Aide Memoire – August 2017 TA Capacity Building for Hydropower and Franz Gerner; Project: Team Leaders: Mining Sectors (HMTA) Project – Lao PDR Sombath Southivong Project Development Objective To increase human capacity and improve the performance of government oversight institutions for the hydropower and mining sectors. Key Project Data Original Financing Project Number P109736 Effectiveness Date 4 August 2010 IDA Grant Amount US$ 8 million IDA Disbursement 100% DFAT Grant Amount US$ 2.54 million DFAT Disbursement 100% DFAT Closing Date 1 March 2014 Additional Financing Grant/Credit Amount US$ 17.8 million Effectiveness Date 22 September 2014 Closing Date 30 September 2018 AF Disbursement 58% PDO Rating MS IP Rating S Introduction 1. The World Bank1 carried out an implementation support mission from July 28 to August 4 and August 21 to 25, 2017. This aide-memoire summarizes the key findings, recommendations and agreements reached during the mission and is subject to confirmation by the World Bank (WB) management. The aide-memoire will not be publicly disclosed. The mission would like to express its gratitude for the hospitality provided by MEM, MONRE, MPI, MOF and EdL. Please refer to Annex 1 for a list of the people met and Annex 2 for the mission objectives. Key Findings 2. Progress towards achieving the PDO is Moderately Satisfactory. MEM capacity building activities – both central and local - were carried out under various components continuing to strengthen technical knowledge in sector planning and management. Institutional oversight to better govern the hydropower and mining sectors is gradually improving. All critical TA packages (power sector reform, mining sector strategy and strategic environmental and social assessment, electricity tariff, IPP process improvement and PSHD implementation, geo-data infrastructure including geological survey and mapping) are under implementation to develop tools and management systems to enhance MEM oversight capacity. However, there remains challenges as some policy areas developed under the project (i.e. design of new fiscal/taxation regime for hydropower and mining, amended electricity law, adoption of the new tariff design, implementation of the mining strategic environmental and social assessment) would require high level GoL commitment for implementation. 3. HMTA uncommitted budget: The uncommitted project funds (workplan activities pending implementation and at risk for not being implemented by project close) is approximately $2.8 million. The mission advised to speed up the review process with all agencies responsible for each of the project components. The review should identify how to allocate the remaining funds to the only identified priority activities to be implemented in the next 12 months. The Bank should be informed of the results of the allocation by end of September 2017. 4. Proposed Sustainable Energy and Extractive Development Technical Assistance Project (SEEDTA): The mission initiated discussions with MEM on the pre- identification of potential scope of work and has agreed in principle on the areas\pillars that would be supported under SEEDTA. These potential areas of support include (i) 1 Franz Gerner (Task Team Leader), Sombath Southivong (Co-Task Team Leader), Daryl Fields (Senior Water Resources Specialist), Takafumi Kadono (Senior Energy Specialist), Morten Larsen (Senior Mining Specialist), Bryan Land (Senior Mining Specialist), Warren Mayes (Senior Social Development Specialist), Hoai Van Nguyen (Procurement Specialist), Siriphone Vanitsaveth (Senior Financial Specialist), Cristina Maria Ladeira Ferreira (Legal/Regulatory Expert), Harvey Salgo (Senior Advisor), Vilayvanh Phonepraseuth (Operations Analyst), Thongkham Chanthavong (Program Assistant). 1|P a g e Aide Memoire – August 2017 implementation/compliance of hydro and mining fiscal and tax regimes, (ii) development of renewable energy policy, institutional and regulatory framework, (iii) implementation of amendments to the Electricity Law including the development of a national power system plan and secondary regulations on competitive bidding; transmission open access; revised grid code etc. (iv) power sector reform/power trade, (v) sector financial viability, (vi) PHSD implementation including on-going support to management and monitoring of the construction and operation of hydropower projects, basin wide assessments and benefit sharing; (vii) mining sector reform, (viii) environmental and social permitting and compliance, (ix) inspection and enforcement, etc – See details in the annex 5 for the draft concept note of SEEDTA that was discussed during this scoping mission). 5. There has been good convergence and understanding of the areas/pillars to be supported by SEEDTA, and the WBG is now waiting for feed-back from MEM confirming and providing more details on the identified areas of support. The WBG will subsequently organize a follow-up mission to finalize a concept note. The proposed SEEDTA aims to be presented to the Board of the World Bank in June/July 2018. To be able to initiate the internal Bank process, the GoL needs to make a formal request for Bank assistance. The formal request letter for the SEEDTA project from the Ministry of Finance is therefore expected by end of October 2017. 6. Proposed Lao-Viet Interconnector Project: The mission discussed with representatives of MEM, EDL and several investors of IPPs the concept of the proposed Lao-Vietnam Interconnector Assistance and agreed on the basic technical design concept to provide 650 MW of additional generation capacity via Xekaman 1 and 3 interconnectors (see annex 6 for the draft project concept and annex 7 for the preparation progress). 7. During the wrap up meeting between the MEM Minister and the Bank Country Manager, the Minister supported the project and requested the Bank to support the preparation so that the electricity can be exported to Vietnam as per the Minutes of Understanding (MOU) signed between MEM and MOIT aiming to export 1,000 MW by 2020, 3,000 MW by 2025, and 5,000 MW by 2030. 8. MEM/EDL requested a workshop with the Vietnamese counterparts as soon as possible to share the updated technical design concept and also to initiate discussions on the commercial aspect for export sales. The Bank agreed to coordinate/facilitate a joint WB, GoL and GoV (or EDL and EVN) meeting in Hanoi in October 2017. 9. Apart from the environmental and social safeguards of the investments to be financed by the Bank, there is a need to conduct due diligence on the environmental and social safeguards of the IPP-d’s. This is to ensure that the export of electricity from Lao PDR to Vietnam is done is a responsible and sustainable manner. Detailed Project Status Component One: Hydropower and Mining Learning Program 10. Learning program for sector professionals: The implementation of the approved training plan 2017 is on-going. A number technical training programs have been conducted focusing on environmental and social compliance monitoring, tariff design, demand forecast, feasibility study review, electricity technical standards etc. Under the master program 3 staff graduated in 2016 and additional 17 graduates expected by the end of project in 2018. 11. Development of the Human Resource Information System (HRIS) is completed and user training/system testing is now under implementation, with the official launch of the system expected by the last quarter of 2017. The Key Performance Indicator (KPI) system will be linked to the HRIS. Tracer study has been conducted to cover 31 technical training topics and showing satisfactory results. 12. Education sector: The National University of Laos (NUOL) and three education institutes (EIs) are on track to implement activities under the approved work plan. Capacity building activities related to curriculum improvement, practical training and hands-on experience for both teachers and students at the project sites are progressing. IT and laboratory equipment under original project are fully operationalized and used during practical training sessions. Installation and training on the use of the new educational laboratory equipment for three EIs is underway. 13. Trade Working Groups (TWGs): Several meetings were organized among the TWGs members facilitated by the national TWG consultant to discuss issues around the Duo Cooperative Training (DCT), potential memorandum of understandings between EIs and the hydropower and mining companies, compilation of mining professional standards, expansion of TWGs members to cover other hydro and extractive company representatives. 2|P a g e Aide Memoire – August 2017 14. A proposal for a revised/expansion of TWGs members which has been submitted to the National Training Council under the Ministry of Education and Sport for approval early this month. The development of SOP for dual cooperative training is progressing and expected to be completed by end of October 2017. Cooperation between EIs and private sector is showing progress as evidenced in the number of MOUs prepared, of which two2 have been signed and various activities under the MOUs are now under implementation. Component Two: Hydropower Sector Development 15. Power Sector/Trading Strategy: MacroConsulting submitted the final report of the assignment on “Development of Roadmap, Detailed Action Plan and Investment Program” as well as the final draft “White Paper” after a consultation workshop to gather comments and feedback in March this year. The recommendations for sector reform will be reported to MEM management for further consideration and instruction. 16. Tariff Study: PWC has completed the task on enhancing financial sustainability of the Lao power sector - financial improvement plan and the task on electricity tariff design and submitted the draft reports. Various consultation workshops including high level meeting were carried out to present the findings and gather feedback and comments to finalize the reports. The consultant will prepare an executive summary highlighting key actions on a time-bound manner (i.e. immediate, within 1 year, 2 years, beyond) for decision makers for consideration by September 2017. 17. The Bank discussed with MEM and EDL and agreed in principle that further support will be needed to provide in- country clarification to MEM, MOF and EDL on their deliberation of the financial improvement plan and the tariff design, carry out additional financial modeling, scenario assessments, tariff/subsidies analyses as requested by MEM/EDL, prepare new electricity tariffs instruction to be ready for approval and implementation, and help draft actionable and time-bound financial improvement plan. PSO and MEM may consider allocating some of the uncommitted budget to extend the scope of work for PWC to cover the above-mentioned tasks. 18. Water Resources and Basin Optimization: The work under water resource and basin optimization (funded by PPIAF and a Bank executed advisory service) is to recommend institutional and procedural options, and improvements in tools, to more effectively manage hydropower cascades and integrated water resources management (IWRM) within the Concession Agreements and government policy on river basin management, in order to maximize the value of Lao PDR’s water endowment. The ToRs scope of work comprises two pilots as demonstrations of integrating water resource management principles into hydropower sector.3 19. The WBG is in final stages of retaining a consulting Consortia to implement the pilots. The expectation is to have a kick-off meeting with the selected Consortia on September 26-28 in Vientiane to confirm on project details with MEM and MONRE, collect information and data and an assess modeling platforms. The WBG requests MEM to convene a working group to participate in the study, to complement a similar working group from MONRE. The WBG will follow up with each of Departments of Energy Policy and Planning, Energy Business and Energy Management. The WBG team met with the Department of Energy Management and was introduced by DEM to the Korean International Cooperation Agency (KOICA) funded team of IWRM experts. The KOICA Experts have been working since last year on “Establishing a Master Plan of IWRM for Nam Ngum River Basin.” The WBG looks forward to exploring synergies with the KOICA Experts as this activity progresses. 20. Hydro Fiscal Regime: Adam Smith International (ASI) delivered the Analysis of Policy Options Technical Paper in July 2017. As a follow-up, the newly appointed Fiscal Regime Committee organized the August 28 Workshop for discussion of the Report. ASI presented key features of different options for hydropower fiscal regime to the participants. In addition, the mission and ASI had follow-up meetings with a broad range of government counterparts including EdL, members of the Hydropower Working Group and the Natural Resources Taxation Unit to discuss respective positioning on the ASI hydropower policy options and how they relate to the current context of development of the hydropower sector in Laos. See annex 11 for more details. 2 MOUs between Lao-Germany College and Namtheun Power Company and between NUOL and Namtheun Power Company. 3 The first pilot will focus on developing operating rules to optimize power generation across multiple hydropower plants and addressing non- power interests such as agriculture and flood management in the Nam Ou basin. The second pilot will cover a larger geographic area and explore approaches to prioritizing new hydropower investments, taking into account environmental and social trade-offs in the fairly undisturbed and pristine Sekong basin. The two pilots are significantly different in that they will provide a wide perspective on integrating water management into hydropower sector. 3|P a g e Aide Memoire – August 2017 21. There is growing recognition that the hydropower sector is in transition, moving from a period in which expansion was the primary objective to one in which simply adding capacity is no longer necessarily the primary goal. As an important pre-condition for successful hydropower fiscal policy, the Workshop discussions highlighted the need for a power sector plan and competitive selection of hydropower projects (as per amendments to the Electricity Law). ASI’s fiscal regime options are centered on competitive royalties bidding for export projects and competitive tariff bidding for domestic projects. Therefore, the Options are supportive of a more prudent project selection based on competition in the market, consistent with the amendments to the Electricity Law. 22. The options focused on two traditional models for hydropower development: (i) IPPs for exports, and (ii) IPPs for the domestic market. For the IPPs for export, ASI recommended royalties fixed at 5% in initial years (1-10?). More data and analysis is needed to justify this recommendation. ASI’s recommendations will also need to be revised to factor that a third model has emerged in which “domestic IPPs” sell electricity to EDL under take or pay arrangements for EdL to sell externally. This third model has resulted in an EdL surplus. The fiscal regime recommendations need to build on and reinforce GoL’s efforts to deal with the challenges and opportunities of EdL’s electricity surplus and GoL’s long term plans for system-to-system electricity trades. See next steps actions required to move forward with the hydropower fiscal regime in the agreed actions table on page 9-10. 23. Concession Agreement (CA) Monitoring and IPP Process Capacity Building: The mission welcomes Mr. Xaypaseuth, Director General of the Department of Energy Business, as the new leader for continuing efforts regarding Components 2 B and 2 C of HMTA-AF. Mr. Xaypaseuth’s leadership will be critical for successful achievement of the objectives of HMTA-AF. We are very grateful for Mr. Sychath’s invaluable contributions as the prior leader on these efforts, and we look forward to continue working with him in his new role as the Director General of the Department of Energy Management. The mission also welcomes Mr. Souksakhone Philavanh, as the new National Project Coordinator, replacing Mr. Singha Ounniyon. 24. PwC\Entura is closing its first year of consultancy services. The mission met with representatives from all the five agencies beneficiaries – DEB, DEPP, DEM, IPD and DESIA to discuss implementation progress and focused on assisting the agencies to identify corrective measures to help ensure benefits from the consultancy. Refer to annex 12 on the Minutes of the August 25th meeting identifying gaps and measures to help speed up and ensure strong focus on implementation of each 10 tasks during the remaining 8 months. 25. National Assembly Approval of Amendments to the Electricity Law—Need for Additional Support to Implement Reforms Introduced by Amendments– The legal passage of the amendments is now in final stages –the Law Committee of the National Assembly is working with MEM on final editorial changes. The enactment of the amendments is expected for end of calendar year 2017. 26. Once in full force, the amendments require MEM to spearhead the development of a National Power Sector Development Plan (NPDP) and the development of secondary legislation to support the reforms introduced by the amendments. The GoL will need to prioritize the drafting of secondary legislations based on national priorities, relative complexity to implement those legislation, investment requirements, existence of preparatory work, and relationships to other activities relevant to the implementation of the amendments. The drafting of secondary regulations on NPDP and Competitive Project Procurement would require substantial resources and time. Importance of benchmarking and sharing relevant international experience was stressed. Discussions were held on the scope the components of SEED-TA, including support to the preparation and drafting of NPDP regulations and Competitive Project Procurement. 