processing enterprises. 8. Several analyses related to timber sales were conducted and MoIC revised the timber sales guidelines based on the proposed recommendations. Analysis of quota distribution in the previous years was initiated. A preliminary analysis on the present and potential contribution of wood industries, REDD+, and PFA management and NTFP collection were carried out. 9. SUFORD supported GoL preparation and piloting of a payment mechanism to compensate communities for watershed protection services. A technical report on payments for forest ecosystem services, specifically forest carbon/REDD+, biodiversity offsets, watershed payments and eco-tourism was prepared. 10. The project supported DOF participation within the UNFCCC REDD+ negotiations by preparing policy briefs, drafting national positions and providing briefings for various stakeholders. SUFORD advisors provided support to the national REDD Task Force, especially with respect to developing the R-PP, Conference of Parties negotiator training and holding seminars for capacity building on REDD. Several preliminary market studies for forest carbon offsets (including REDD+), along with policy reports to support the development of a national REDD+ position within the UNFCCC negotiating process were undertaken. 11. Establishment of the Permanent National Production Forest Area. The Prime Minister’s Office issued a decree establishing the framework for management of Protection Forests. SUFORD supported a study to examine management issues and to propose zonation criteria to assist in selection and zonation of the Protection Forest Areas. 12. During project implementation, GoL identified and decreed the formal expansion of Production Forest Areas on two occasions. Decree 29 in 2006 and Decree 270 in 2008 increased total PFA area from an initial 656,000 ha to 2.5 M ha and eventually to 3.1 M ha. 13. In 2009, DOF transferred the responsibility for monitoring related to PFAs and forest certification from the Planning Division to the Production Forestry and Forest Business Management Division. 14. Forest Management Guidelines and Procedures. An extensive set of forest management guidelines and procedures were prepared during SUFORD (see Annex 8: List of Supporting Documents). Selected key outputs are listed below. 27 15. Reduced Impact Logging regulations were approved under the Code of Practice for Harvesting in Production Forest Areas. 16. Revision to the Permanent Sample Plots (PSP) guideline manual for data collection and establishment was completed with training at central and provincial level being conducted in all provinces. 17. Two studies were undertaken on Habitat Classification and Management Models; the findings suggest current management methods are adequate. 18. Worldwide Fund for Nature (WWF) and SUFORD collaborated to produce a booklet promoting Laos FSC timbers and NTFP species (Rattan). 19. Strengthening Sustainable Forest Management Capacity. 20. SUFORD supported participation of staff from MAF and MoIC in the ASEAN forest certification process as required. The Department of Forestry and the Department of Import and Export (DIMEX) participated in the ASEAN process, which is supporting the development of internal and external monitoring systems for forestry in Lao PDR.A complementary grant of US$500,000 became available from the Japan Policy and Human Resource Development (PHRD) Grant facility under the World Bank. 21. The project assisted a number of domestic wood processing manufacturers in developing and adopting Chain of Custody (CoC) in their operations. The process of connecting these factories with other Global Forest and Trade Network (GFTN) members in the region is now in progress. A marketing booklet on Forest Stewardship Council (FSC) timber and non-timber forest products is being finalized and published. 22. Several studies related to management models were conducted, including a rapid review of the role of Traditional Ecological Knowledge in forest management, a study on dry forest management options, an initial biodiversity assessment, an initial review of forest restoration strategies. The findings were incorporated in relevant guidelines. 23. A review of planned or proposed development activities that overlapped the SUFORD PFAs was prepared and updated periodically during the AF phase. This provided an opportunity to identify and discuss any upcoming development activities with a potential to disrupt or delay project implementation. Given the large footprint of SUFORD it was understood that some overlapping activities would occur and some of these might require selected areas to be excluded from production purposes. This exercise facilitated discussion among government agencies and between GoL and Development Partners on how these tradeoffs were being managed. 24. Several REDD-related studies were carried out during the project, including analyses on baselines, references levels and feasibility of financing in Dong Sithouane PFA, a review of markets for carbon offsets, and an analysis of the village development 28 fund examining the SUFORD project’s impact on poverty reduction and its implications for REDD+ activities. In addition, Annual Review of REDD+ activities in Lao PDR, several REDD+ Briefing Notes for DOF and a proposal for a pilot project were prepared. 25. The DOF developed a database of Lao timber species and ToR prepared for studies on Protection Forest System and management models in dry and mixed deciduous forests. Component 2: Sustainable Forest Management and Village Development 26. Under component 2 outputs identified during project design included:  Key natural production forests in project provinces under sustainable management providing products and services for the market and to meet household needs and  Village organization capacity strengthened and forest revenue and project funds used to implement village development plans to meet villagers priority needs 27. The project paper revised the expected targets under component 2 and included delivery of the following;  All 16 PFAs in 9 provinces with approved management plans by 2011, including annual operational plans for 40% of all identified FMAs.  Independent certification maintained at least until 2011 and number FSC certified of FMAs increased to 20.  Provincial level pilot analysis (based on new remote sensing technology) completed for 2 provinces to allow for comparison and analysis of deforestation trends 1992-2002 - 2008.  Community-based NTFP monitoring system in place in selected PFAs/FMAs indicating trends in NTFP abundance and sustainability.  Broad-based participation and equitable benefit sharing of forest benefits extended to all project areas; VD plans completed in 80% of all new project villages and No. of villages receiving timber revenues increased to 60% in existing project areas.  Participation of ethnic minorities and poor households in forest management activities, including paid labor, VFOs, VFC and GVFC in new project areas, disaggregated by ethnic group and poverty level.  VFO, VFC and GVFC established and functioning in all new FMAs that will be identified during forest management planning. 29 28. Production Forest Area Management. At project outset there was no Production Forest system in place in Lao PDR and joint analytical work undertaken with Sweden and Finland highlighted poor financial performance and general disarray in the forest sector. At the time of project completion, Participatory Sustainable Forest Management (PSFM) has been adopted as a national program expected to be operational in all PFAs by 2015 and Forest Management Plans for all PFAs selected for inclusion in SUFORD were completed, including annual operating plans. 29. The annual allowable cut for the SUFORD provinces was estimated at 34,483 m3 of which 15,262 m3 is in the new provinces and 19,221 m3 in old provinces. PAFOs conducted pre-harvest inventories and other associated activities involved with preparation of timber harvesting. Signage was installed to demarcate forest restoration areas. Exercising an abundance of caution the timber quota and the actual harvest were both below the estimated Annual Allowable Cut in SUFORD provinces. 30. During implementation, SUFORD supported participatory approaches to the development and implementation of management plans, following annual operations plans, restoration activities, forest harvest planning and pre-harvest inventory and harvesting of timber. The project worked most extensively with communities that had available timber resources. Community members were involved in all aspects of forest management planning, patrolling, and timber production although harvest operations were undertaken by trained professionals. 