27. Uneven Progress on Implementation of the IPP & PSHD Assignment - The five agencies of the GOL that are beneficiaries of the IPP & PSHD Assignment4 reported that there is uneven progress on most of the 10 tasks and associated sub-tasks under the IPP & PSHD Assignment. The IPP & PSHD Assignment ToR is intentionally flexible to allow for different pace in implementation of tasks and sub-tasks. However, existing delays risk compromising achievement of the contemplated results in the remaining 8 months. 4 The five beneficiary agencies are (i) MEM’s Department of Energy Business DEB; (ii) MEM’s Department of Policy and Planning (DEPP); (iii) MEM’s Department of Energy Monitoring (DEM); MONRE’s Department of Environmental and Social Impact Assessment (DESIA) and (iv ) MPI’s Investment Promotion Department (IPD.) 4|P a g e Aide Memoire – August 2017 28. At the end of September, PwC\Entura will deliver 15 draft Standard Operating Procedures for rationalization of work process of various departments and divisions of the beneficiary agencies. It is critical that each of the SOPs be properly stress-tested by the concerned department and divisions and that good feed-back is provided to Consultants within the next couple of months to allow time for correction and adjustments. 29. A computerized tool for monitoring Concession Agreements has been developed, but it will only be useful if timely populated with the existing CAs, MOUs and PDAs and works effectively as a centralized platform to disclose and share data among the concerned agencies. After the tool is populated, the agencies have to discuss common access to the tool. 30. There is substantial work to be done to review the PSHD Action Plan and revise the implementation guidelines for the new evaluation criteria and prepare the 2017 Status Report. The Consultants are in final stages of drafting the new evaluation criteria. The 2017 Annual Status Report of PSHD under the new criteria requires stronger coordination among multiple agencies at concerned ministries engaged in monitoring of sustainable hydropower development. The evaluation will not only cover projects under operation but also projects under construction. The PSHD Steering Committee’s new members need to lead the evaluation, assign focal points at each agency and allocate necessary resources. The 2017 Status Report is due by end of March 2018. 31. The review of the Lao Electric Power Technical Standards (LEPTS) is under way, but still needs to be properly customized to reflect challenges of current practices on the ground. DEM started involving consultant in field visits to facilitate understanding of current practices and benefitting from on-the-job capacity building. DEM provided Chinese Technical Standards for Consultant Review. The MEM informed that instead of a panel of experts to critically review LEPTS work done by consultant, a firm lead by Chris Grant – a hydropower engineer that has in numerous occasions served as independent GoL engineer for many Concession Agreements will provide the review. The development of Dam Safety Guidelines may require additional time and budget for its adequate conclusion. 32. On-the-job Capacity Building is at the core of the IPP & PSHD Assignment. As a reminder HMTA-AF Project Development Objective is “To increase human capacity and improve the performance of government oversight institutions for the hydropower and mining sectors”. However, this task appears to be lagging behind. With the presence of resident PwC/Entura consultants during the remaining 7 months, the capacity building (on the job capacity building as well as formal training at central and provincial level) should be implemented in a deliberate and systematic fashion. This will enhance the probability of long-term sustainability of the consultancy interventions and actual knowledge transfer from consultants to government staff. Specific Points of Attention – Building on the above, moving forward would require: • Stronger DEB, DEPP, DEM, IPD and DESIA Engagement during remaining 7 months of consultancy is Critical. There is a need for the five agencies to work more closely with PwC/Entura consultants to develop specific work plans relevant to each task, set milestones and allocate staff time to assure prompt feed-back on an on-going basis. The National Coordinator needs administrative/technical support to follow-up and obtain GoL’s internal feedback – the World Bank would like to seek confirmation from DEB, as the focal point for implementation of consultancy that additional DEB staff will support the National Coordinator, or that HMTA-AF will fund the hiring of an administrative/technical support. • Speed-Up Just-in-Time on the Job Capacity Building – the 5 agencies only have a few months to benefit from coaching and input of expert consultants on their day-to-day work. Specific requests should be sent to the Consultants Project Leader within the next month for planning purposes. • Prioritize Feed-back for SOPs – The relevant departments and agencies need to provide prompt feedback to allow consultants to make necessary adjustments for SOPs to be useful going forward. • Focus on populating the IT Tool for CA, PDA and MOU Monitoring. DEB to allocate staff and develop a schedule to benefit from Consultants assistance in populating the IT Tool with 6 CAs by end of calendar year. • Focus on PSHD Annual Evaluation - The PSHD Steering Committee’s new members need to lead process for approval of new criteria and guidelines. Thereafter, prepare and launch the annual evaluation process by assigning focal points at each agency and allocating the necessary resources. The 2017 Annual Status Report is due by end of March 2018. 5|P a g e Aide Memoire – August 2017 Component Three: Mining Sector Development 33. Mining Sector Strategy: The Department of Mines (DOM) informed that H.E. Khammany had endorsed the Mineral Sector Strategy which was presented at the annual MEM Conference in October, 2016. The strategy rests on five guiding principles: 1) administrative efficiency, 2) sustainable resource exploitation, 3) compliance enforcement, 4) promotion of domestic processing of mineral products, and 5) economic development derived from mineral sector activities. To date the Mineral Sector Strategy has not been formally adopted by the Government. Previous precedents, such as policy statements on Renewable Energy and on Energy Efficiency, which present a succinct vision for the sector, together with the objectives and indicators for implementation would be suitable. At a workshop attended by representatives of DOM, DGM and MPI and of donors on August 3 participants agreed with this idea and also recommended to set up a Work Plan for Mineral Strategy Implementation (see Annex 9). The same Work Plan would serve as a useful guidance for coordination of development partner support, including the proposed Bank-financed SEEDTA Project, potential future support from BGR and others. 34. The five principles of the Mineral Sector Strategy have guided the draft mining law changes prepared by MEM. During August the drafts underwent extensive discussion with other concerned Ministries, the Prime Minister’s Office and Steering Committee of National Assembly. A new draft is to be presented to a large group of National Assembly members at a workshop on September 8, 2017. The mission was informed that the Government will be seeking National Assembly approval of the new mining law before the end of 2017. 35. The combination of a policy statement on Mineral Sector Strategy and the new Mining Law will provide the public and the international mining industry a clear signal of the direction of the sector in the coming years. 36. Regulatory Strengthening: Since the beginning of the project, 20 mining regulations and legal texts have been approved by MEM – already exceeding the 2018 project target of 12. A further 19 texts are in draft form or under consideration. This represents a strong achievement which is a result of a collaborative effort between the HMTA Project, BGR and the leadership of MEM. Specific achievements include: • The standardized Mineral Development Agreement. • Regulations and guidelines on operational compliance. • Guidelines and regulations for inspection. 37. Given the importance of amending the Mining Law, DOM reported no further progress of regulatory drafting since the last mission in February. Several of the regulations that have already been issued may need consequential amendment once the new Mining Law is in force. 38. Strategic Environmental and Social Assessment (SESA): The mission briefed both Minister of MONRE and Deputy Minister of MEM about the completion and findings of the SESA for the mining sector. Key conclusions of the SESA emphasize (i) the unclear delegation of authority between MEM and MONRE with respect to monitoring and enforcement of operators’ social and environmental compliance, (ii) inconsistent reporting from mine operations, and (iii) inadequate regulation and planning for mine closures. It was confirmed that these are all issues which will be addressed in the new Mining Law. The mission recommended the SESA Steering Committee preserve its mandate to oversee follow-up of the conclusions. This would include adoption of SESA recommendations in the mineral sector strategy (mentioned above). The mining sector SESA is the first of its kind in Lao PDR and offers important lessons future assessments of similar nature in other sectors. 39. Mineral Fiscal Regime and Administration: In July 2017, the consulting firm ASI submitted the first two deliverables under its contract consisting of i) Data and Options Review Report” and ii) “Analysis of Policy Options Technical Paper. They summarize past policy guidance, the current fiscal regimes and propose policy options for both the hydropower and mining sectors. At the end of August, the ASI team visited Laos to present the two reports to the Fiscal Policy Committee chaired by the Director General of Fiscal Policy of the Ministry of Finance and officials of relevant Ministries. The objective of the visit is to obtain feedback from the Committee on the policy options and agree a way forward for agreeing suitable fiscal policies and designing suitable legislative and institutional implementation steps. ASI will also conduct training in the building and use of cash flow models to support fiscal regime design and monitoring. 6|P a g e Aide Memoire – August 2017 40. The ASI mining experts recommend several specific changes to royalty, profits tax, customs and VAT legislation which would help to standardize fiscal terms for mining and allow Laos to compete successfully for investment in exploration and mining of minerals. The Bank was informed that the Ministry of Finance is implementing a program of general tax reforms and has a program of legislative changes later this year and next year to achieve this. The advice provided by ASI can feed into these reforms. 41. In late August Dr. Andre, individual consultant on mining tax administration submitted the final report of his work program. The mission was informed that the consultant’s assistance was well received in the Natural Resources Taxation Unit and came up with good suggestions for strengthening tax administration. [The World Bank team has submitted its comments on the consultant’s reports]. 42. Inspection and Monitoring of Mining Operators: MEM reported that the number of mine inspections had dropped from a high of 71% (57 out of 80) operating sites in 2016 to the current inspection rate of 11% (9 site inspections) in 2017. Three areas of concern had received inspectors’ attention: (i) management of tailings storage facilities (TSF), (ii) workers’ health and safety, and (iii) mine closure management. With respect to TSF management, DOM expected to recruit a consultant before the end of 2017 to accompany DOM site visits and draft guidelines for management, inspection and water release from tailing facilities. 43. Mineral Cadastre Management System (MCMS): The MCMS has been fully installed and has been operational at Department of Geology and Minerals (DGM) as well as Department of Mines (DOM) for more than two years. In March 2017, Trimble (the consultant) completed the final training of staff. Consequently, all relevant staff at DGM and DOM have acquired “user-level” skills to populate and update the MCMS. However, as part of after - sales services, Trimble will provide regular support and trouble-shooting as well as system maintenance to address any problems that may emerge. 44. The mission observed a number of positive developments, including (i) the number of system error messages has decreased over the past six months and (ii) the number of staff who are populating and updating the MCMS has also been reduced to approximately 10 persons at DGM and DOM, respectively. This indicates a centralization of the MCMS tasks among fewer staff who acquire stronger specialization. The World Bank team recommends a definitive centralization MCMS operations in a single unit within MEM, as is standard practice globally in order to increase efficiencies. Important next steps would require (i) inclusion of the approximately 400 quarrying and small- scale mining licenses issued by provincial authorities and (ii) a timetable and road-map for on-line access to or periodic reporting of MCMS updates. 45. Geo-science Development: Aerial survey using magnetic resonance equipment was completed in early 2017. In addition, approximately ten staff from DGM and provincial agencies have completed training courses in geoscience analysis. In the coming months, the data collected by the survey will be analyzed. Areas showing relevant geological anomalies will subsequently be investigated through field surveys, planned for November. 46. Community Development Fund (CDF): Pilot projects for implementation of the CDF arrangements under the guidelines prepared for CDF are reportedly in progress but no field reports or results were available at the time of the mission. This will be followed up at the time of the next supervision mission. Financial Management 47. Financial Management: The financial management performance is “Satisfactory”. IFRs and the financial audit reports were submitted on time. The project has employed several remedies to strengthen its internal controls such as (1) improvement of asset management by carrying out physical count of assets (2) up-to-date records of information in the vehicle log book (3) no issuance of cheque as “cash” for payments. The project is recommended to continue strengthening its internal controls to resolve some of the recurring FM issues such as the issuing of cheque prior to formal sign off for approval of activity by project director; delay in clearing advances and incomplete documentation for bank reconciliations. 48. Budget and Disbursement: The two IDA grants have been fully disbursed. In addition, the disbursement from credit has increased considerably from 3.3% during the previous mission to 15.58%. Two direct payment applications amounting to US$579,000 have been prepared and will be submitted to the Bank for payment. The mission team was informed that remaining uncommitted funds is approximately US$2.8 million. Estimated cost for 7|P a g e Aide Memoire – August 2017 on-going procurement packages is approximately US$0.6 million and incremental operating cost (IOC) from now to the closing of the project is estimated to be approximately US$0.25 million. Project team discussion will take place in September to discuss and confirm the use of the remaining funds. As the project is closing in a year’s time, the mission team recommends the PSO to monitor remaining funds closely at least on a quarterly basis to ensure fund sufficiency. Grant/Credit Number Total Grant Cumulative Disbursement as at AUG 17, 2017 XDR XDR % IDA H5390 5,000,000 5,000,000 100% IDA H9470 5,800,000 5,798,957.47 99.98% IDA 54490 5,800,000 903,352.52 15.58% Project Management, Monitoring and Evaluation 49. Project Coordination and Management: Project management and coordination is Satisfactory. The PSO has mobilized a full team to support project management, procurement, financial management, coordination, project monitoring and evaluation. Efforts have also been made to improve coordination among concerned implementing agencies and monitoring implementation progress by having regular project meetings to discuss project challenges. The project implementation progress report was submitted on time with good quality. Procurement 50. Procurement Performance: The procurement performance is satisfactory. The procurement process of most of the packages under the project has been completed and the implementation of contracts is generally on track. See annex 4 for the full procurement assessment. The implementation of several major contracts have been completed although there were some delays. The PSO should closely monitor the contracts under implementation in order to keep their implementation on track and the PSO should also pay attention to the payment issue to make sure that payment to consultant in accordance with the contract provisions. 51. Procurement Plan (PP): The PSO should update the procurement plan to capture the current status of all packages and to add new packages if needed. The PSO should submit the updated procurement plan to the Bank for review. 