31. With project support the DOF developed, tested and introduced a manual for forest and land use zonation. Initially capacity building focused on developing a pool of trained DAFO staff to conduct project activities. A preliminary operability analysis was used to identify the areas potentially most suitable for forest inventories and forest management. A study of feasibility of different harvesting techniques was also completed. Additional information on forest monitoring and forest certification is included under component 3 below. 32. Village Capacity and Priority Development Needs Addressed. Province and District staff received training to introduce the project concept, set up village organizations and delineate village boundaries in all provinces. A Village Development Manual was prepared to guide data collection and link village development to forest management. 33. An Ethnic Group Development Strategy was prepared and agreements were signed between the Department of Forestry and the Lao National Front for Construction and the Lao Women’s Union to support implementation of ethnic development work. Ethnic villages were grouped into categories depending on the degree of support they were expected to need; associated procedures of work were developed. Ethnic support teams at province and district level were established and trained and they visited priority villages according to agreed work plans. 30 34. District extension officers visited all participating villages and prepared plans for the strengthening the capacity of village organizations. Various training meetings were held to improve monitoring of transfer and use of Village Grant funds. District staff monitored the status of existing village development funds. VD Grants were transferred to all villages and used to support village level sub-projects (mostly for livestock). During the first phase of SUFORD VD grants were provided in two tranches ($3,000 and $5,000) to each village. In many instances communities chose to manage these grants as revolving funds targeting the poorest residents to receive small low interest loans. Recognizing that there was limited capacity within DOF and in Laos more generally to manage these revolving funds the practice of revolving grant funds was discontinued during the AF phase. 35. The TA conducted an impact assessment of the village development activities and extension provided to villagers and government staff in collaboration with an independent consultant. In addition, the TA conducted an inventory of the infrastructure projects made with SUFORD funds in the old provinces. In ethnic and gender work, the main activity consisted of monitoring the ethnic and gender performance of the ethnic teams at provincial and district level. This activity strengthened the project structure between the central, provincial and district level in terms of planning and coordination, in addition to providing valuable information on the extent to which women, ethnic minorities and poorest households have participated and have received direct benefits from the project. 36. During additional financing, PSFM in old provinces focused on consolidation and ensuring that provinces were able to implement all planned activities. Of the total 412 villages, 180 or 44% received a share of timber revenue. Villages were paid on average $183 per year (totaling $33,000 annually). 37. The Ethnic and Gender team arranged District Level Workshops on gender and ethnic issues in the five new provinces from February to July 2011 to clarify the role of the Lao National Front for Construction (LNFC) and Lao Women’s Union (LWU) in Forestry and VD work. The LNFC and LWU’s role was to facilitate communication between technical forestry staff and ethnic groups and women. To assess the impact of the project on ethnic groups, a monitoring study was conducted. The findings emphasize the need for the Ethnic Teams and Technical Teams to strengthen the consultative process. Based on the experience gained, the Implementation Framework for the Ethnic Group and Development Plan was revised and updated to better reflect resources available for implementation. Component 3: Forest Sector Monitoring and Control 38. Under component 3 the original expected output was:  Efficient forest sector control and monitoring and improved forest law enforcement systems in place and operational 31 39. The project paper revised the expected targets under component 3 and included delivery of the following;  Pilot exercise completed using new data sources and technology to compare most recent forest cover changes for selected ‘hot spot’ provinces;  Development of a comprehensive technical design and field testing for an integrated forest inventory and cover monitoring and data management system, including forest cover, quality, biomass, and carbon stocks as required under REDD process;  Completion of internal control and reporting system covering forest management operations, conduct of timber sales procedures, revenue flows;  Forest Law enforcement program developed and under implementation, including intelligence systems development; interagency agreements and operations, training and public awareness, and formulation of long-term Forest Law Enforcement Strategy; and  Independent and internationally recognized forest management certification confirms sustainability of PSFM approach and DOF group certificate maintained beyond 2011 and pool of certified FMAs expanded to 20 by 2011. 40. Internal Controls and Management Information System (MIS). DOF developed and deployed a management information system to store, analyze and disseminate all forest management and timber sales information for decision-making purposes. DOF documents are now entered into a Document Management System (DMS). DOF has developed databases for internal audit results, approved auditors, timber CoC tracking, and timber sales. The DOF has worked together with DOFI to ensure that the future DOFI information systems are fully compatible with the DOF information systems. Annual internal monitoring was conducted in SUFORD provinces, and reports submitted to DOF. 41. Annual internal audits are conducted to check compliance and to progressively improve compliance with national PSFM standards. DOF has worked together with DOFI to ensure that the future DOFI information systems are fully compatible with the DOF information systems, including the DOFI Intelligence Information. A system for National Forestry Reporting was developed and deployed in all provinces. 42. Reconciliation of harvesting and sales data is carried out to analyze the progress of annual timber quota implementation. DOF also carries out post-harvest assessments in all harvesting sites. DOF and DIMEX designed jointly a database system where the DOF system monitors harvesting and transfers to commerce and the DIMEX system monitors the transfers from forestry sector and sales volumes and value. 32 43. The Finnish TA prepared a background paper on Internal Control/Standard operating procedures. The DOF compiled an Assessment of Performance Reporting Practice at the Department of Forestry. Registers to keep track of Corrective Action Requests (CARs), both from external and internal monitoring/assessment, have been established. 44. External Controls. With project support DOFI prepared a Forest Law Enforcement Strategy to the Year 2020 comprising five components: (i) planning, (ii) operations, (iii) human resource development, (iv) administration, and (v) infrastructure development. DOFI has implemented many activities in line with the new strategy since it was formulated, including;  A Code of Conduct for DOFI staff was prepared and approved by the Director General.  The Director General of DOFI was appointed the chairman of the ASEAN-WEN coordinating unit, which is a platform for collaboration between DOFI/POFI, Customs, Economic Police, and the Army.  DOFI participated in a public awareness effort, which concentrated on the wildlife trade campaign surrounding the SE Asian Games held in Vientiane in December 2012.  The legal provision regarding the Disposition and Disposal of seized timber and equipment were reviewed.  The Government of Lao PDR launched the Lao Wildlife Enforcement Network (WEN). Lao-WEN is a chapter of the ASEAN-WEN, the world’s largest wildlife law enforcement network that involves police, customs and environment agencies of all 10 ASEAN countries.  DOFI made several high profile seizures of illegal timber and non-timber products.  