52. Post Review: Procurement post review will be conducted during the next mission. Environmental and Social Safeguards (E&S) 53. Consultation, disclosure and inclusion in decision-making (under OP4.01 and OP4.10): HMTA succeeded in ensuring that major environmental and social (E&S) assessment (Policy on Sustainable Hydropower Development - PSHD and Mining Strategic Environmental and Social Assessment - SESA) involved consultation (engaged with international organization, SESA involved consultation with local communities for identification of VECs for cumulative impact assessment). Updated Community Development Fund (CDF) guidelines have been drafted to adhere to the requirements for consultation with vulnerable ethnic minority communities and ensure that they are included in the benefits of mining and that they have an influence over decision made on how to allocate the CDF. The Mining SESA has also assessed vulnerabilities of remote ethnic minority communities and livelihoods. The PHSD integrates relevant aspects of the policies in its vision and these require articulation in further detailed supporting criteria. 54. Integration of E&S performance into the hydropower and mining sector management: An increasingly complex policy guidance regime is slowly being integrated into a formal management system for the hydropower sector with arrangements to identify, evaluate, control, monitor and change E&S performance. This policy framework is largely oriented toward management of project-level intervention. A key outstanding tool in this policy framework is a strategic assessment of basin development including identification of cumulative effects. Engagement on E&S performance aspects in the new mine inspection process is limited and involves nominal referral to MONRE. A good practice SESA has been conducted for the mining sector which outlines similar need for systematization of processes and associated responsibilities. Operational parameters remain unclear within and between ministries, questions remain about management commitment to pursuing recommendations of the SESA and the updated CDF guidelines, and empowering and training staff. See detailed safeguards review in the annex 10. 8|P a g e Aide Memoire – August 2017 Key Issues and Actions Required Overall Project Implementation Actions Responsibility Date Conduct review process of uncommitted budget and agree on prioritized MEM/PSO 30 September 2017 activities to be implemented by the HMTA project close and inform Bank Consolidate feedback from technical departments on draft SEEDTA CN PSO/MEM 20 September 2017 Send a request letter to MOF on the SEEDTA MEM 20 September 2017 A formal request letter from MOF on the SEEDTA to the Bank MOF 20 October 2017 Laos-Vietnam Interconnector Facilitate workshop between MEM/EdL and MOIT/EVN in October 2017 in WB/MEM/EDL October 2017 Hanoi Determine the scope of the feasibility study through discussion with WB/MEM/EDL October 2017 MEM/EdL and to consider sources of financing Manage ESA study under HMTA with involvement of MEM/EdL WB/MEM/EDL October 2017 Determine the extent of environmental and social due diligence required for WB October 2017 the IPP-ds, and identify sources of financing Hydro Fiscal Regime (a) MEM and EDL to provide additional data to guide and strengthen ASI’s MEM and EDL 30 September 2017 analytical work justifying the proposed options, including: (i) data on terms of existing lending for IPPs, and (ii) data on “other” taxes currently being levied on IPPs. (b) The designation of two lead counterparts within the members of the Fiscal Regime 20 September 2017 Fiscal Regime Committee and confirmation of their time availability Committee (c) Guidance on whether to move forward with Hydropower Fiscal Regime Fiscal Regime 20 September 2017 regulations. The next task under ASI ToRs is to draft regulations for Committee hydropower fiscal regime. Given new dynamics in power sector, ASI is seeking final guidance from the Fiscal Regime Committee as to whether drafting regulations may be premature Procurement Actions Accelerate procurement process for the remaining packages (i.e. package #G7 PSO September 2017 for “procurement of server for ITC”, package #CS05 for “Developing regulations for Construction and Management of the Tailing Storage Facility”, package #CS09 for “Hiring a consulting firm to set up information system for CO & DEB”, and #CS46 for “National Legal Consultant for Development of National Assembly Guidelines for Review and Approval of Mining Concession Agreement”) Update procurement plan to capture the current status and new procurement PSO 30 September 2017 activities and send to the Bank for review Financial Management Actions Submit Interim Unaudited Financial Report (IFR) for the quarter ended Sept PSO 15 Nov 2017 30, 2017 Submit audit report for the fiscal year ending December 31, 2016 PSO 30 Jun 2018 Social and Environmental Safeguards Ensure that the scheduled environmental and social safeguards trainings are PSO Sep 2017 held and not postponed indefinitely or budget reallocated. Confirm that the current plans will be undertaken PSO to develop a matrix of all relevant policy and procedure development PSO Sep 2017 under HMTA that contains environmental and social performance management guidance and verify that this list is current and complete 9|P a g e Aide Memoire – August 2017 List of Annexes 1. List of People Met 2. Mission Objective 3. Results Framework 4. Procurement Assessment 5. Draft Proposed SEEDTA Concept (as of August 11, 2017) 6. Draft Proposed Laos – Vietnam Interconnector 7. Laos-Vietnam Interconnector Preparation Progress 8. Mining Sector Statistics 9. Work Plan for Mineral Strategy Implementation 10. Safeguards Review 11. Hydropower Fiscal Regime 12. Minute of the meeting on Improving Hydropower Independent Power Producers (IPP) Process; Concession Agreement Management and Monitoring and the Implementation of Policy on Sustainable Hydropower Development 10 | P a g e Aide Memoire – August 2017 Annex 1: List of People Met Name Institution Position H.E. Dr. Khammany Inthirath MEM Minister Dr. Daovong Phonekeo MEM, CO Director General, Cabinet Office Acting Director General of Institute of Renewable Energy Promotion and Head Mr. Chantho Malattanapheng MEM, IREP of HMTA Project Mr. Chansaveng Boungnong MEM: DEPP Acting Director General, Dept. of Energy Policy and Planning Mr. Khamso Kouphokham MEM: DEPP Deputy Director General, Dept. of Energy Policy and Planning Mr. Litthanoulok Laspho MEM: DEPP Dept. of Energy Policy and Planning Ms. Santisouk Phimphachanh MEM: DEPP Dept. of Energy Policy and Planning Mr. Khamla Vichitvongsa MEM:DPO Deputy Director General, Department of Personnel and Organization Mr. Souksavanh Phanthong MEM:DPO Deputy Director of Division of Personnel and Organization Ms. Sangkhaninh Daravong MEM: DPO Technical Officer, Department of Personnel and Organization Dr. Simone Phichit MEM: DOM Deputy Director, Department of Mines Mr. Khamtanh Vongphansipaseuth MEM: DOM Deputy Director, Department of Mines Mr. Keo Khamphavong MEM: DOM Deputy Director, Department of Mines Mr. Saiphet Visaypaseuth MEM: DOM Division Head, Department of Mines Mr. Bounnhong Sidavong MEM: DOM Division Head, Department of Mines Mr. Vongthong Thimahaxay MEM: DOM Deputy Director, Mines Health, Safety and Development Division of DOM Mr. Chanthaboun Souk Aloun MEM: DEB Deputy Director General, Dept. of Energy Business Mr. Khamphanh Sihavong MEM: DEB Deputy Chief of Project Development & Monitoring, Dept. of Energy Business Mr. Sychath Boutsakitirath MEM: DEM Director General, Dept. of Energy Business Mr. Bouathep Malaykham MEM: DEM Deputy Director General, Dept. of Energy Management Mr. Houmphanh Vongphachanh MEM: DEM Division Director, Dept. of Energy Management Mr. Manomay Vilayhong MEM: DOM National Technical Consultant to Mining Component Mr. Boaulay SaAthsy MEM: DGM Deputy Director, Department of Geology and Minerals Mr. Inpong Homsombath MEM: DGM Department of Geology and Minerals Mr. Bounma Manivong EDL Deputy Managing Director Deputy Manager, Study and Design Projects for TL & SS, TL & SS Mr. Somsanith Sadettan EDL Development Dept. Mr. Chitpanya Phanisonh EDL Department of System Planning Prof. Dr. Boualinh Soysouvanh NUOL Dean of Faculty of Engineering, Hydropower Section Assoc. Prof. Nhinxay Visane NUOL Head of Department, Department of Civil Engineering, Faculty of Engineering Head of Department, Electrical Engineering, Department, Faculty of Assoc. Prof. Khampha Sihanakhone NUOL Engineering Mr. Somlith Vilivong LGTC Head of LGTC Mr. Chanthone Naovalath MMG Head of TWG – Mining Mr. Souliphone Phommachan NTPC Coordinator, Representative of TWG - Mining Mr. Phayvanh Vongsaly PSO Financial Management Specialist, Consultant Mr. Juergen Piechotta PSO Project Management Adviser, Consultant Ms. Vilayvanh Sisomboun PSO Project Coordinator, Consultant Dr. Sengpasong PSO TWG Consultant Dr. Bounleua Sinxayvoravong MOF Director General, Department of Fiscal Policy Mr. Phayvanh Chandavong MOF Deputy Director General, Department of Fiscal Policy Mr. Pasomphet Khamtanh MOF Deputy Director General, Department of Fiscal Policy Mme. Vannida Savatdy MOF Deputy Director General, External Finance Department Dr. Sengaroun MOF External Finance Department Mr. Amphon Southiphonh MOF Director of Division, Department of Fiscal Policy Mr. Lamphoon Syvoravong MOF Chief of Division, Department of Fiscal Policy Mr. Phaytoun Tienglamay MOF Deputy Director of Division, Department of Taxation 11 | P a g e Aide Memoire – August 2017 Annex 2: Mission Objectives 12 | P a g e Aide Memoire – August 2017 Annex 3 –Results Framework Project Development Objective: To increase human capacity and improve the performance of government oversight institutions for the hydropower and mining sectors Progress to Date to Cumulative Target Values** Unit of Baseline PDO Level Results Indicators* Achieve Measure (2010) 2014 2015 2016 2017 2018 (August 2017) Indicator One: Percentage of trained GOL Percent None Achieved: Tracer study System 50 60 70 80 staff report medium to intensive use of (cover 31 technical training developed knowledge and lessons learned from capacity topics) show more than 80 building measures. percent report medium to intensive use of knowledge. Indicator Two: Number of River Basins, Number 0 Achieved: Targets achieved - 1 2 3 5 where all Hydropower Projects are and exceeded. About 11 monitored for CA compliance. river basins – where 48 Hydropower Projects are monitored for CA compliance. Indicator Three: Percentage of on-the- Percent 0 Achieved: 66 mining 10 20 30 40 50 ground inspections of exploration/mining projects inspected by DOM operations performed using improved (80% of total 81 mining systems and procedures in line with projects). international practice. In 2015 – 35 projects out of total 68 projects In 2016 – 57 additional out of total 78 projects In 2017 – 9 mining projects inspected by DOM INTERMEDIATE RESULTS Intermediate Outcome (Component One) (AF): (i) Increased number of GOL personnel benefit from training on technical and cross-cutting areas in the hydropower and mining sectors; (ii) Increased capacity of national university and technical schools to develop national human resources in the mining and hydropower sectors. Unit Baseline Progress to Date 2014 2015 2016 2017 2018 Intermediate Indicator 1.1: Number of GoL Number of None Achieved: 809 staff (181 60 women 135 women 135 women 140 women 150 women female/male personnel trained on technical staff women and 628 men) 150 men 315 men 400 men 500 men 600 men aspects, such as contract management, financial analysis, accounting, environmental and social management. Intermediate Indicator 1.2: Completed and Text No KPI Partially Achieved: Mobilized Tested and Approved the Operationalize Assessment of overall operationalized the performance evaluation system in Computerized KPI additional trained on the system by d the system results (KPI) system for MEM and PDEMs place developed. Testing and consultant application of MEM Training for users KPI system underway. 13 | P a g e Aide Memoire – August 2017 Intermediate Indicator 2.2: Direct project Number 0 Achieved: Over 7,600 460 700 900 1,060 1,280 beneficiaries (number), of which female Percent beneficiaries including 25% 25% 25% 25% 25% (percentage) MEM, PDEMs, DDEMs as well as teachers and students from the three EIs beneficiaries (10% females) Intermediate Outcome (Component Two) (AF): i) Enhanced planning capacity for hydropower development; (ii) Improved institutional processes and procedures for CA monitoring; (iii) Improved transparency and performance of hydropower development through the implementation of PSHD. Unit Baseline Progress to Date 2014 2015 2016 2017 2018 Intermediate Indicator 3.1: Percentage of Percent 0 Achieved: Avoided costs 0 10 100 100 100 New Hydropower Power Purchasing methodology/model Agreement (PPA) that are subject to the developed and applied 100 avoided costs methodology percent to 5 new PPAs since May 2016 (Namneun, Namnga, Nambi, Nammone, Namdik) Intermediate Indicator 3.2: Completed Text No On track: Final report Consultant Round table Final Draft Draft White White Paper issued power trade strategy and action plan. strategy/ submitted and draft White mobilized consultation/ Paper by MEM action plan Paper is prepared. draft strategy & action plan Intermediate Indicator 4.1: Percentage of Percent 0 On track: 100% Standard 0 20 50 80 100 new hydropower IPP applying the standard CA – updated DEB model CA requirements. with additional provisions in negotiation of new CAs completed. 3 new IPPs has applied this updated model. Intermediate Indicator 4.2: Approved Text No SOP Partially Achieved: Consultant Draft SOP Draft SOP Draft SOP and SOP endorsed by Standard Operation Procedures (SOP) for Development of SOP is in mobilized public MEM IPP process. progress. consultation Intermediate Indicator 5: Annual report on Text Original Achieved: 1st Annual Status PSHD Annual Report Annual Report Annual Report Annual Report the implementation of the PSHD. NPSH in Report finalized by March approved by place 2016 and public closure in MEM May 2016. 2nd Annual Status Report was completed in December 2016. Annual WS to disseminate the status report, lessons learnt from PSHD implementation conducted in March 2016. The consultant is developing matrix for evaluation of PSHD elements (consultation, information disclosure, project affected people/social impact). 14 | P a g e Aide Memoire – August 2017 Intermediate Outcome (Component Three) (AF): (i) Improved Governance of the Mining Sector; (ii) Improved Government Oversight of the Sector. Unit Baseline Progress to Date 2014 2015 2016 2017 2018 Intermediate Indicator 6.1: Model Mining Text Non- On-track: Final Mining Final draft of Moratorium on Finalized draft Public Draft MDA approved Development Agreement approved by MEM. standardized Development Agreement model contract new mining MDA consultation by MEM terms & was submitted to PMO for concession conditions approval in September 2016. still in place for mining concession Intermediate Indicator 6.2: Number of Number 0 Achieved: 20 mining 4 6 8 10 12 approved mining regulations. regulations and legal texts have been passed – already exceeding the 2018 target of 12. Intermediate Indicator 6.3: Completed Text No strategy Achieved: Final draft Mobilized Draft strategy Final Draft Public Sector Strategy sector strategy and action plan. & plan for Mineral Strategy has been consultant consultation approved by MEM mining completed and is being sector reviewed by DOM. Public consultant was carried out in August 2017. Intermediate Indicator 7: Geoscience Text No On-track: Airborne survey - - Consultants Deliverables Final deliverables and infrastructure mapping (Geophysics & geoscience was completed in February and and by- by-products (100%) Geology) in two selected areas infrastructur 2017 contractors products e mapping mobilized (80%) in place Geophysical and ArcGIS (60% training has been provided completion) to technical staff of DOM, DGM and PDEM in May 2017 The consultant has deliver three reports. 15 | P a g e Aide Memoire – August 2017 Annex 4: Procurement Assessment Procurement performance: The procurement performance of the project is remained satisfactory. The procurement process of most of the packages under the project has been completed and the implementation of contracts is generally on track. The table below shows current implementation status of the major packages under the project: No. Package Package name Contract (USD) Current status 1 G1 Technical equipment and 756,738 Implementation of the contracts for Lot 1, 3, teaching aid for NUOL, LTG, and 4 has been completed. Regarding PTC, LPBTS contracts Lots 2 & 5, goods has been delivered and will be installed in the first week of September 2017. About 40% of the total contract amount has been paid. 2 C2-a-CS01 Hydro Power Sector 398,343 Although the contract implementation period Development Strategy had to be extended nearly 7 months, the implementation of the contract was completed and all payments had been made to the consultant. 3 516,744.12 Implementation period is 12 months from July Enhancing Financial 2016 to July 2017. Nevertheless, due to Sustainability of Power Sector in implementation delay, the contract has been C2-a-CS02 Laos and Developing Suitable extended to September 4, 2017. It is estimated Power Tariff Regime that 75% of works done and disbursement rate is about 55%. 