Training courses were arranged, inter alia, with the Public Prosecutors Office.  A Strategic and Tactical Enforcement Patrol Project (STEPP) supported with funds from SUFORD and Finland has been implemented in all provinces, approximately eight weeks ahead of schedule.  A survey on capacity in information technology (devices, software), related work in relevant institutions and development needs (capacity building and training needs) was conducted and a capacity development plan was prepared. Training was provided on database development, use of associated software, and operability analysis. 33 45. Forest Certification. Consistent with revised project targets independent and internationally recognized forest management certification (Smartwood) has audited and confirmed the sustainability of the PSFM approach in certified areas. The group certificate (so called “pure standard�) was maintained by timely attention to Corrective Action Requests and the pool of certified FMAs expanded to more than 20 sub- FMAs. All FSC certificates were maintained and a new contract was signed with WWF to expand FSC Rattan certification to two villages in Boulikhamxai. To support FSC expansion a consultant mission was undertaken in Attapeu, Vientiane and Boulikhamxai. DOF worked with the Provincial Forest Service (PFS) in Bolikhamxai, and Attapeu provinces to prepare two new sub forest management units for certification against FSC “pure standard�. Certification assessment for Controlled Wood Standard was conducted in Dong Khapo PFA in Savannakhet and in Phoutalava and Laongam PFAs in Salavan Province. The total area under the certification scope has been expanded to 81,618 hectares by adding three new members (Sub-FMAs) to the DOF group in 2010. 46. Other corrective actions have been carried out by the DOF in collaboration with DIMEX and National University of Laos. All corrective actions except those requiring training have been addressed. A Strategy for Expansion of FSC Certified Area containing four optional strategies was prepared and will be supported by the recently approved FIP/IDA project. A CoC Training Course for Industry was arranged. A concrete outcome of the training was a study documented in Report on Chain-of-Custody for Forest Products and Expansion of Legal and Controlled Wood Sources in Lao PDR. 47. Forest Cover Assessment and Forest Inventory. The Forest Cover Assessment report was finalized and disseminated at Ministry and Department level and data has been used to support policies such as Protection Forest Cover establishment. The final version of the National Forest Inventory design document was delivered in March 2010. Development of technical design for integrated forest inventory was completed by organizing and converting historical datasets to modern structures. Changes in volume, biomass and carbon between 1982 and 2002 were calculated. The project also conducted case studies in Savannakhet province for testing new image processing techniques for carbon monitoring. Results of the laser-scanning exercise were demonstrated and the results were reported. A needs assessment and system design for the Forest Inventory System of the FIPD was completed. Two major draft reports were delivered, including: Development of FRA design for Lao PDR, and Conceptual database design for FIPD. 48. A “hotspot� analysis was conducted to review changes in forest cover between 2011 and 2012 in Attapeu Province. This analysis supported inter-ministerial dialogue and led to a high level field visit in April 2012. This trip provided an important opportunity for GoL officials to become aware of the relative low cost and high degree of analytical accuracy of change detection provided by comparing high resolution satellite imagery between two dates. 34 Component 4: Project Management 49. Under component 4 the original expected output was:  Effective decentralized implementation of the project supported by a good administrative and M&E system providing information in a timely manner to project management, Steering Committee and financing agencies. 50. The project paper did not revise the expected targets under component 4. 51. Under this component, national level management was carried out by DOF and DOFI with subnational implementation managed by the respective Provincial Agriculture and Forestry Office (PAFO) and District Agriculture and Forestry Office (DAFO) for most aspects of PSFM and Village Development and the Provincial Office of Forest Inspection (POFI) for forest law enforcement. DOF and DOFI received technical support for project management and M&E from SUFORD and the Finland TA. A PHRD grant to the Department of Forest Inspection also supported project management and M&E within DOFI. During project implementation, timely assessments of Village Development Grants, infrastructure development, timber revenue sharing and capacity of forest-related institutions at village and sub-FMA level, as well as forest restoration activities were completed. A review of financial management procedures was undertaken which subsequently led to easing the administrative constraints related to release of funds. 52. As noted earlier slow project start-up is attributed in part to limitations in the capacity of project management during the early years of implementation. Limited capacity at the sub-national level required Technical Assistance to devote substantial time to capacity building and on the job training particularly in areas where skills were lacking within the implementing agencies. Overall the international TA inputs were delivered as planned. The total was 79.5 person-months, including 63 person months of MFA funded inputs and 16.5 person-months of IDA funded inputs. The total input from local TA was 258 person-months. There was high turn-over in the applied anthropologist position which only added to the challenges inherent in working with ethnic groups. 53. The total number of IDA-training days was 7,794 (1,859 women, 5,935 men); 3,217 training days were delivered with Finnish funds (604 women, 2,613 men). With respect to IDA and Finnish funds, female training days accounted 23.9% and 18.8% of the total, respectively. More than 70% of all training days were provided under component 2; the rest were divided between the other components. 54. With respect to DOFI’s Strategic and Tactical Enforcement Patrol Program (STEPP) a set of financial management guidelines were prepared and a series of training sessions were conducted in four provinces and Vientiane Capital with participants from all 17 provinces. 55. At the provincial level, the implementation of PSFM and VD made good progress, the pace of implementation accelerated compared to the early stages of the 35 project and much of the backlog in terms of output could be cleared. At the central level, implementation was still behind schedule, on average only 40% of the planned outputs could be reached. To some extent, this is explained by capacity constraints. 56. The number of TA meetings was increased to improve coordination between various components. The detailed budget monitoring system developed by the Financial Unit was taken into use and the first results were presented to provincial stakeholders. A comprehensive evaluation framework to assess the performance of provincial teams was drafted consisting of both quantitative and qualitative indicators. WB/GoF conducted formal supervision missions regularly. From September 2006, the WB Task Team Leader was based in Bangkok and was able to engage the project management team frequently throughout the year. 36 Annex 3. Economic and Financial Analysis 1. There are four components associated with this project: i. Support Services for Sustainable Forest Management ii. Sustainable Forest Management and Village Development iii. Forest Sector Monitoring and Control iv. Project Management 2. Putting in place the necessary policy, legal and regulatory framework as well as the sector monitoring and control functions are essential for sustainable forest management. The enabling policy environment and enforcement facilitates economic activity and sustainable management of the resource base. These are concrete benefits from a well-functioning policy environment. However, such benefits are hard to quantify explicitly. For purposes of this ICRR, the team has used a similar approach to that adopted in the PAD to project the potential benefits of improved forest resource management. PAD Estimated Project Benefits and Rates of Return 3. In the PAD for SUFORD, the project was anticipated to ensure that forest products will be harvested at maximum sustainable levels without degrading the forest resource. The project was envisioned to reduce the incidences of improper logging practices and illegal logging, allowing the Government to maximize rent capture from reduced logging wastes and illegal log flows. The project objective was to manage forest resources more sustainably, thereby maintaining the flow of environmental services and conserving the resource bases of timber and NTFPs. 4. At project appraisal, valuation of project benefits was based on the benefits from sustainable management of the forest resources. The estimation in the PAD was based on a sustainable annual yield of 0.9 m3ha as a basis for estimating the annual allowable cut (AAC). This implied that the 195,000 ha of commercial forests in the nine production forests would yield about 175,500 m3 of timber.1 In the estimation it was assumed that to extract this volume, under the with-project scenario some 219,500 m3 of tree volume would have to be cut if logging losses were equivalent to 25% of extracted volume. Under a without-project scenario the corresponding volume would be 280,800 m3 if logging losses were equivalent to 60% of extracted volume. 2 The difference between these two volume estimates was used to discern the volume that would be over cut, i.e. 1 World Bank, 2003. Project Appraisal Document on a Proposed Credit to Lao People’s Democratic Republic for a Sustainable Forestry for Rural Development Project. Report No: 25311-LA. Rural Development and Natural Resources Sector Unit. East Asia and Pacific Region. World Bank: Washington DC. 2 World Bank. 2003. Project Appraisal Document on a Proposed Credit to Lao People’s Democratic Republic for a Sustainable Forestry for Rural Development Project. Report No: 25311-LA. Rural Development and Natural Resources Sector Unit. East Asia and Pacific Region. World Bank: Washington DC. 37 61,425 m3. Using a value of US$40/m3 (or 50% of the estimated stumpage value), this volume was estimated to be worth US$2.45 million. 5. US$2.45 million was the amount that represented the main part of the incremental annual benefit of the project in 30 years over the without-project scenario. Incremental benefits from existing pilot village forestry sites had been included in the analysis because without the project the existence of overwhelmingly large areas of unmanaged forests would put pressure on managed forests to revert back to their former unmanaged state. 6. The costs used in the net benefit estimation were associated with the SFM field implementation component, including technical assistance, investments and incremental operating costs such as salaries, per diems and O&M. Replacement costs of vehicles and equipment were included in the cost flow over the thirty-year analysis period assuming full replacement after every five years. Sector and country-wide costs related to the establishment of the PFA system and sector monitoring and control were included proportionately in the profitability analysis using cost allocation shares of 25% and 60%, respectively. 7. The assessed financial viability in the PAD was that the project would yield an IRR of about 19.7%. The IRR would decrease to 15.7% if all costs would increase by 20% and to 15.6% if benefits would be delayed by two years. The IRR would increase to 23.7% if certified logs would be produced, assuming price premiums of 10% and current level of costs associated with forest certification. This analysis was done using only the quantifiable benefits related to timber production. It did not account for the benefits from conservation of resource base, NTFPs, and other associated ecosystem services. ICR Estimation Methodology 8. For estimating the benefits from sustainable forest management, this ICR uses a slightly different methodology than presented in the PAD. The approach involves assessing the tangible benefits from the different components associated with the project. As noted earlier, there are four components in this project, including project management. Of these, component 2: Sustainable Forest Management and Village Development has roughly 57% of the total project value (US$ 21.99 million). 9. Using a SUFORD dataset 3 , the economic analysis for this ICR involves estimating the aggregated cash flow for the sub-FMAs that had approved management plans. The SUFORD dataset included estimated volumes extracted area under forest cover and different uses, and annual allowable cut. In addition, another dataset4 from one PFA (with 12 sub-FMAs) provided average prices and costs (including fixed annual operating costs, forest management cost, direct investment cost, variable annual costs, 3 Sub FMA Data SUFORD _ MASTER_2012_10_11_Monday 15th October 2012.xlsx 4 Price Setting and Revenue Calculation_Dong_Sithuane5.xls 38 cost of harvesting and logging and cost of contractor profit, and royalties, including tax and other duties) (Table 1). The data were used to estimate the net present value of sustainable management of production forest areas. 10. Some of the assumptions in the financial analysis include:  All sub-FMAs for which management plans were pending final approval were included in the analysis (because it is technically recognized that these sub-FMAs would be up and running during the time period of the analysis) Table 1 Values for unit cost and revenue variables Cost Variable US$ /1 Forest Management cost/ha 2.37 Fixed Annual operating cost/m3 (excluding 6.12 certification) Annual Variable cost/m3 1.84 Annual Variable costs (excluding logging)/ha 11.09 Harvesting and logging costs/m3 40.42 Contractor Profit (15%)/m3 (on harvesting and 6.06 logging costs) Royalties tax and other duties /m3 64 Annual central level monitoring cost (per PFA) 16,419 /1 Annual certification monitoring cost (per PFA) 10,000 /1 Revenue Variables US$ Average selling price /m3 33 1/ These cost values are from price and cost estimations for a subset of PFAs. It is noted that there should be variation in the cost per PFA given the different forest types and number of villages and sub-FMAs. Due to lack of data, however, these estimations are being used. 2/ Price per m3 has varied during the project life. The price estimates used in various analyses during the SUFORD and SUFORD AF project have ranged from US$ 122/m3 to US$ 144/m3.  The direct investment cost of forest management planning (this is distinct from operating cost) was spread over a period of the first three years of the project for both SUFORD and SUFORD AF. Accordingly, harvesting from SUFORD sub- FMA areas was not initiated till 2007. In SUFORD AF it is assumed that extraction was not initiated until 2012 given that most management plans were only approved in 2012 39  The level of sustainable harvesting is roughly 4m3/ha. (if only preferred species are considered) (SUFORD Impact Study, 2012). This information was used to estimate the total area from which extraction was occurring every year  Each harvesting cycle is 15 years. Accordingly time period of the analysis extends from the start of the project to 14 years from the start of harvesting for SUFORD AF (2004 -2025)  The dataset includes projected extraction levels for one harvesting cycle for SUFORD sub-FMAs and for two cycles for SUFORD AF sub-FMAs. Accordingly, recognizing its shortcomings, it is assumed that in SUFORD sub- FMAs the same volumes are extracted in the second harvesting cycle. It is noted that the estimated harvest for SUFORD in the second harvesting cycle does not include forest areas that were being managed for regeneration during the first harvesting cycle.  The discount rate is estimated to be 5 percent Project Benefit Cost Ratio 11. Using the information indicated above, the cost benefit ratio, using the present value of revenue and costs (excluding royalties), is 1.38. If royalties are included, then the benefit cost ratio, is 0.83 (which indicates that the net present value is negative). A price of US$ 160/m3changes the benefit cost ratio to 1 (done based on a sensitivity analysis for price). 12. The above financial analysis, however, does not take into account some of the economic benefits resulting from restoration, the availability of NTFPs and other ecological benefits resulting from management of carbon (e.g., reduced carbon emissions). Benefits from Carbon 13. The Technical Report Historical Baselines, Reference Levels and Projected crediting Scenarios in the Dong Sithuane Production Forest Area, estimates 250,000 t C or 915, 000 t CO2e of emissions reduced over a 30 year period from SFM of 151,000 ha in the PFA. This is approximately equivalent to an annual emissions reduction of 8333 t C or 30, 500 t CO2e within this area.5 Using these estimates to scale up to the 16 PFAs and using a price of US$ 5/tCO2e, the present value of the economic benefit from reduced emissions is roughly US$ 6,657,000 over the 21 year period examined in this analysis. 