4 Consulting firm to develop fiscal The contract has been signed on May 5, 2017 policy regime mechanism, and at present under implementation. The C2a-CS03 creating hydropower & mining 452,834 disbursement rate is 30%. accounting including trial for MoF 5 Consulting firm for Improving Implementation period is 18 months from Hydropower IPP Process; August 19, 2016 to January 31, 2018. Concession Agreement Disbursement rate is about 50%. C2b.c.d- Management and Monitoring 2,068,675 CS04 and the Implementation of Policy on Sustainable Hydropower Development (PSHD) 6 Consulting Company to set up The implementation of the contract was and and make functional completed and all payments had been made to Cadastre management System in the consultant. C3b-CS07 305,667 3 Provinces (including related agencies in MEM and other Ministries) The implementation was delayed and the Acquisition and Development of contract implementation was extended from C3b-CS08 Geo-data Infrastructure 2,190,811 October 2017 to June 2018. Disbursement rate (geological mapping) is about 66%. C3a-CS45 Consulting Company to carry Although the implementation of the contract out Strategic Environmental and was delayed and the implementation period Social Assessment (SESA) of had to be extended from July 2016 to to the 248,450 the Mineral Sector end of March 2017. The implementation of the contract was completed and all payments had been made to the consultant. Based on the current status of the above major contracts, the implementation of a number of major contracts have been completed although there were delays. The mission still advised the PSO to closely monitor the contracts under implementation in order to keep their implementation on track and the PSO should also pay attention to the payment issue to make sure that payment to consultant in accordance with the contract provisions. 16 | P a g e Aide Memoire – August 2017 The mission also noted that procurement process of a number of goods and consulting packages including package #G7 for “procurement of server for ITC”, package #CS05 for “Developing regulations for Construction and Management of the Tailing Storage Facility”, package #CS09 for “Hiring a consulting firm to set up information system for CO & DEB”, and #CS46 for “National Legal Consultant for Development of National Assembly Guidelines for Review and Approval of Mining Concession Agreement” have not been completed. The mission advised the PSO to spend extra efforts in order to accelerate the procurement progress of these packages. Regarding the services of Export Sale Agreement, the mission advised the PSO to add the services to a current contract as additional services if it is appropriate and justified; or to create a new package procured using CQS method if the cost estimate is below USD 300,000. Procurement Plan: The mission advised the PSO to update the procurement plan in order to capture the current status of all packages and to add new packages if needed. The agency should submit the updated procurement plan to the Bank for review. Procurement post review: Procurement post review will be conducted during the next mission. 17 | P a g e Aide Memoire – August 2017 Annex 5: Draft Proposed SEEDTA Concept (as of August 11, 2017) Government of Laos (GoL) Objectives and Vision: There are various documents that formulate the GoL energy and extractives sector vision and strategy. The 8th National Socio-Economic Development Plan (NSEDP) 2016-2020 continues to emphasize the important role of the hydropower and mining industries in the Lao economy, citing it as major contributors to the state budget, economic development and employment. It also makes a particular reference to safeguards end environmental sustainability. The Government’s Energy Sector Vision to 2030 includes the following objectives: - Continue to explore natural resources - Develop energy in a green and clean manner - Ensure sufficient and sustainable supply for domestic consumption - Develop the integration with neighboring countries and regions EDL’s power grid development plan from is considered a key tool to achieve these objectives. The Vision to 2030 also identifies major energy sector weaknesses including: (i) unsatisfactory achievement rates of generation and transmission projects; (ii) sector/project governance; (iii) financing capacity; (iii) sector policy dissemination and understanding; and (iv) need to improve sector policies, rules, ownership and coordination. The 2025 EDL Development Strategy can be summarized as follows: - Improve financial management (asset and risk) and financial robustness - Improve customer services (customer relationships, efficiency of services) - Develop and disseminate corporate values - Become a leader in energy efficiency measures (e.g. smart grid development) - Increase Non-hydro renewable energy - Increase environmental responsibility The Renewable Energy Strategy Paper 2011 identifies biomass, solar and wind as the main renewables options other than hydro. The document lists the barriers for non-hydropower renewable development, including: - No specific policies or strategies on renewable energy development - Lack of coordination between stakeholders and renewable energy projects - Lack of specific regulations and laws - Insufficient knowledge and understanding of renewable energy - Lack of public funding for renewable energy projects and R&D - Absence of price regulation and incentives - Insufficient information on renewable energy potential for provincial level - Rural households prefer grid to off-grid energy solutions Overall, the strategic goal of the GoL are to become a central regional energy actor and the power sector to be a major contributor of forex to fund economic development. In addition, the goal is to develop sufficient, clean, reliable and affordable energy for the domestic market to contribute to the country’s industrialization and modernization. The Government’s strategy for development of mineral resources is under preparation with its principle elements outlined in November 2016 at the Ministry of Energy and Mining’s Annual Conference. Formal endorsement is due to take place in conjunction with the completion of a revised Mineral Law later in 2017. The five high level goals are to: i) improve administrative efficiency; ii) promote sustainable mineral exploitation iii) improve governance and compliance enforcement 18 | P a g e Aide Memoire – August 2017 iv) promote domestic mineral processing and job creation v) foster economic diversification and development. To support the Government’s objectives and vision, the four strategic pillars of World Bank Group (WBG) energy engagement in Laos include: (i) Renewable Energy Development; (ii) Sustainable Mining Development; (iii) Power Grid Improvement; and (iv) Electricity Trading Promotion. Energy and Mining Sector Challenges and Opportunities: Laos has successfully developed its energy and mining sector, connecting 90% of households to the power grid and generating sizeable Government revenues through mining and export oriented hydropower projects. The Bank has supported the GoL to develop domestic and export infrastructure through various investment projects (e.g. Nam Theun 2). The Bank has also played a critical role in supporting the GoL in developing its energy and mining sector policies and develop capacity and knowledge sharing through the Hydropower and Mining Technical Assistance Project (HMTA) and HMTA Additional Finance Project that has been implemented from 2010 to 2014 and 2015 to 2018. Energy Sector: The main challenges and reform opportunities of the energy sector are: - Meeting fast growing electricity demand: Electricity demand is growing fast driven by residential and industrial sectors. The grid remains weak; large portions of the country are not covered and some regions are not connected to one another. Parts of the country cannot be supplied by domestic generation resources and EdL is required to import power to serve customers in these areas. To improve security, reliability and efficiency of power supply in the domestic market, the Government should attract public and private investment to scale-up network development to serve domestic load and integrate the national power grid. - Overcoming limitations of current export-oriented IPP model: The power sector developed rapidly following a model of export oriented IPPs and dedicated network infrastructure. This model was suitable for large hydropower developments which are declining and a different model will be required to develop smaller scale projects. To optimize benefits from the country’s overall energy potential, the Government is developing a new strategy for system -to system transactions, requiring structural changes in the power sector and the role of EDL as well as developing new export markets, especially Vietnam and Myanmar. - Improving financial situation of EdL: The causes of the declining financial viability of EdL are: (i) continued borrowing for hydropower projects which are transferred to EdL Gen for operation while debt service remains responsibility of EdL; (ii) high network losses; (iii) accumulation of arrears due to non-payment for electricity services provided to public entities; and (iv) EdL being signatory on numerous PPAs for IPPs whose output will not be required by EdL, thus causing a generation surplus. EdL’s financial situation is precarious and the GoL aims to improve the financial position of EdL as the main offtaker. - Better management of environmental and social impacts: Weaknesses in the legal and regulatory frameworks pertaining to investments in hydropower and mining, overlapping oversight mandates of central and provincial governments, incomplete administrative procedures and mechanisms to supervise and lack of capacity within the existing government civil service are significant to address serious environmental and social impacts for private sector investments. GoL aims to improve that framework and strengthen its institutional capacity to supervise sustainable energy development. Mining Sector: The GoL introduced in 2012 a moratorium on new mining investments, with an exception for non-metallic minerals. The moratorium was the result of increasingly widespread concern by the 19 | P a g e Aide Memoire – August 2017 government and public that the industry was leniently monitored and disproportionately favored operators in the profit-sharing. The moratorium was designed to allow the government to review existing operators’ compliance with regulations and contracts. Although the moratorium was set to expire at the end of 2015, it has been kept in place and no timetable for its removal has been established. Further, the rapid drop in commodity prices has dramatically reduced government taxes, from $290 million (12 percent of total revenue) in the 2012/13 fiscal year, to $128 million (5 percent of total revenue) in 2015/16. These figures are expected to decline further as the existing large-scale operations, Phu Bia and Sepon, wind down their production as resources get depleted within the next five years. In light of the official ban on new investments, the next generation of potential operators have been impeded from exploring the mineral resources of the country, which are otherwise considered to be very promising by industry experts. This means that the sector is becoming increasingly dominated by small-scale operations which offer very limited returns to Government with often limited technical capacity and large environmental and social impacts. Key challenges for the mining sector over the next few years are: - The moratorium allowed authorities an opportunity to re-evaluate impacts, benefits and mitigation measures of the mining industry. However, the effects have been counter-productive: (i) the actual number of mining and exploration licenses has increased; (ii) small-scale operators with sub-standard practices have gained dominance, and government revenue collection is suffering from the flight of international, large-scale investors. Potential solutions include: (i) corrective measures or license cancellations to address poor environmental and social performance; (ii) stream-lined and systematic review and approval processes award of licenses; and (iii) a taxation and fiscal framework which ensures greater returns to government as prices and profitability rise. - The foundations for a better managed mining industry have been created, including the mineral cadaster system, geological surveys, and community development practices. But these foundations must be sustained by further capacity building of staff who will eventually be responsible for sustained sector management. - The recently completed Strategic Environmental and Social Assessment (SESA) of the mining sector has identified a number of short and medium-term actions, including: (i) improved monitoring and reporting of operators; (ii) modalities for mine closure and sustained community development after mine closure; and (iii) water quality management. The Proposed SEED-TA Project: The proposed IDA$20 million SEED-TA Project is a follow up operation to the HMTA AF project that will close in September 2018. The overall objective of the new project is to build on the successful technical and capacity building support provided under HMTA to the GoL; further implement and strengthen key policy areas that were developed under the project under hydropower and mining; and expand into new areas as the energy market has developed to address emerging challenges and government objectives (e.g. solar, wind, sector restructuring, EDL financial viability, power trade). The overall Project Development Objective (PDO) of SEED-TA is to develop relevant sector policies and build capacity to ensure the sustainable development of energy and mining sectors. The proposed SEED- TA Project as four components: o Component I: Taxation & Fiscal o Component II: Energy Sector o Component III: Mining Sector o Component IV: Project Management 20 | P a g e Aide Memoire – August 2017 Component I: Taxation & Fiscal ($2 million) The aim of this component is to support the Ministry of Finance (MoF) to manage the revenues generated from the energy and extractives sector in Laos, since they have a significant effect on overall macro- economic performance. This includes: - Design fiscal regime to encourage trade and investment while assuring a fair share of resource rents are captured; - Assure that systems for collecting revenues are administered effectively both to minimize revenue leakages and avoid an excessive compliance burden; and - Adopt measures to protect the economy from volatility and other sources of balance of payments and budget instability linked to high levels of dependence on the energy and extractives sector. SEED TA will build on achievements under HMTA/HMTA AF supporting the Natural Resource Taxation Unit (NRT), which was formed in 2016 under the Department of Taxation, and has already gained recognition as the centre of expertise on natural resource taxation issue to: - Build capacity to evaluate and recommend energy and extractives tax measures; - Develop procedures for more systematic and efficient control and audits of mineral and hydropower operators; and - Prepare resource revenue projections for planning and budgetary purposes. The MoF, including the Fiscal Policy Committee which it chairs, will be assisted to strengthen revenue management, for example, by evaluating macro-economic impacts of global developments in energy and extractives sectors, building resource sector projections into the medium-term budgetary frameworks and considering options for stabilization and savings measures relevant for a resource-dependent economy. Specific objectives of the support under SEED TA will be to assist with a change from the current system in which tax rates and fiscal terms are negotiated concession-by-concession for new investments to more standardized fiscal packages for hydropower, other new energy sources (e.g. development of wind, solar, biomass) and for mining. The proposed project will also review energy export taxation and fiscal arrangements to ensure Laos PDR maximizes its benefits exporting its energy related natural resources. As part of the assignment, an analysis will be conducted to assess the overall cost/benefits for Laos of developing natural resources for exports. Proposed SEED-TA Component I: Taxation & Fiscal Areas HMTA/HMTA AF SEED-TA SEED-TA Results Mining - Mining Fiscal Regime - Implementation of new tax and - New fiscal and tax Design Study 2017 non-tax fiscal regime for regime adopted by MOF - Mining Tax mining ($0.2 mn) - Key tax administration Administration - Implementation by the Natural reforms adopted by Assessment 2017 Resources Tax Unit of tax MOF administration reforms ($0.2 - Completed audits of mn) mining taxpayers - Tax audit support ($0.4 mn) Energy Hydropower Fiscal - Implementation of new tax and - New fiscal regime Regime Design Study non-tax fiscal regime for adopted by MOF 2017 hydropower ($0.2 mn) - Fiscal & taxation regime - Develop fiscal & and non-tax for non-hydro developed fiscal regime for non- and adopted by MOF hydropower renewables (solar, wind, biomass) ($0.5mn) 21 | P a g e Aide Memoire – August 2017 Other - Conduct overall cost/benefits - Analysis conducted and assessment of developing capacity built natural resources for exports & evaluate stabilization and savings policies, measures and institutions ($0.2 mn) The training and capacity building activities under this component will focus on sending a few MOF middle management staff to relevant training and capacity building events on fiscal & taxation for energy and mining. These may include relevant university courses or secondments to relevant government agencies abroad. Some relevant workshops may be organized in Laos at the central/provincial and municipal level to improve the effectiveness of the implementation of the fiscal and taxation regime with relevant authorities. The GoL and World Bank should explore grant financing opportunities with bilateral donors in Laos to support training and capacity building support activities on fiscal and taxation (e.g. Australian Government on mining). Proposed SEED-TA Training and Capacity Building ($0.3 million) Areas SEED Capacity Building SEED-TA Results Design of Fiscal/Tax Regimes University courses; etc Up to 3 middle managers trained Collection & Monitoring Secondments Up to 2 middle managers seconded Implementation Workshops A few strategic workshops organized at national/provincial levels Implementation Agency: MoF Component II: Energy Sector ($10.5 million) The aim of this component is to a) implement hydropower policy engagements developed under HMTA; and b) develop policy and capacity building in new critical areas to ensure the sustainable development of the energy sector in Laos, including non-hydro renewable energy, power system planning, financial sector performance, power trade, sector restructuring, technical capacity of EDL to manage and operate system. Proposed SEED-TA Component II: Energy Areas HMTA SEED-TA SEED-TA Results Non-hydro RE N/A - Develop RE policy/strategy - RE policy/strategy adopted (Solar, wind, - Develop legal and my MEM biomass) regulatory framework (e.g. - Relevant laws and bankable PPAs) regulations - Design of FIT/auction developed/adopted by regime MEM - Design and implementation of FIT/pilot auctions Coordinated Revised - Develop organigram on - Organigram of Power System Electricity Law - institutional CPSP responsibilities adopted by Planning DEPP prepare 5- responsibilities MEM (CPSP) year plan - Develop CPSP - CPSP strategy/approach approach/strategy adopted by MEM - Update Grid Code - CPSP developed and - Build CPSP capacity adopted by MEM - Grid Code Updated 22 | P a g e Aide Memoire – August 2017 Financial - 3rd Financial - Develop EDL Group - EDL Group organizational Viability of Action Plan for organization structure & and financing strategy EDL and Power Financial Financial Strategy up to adopted by EDL Sector Viability of 2030 - Credit Rating conducted by Power Sector - Conduct credit rating(s) for EDL (2018-2022) selected EDL Group entities and advise on raising commercial finance Power Sector - Power Sector - Develop Energy Sector - White Paper adopted by Reform and Reform White Paper MEM Trading Development - Unbundling of EDL and - Transmission Company Strategy establishment of established - Electricity Transmission Company - Regulatory and tariff tariffs & - Design of regime adopted by ME subsidy economic/financial/technical - Adopt/implement STS mechanism regulatory regime (i.e. role of DEM - Develop formal tariff and open access regime - Develop legal, commercial, technical strategy to improve power trade - Develop STS strategy Power System N/A - Develop technical options to - Adopt/implement strategy Operation improve system operation to improve system - Train relevant EDL staff operation - Policy on PSHD policy & - Develop legal, regulations, - Adopt/implement PSHD Sustainable technical guidelines regulations and guidelines Hydropower guidelines - PSHD implementation Development (PSHD) Non-Hydro Renewable Energy ($2 million): The main non-hydro RE resources are wind, solar and biomass and Laos faces the following key challenges in developing these resources, including: - No specific policies or strategies on renewable energy promotion; - Lack of coordination between stakeholders in renewable energy projects; - Renewable energy policy has not yet been clearly stated in the National-Socio-economic Development Plans or in strategies on growth and poverty reduction, as well as five year plans of the government; - Lack of specific regulations and laws on renewable energies; - Lack of public funding support for the renewable energy sector, including R&D - Insufficient information on renewable energy potential at national and provincial level; Given the RE resource potential of Laos and the recent evolution of solar and wind costs, it is appropriate, given the geographical and climatic opportunities the country offers, to consider other RE that could contribute to the base load requirements and improve the firm power capacity to improve the standing of Laos as a major power exporter in the region. Hence, the SEED project will support the GoL to: (i) Develop an overall renewables development strategy (ii) Develop a legal and regulatory framework with clear allocation of responsibilities 23 | P a g e Aide Memoire – August 2017 (iii) Design and implement a pricing regime (FIT/auction) Coordinated Power System Planning ($2 million): Following the revision of the Electricity Law DEPP will be responsible to develop a 5-year power system plan, including a) electricity demand forecasting; b) generation planning; and c) transmission & distribution planning. The coordinated power system planning will also include a coordinated approach with MONRE and other government agencies on integrated water resource management. Key areas that SEED-TA will need to address, include: (i) Who is responsible for what on power system planning (institutional set up, data ownership and management) (ii) Developing suitable and integrated demand forecasting, generation and network planning systems and plan; (iii) Update of Grid Code (iv) Building relevant capacity in relevant institutions. Financial Viability of EDL and the Power Sector ($1.5 million): EDL and the power sector face critical financial challenges. In 2016, EDL Group has been incurring operational losses and consolidated revenues from dividends and consolidated net profits are declining. The debt service coverage ratio is below 1 indicating EDG Group challenges to service debt. Increasing borrowings to finance new investments have raised debt-to-equity ratio to 3 breaching loan covenants. Government receivables (arrears) averaged 19 months of sales to government customers. Measures to improve the financial situation of EDL in the next three years include: (i) prioritize and limit capital expenditure; (ii) recapitalize EDL Group; (iii) adjust tariff structure; (iv) improve PPAs for upcoming export projects; (v) appoint full-time financial experts to assist EDL senior management. In the medium term and under SEED-TA the following will be included: (i) Assist EDL in implementing the 3rd Financial Action Plan for Financial Sustainability of the Power Sector (2018-2022) developed under the HMTA Project; (ii) Develop alternatives for a new EDL Group organizational structure to optimize the domestic electricity supply and export businesses and develop implementation plan towards new structure (incl. administrative, legal, regulatory aspects); (iii)Develop an overall Financial Strategy for EDL Group compatible with the abovementioned organizational structure up to 2030; (iv) Prepare a financial roadmap for EDL Group, including milestones of financial indicators for the various entities in EDL Group (e.g. EDL-Gen, EDL power grid, etc.). (v) Conduct a credit rating(s) for selected EDL Group entities for raising commercial debt/bonds etc. Power Sector Reform and Trading ($2 million): There are a number of major power sector issues that will need to be addressed to improve sector performance. At present, EdL provides transmission and distribution services and is the single buyer of generation to serve domestic customers. In addition to export IPPs, there is substantial and growing amount of excess power for sale from EdL’s system to the systems of its neighbors, primarily Thailand and Vietnam. The surplus, along with the potential for significant gains or losses, is on EdL’s books. The EdL transmission grid needs significant enhancement both for improved domestic service, as well as for the export of system-to-system (STS) power. Pursuant to a recent revision of the Electricity Law, it will be necessary to develop an open access regime with fair and transparent rules and establish a transmission company. Some areas that the SEED-TA will need to address include: (i) Develop an Energy White Paper that clearly sets out the vision and objectives of the power sector in Laos; 24 | P a g e Aide Memoire – August 2017 (ii) Develop a structure on the ownership and operation of the transmission business; (iii) The development and implementation of open access rules on transmission; (iv) Develop a suitable regulatory regime for Laos, and set our clear responsibilities for technical and economic/financial regulations (v) Develop a comprehensive electricity tariff regime Power System Operation ($0.5 million): EdL have started to build modern system control centers (CCs): a national one in Vientiane and regional once one in each of the 4 regions. The national CC would take charge of generation scheduling and dispatch and take power export/import decisions, while the regional CCs would manage their respective regional networks. EDL staff have also started to acquire power system operation knowledge they will require for the future to trade in a system-to-system environment where EDL will face more complex load management and dispatch requirements with a more diversified generation mix. The main challenges are as following: - New equipment and software will be required to assume the new functions (e.g. economic dispatch, contingency analysis, load frequency control) related to the extension of eth system and to move towards a system-to-system trading regime - Generation scheduling will need sophisticated dispatch tools to optimize hydro/RE/thermal coordination; - The system operation function should be thought through and reallocated in the framework of a more global sector reform and reorganization process - EdL staff will need to acquire new knowledge to ensure efficient system operation. The SEED project will: (i) develop suitable technology options for power system operation to meet future market requirements; and (b) conduct training to relevant EDL staff. Policy on Sustainable Hydropower Development (PSHD) ($2 million): The GoL through its PSHD has embraced a paradigm shift towards an environmentally and socially sustainable model of economic growth by promoting improved development, monitoring and management of its hydropower resources. The institutionalization and operationalization of the PSHD is work in progress and the MEM has established an inter-ministerial committee to oversee its implementation. The DEPP, serving as the Secretariat, has prepared and disclosed an Action Plan and the 2016 Annual PSHD Status Report highlighting implementation challenges set out below. Many of the issues identified relate to non-power interests and needs and can be traced to wider water management impacts of hydropower development and operations. Consequently, a focus of SEED-TA support to PSHD implementation will be on better integration of water resources principles in three key business processes of MEM. Building on the PPIAF-funded demonstration projects under HMTA, SEED-TA will expand application of Integrated Water Resources Management (IWRM) into: (i) system planning, including but not limited to cumulative impacts assessments, coordination with MONRE river basin planning, improved modeling and data management, and assessment of multi-purpose facilities; (ii) operations protocols and rules to better optimize generation across a cascade, address conflicting water rights, and balance across power and non-power interests (including formulation of river flows and reservoir operations, complementary infrastructure, and communications during climate induced extreme events); and (iii) monitoring, enforcement and reporting to address current challenges in PSHD implementation and CA compliance, dealing with uncertainty of impacts through adaptive management, and identification of remedial actions. The following PSHD implementation shortcomings were identified by DEPP: On Policy 2 (Planning and Coordination) - Absence of Cumulative Impact Assessment (CIA) of multiple hydropower projects; - Absence of River Basin Master Plans that consider the individual and cumulative impact of hydropower developments within and between catchments; 25 | P a g e Aide Memoire – August 2017 - Understanding varied approaches (engineering/technological/managerial) of Integrated Water Resources Management: The current the 25+ projects in operation to maintain the approach to managing water resources on a project-by-project basis in the hydropower sector is creating risks and potentially minimum environmental flows required by undermining full optimization. There is a need to identify and CAs; create a systems approach, integrating multiple hydropower - Lack of knowledge/capacity by GoL facilities, and broader energy and water considerations. This requires better definition of the needs for power facility agencies to monitor variation of flows in coordination on a river, attendant environmental and social basin and impacts of low flows on hydro responsibilities, and the associated multi-stakeholder generation, flora, fauna and downstream institutional set-up. In addition, the tools for implementing such a framework need strengthening within the mandated communities; agencies, and explicit procedures need to be defined. Private - Lack of communication and coordination sector investors will be more willing to take risks and invest if between developers in same basin including there is more confidence on the availability and reliability of water supply, and the decision processes for determining project with regards to natural hazards, landslide parameters. Stakeholders will have more confidence that the and flash floods. sector is managing the water resource in the best interests of the public. While the individual initiatives under PSHD, Electricity On Policy 4 (Feasibility Studies) & Policy 5 Law and Water Law provide important foundations for (Economic Aspects Consideration) managing water in the hydropower sector, they fall short of clear, cohesive direction to the multiple stakeholders involved - Asymmetric information between and are not sufficiently comprehensive to cover the complexity developer and MEM on reviewing of associated hydropower/water management issues. feasibility studies; Furthermore, effective cascade and hydropower management - Lack of experience/knowledge with project currently lacks strong coordination across multiple ministries (in particular MONRE and MEM) and effective and clear structuring/carrying out competitive procedures across the hydropower cycle (e.g., from basin bidding. planning to operations and decommissioning). On Policy 8 (Project Affected People) & Policy 13 (Benefit Sharing) - Effectively assessing if negative impacts are duly mitigated under resettlement and improved livelihoods plans for affected people; - Difficulties with stakeholder communication and taking stock of stakeholder feedback; - Difficulties evaluating how effective are existing benefit sharing mechanisms; On Policy 9 (Consultation) & Policy 10 (Information Disclosure) - Difficulties with stakeholder communication and taking stock of stakeholder feedback; - Publishing non-confidential parts of MOU, PDAs and CAs; lack of centralized platform to disclose and share IPP data, etc. On Policy 11 (Management and Conservation of Watershed and Water Resources) - Incorporating findings regarding “hot biodiversity zones” into hydropower planning; On Policy 12 (Monitoring and Compliance) - Difficulties coordinating multiple GoL agencies to work jointly on PSHD monitoring due to absence of effective institutional arrangements and technical & financial capacity; - Difficulties enforcing remedial actions for developers’ non-compliance with PSHD related obligations set out in CAs or applicable legislation/regulations; Hence, some of the key areas that SEED will need to address include: (i) On-going updates and refinement of PSHD Action Plan and Annual Status Reports; (ii) Support to management and monitoring of CA provisions related to PSHD; (iii) Develop suitable institutional and monitoring mechanisms for PSHD implementation; (iv) Capacity building for staff responsible for PSHD implementation and management and monitoring of CAs at provincial level; 26 | P a g e Aide Memoire – August 2017 (v) Pilot cascade for the Development of a CIA and identify a river basin(s) for the development of River Basin Master Plan; (vi) Review practices/mechanisms and compliance with CAs provisions on environmental flow regimes and suggest implementable mechanisms for its monitoring; (vii) Create incentives for compliance with CA environmental and social requirements, adopt practices of data sharing systems for decision making by riparian projects; (viii) Identify gaps and constraints in implementing the new and existing regulations that support implementation of PSHD (including the institutional mechanisms); (ix) Identify needs and draft regulations to support PSHD implementation in a forward-looking way, with regard to the propensity/ potential for incentives or disincentives for compliance with PSHD related obligations, including with respect to benefit sharing; (x) Develop of Stakeholder communication plans; (xi) Develop and implement of suitable mechanisms for information/ data sharing with downstream/ riparian project / stakeholders to enable sustainable decision making on sustainable use of water resources for various purposes such as conservation, agriculture, fishing and other inter related sectors. (xii) Capacity Building for staff responsible for project structuring and competitive tender (xiii) Assistance with the competitive bidding of first transmission or generation project. (xiv) Improving efficiency of institutional mechanisms and arrangements, with a focus on inter- ministerial coordination and engagement with stakeholders on IWRM; (xv) Strengthening procedures to embed PSHD principles (especially water resources management principles) into decision-making; and (xvi) Expanding tools and capacity to meet current needs and create a pool of talent for the future IWRM. Energy Sector Training (0.5 million): The training strategy for the energy will focus on identifying key energy experts in MEM and EdL and other relevant agencies and provide strategic intensive training to develop key expertise required to the sustainable development of the sector. The strategy will focus on developing strategic partnerships to provide training opportunities in those countries (university courses; on the job training in companies, government agencies etc). Where needed, foundation/prep courses (i.e. Intensive English Prep courses) maybe provided under SEED. Some training will be allocated to train municipal and provincial governments on key aspects (e.g. licensing). Type of Training Key Mining Expertise Required Foundation/prep courses Language and financial/economic literary University courses/executive training Technical, economic and legal relating to energy, environment, and social related domains On the job training Subject specific workshops/tuition linked to SEED deliverables Implementation Agency: MEM Component III: Mining Sector Development ($6 million) The aim of this component is to sustain the support provided under HMTA to the GoL to implement critical reforms needed to improve the contribution to sustainable mining development in Laos. A Moratorium was put in place on new metallic mineral mines in 2012 to allow time for regulatory agencies to improve their ability to screen and approve mining investment projects and to strengthen monitoring and enforcement activities to assure higher standards of performance by mining operators. SEED will provide assistance in the six critical areas described below. 