5 Clarke, Majella. 2010. Economic valuation of Forest Ecosystem Services in Lao PDR. SUFORD. 40 14. The net present value of the carbon revenue stream would also depend on the transaction costs (associated with monitoring reporting and verification and other compliance requirements with the carbon market) and institutional costs in Lao PDR. While not optimal, it possible to estimate the net present value of this stream of revenue by using the values for costs from other case studies 6 and assuming all cost of management is already reflected in the net revenue from timber. The net present value for the period of 21 years from the start of SUFORD (with a 5 percent discount rate) would range from US$ 4.5 million to US$ 6.3 million. 15. While accruals for payments from environmental services were not part of this project, there now exist opportunities for the Government of Lao to explore generating revenues from such payments in the SUFORD PFAs. Benefits from Non-Timber Forest Products 16. In Lao PDR, non-timber forest products are an essential feature of rural households’ daily lives. Income streams from these forest products are on average US$ 204/household (approximately 39% of total household cash income) and non-cash income US$489/household.7,8 NTFP collected for cash income, is expected to be subject to a reduction of 3% per year due to degradation of the forest. In SUFORD production forest areas, it is estimated that NTFPs are worth US$ 164/household in cash income (which is approximately 31% of average cash income per household) and US$ 653/household in noncash income.9 The NTFP are worth approximately US$ 71/ha in SUFORD supported PFA 10 . Inclusion of this value in estimating net revenue for the project notably increases the economic benefits of the project. Using the total forest area that is under PFA for SUFORD and SUFORD AF, the present value of benefits from NTFPs are equivalent to US$ 389.6 million. However, due to lack of adequate 6 A recent study from Tanzania, using a bottom up approach to estimating the cost of REDD+, estimated that the transaction costs comprised a minor share of the total costs, between US$ 0.21 - 1.46 tCO2. Similarly, the institutional costs comprised around 1% of total REDD+ costs in a range of US$ 0.06 – 0.11 tCO2. (Merger, Eduard, Christian Held, Timm Tennigkeit, and Tom Blomley. 2012. A bottom-up approach to estimating cost elements in REDD+ pilot projects in Tanzania. Carbon Balance Management 7:9 (viewed online October 2012) ) 7 Foost, Joppes and D. Samontri. 2010. Technical Report: Assessment of the values of Non-Timber Forest Product in Lao PDR. Sustainable Forestry for Rural Development Project – Additional Financing. Vientiane, Lao PDR. 8 Benefit streams from NTFPs are often not factored in though they are legitimate benefits for households because there rarely is active management for NTFPs. Moreover, few analyses take into account the labor requirements (and therefore the opportunity cost of labor) to collect the NTFPs. This is often because NTFPs serve as a safety net and are used for subsistence purposes or income generation during lean times and when there are no other employment opportunities, or they are collected while undertaking other activities (e.g., herding). In Lao PDR, however, NTFPs have featured in export revenues. Moreover, the definition used includes firewood and wild fish. 9 Foost, Joppes and D. Samontri. 2010. Technical Report: Assessment of the values of Non-Timber Forest Product in Lao PDR. Sustainable Forestry for Rural Development Project – Additional Financing. Vientiane, Lao PDR. 10 Foost, Joppes and D. Samontri. 2010. Technical Report: Assessment of the values of Non-Timber Forest Product in Lao PDR. Sustainable Forestry for Rural Development Project – Additional Financing. Vientiane, Lao PDR. 41 information on the cost of collection, permits, the frequency of collection, changes in value by area, and labor costs for collection, this value is presented with some reservations and not explicitly included in the estimation of economic benefits. Additional Livelihood Benefits 17. The project also included tangible benefits through village development grants and the sharing of revenues from timber sales. 18. The number of villages that are directly involved in forestry management are estimated to be about 10-15% of the total number of villages (720). Therefore roughly 72-108 villages earned revenue from returns of timber sales. Information on the latter suggests that the revenue sharing (under the benefit sharing arrangement that was in place prior to the new decree) while positive was a nominal amount per village. 19. To estimate livelihood benefits for the economic analysis, a subset of the economic activities undertaken by households that received grants from the village development fund are examined. The Impact Study on Village Development activities11 (Piechotta, 2012) shows that the grants were used for a range of household activities (Table 2). Of these, activities such as raising cows, planting banana, planting peanuts, weaving, and raising buffalo were considered to be successful. The impact study found that paddy field expansion was rated far less successful in Savannakhet than in the other provinces and raising cows was rated somewhat lower in Khammuane and Savannakhet as compared to Champasack and Salavanh. Reports on changes in income (collected by the impact study) validated these findings.12 20. To analyze the economic benefits of the livelihood activity, distribution of sampled households among the various activities is considered to be representative of the total number households that were involved with village development activities. In the sample, 48% of households engaged in activities that more successful than average (see activities labeled in bold in Table 2 below). In contrast, 9% engaged in activities that did not succeed (activities labeled in italics in Table 2 below). 21. The Village Development Fund impact study (2012)13 also provides information on an approximate cost per household for paddy field expansion and rearing livestock. 11 The study was based on a sample of 12 villages in four provinces (48 in total). In each of the provinces (Savannakhet, Champassack, Khammoune and Salavan), two districts were chosen by the data-collection teams. In each district six villages were randomly selected from those villages for which baseline-information was available (and where there were less than six villages in a district, villages from a third district were selected randomly). The sample consisted of 9 poor villages, 31 medium and 8 better off ones and were situated between 0 to 47 Km from the district capitals (average23 Km). 12 households were surveyed in each village – eight households that had received the loan and 4 that had not. 12 An exception here is cow-raising, which reportedly changed the income slightly less positive than average. Since cows are often used as savings and consequently not sold, this does not necessarily show less success from cow rearing. 13 Piechotta, Juergen. 2012. SUFORD village development activities. Impact assessment study. SUFORD TA team, Lao PDR 42 The information on paddy reveals that households involved in paddy expansion took loans that enabled them to expand their paddy fields between 0.1 ha and 2 ha (average 0.6 ha). The size of the expanded area depended partly on the size of the loan. A loan of US$ 125 enabled farmers to expand through inputs between 0.2 ha to over 1 ha of paddy land (average 0.4 ha).14 The majority of the farmers used the expanded area to plant rice (93% of beneficiaries), while the remaining 7% planted rice on between 0 and 80% of the expanded area. Table 2: Common activities financed by Village Development Grants (sample of households surveyed as part of Impact Study on SUFORD Village Development Activities 2012) Average % of households from each loan Number of poverty level Repayment Row Labels size households rates (US$1) (only loans % hh better poor medium due before in off 2012) activity Paddy field 155 37 42 20 248.46 16 37% expansion Cow raising 120 18 65 15 292.20 49 29% Goat raising 28 61 21 14 128.23 45 7% Planting Banana 25 8 76 16 159.50 37 6% Planting Peanuts 24 25 29 46 187.50 10 6% Weaving 16 25 56 19 119.44 51 4% Buffalo raising 12 8 67 17 337.92 46 3% Fish raising 10 10 50 20 212.38 32 2% Planting Corn 9 11 78 11 170.83 42 2% Planting 8 63 25 13 113.75 66 2% Watermelon Planting Soybeans 4 25 50 25 178.13 8 1% Pig raising 2 0 50 50 237.50 100 0% Open a shop 1 0 100 0 187.50 20 0% Chicken raising 1 0 100 0 76.25 100 0% All 415 28 51 19 235.28 33 100% 1/ The exchange rate used was US$ 1 = Kip 8000 Source: Piechotta, Juergen. 2012. SUFORD Village Development Activities: Impact Assessment Report. 14 The differences between the provinces is large (Khammuane 0.2; Savannakhet 0.3; Salavanh 0.5; Chammpasack 0.8) however the reasons for the differences are not known. 43 22. The rice yields ranged from 280Kg/ha to 6000Kg/ha (average 2343 Kg 15 ) per year. Using an estimated rice price of US$ 0.38/Kg 16 , households made an average income of US$ 775. Cost of inputs was on average US$ 122.50 (excluding labor). Households made, on average, more than US$ 625 in additional value from expanded paddy fields. The labor costs associated with one crop of rice, however, are not documented. Studies on rice in Lao indicate that labor requirements for rice can be higher in lowland rice compared to slash and burn rice (or upland rice) because of the associated weeding.17 23. Similarly for animal rearing, households used loans to pay for livestock and breed more livestock. Families in some provinces received loans of US$ 287.50 18. Based on a small sample of data points, Piechotta (2012) found that mortality of cows that were bought from the loan was approximately 5%. In contrast the mortality rate for other livestock was high, including: 50% of goats, 18% of buffaloes, and 20% of pigs. Farmers tended to keep their cows and buffaloes in contrast to goats (out of which 40% were sold, bartered or exchanged) and pigs (all were sold, bartered or exchanged)19. Table 3: Average monetary inputs used (US$ per household1) for vaccines for treatment for others total buffaloes 9.08 9.38 11.15 29.61 cows 3.66 8.14 4.67 16.47 pigs 8.33 8.33 goats 0.71 6.0.76 0.63 2.10 1/ Exchange rate used US$ 1 = Kip 8000 24. Newly born animals were numerous, especially for cows and goats. To 10 animals from the loan, farmers could add another 16 cows and 13.7 goats. The price for a cow depended on its size, including roughly 3 million kip for a large cow (Clarke, 2010). Using the price of a large cow as an average price, the analysis suggests that households that reared cows made positive net revenue (though cost of labor is not accounted for). 25. A large percentage (88%) of sampled households that used village development grants wanted to continue the activities they were engaged in as the activities were 15 Probably these figures slightly overestimate the production, since it seems that some data-collection staff have rather recorded the total rice production instead of the rice production on the expanded fields only. 16 Piechotta, Juergen. 2012. SUFORD village development activities. Impact assessment study. SUFORD TA team, Lao PDR (used an exchange rate of US$1 = Kip 8000) 17 Roden, W. 2001. Slash-and-Burn Rice Systems in the Hills of Lao PDR: Description, Challenges and Opportunities. Los Banos (Philippines): International Rice Research Institute 201p 18 Clarke, Majella. 2010. The Village Rice-Buffalo Economy in Lao PDR: Household and Village Case Studies on the SUFORD Project’s Village Development Grants and Funds. SUFORD TA Team: Lao PDR. 19 This is consistent practice In Lao PDR An intangible gain from such practice is the enhancement of resilience of vulnerable families, as they raise small animals to reduce household vulnerability to external shocks. 44 considered financially promising. There is some evidence from the field to confirm the financial viability of the activities. The livelihoods activities, along with the revenue from reducing degradation and deforestation from sustainable forest management indicate that the project had a positive economic impact. 45 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending William B. Magrath Task Team Leader EASRD Task Team Leader Guzman Garcia-Rivero Portfolio Manager EASRE Portfolio Manager Svend Jensby Social Safeguards EASSD Social Safeguards Nina Masako Eejima Lawyer LEGEN Lawyer Enrique Crousillat Country Manager LCSEG Country Manager Linda Schneider Country Anchor EACLF Country Anchor Forestry Specialist James B. Carle Forestry Specialist (FAO) EASES (FAO) James Smyle Peer Reviewer LACES Peer Reviewer Peter Jipp Peer Reviewer EASTS Peer Reviewer Nipa Siribuddhamas Financial Management EAPFM Financial Management Chinnakorn Chantra Procurement Officer EAPCO Procurement Officer Rosa Muleta Disbursement Officer LOAAS Disbursement Officer Evelyn Bautista-Laguidao Program Assistant CROVP Program Assistant Cecilia B. Tan Team Assistant SEGOM Team Assistant Malarak Souksavat Program Assistant EASFM Program Assistant Brenda Phillips Quality Control EASRD Quality Control Arlene Reyes Quality Control EASRD Quality Control Supervision/ICR Peter Jipp Task Team Leader EASTS Task Team Leader Sr. Natural Resources Sr. Natural Resources Ulrich Schmitt EASCS Economist Economist Sr. Counsel, Country Roch Levesque Sr. Counsel, Country Lawyer LEGES Lawyer Climate Change Khamlar Phonsavat Climate Change Specialist EASTS Specialist Jeremy Stephen Broadhead Consultant EASTS Consultant Financial Management Financial Management Kannathee Danaisawat EAPFM Specialist Specialist John H. Dick Consultant ENVCI Consultant Lead Natural Resources Lead Natural Resources William B. Magrath SASDA Economist Economist Sr. Social Development Sr. Social Development Satoshi Ishihara EASTS Specialist Specialist Social Development Sybounheung Phandanouvong Social Development Specialist EASTS Specialist Environmental Viengkeo Phetnavongxay Environmental Specialist EASTS Specialist Souphanthachak Sisaleumsak Procurement Specialist EASR2 Procurement Specialist Malarak Souksavat Financial Management Analyst EASFM FM Analyst 46 Renae Nicole Stenhouse Consultant EASER Consultant Manager, Financial Manager, Financial Jennifer K. Thomson SARFM Management Management Lead Specialist and Forest Lead Specialist and Giuseppe Topa EAP Advisor Forest Advisor Forest Law Enforcement Forest Law Richard Grandalski NA Specialist Enforcement Specialist Natural Resources Diji Chandrasekharan Behr Natural Resources Economist AES Economist Viengsamay Srithirath Country Officer EACLF Country Officer Sr. Social Development Sr. Social Development Wang Chaogang MNSSO Specialist Specialist Thalavanh Vongsonephet Program Assistant EACLF Program Assistant Chutima Lowattanakarn Team Assistant EACTF Team Assistant Manoly Sisavanh Program Assistant EACLF Program Assistant (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY00 0.54 1.5 FY01 0 0 FY02 13.24 170.1 FY03 20.36 189.3 FY04 1.45 6.25 Total: 35.59 367.12 Supervision/ICR FY04 8.48 49.52 FY05 13.86 66.46 FY06 25.04 96.46 FY07 23.47 97.9 FY08 11.64 71.22 FY09 11.17 81.57 FY10 17.58 11.85 FY11 21.18 98.68 FY12 12.82 90.71 FY13 6.96 57.72 Total: 156.2 820.77 47 Annex 5. Beneficiary Survey Results Not Applicable 48 Annex 6. Summary of Borrower’s Report PREFACE As the Borrower’s Report exceeds the 10-page limit, a Summary is provided here. The complete Borrower’s Report of June 11, 2012 is on file. IMPACTS As the Borrower’s Report exceeds the 10-page limit, a Summary is provided here. The complete Borrower’s Report of June 11, 2012 is on file. The main impacts of the SUFORD Project 2003-2012 are: - The previous regulation concerning sharing of timber revenue, MAF 0204, part of timber revenue was transferred to Village Development Funds and Operational Costs of Forest Management but the amounts were low. With the approval of the Presidential Decree 1, the share of timber revenue allocated for these purposes will increase significantly. As a result, the government sector will be able to self-finance the core activities. Protection, reforestation and regeneration will need additional funds. - The decline of forest cover inside most SUFORD PFAs has declined or stabilized whereas it continues to accelerate outside of the PFAs. The SUFORD project has contributed to this development by improving the rules and organization of forest management inside the PFA and by improving the livelihoods of people so that there is less pressure to use the forest resources unsustainably. - The Participatory Sustainable Forest Management concept developed by SUFORD is environmentally and socially sustainable as indicated by the fact that a significant portion of the forests inside the PFAs have been certified to the international FSC standard and DOF has been able to maintain the certificate for five years and extend it for another five-year period in spring 2010. These areas represent the first and largest areas of certified natural forest in mainland SE Asia. - The SUFORD project has contributed to poverty reduction, especially through loans given using the Village Development Grant. Before loans were received the poverty rate in SUFORD villages was on average 28-29 %. In 2012, it was found that among households that had not received a SUFORD loan, the proportion of poor households had dropped to 14% mainly because the overall economic development and other government programs had helped them. Among those who had received a SUFORD loan, the proportion of poor households had dropped even more to 9%. The difference is SUFORD’s contribution to poverty reduction. 