27 | P a g e Aide Memoire – August 2017 Mining Regulatory Framework ($0.3 million): HMTA financed inputs into the preparation of MEM’s Mining Strategy which was highlighted at the November 2016 MEM Conference and the re-organization of MEM under which the Department of Geology and Minerals has been re-incorporated in MEM after several years as part of MONRE. A revision of the Mining Law is also in progress to provide legislative underpinning to the Mining Strategy and MEM re-organization. The Mining Law is undergoing harmonization with the revised Law on Investment Promotion to address the future role of the Ministry of Planning and Investment (MPI) in granting of investment concessions, including mining. Completion of the Mining Strategy, MEM re-organization and Mining Law revisions during 2017, will mark a significant milestone and lay the foundation for the implementation of mining sector management reforms necessary for the future direction of the mining sector once the Moratorium has been lifted. SEED will provide the following support to implement the improved regulatory framework for mining sector development. - Mining Regulations: There is a large body of technical regulations already under development, some of which has already been issued. The project will finance continuing support to complete regulations in line with changes to the Mining Law. - Model Agreements: Model mining investment (concession) agreements will need to be reviewed and revised in keeping with changes to the Mining Law and relevant legislation. - Institutional Mandates: Regulatory functions defined in the legislation will need to be reflected in the mandates assigned to different regulatory agencies in the key ministries, especially MEM, MONRE and MPI. - Policy and Investment Guidance: Once key elements of the mining regulatory framework are in place the Government would benefit from issuing guidance on policies and investment conditions to address the interests of a wide range of stakeholders. Mineral Licensing ($1.2 million): HMTA financed development and installation of the establishment of the Mineral Cadaster Management System (MCMS). It now incorporates almost 400 mineral licenses that have been awarded or are awaiting approval at the national level. The computerized system centralizes licensing documentation and establishes a rules-based workflow for receiving, verifying and processing applications. The MCMS also allows greatly improved oversight of existing operations by tracking all license commitments, milestones and deadlines. The objective of further support would be to enable online operation of the MCMS and incorporate licenses issued at the provincial level. Some re- programming would be needed to reflect any changes in license management resulting from amendments of the Mining Law. It is also expected that a dedicated Mineral Cadastre Unit will be created to manage all stages of license administration. The SEED will support the institutional strengthening of this agency. HMTA also financed an in-depth review of screening criteria and review steps for exploration and mining applications, including exploration work plans and mine feasibility studies. This included production of a manual on “Investment Appraisal”. SEED will build on this to support relevant units engaged in the investment appraisal process to carry out their functions. This will include a mix of training and supply of equipment. Environmental and Social Management ($2 million): Appropriate management of the environmental and social impacts lies at the heart of responsible mining that has a positive contribution to the local community. Laos is experiencing challenges in attaining this objective and wishes to greatly strengthen the regulatory framework and performance in this area. To help achieve this HTMA financed the first ever Strategic Environmental and Social Assessment (SESA) conducted in Laos, with a focus on mining sector development. The SESA findings were accompanied by a series of recommendations and an Action Plan. The Action Plan is under discussion by the SESA Working Group, which is chaired by MONRE and draws its members from MONRE (DESIA and DEQP) and MEM (DOM). Once the Action Plan is 28 | P a g e Aide Memoire – August 2017 adopted directives will be issued clarifying the responsibility for implementation of actions set out therein. Key recommendations of the SESA which form the basis of the Action Plan, whose implementation SEED will support, are: (i) Strengthen environmental and social impact assessment and management; (ii) Strengthen mining sector environmental and social governance, compliance and enforcement; (iii) Increase level of local benefits to communities impacted by mining (Section 5 below); (iv) Mitigate social impacts through the mine life; and (v) Improve company performance for mine rehabilitation, remediation and mine closure. The Action Plan groups actions to be taken in short, medium and long term corresponding to these five areas. SEED will support those actions taken in the short and medium term (1 to 7 years). Monitoring, Inspection and Enforcement ($0.5 million): MEM was supported through HMTA and BGR, through its own mining TA project, to build capacity to conduct routine monitoring and inspection of mine sites as a basis for enforcing compliance by mining companies with their obligations under mining licenses, environmental permits and mining concession agreements. The support focused on the preparation of relevant technical regulations, inspection report templates, pilot inspections and staff training. Only limited support was provided to meet the equipment and recurrent financing needs of MEM. While important progress was achieved in MEM’s ability to organize and conduct inspections, th e frequency and quality of inspections is assessed as requiring considerable further support. Moreover, until re-organization in 2017 this function was split between DGM (covering mineral exploration) in MONRE and DOM (covering mining and mineral processing) in MEM. This hampered coordination and cost- sharing. Furthermore, certain statutory requirements require monitoring and enforcement by units in MONRE (DESIA, DEQP), such that close coordination would ideally take place in sharing data and conducting routine inspections. SEED will finance a capacity building program designed to achieve consistent performance of the critical monitoring, inspection and enforcement functions of MEM and, where shared responsibility exists, of technical units in MONRE. This will include further support to define regulations, procedures and inspection templates, further training, and the provision of critical equipment. To assure consistency and assist with monitoring an inspections database will provide a repository of reports and relevant data to support the inspection function. Community Benefit Arrangements ($0.2 million): An important feature of modern mining sector arrangements designed to assure sustainability is an agreed system for engaging with mining-affected communities and determining how benefits will be allocated. In Laos, the Mining Law provides for the financial needs of mining-affected communities to be met through Community Development Funds (CDF). HTMA financed the preparation of CDF guidelines to hold operators accountable to contribute to local development through an organized, rules-based and consultative process. An estimated $6-8 million is handed over by companies each year in funding to communities – an amount almost equivalent to the Poverty Reduction Fund’s (PRF) annual budget. The CDF guidelines have drawn on experience from the PRF. SEED will support the development of a suitable monitoring mechanism to provide transparency and account for the flow of funds, their use and outcomes achieved. Geodata Acquisition and Management ($1.5 million): The foundation for assessing a country’s mineral resources, determining the implications for land use planning and promoting investment in mineral exploration and mining activities is the acquisition of “pre-competitive” geodata and its availability for use by a wide range of users, including researchers, regulators, mining companies and the public at large. A dedicated institution with a suitable mandate, usually a national Geological Survey, needs adequate capacity to acquire, interpret, store and manage geodata. Existing geodata records and maps need careful storage and management to be of value to users. Value can be added to such geodata, for example, by 29 | P a g e Aide Memoire – August 2017 consolidating and filling gaps in the existing series of maps. HMTA financed the acquisition of new airborne geophysical data in 2026-17 which, once interpreted and integrated with existing geodata, can provide a strong foundation for promoting new mineral exploration opportunities in Laos. This activity also allowed staff from DGM to be trained in this important aspect of geodata analysis. As part of the re-organization which has seen DGM moving from MONRE to MEM the mandate of DGM is being re-visited, with the Geological Survey function being clarified. SEED will finance activities to support the establishment of an effective Geological Survey. This will include support for further targeted geodata acquisition and field mapping, strengthening of records management and creation of a secure geodata repository which can serve as a basis for a wide range of users to gain access to stored geodata. There will be a need to finance both equipment and provide requisite training. Finally, guidance will be provided on how to promote mineral exploration using the geodata resources available. The proposed SEED Mining Sector Activities described above are set out below. Proposed SEED-TA Component III: Mining Areas HMTA/EFO Proposed SEED Activities SEED Results Mining - Input into design of - Further revise regulations - Fully defined regulatory Regulatory Mining Strategy & & model agreements in framework with less reliance Framework Roadmap line with revised Mining on concession negotiations - Input into Model Law - Clear, streamlined and Mining Agreement - Re-define institutional coordinated administration of - Input into Mining mandates of regulatory regulatory functions across Regulations agencies in line with regulatory agencies - License & revised Mining Law - Policy clarity and stability to Investment - Support design and use of attract and retain responsible Appraisal Study policy and investment miners (SNL) guidance products Mining Licensing - Flexicadastre - Adapt Flexicadastre to - Rules based online mineral designed and revised Mining Law license management system installed & data - Design and launch online run efficiently and predictably loaded and verified portal - Capture province level licensing - Support creation of a Mineral Cadastre Unit in MEM Environmental & - Strategic Activities to design and - Strengthened environmental Social Permitting Environmental and implement reforms in and social impact and Compliance Social Assessment following areas set out in assessment and - SESA Action Plan Action Plan. Activities management; pending adoption of Action - Strengthened mining sector Plan and allocation among environmental and social donors. governance, compliance and enforcement; - Mitigated social impacts through the mine life; and - Improved company performance for mine rehabilitation, remediation and mine closure. 30 | P a g e Aide Memoire – August 2017 Inspection & Inspection checklists Inspection templates & Inspections and enforcement Enforcement and training database actions conducted in line with Equipment good practice and coordinated Coordination with DESIA among mandated regulatory agencies Community CDF guidelines M&E system for CDFs Monitoring mechanism to Benefit provide transparency and Arrangements account for the flow of community development funds, their use and outcomes achieved Geodata Airborne geophysics Strengthening of records An effective Geological Survey Acquisition & and field mapping management capable of serving the needs of Management Creation of a secure multiple users. geodata repository with online user portal Selected geodata acquisition and interpretation Generation of maps and mineral exploration promotional products Training and equipment Mining Sector Training (0.3 million): The training strategy for the mining will focus on identifying key mining experts in MEM and other relevant agencies and provide strategic intensive training to develop key expertise required to the sustainable development of the sector. The strategy will focus on developing strategic partnerships (eg Australia, Germany) to provide training opportunities in those countries (university courses; on the job training in companies, government agencies etc). Where needed, foundation/prep courses (i.e. Intensive English Prep courses) maybe provided under SEED. Some training will be allocated to train municipal and provincial governments on key aspects (e.g. licensing). Type of Training Key Mining Expertise Required Foundation/prep courses Language and financial/economic literary University courses/executive training Technical, economic and legal relating to mineral, environment, and social related domains On the job training Subject specific workshops/tuition linked to SEED deliverables Component IV: Project Management ($1.5 million) The PSO of the HMTA Project has been successfully managing the project on behalf of the GoL. PSO duties included financial management, procurement, implementation and supervision responsibilities of consultant services. The PSO arrangements will be maintained for the SEED-TA project for the 5-year duration of project implementation. Key PSO staff will include: Key PSO Staff Expertise Employment Project Manager/Director Full time (in house) Project Coordinator Full time (outsource) Financial Management Specialist Full time (outsource) Procurement Specialist Full time (outsource) Procurement Specialist (international) Part time (outsource) Project Monitoring and Supervision (or Management) Advisor Part time (outsource) 31 | P a g e Aide Memoire – August 2017 SEED-TA Co-financing and Partnerships: Several World Bank multi-donor Trust Funds (e.g. PPIAF, GIF) have expressed interest to explore cooperation opportunities on the project and potential contribute grant funds to conduct certain project aspects. The Bank team will further explore those opportunities as the project develops and the components are more clearly defined. Various bilateral donors and agencies (e.g. USAID, DFAT, AfD, SECO, JICA) are increasingly active in Laos on energy. The Bank will coordinate with those agencies to ensure the complementary of the SEED- TA project with ongoing and planned activities. Further, it is critical that the GoL, in its discussions with those donor agencies proposes relevant activities that can complement and further strengthen the SEED- TA project. Of relevance are training program for Government officials that could be supported by those donors (e.g. secondment to countries and utilities/regulators etc to develop technical skills of GoL staff; university courses). Where needed, foundation/prep courses (i.e. Intensive English Prep courses) maybe provided under SEED-TA. Indicative training programs are set out under the various activities above. Indicate areas for Donor Coordination/Co-financing Donor Area PPIAF - Integrated Water Resource Management - SEED-TA Implementation Support providing technical experts ESMAP - RE Mapping GIF - Pre-FS for IPP development - RE auction design - EDL credit rating AfD - Training opportunities at EdF (eg dispatch, power system planning and operation) BGR - Mining Inspection DFAT - Mining USAID - RE JICA - Power system Planning 1. Indicative World Bank and Government of Laos Project Development Timeline World Bank Government of Laos Concept Review Meeting – October 2017 MEM request to MOF August 2017 QER – February 2018 MOF request to the Bank – September 2017 Decision Review – April 2018 Appraisal – May 2018 Negotiation – June 2018 Approval – August 2018 32 | P a g e Aide Memoire – August 2017 Annex 6: Draft Proposed Laos – Vietnam Interconnector 33 | P a g e Aide Memoire – August 2017 34 | P a g e Aide Memoire – August 2017 35 | P a g e Aide Memoire – August 2017 36 | P a g e Aide Memoire – August 2017 37 | P a g e Aide Memoire – August 2017 Annex 7: Laos-Vietnam Interconnector Preparation Progress Objective: The objective of the mission was to present the updated technical design concept of the proposed Lao- Vietnam Interconnector to the Ministry of Energy and Mines (MEM) and to Electricite du Laos (EdL), confirm acceptance of the concept by MEM and EdL, and to plan the project preparation. Key Findings: Representatives of MEM and EdL agreed to the updated technical design concept, and requested for a workshop with the Vietnamese counterparts. The Minister confirmed the Government’s support for the project during the wrap-up meeting. The mission agreed to coordinate with the Ministry of Industry and Trade (MOIT) and Vietnam Electricity (EVN) to organize the workshop. Next steps largely comprise the following tasks: (i) Feasibility study (FS) including dynamic analysis (use HMTA savings, or Bank to mobilize additional resources) (ii) Export Sales Agreement (ESA) study (already included under HMTA) (iii) Environmental and social due diligence on domestic IPPs (IPP-d’s) that will connect to the interconnectors (Bank to mobilize financing) Detailed Discussions: a. The technical design concept was updated by DIgSILENT based on comments and additional information provided by MEM and EdL during and after the previous mission during June 26-27, 2017. The proposed Phase 1 investments will enable 380 MW and 275 MW of export to Vietnam respectively through Xekaman 1 – Pleiku interconnection and Xekaman 3 – Thanh My interconnection by 2020. All notable investments will be made in Lao PDR, and EdL is expected to be the end-borrower. Representatives of MEM and EdL agreed to the proposed investments, and manifested their strong interest to move ahead with project preparation. b. MEM/EdL requested for a workshop with the Vietnamese counterparts as soon as possible to share the updated technical design concept and also to initiate discussions on the commercial aspect of the export sales. The mission agreed to coordinate with MOIT/EVN. c. The mission introduced the project design concept to several investors of IPP-d’s in southern Lao PDR. The investors expressed their interest to see the EdL-EVN interconnector to be completed by 2020. d. During the wrap-up meeting between the Country Manager and the Minister of Energy and Mines, the Minister supported the project and requested the Bank to support the preparation so that the electricity can be exported to Vietnam as per the Minutes of Understanding (MOU) signed between MEM and MOIT aiming to export 1,000 MW by 2020, 3,000 MW by 2025, and 5,000 MW by 2030. The Country Manager and the mission agreed and indicated that the Bank is also excited to contribute to the diversification of electricity export from Lao PDR and to play a part in the regional power interconnection. e. The FS will broadly comprise two components. The first component involves a detailed dynamic analysis of the system following up on the preliminary analysis conducted by DIgSILENT. For this, a much more detailed generator data of the IPP-d’s are required and a greater understanding on the technical standards is needed. The second component will be the technical study on the investments, bill of quantities, cost estimate, economic and financial analyses, environmental and social safeguards, corporate financial analysis of EdL, etc. f. In parallel to the FS will be the Export Sales Agreement (ESA) study which is already included under the HMTA. The ESA study will build on the studies conducted to date by IES. g. Apart from the environmental and social safeguards of the investments to be financed by the Bank, there is a need to conduct due diligence on the environmental and social safeguards of the IPP-d’s. This is to ensure that the export of electricity from Lao PDR to Vietnam is done is a responsible and sustainable manner. The Mission and MEM discussed the financing of the FS and the due diligence on the IPP-d’s. One option will be to use HMTA funds, but the Bank will also endeavor to identify alternative sources of financing. Next Steps: The Bank to: a. Facilitate a workshop between MEM/EdL and MOIT/EVN in mid-October 2017 in Hanoi. b. Determine scope of feasibility study through discussion with MEM/EdL and consider sources of financing. c. Manage the ESA study under the HMTA with substantial involvement of MEM/EdL. d. Determine extent of environmental/social due diligence required for IPP-ds, and identify financing. 38 | P a g e Aide Memoire – August 2017 Annex 8: Mining Sector Statistics Production Value and Government Revenue (USD millions) Year Production Value Government Revenue 2009 850.80 126.80 2010 1,300.60 215.00 2011 1,519.27 291.90 2012 1,618.15 293.67 2013 1,756.60 264.58 2014 1,552.77 192.96 2015 1,442.63 157.16 Production Volume by Mineral (metric tons) Commodity 2008 2009 2010 2011 2012 2013 2014 2015 Coal Anthracite 186,468 167,447 211,721 166,609 129,927 104,260 110,317 141,328 Lignite 379,273 466,082 501,622 511,700 575,387 403,925 99,144 4,509,606 Copper concentrate 90,216 131,531 139,67 148,822 159,908 170,264 165,500 183,599 Gold-bullion bar 6 5 5 3 10 27 31 41 (dore) Gypsum 337,304 761,331 553,396 686,150 562,386 772,138 707,908 989,516 Iron 7,012 16,309 19,728 16,544 122,608 565,473 717,857 119,294 Lead 1033 700 794.5 1022 1579 350 105 88 Limestone 911,658 1,488,070 3,106,724 997,591 2,006,337 3,781,176 2,010,185 1,807,052 Potash (k20)60- 42,798 133,075 324,589 411,452 65%.kcl 95.89% Licenses (as of February 2017) License Type Active Pending5 Mining License 113 30 Mining and Production License 38 N/A Detailed Feasibility Study 19 16 Prospection License 28 18 Pre-Feasibility Study 24 31 Exploration License 85 26 OGP 3 Ore Processing License 7 1 Totals 317 122 5 Where pending means the license status is: under application, proceeding to next stage, awaiting renewal, etc. 39 | P a g e Aide Memoire – August 2017 Annex 9: Work Plan for Mineral Strategy Implementation 40 | P a g e Aide Memoire – August 2017 41 | P a g e Aide Memoire – August 2017 Annex 10: Safeguards Review P109736 HYDROPOWER AND MINING TECHNICAL ASSISTANCE (HMTA) SAFEGUARDS CLASSIFICATION: Environmental Category NA; ES Risk Rating Moderate; OP4.01 & OP4.10 triggered SAFEGUARDS INSTRUMENT: Environmental and Social Safeguards Activities Document (ESSAD) prepared for AF and disclosed online at: http://documents.worldbank.org/curated/en/390601468091769808/text/E44870EAP0ESMP0Box385163B00PUBLIC0.txt KEY MILESTONES: 2014: Environmental and Social Safeguards Activities Document disclosed (project safeguards framework for Additional Financing) 2015: Policy on Sustainable Hydropower Development finalized 2017: Mining SESA completed, Hydropower IPP process and CA incorporating SESOs 2018: Project completion and ICR ENVIRONMENTAL AND SOCIAL RISK: o Operational: no direct physical impacts; project supports development of ministerial policy and guidelines which have an indirect influence on future project scenarios in energy and extractives; policy guidance difficult to convert into effective enforcement o Contextual: continued development of large-scale hydropower in the upper Mekong basin poses cumulative and transboundary risks; a national moratorium on allocation of new mining tenements has been imposed to reform the regulatory environment o Stakeholder Engagement: process for public consultation and disclosure of draft government policy consists of ad-hoc intra-agency engagement for comments; international CSOs and communities are poorly engaged; Riparian collaboration is weak o Borrower Capacity and Commitment: E&S management is not considered the domain of the implementing agency, the Ministry of Energy and Mines. Despite this, E&S management requirements are increasingly prominent in new sector policy and there is a need to better define collaboration between implementation and compliance monitoring roles of MEM and MONRE. This indicates risk of inability to manage incidents and impacts of future projects and to implement remedies with respect to poorly performing projects. SAFEGUARDS IMPLEMENTATION PERFORMANCE RATINGS: Component One: Hydropower and Mining Learning Programme Moderately Satisfactory Component Two: Hydropower Sector Development Moderately Satisfactory Component Three: Mining Sector Development Moderately Satisfactory Component Four: Project Management, M&E Moderately Satisfactory ENVIRONMENTAL AND SOCIAL SAFEGUARDS ACTIVITIES DOCUMENT (ESSAD) IMPLEMENTATION REVIEW ESSAD REQUIREMENTS PROGRESS AS OF AUG 2017 RECOMMENDATIONS Component One: Hydropower and Some evidence of this requirement being integrated into the • For HMTA: ensure that the Mining Learning Programme: training plan but either postponed or planned for future scheduled safeguards trainings • basic knowledge on environmental implementation. Relevant courses include: are held and not postponed and social safeguards to be • Mine health and safety training (scheduled early 2018) indefinitely or budget integrated into training modules. • Mine health and safety Training of Trainers (scheduled reallocated. • promote awareness and improve early 2018) knowledge on safeguards for MEM • Environmental engineering masters degree in Vietnam staff at both central and local (on offer) levels through integrating • Environmental monitoring and assessments training safeguard considerations into (originally included in training plan but then cancelled) technical training courses in order • Under the implementation plan for the Policy on to strengthen effective Sustainable Hydropower Development there is a coordination among key knowledge exchange activity with NUOL on hydraulic stakeholders. engineering and concrete dam engineering but • ensure that gender is integrated unclear how this specialized subject area would lead into the technical training courses to greater focus on environmental or social and the human resources management. development activities Component Two: Hydropower Sector • PWC consultants embedded in MEM provide on-the- For HMTA: PwC to ensure follow Development: job training to DESIA on EIA/ESIA implementation over up as part of their action plan • Integration of environmental and an 18-month period (March 2017) an implementation social management into policy and • Developed a template for Standard Environmental and strategy to develop detailed criteria procedures Social Obligations (SESO) to be incorporated into CA for environmental and social • Consultation on relevant draft principles identified in the PHSD agreements as an annex stakeholder consultation, grievance policies, regulations, and technical • PSHD dissemination workshop held in March 2017) redress, monitoring of PAPs, action guidelines (PHSD, IPP) with key • PSHD implementation plan to involvement planning for compensation and agencies and other stakeholders development of detailed criteria for environmental livelihood restoration, ethnic (MONRE, LFNC) and social assessment and management principles set minorities engagement. 42 | P a g e Aide Memoire – August 2017 • Engage local people in the out in PHSD (stakeholder consultation, grievance implementation of the upstream redress, monitoring of PAPs, action planning for work through dissemination compensation and livelihood restoration, ethnic workshops, training, and minorities engagement) involvement in the monitoring of • Field visits for PHSD compliance monitoring conducted the CA, where feasible. in northern provinces and engaging relevant sectors of local administration (including LFNC, MONRE) • PSHD implementation workshop MEM, MONRE, MOAF, WB, IFC (28 June 2017) – in December report – scores companies for E&S criteria (IPP status report 16) Component Three: Mining Sector • CDF summary of reports and a pilot project evaluation CDF pilot implementation should Development: submitted to DOM. However the current consultant proceed utilizing the most up-to-date • engagement with ethnic groups in has demonstrated minimal progress. It is also reported guidelines (developed by the Bank the CDF pilot component through that instead of using the updated CDF guidelines consultant). Dissemination of CDF consultation with the LFNC developed under a Bank-side consultancy the guidelines should not proceed prior • ensuring participation of mining- attempted pilot utilized earlier drafts considered to be to successful demonstration of pilot affected local communities in project results according to the lacking in quality. Dissemination and consultation Bank-approved guidelines) decisions on CD fund allocation. meetings on the CDF implementation have been • support consultancy service for planned or are underway in a number of provinces SESA action plan subject to financial and operational (Phongsaly, Xieng Khuang, Oudomsay, Champassak, further consultation with management of the CDF, but not Vientiane, Khammuan) however this seems premature government and endorsement by any direct funding of CDF given the lack of demonstrated progress on pilots MONRE minister, require further investments. utilizing the most up-to-date guidelines. internal consultation. • detailed procedures, including • Mining sector SESA completed 2016 with environmental and social recommendations for inclusion in the minerals sector screening procedures strategy has been discussed with MONRE Minister. (incorporating social assessment, SESA recommendations have also been an input into a FPIC and ethnic minorities consultancy for revision of the mineral law (PGR development planning) will be German geology firm supporting MEM not under prepared prior to any such HMTA). HSE and mine closure regulations have also consultancy support. been drafted. • Mine inspections carried out in 9 companies in 2017 but quality of reports is negligible and inhibited by lack of role definition and exchange between MEM and MONRE Component Four: Project • In-depth discussions on environmental and social For HMTA: PSO developed a Management, M&E: aspects of hydropower and mining have been held safeguards screening document to • conduct safeguard training at least with ministry staff from both key departments during monitor policies and guidance one time per year during the first 3 implementation support missions every six months documents and ensure E&S issues years (2014, 2015, and 2016). since 2015. arising in implementation of • subcomponents are captured for closely monitor the • Gender strategy dissemination: PSO hired an implementation progress related quality review. However, the individual consultant to draft a gender strategy for to safeguards and include the process has never become functional mining and hydropower, and has held consultations due to limited understanding within results in the project progress with other government agencies on this strategy. MEM. PSO progress report for ICR report (PSO responsibility). • PSO reports a very limited ability to ensure compliance should detail this and all other and a lack of understanding of the need for aspects of environmental and social environmental and social awareness and performance performance pursued under each of management capacity within MEM – considering this the HMTA subcomponents. to be the role responsibility of MONRE 43 | P a g e Aide Memoire – August 2017 Recommendations for SEED TA: on Environmental and Social Safeguards E&S Training: Ensure a more prominent focus on integration of E&S considerations in training programmes across mining and energy sector in addition to the IPP process and implementation of PHSD. Basic awareness building: Training methodology should focus on systemic awareness raising across agencies and delivery of basic knowledge acquisition and clarification of role relationships. Advanced specialization: university courses for the mining sector could be sourced from CSRM at University of Queensland Australia and the IAIA and relevant international bodies for hydropower. Institutional Strengthening Component: Training and workshops on inter-agency role collaboration responsibilities. This might involve promoting the role relationship between MEM and MONRE through an ‘operational support – compliance monitoring’ distinction similar to that within the Bank between OPCS and GPs. Energy Component: Develop criteria for systematic stakeholder engagement for policy consultations: MEM struggles to manage provision of feedback and comments on submitted drafts from relevant agencies (EDL etc) which then impacts on quality of policies and guidelines. Unclear whether PSHD has involved consideration of feedback from international organizations (International Rivers Alliance provided feedback in Dec 2013 suggesting some form of disclosure and consultation). Hydropower SESA: MEM has expressed interest in a hydropower SESA to inform decision-making about future projects but decision needs to be made on whether this would be covered by future SEED TA or another project. Such a strategic assessment would also inform further development of the interconnector project concept. Mining Component: CDF pilot implementation should proceed utilizing the most up-to-date guidelines (developed by the Bank consultant) and deploying a competent advisor. Dissemination of CDF guidelines should not proceed prior to successful demonstration of pilot project results according to the Bank-approved guidelines) SESA action plan subject to further consultation with government and endorsement by MONRE minister. Training for collaborative mine inspection process: currently separated between DSIA and MEM with DOM focus on health and safety, DSIA focus on environmental and social the two organizations are unclear on how they then combine findings and share reporting. Project Management: The PSO needs a dedicated and trained E&S performance officer or unit (as a counterpart and focal point for collaboration with MONRE on environmental and social performance issues) and not simply a staff member assigned as one of many duties. 