49 CONCERNS The most significant concerns are: - Illegal logging or logging that is not included in forest management plans takes place on a scale that threatens the sustainability of forest management. - Procedures for management of timber revenue and other financial transactions are not clearly defined or transparent; there are no effective sanctions against those who violate the existing regulations. - The majority of villages inside the PFAs will not benefit from timber revenue; unless new policies such as village-based tenure of degraded forest land are adopted there is a risk that many villages will have limited interest to contribute to PSFM. - Land use plans sometimes do not reserve enough agricultural land for local people, especially for those who practice shifting cultivation. If they do not have enough land they may go to regeneration and restoration sites. In this case there is a risk that the investments made in regeneration and restorations are lost. - The government staff has capacity to implement the basic tasks of forest management but the capacity to implement work related to “new� topics such as REDD+ is still limited. - The majority of Village Development Funds are not sustainable because the managers of these funds in villages do not have the necessary skills; the government staff assisting them also lack experience in micro financing. - Participation of women and ethnic minority groups in forest management and village development activities has been integrated as part of standard procedures but implementation of these procedures is still weak. OPPORTUNITES The best future opportunities are: - With the development of the Monitoring, Verification and Reporting System carbon funding may become available in the near future; payments for other environmental services such as watershed protection may increase the sector financing in the medium term. - The establishment of Chain-of-Custody certification in selected wood enterprises creates an opportunity for the sector to access international markets with high value added products. 50 - Successful implementation of the proposed regulations for timber sales would increase timber prices and ensure that the timber goes to the most competitive companies with the highest development potential. ROAD MAP The PSFM concept in the PFAs is environmentally and financially sustainable, if implemented properly. Timber harvesting practices are estimated to cause minimal harm to the environment, yet the PFAs are able to generate net revenue. If the new Presidential Decree 1 on sharing of timber revenue can be implemented effectively, it will considerably increase the financial sustainability of PFA management. To implement the new mechanism successfully, it is necessary to improve the procedures of financial management and increase capacity for financial management and oversight. One of the key challenges regarding environmental sustainability is deforestation which has been brought under control but is still continuing in part of the PFAs as well as outside. To halt this trend it is necessary to find alternative livelihoods for people who continue practicing pioneering shifting cultivation and causing deforestation. In this regard, collaboration with development efforts in other sectors is crucial as the resources within the forest sector are a fraction of the amount of resources needed. The experience with the Village Development Grants delivered under SUFORD shows that in the short term they can contribute to poverty reduction and reducing pressure on forest resources. However, the public sector does not have adequate capacity to ensure the long-term sustainability of the revolving funds established to manage the funds at the village level. New revolving funds should be established only if they can be integrated into commercial micro financing schemes, for instance, through public-private partnership arrangements. Development of village community forestry for degraded areas is another option to motivate local people to develop and protect forest resources. In the short term, however, the REDD+ payments may be the best opportunity to attract new financial resources to the forest sector. More attention needs to be paid on appropriate implementation of safeguards to secure the environmental sustainability of forest management, ethnic people’s rights etc. Forest restoration is an important long-term goal for the Lao government. To date, the efforts have been constrained by lack of funding; the limited budgets have not allowed the implementation of existing technical solutions. New opportunities are however emerging such as payment of watershed services which should be explored further. At the same time, development of technical solutions for forest restoration should continue. One of the key measures is to improve land use planning to minimize the risk that the restoration sites are converted to other land uses and that the investment is lost. Promoting the use of wood energy is another opportunity to generate added value in the forest sector, for instance, exports of certified charcoal and improved charcoal production systems (e.g. Adam’s retort). At the same time, the examples from some PFAs as well as from other countries show that uncontrolled use of firewood may have negative 51 environmental impacts. More efficient use of residues in the forest and wood industries, and promoting an improved cookstove program are examples of opportunities for positive development that may also attract international funding through REDD+. To ensure that these benefits are captured, the forest sector will have to actively seek opportunities to promote sustainable use of wood energy. Another potential threat is forest degradation which is driven mainly by illegal logging. There are also cases where logging has not been part of the forest management plan but it has been approved separately by the government. To contain illegal logging, it is necessary to enhance the capacity and funding for DOFI, the law enforcement body. Another equally important measure is to win the co-operation of the local population; the forest area is too large to be controlled by authorities alone. It is expected that the increase in villagers’ share of timber revenue will increase their motivation to protect the timber resource. To ensure that logging which is based on separate approvals by the government does not lead to degradation, it is necessary to improve the coordination between government agencies. Although the volume of such logging is not known, it appears significant, and there is a risk that it leads to overharvesting. The small supply of timber supply is currently constraining efforts to increase net revenue from PSFM. The supply is limited due to unsustainable practices in the past which have depleted the growing stock. However, it is set to increase as the growing stock is gradually restored. In the short and medium terms, the key to enhancing financial returns to forest management and benefits to the economy as a whole is to encourage improved productivity and modernization of the wood industries sector. The public sector can facilitate this process by strictly applying competitive methods of timber sales to ensure that the best companies with the highest development potential have access to it. To broaden the resource base, lesser known species should be actively promoted. The past experience also shows that creating a competitive environment encourages the companies to use a wider range of tree species. Increasing the supply of certified timber, including controlled wood will facilitate the Lao wood industries’ access to international markets. The expansion of certification will be accompanied by adoption of CoC among Lao wood industries. Capacity building should be continued vigorously in terms of both technical and facilitation skills. Training on technical issues should be complemented with development of soft skills such as communication and facilitation. Sophisticated methodologies have been developed in other sectors, for instance, by the LEAP project but they are yet to be applied in the forest sector. In general, it is necessary to encourage coordination between related sectors such as forestry and agriculture. 52 Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders Comments provided by Finland: “Our only observation is whether it is accurate to conclude that ‘regulations covering all key aspects of PSFM approved and applied’, and ‘benefit sharing and transfer systems finalised and applied’; when no harvest quota has been approved in 2 consecutive years.� 53 Annex 8. List of Supporting Documents PROJECT DOCUMENTS - SUFORD AF Financing Agreement 2009 - SUFORD AF Project Paper 2008 - SUFORD Mid Term Review Report 2005 - SUFORD Development Credit Agreement 2003 - SUFORD Project Appraisal Document 2003 PROJECT PROGRESS REPORTS - Annual and Quarterly Reports 2003-2012 PROJECT IMPACT ASSESSMENTS - Social Safeguards under SUFORD: An Assessment. Rita Gebert and Ny Luangkhot, 2012 - A Study of SUFORD Village Forestry Institutions. Kirsten Ewers Andersen, Khamla Phanvilay, Daovorn Thongphanh, Samphanh Phomma. 2012 - Environmental Impact Assessment SUFORD AF. National University of Laos. 2008 - Social Impact Assessment of SUFORD AF. James R Chamberlain. 2008 STUDIES AND REPORTS - Report on Ethnic and Gender Work Performance and Village Development Related Monitoring. Steeve Daviau, Khamla Soubantit, Khanxay Sayavong, 2012 - Report on Internal Review of Village Development Grants and Village Development Funds. Teo Dang Do, Phatnakhone Khanthamixay, Phetsamone Soulivong, Hieng Phang, 2012 - Village Infrastructure Monitoring Report. Hanne Vaarala and Karoliina Lindroos, 2012 - Village Development Activities Impact Assessment Report. Juergen Piechotta, 2012 - Summary from Wood Energy Study. Dong Sithuane, 2012 - Assessment of Values of Non-Timber Forest Products (NTFP) in Lao PDR, 2010 - Ethnic Work Monitoring. 2010 - Financing of PFA Management - Projections on Revenue and Costs, 2010 - Financing REDD in Dong Sithuane PFA, 2010 - PFA Land Cover and Carbon Change Analysis 2010. Summary of Results, 2010 - Preliminary Biodiversity Assessment and Management Recommendations of Production Forest Areas., 2010 - Report on Forest Land and Land Use Zoning Monitoring and Evaluation, 2010 - SUFORD Case Studies Poverty Reduction Impact Assessment, 2010 - Ethnic Group Participation Strategy, 2010 - Gender Mainstreaming Strategy, 2010 - Harvesting Projection Analysis, 2009 - Opportunities for Restructuring Wood Industries in Lao PDR, 2009 - Options for Timber Pricing in Lao PDR, 2009 - Ethnic Group Development Plan Draft, 2002 54 TRAINING GUIDES - Training Guide for Field Verification: Forest Cover, 2007 - Training of Trainer Manual, 2006 - Training Guide for Independent Forest Cover Monitoring: Remote Sensing, 2007 - Training Guide for Independent Forest Cover Monitoring and Basic and Advance Use of Geographical Information System, 2007 - Village Rule Recording HCV/HCVFA Assessment and Selected Aspect of Institutional Strengthening, 2006 - Sub-MFA Management Planning Preparation Pre-Harvest Inventory and Post- Harvest Inventory, 2006 - Timber Harvesting, 2006 - SUFORD Training Program, 2006 - Pre-Harvest Inventory, 2005 - Training Guide on Forest Management Planning, 2005 - Village Boundary Demarcation, Village Land-use Mapping and Village Land-use Planning, 2005 - Training Course on PFA Delineation and Demarcation, 2005 - Formation of Group of Village Forestry Organization (GVFOs), 2005 - Training Course on Arc GIS for Provincial Agriculture and Forestry Office, 2004 VILLAGE DEVELOPMENT HANDBOOKS AND PSFM GUIDES - Gender and Development Handbook, 2005 - Ethnic Minority and Poor Family Development Handbook, 2005 - Participatory Village Development Planning Handbook, 2005 - Village Development Activity Approving Principle Handbook, 2005 - Handbook on Social and Environment Impact Evaluation, 2005 - Participatory Village Data and Appraisal Handbook, 2005 - Participatory Village Development Activities Plan Writing Handbook, 2005 - Village Development Fund Management Handbook - Establishment and Operation of VDC Guidelines on PSFM - Proposed Procedure for Competitive Bidding on Sale of Timber for Natural Forests - Evaluation of Arrangements for Sharing Timber Revenue in SUFORD Project Areas - Village Land Use Planning and Establishment of Sub-Forest Management Areas in Production Forest Areas - Forest Law Enforcement Reporting and Case Tracking System - Guidelines on Establishment and Operation of Forest Management Information System (FOMIS) Development Team - Design and Implementation of the DoF Management Information System (FOMIS) System - Manual for Interpreters and GIS Operators to Select and Map Production Forest Areas 55 - Guidelines for Monitoring Forest Cover from Satellite Images to Detect and Report Changes - Guidelines for Forest Cover Monitoring and Field Verification - Guidelines and Procedure for Village Boundary Demarcation - Guidelines for Identification of Biodiversity Value Areas in PFAs - Guidelines on Establishment and Maintenance of Permanent Sample Plots for Tree Measurement, NTFP and Biodiversity Monitoring in Production Forest Areas - Guidelines and Procedure for Biodiversity Monitoring in Production Forest Areas - Guidelines for Internal Forest Control TECHNICAL REPORTS - Sharing Timber Revenue – Assessment of Alternative Approaches, 2007 - Social Economic Impact Assessment, 2007 - Independent Biodiversity Monitoring and Assessment in SUFORD PFAs, 2007 - Evaluation of Arrangements for Sharing Timber Revenue in SUFORD Project Areas, 2007 - Participatory NTFP Inventory and Management Plan Preparation SUFORD Guidelines, 2007 - Gender in Development, 2007 - Report on Forest Cover Monitoring, 2007 - Forest Revenue Study, 2006 - The People and Their Forest, 2006 - Establishment of the Production Forestry Areas System, 2006 - Market Strategy for PFAs for Four Provinces, 2006 - Village Development Activities Feasibility Study Mission, 2006 - Criteria and methodology to determine Production Forest Areas – Using remote sensing information and field demarcation to put under sustainable forest management and rural development, 2005 - Biodiversity Survey of Production Forest Areas, 2005 - Gender, Forest Resources, and Rural Livelihoods, 2004 - Managing Non-Timber Forest Products (NTFPs) in Production Forestry and Rural Development, 2004 - Development of Monitoring and Evaluation System, 2004 56 IBRD 36567R2 100˚ 102˚ 104˚ 100˚ 105˚ 110˚ MYANMAR CHINA CHINA LAO PEOPLE'S Gulf 20˚ DEM. REP. of Vientiane Tonkin 22˚ 22˚ 1A THAILAND 19 Phongsaly VIETNAM 15˚ 15˚ Andaman Sea PHONGSALY VIETNAM 1B MYANMAR CAMBODIA 2E 17 21∞ Luang Namtha 10˚ Gulf LUANG Muang of g BOKEO Sam n NAMTHA Sai Thailand Meko 13N 3 Neua Ban OUDOMXAI 6 100˚ 105˚ 110˚ Huaisai 2W 1C Chiang LUANG HOUAPHAN This map was produced by Kong g PRABANG 106˚ 20˚ Pak Beng kon the Map Design Unit of The Me World Bank. The boundaries, 4B Luang colors, denominations and XAIABOULY Prabang XIANG any other information shown on this map do not imply, on KHUANG the part of The World Bank 4A 7 Group, any judgment on the Xiang legal status of any territory, Sayaboury Khoang or any endorsement or acceptance of such 13N Nongpet-Naseng boundaries. Phou Pasang-Punghok THAILAND Vang Vieng 5 Phak Beuak Xaisomboun Phou Phadam 1D 4 VIENTIANE GULF Pone BOLIKHAMXAI Paksane Hong Nam Ngum OF ng Namkading eko 10 Reservoir M Phou Gneuy 11 13S 8 TONKIN Me Sanakham Thanaleng 18˚ ko 18˚ ng A12 Ban VIENTIANE Nongsu 1E Kenethao KHAMMOUANE Dong Phouxoi 12 Thakhek Nakathing-Nongkapat LAO PEOPLE'S DEMOCRATIC REPUBLIC 1F SUSTAINABLE FORESTRY FOR Keng 9A Dong Kapho RURAL DEVELOPMENT PROJECT Kabao 9B Seno 9 Savannakhet Ban SAVANNAKHET Selected Production Forest Areas (PFAs) Laksamsipha Phou Talava 1G 15 16˚ 16˚ Dong SUFORD ADDITIONAL FINANCE (AF) AIRPORTS PRODUCTION FOREST AREAS (PFAs) Sithouane SALAVAN Salavan Huaypen TOWNS 15 SUFORD PRODUCTION FOREST AREAS (PFAs) Lao PROVINCE HEADQUARTERS Ngam 1H Xekong PRINCIPAL HIGHWAYS NATIONAL CAPITALS XEKONG 20 Silivangveun 16 HIGHWAYS PROVINCE BOUNDARIES Nam Pa Huayvy 16 16B OTHER ROADS 1I INTERNATIONAL BOUNDARIES Champasack CHAMPASACK BORDER CROSSINGS Attapeu Ban Bengvilay 18B 18A g ATTAPEU Mekon 13S 1J 0 50 100 150 Kilometers Khong Pathoumphone 14˚ 0 25 50 75 100 Miles 14˚ 102˚ 104˚ CAMBODIA 106˚ MAY 2013