44 | P a g e Aide Memoire – August 2017 Annex 11: HYDROPOWER FISCAL REGIME Adam Smith International (ASI) Hydropower Fiscal Regime - Takeaways and Next Steps: The ASI team presented three broad options in the 11 July, 2017 ‘Analysis of Policy Options Technical Paper Report, followed by Workshop and presentations during the week of August 28 to September 1. Option 1: Competitive bidding of royalties for export projects • Pre-bidding independent feasibility study • Pre-bidding negotiated PPA with foreign offtaker • All primary taxes collected according to existing law/regulation • Royalties fixed (5%) in initial years (1-10?) to facilitate debt servicing • Royalties competitively bid for remaining years of concession period Option 1A: Competitive bidding of PPA tariff to EDL for domestic projects • Pre-bidding independent feasibility study (same as in Option 1) • Fixed, low royalty for all concession years (or no royalty at all) • All primary taxes collected according to existing law/regulation • PPA tariff to EDL competitively bid in USD/kWh or all concession years Option 2: Negotiated variable royalty profile • Option only applicable to new technologies (Electricity Law 2017), or perhaps beneficial selected projects lacking competitive bidders • Similar to existing approach, except… • All primary taxes collected according to existing law/regulation • Royalties collected according to a written guideline; set to achieve a negotiated developer ROE Main Take-Aways: The hydropower IPP sector has developed with two distinct models: (i) an export model in which IPPs sells electricity directly to foreign off-takers through dedicated transmission lines, and (ii) a domestic model in which IPPs sell electricity through the Lao grid to EDL to meet Lao requirements. However, a third model is emerging in which “domestic IPPs” sell to EDL on take or pay contracts, for EdL to sell externally. To do so, EdL contemplates it will pool this electricity for export sale and will need additional transmission infrastructure to do so. This third model, is increasingly important in the future mix, necessitated by recognition of a significant energy surplus at EDL in the coming years. As a practical matter, when system-to-system trades are implemented in the future, the electricity that EdL purchases from domestic IPPs (pursuant to domestic PPAs) may be sold to either Lao consumers or foreign entities. In some instances, a domestic IPP’s power could be specifically designated for resale cross-border; but over time EdL will optimize its entire system supply to meet both domestic needs and the requirements of cross- border Export Sales Agreement. This means that EdL won’t always have one group of domestic IPPs whose power it uses domestically and another that is on-sold to EVN or EGAT (or elsewhere). Since there is not such distinction between EdL purchases for domestic or export purposes from IPPs, the fiscal regime issues are not straightforward. In all events, any increase in royalties will reduce EdL profit margins (or increase losses), since cross-border purchasers will pay no more than their avoided costs (that is the avoided cost of EGAT, EVN or any other utility). If GoL were to pursue to higher royalties from domestic IPPs, it would lower EdL profits which in turn would reduce GoL’s returns as owner of EdL. The impact of EdL profits and losses from system-to-system exports on GoL returns becomes a fiscal regime issue. The sector is in transition, moving from a period in which expansion was the primary objective to one in which simply adding capacity is no longer the primary goal. In the future, prudent selection of projects for development must involve basin-wide analysis, integrated water resource management, adequacy of transmission support, alignment with GOL priorities, in addition to technical, environmental economic and financial viability. The discussions highlighted the need for such a national policy of careful project selection as an important pre- condition for successful hydropower fiscal policy. While it is recognized that competitive bidding will be mandated under Electricity Law 2017, there was a concern expressed that few projects remain to need this type of bidding since most have been awarded already. 45 | P a g e Aide Memoire – August 2017 However, the GoL expects that MOUs will expire and GoL may be able to cancel MOUs and PDAs of developers who are not complying with their obligations or simply no longer interested in pursuing projects. The options anticipate that GoL will prepare feasibility studies and fully structure projects for competitive bidding. The cost of a required independent feasibility study (including substantial EIA) was also a concern, although this expense would be refunded through a concession fee covering GOL costs, due at financial close. There was discussion on development partners funding some project development facility to assist GoL with feasibility studies and project structuring for competitive bidding. Further, bidding would not eliminate all negotiations, particularly if the developer’s own feasibility study justifies a variation from the independent FS on which the royalty is bid. Some participants thought that in the context of IPP for export, a fixed royalty of 5% for first 10 years would not be possible while servicing debt. A solution proposed is to allow bidding for all concession years. Similarly, the fixed royalty for domestic projects (5%) was considered too high given its direct impact on retail tariffs. Additional data has been requested to justify variation from the existing Presidential Decree. However, one developer expressed the view that a firm royalty policy would be advantageous in that it would deter bidding by contractors and brokers who are not knowledgeable, experienced hydropower developers. There were conflicting comments regarding the collection of primary taxes. MOF participants liked the idea of enforcing all tax laws without waivers or exceptions; monitoring/collection is complicated when every company operates under different rules. MEM participants argued that waivers are often necessary to meet project financing obligations. One suggestion proposed is to bid royalties only, as this approach would greatly simplify fiscal policy for IPPs. The policy that VAT is charged on domestic transactions but not on exports can be very unfair, and is especially difficult to fairly administer when sales can be used for export or domestic consumption. Next Steps: To provide more informed advice in light of the take-aways, ASI has requested additional data from MEM and EDL that will be used to fine-tune recommendations, including: (i) Project Data – COD, MW, assumed MWh (ii) Terms of Take or Pay (iii) Royalties (iv) Water and other separate fees charged if any (v) Equity debt ratio (vi) Financing source (e.g. – Chinese, Thai, etc) (vii) Terms and conditions of lending (e.g. – tenor and interest rate (viii) Investor (e.g. a construction company, etc) (ix) ROE (x) EdL Equity Share (free carry, discounted or purchased at full price) (xi) Other benefits for EdL – free or discounted electricity Further, ASI will continue to consider the implications for “Model 3” pooling of some domestic project energy for EDL system-to-system export. ASI will prepare a “white paper”/policy paper clearly explaining the complexity of issues involved in defining specific new regulations. This paper will include among others the drafting of a legal instruction in ley terms. An actual regulation may be premature due to unsettled sector issues, especially the options for, and economics of, EDL system-to-system power sales. 46 | P a g e Aide Memoire – August 2017 Annex 12: Minute of the meeting on Improving Hydropower Independent Power Producers (IPP) Process; Concession Agreement Management and Monitoring and the Implementation of Policy on Sustainable Hydropower Development Record of Discussions held between DEB, World Bank and PwC on 25nd August 2017 Objective –To gather feedback on the task wise progress and way forward for ongoing HMTA-AF TA aimed at Improving Hydropower Independent Power Producers (IPP) Process; Concession Agreement Management and Monitoring and the Implementation of Policy on Sustainable Hydropower Development Attendees:- 1. Chanthaboun Soukaloun, DDG, DEB 2. Cristina Maria Ladeira Ferreira, World Bank 3. Harvey Salgo, Senior Advisor to HMTA-AF 4. Sonam Tshering, Team Leader, PwC 5. Souksakhone Philavanh, Project Coordinator, DEB 6. Jurgen Piechotta,Advisor,PSO 7. DEB Staff Members 8. Consulting Team Members, PwC and Entura Task 1: Discussions on Electricity Law: • Article 49 of the amended E. Law specifies "unsolicited Proposal without conducting a bidding relates to projects which are of high benefit to the Government............". The Senior Advisor to HMTA-AF suggested to revise this Article by using "Country" in place of "Government". This would help to widen the scope of "high benefit" beyond tax and royalty which are only viewed from the perspective of "Government" and does not include other parameters for defining "high benefit" which extends beyond "Government" and encompasses "Country" as a whole. WBG suggested that “high benefits to the Country” should encompass a more optimal use of resources: that is, tie it back to the planning process. This would result in system benefits, which would enhance socio-economic returns. • DDG-DEB (Contract Division) agreed to discuss this point in the next meeting with the Law Committee of National Assembly and take necessary action. If it is not possible to make this change, then DEB stated that it would be addressed through the secondary regulation. • Representatives from PwC referred to earlier discussion that they had with DEB officials working on the E. Law amendment where they stressed on the importance of defining "Government" in the Law. It was clarified by DEB that "Government" has been defined in the constitution and the same definition will apply in E. Law as well. In view of this it was felt important to revisit the definition of "Government" in the constitution. • Developing the action plan for E. Law implementation is priority for GoL and the first draft to be submitted by September 2017. Discussion on Royalty as bid parameter: • The Senior Advisor to HMTA-AF highlighted that "royalty" as bid parameter for domestic IPP will not be appropriate is it is linked to consequential increase in tariff. Moreover, for unsolicited proposal, if the developer pays higher royalty rate than the prevailing rate and recovers the same through high tariff, the purpose of "high benefit" to the "Government" is defeated. • DDG-DEB (Contract Division) referred to the tariff provision in the E. Law (Chapter VII - Electricity Prices) and clarified that such unaccounted increase in tariff to recover the higher royalty will not be permitted following the existing provision of E. Law. Discussions on Unsolicited proposal: 47 | P a g e Aide Memoire – August 2017 • The World Bank suggested that drafting of secondary regulations on National Power Development Plan (NPDP) and Competitive Project Procurement would require substantial resources and time. Importance of benchmarking and sharing relevant international experience was stressed in the meeting. The WBG is prepared to scale up its support for implementation of the amendments to the E.Law through the contemplated new activity SEED-TA. The WBG mission was visiting Vientiane this week to initiate discussion on the scope the components of SEED-TA, including support to the preparation of NPDP and the drafting of NPDP regulations and Competitive Project Procurement. DEB informed that PwC would not be required to undertake further work on the secondary regulations on Planning and Competitive Project Procurement as it would be premature at this stage; it would be necessary to have the National Power Development Plan in place before any project could be considered for solicited mode of allocation. It was discussed that it will take around 2 years to develop the NPDP. • After the amended E’ Law is promulgated and prior to developing regulation on project procurement through solicited mode, projects will be allocated through unsolicited approach. Hence, it is important to finalize the regulation on project procurement through unsolicited approach prior to enforcement of the amended Electricity Law. Therefore it was decided that PwC would now focus on developing regulations for unsolicited projects. Discussions on PSHD: • PwC team apprised on the progress made on developing PSHD evaluation criteria. • The team expressed their concern regarding completing evaluation of projects in "under construction" and "operation" category for inclusion in the annual status report by December. It was agreed to initiate the process for evaluation and target to complete the evaluation process by February, 2018. • It was also discussed and agreed that Mr. Jürgen Piechotta –Advisor PSO will support the PwC team in terms of data collection for project evaluation. In case project related information is not available, evaluation will include the projects for which information can be made available. Task 2 • PwC team mentioned that with the recent creation of two new departments in MEM, mandates of DEB, DEM and DEPP have been revised. As such they will be submitting the addendum to the Diagnostic Assessment Report by 31 August 2017. • PwC team further mentioned that they will submit first draft of the revised mandates including any recommendations, if required, for organizational changes (such as merging or splitting or creation of divisions) by end of October 2017. Task 3 • PwC team mentioned that they are in process of developing around 24 SOPs and will submit the first draft of about 15 SOPs by end of Sept’17. • Given the dynamic nature of the SOPs, PwC suggested that the identified counterparts should take ownership of these SOPs and keep updating /modifying it based on the relevant changes in regulations/ guidelines, etc. It was also agreed that a few sample SOPs will be developed by internal staff at MEM, under guidance of the consulting team, so that the process of OJT and knowledge transfer with regards to SOP preparation and modification is efficiently carried out. The consultants would discuss with the Project Coordinator regarding the SOPs which can be developed by MEM staff. 48 | P a g e Aide Memoire – August 2017 • Consultants mentioned that DESIA is undergoing organizational changes and are not sure when it will be finalized. To this they further reiterated that they will keep the cutoff date as 31 July 2017, as agreed previously, for any institutional changes to be taken into account for preparation of SOPs. • Consultants further mentioned that they may not be able to submit some SOPs within the project period due to lack of clarity on certain aspects such as regulations for unsolicited/solicited project procurement, dam safety etc. This will be discussed in more detail at a later date when more clarity emerges. Task 4: • The following points were discussed with regards to the CA Management and Monitoring Tool o The updated Master list of MOU and PDA have also been uploaded along with CA. o Consultant shall support DEB identified focal points by providing assistance in using the system for any one project as a part of OJT. o The tool hosting server license, currently purchased by the Consultants, is valid only till May/June 2018. For procurement of server license and hardware for long term operationalization of the tool, the Consultants will provide the hardware and software requirements for hosting the tool post the validity of the existing license by 31 st August 2017. DEB and PSO shall decide regarding purchase of server license and hardware. o DEB shall take decision on providing full/restricted access rights to other relevant GoL agencies and communicate the same to the Consultants. o The Consultants shall transfer the full rights of the software, including the right for modification/ customization of the software through engagement of other consultants, to DEB/ MEM by the end of the project. However, training DEB/ MEM staff in the programming and coding language based on which the software has been developed is beyond the scope of the consultants. At the same time, basic discussion between PwC IT expert and DEB IT support on the coding language should be undertaken when PwC IT expert is back to Vientiane. • Consultant mentioned that they are in process of preparing the framework (functional structure) for the Hydropower Generation Database and will submit to MEM for their feedback by September 8 th 2017. Once the framework will be finalized, MEM can appoint an IT Consultant for development and implementation of the database, based on ToR prepared by consultants. • Consultants mentioned that they will also assist in preparation of ToR of an IT Consultant who will help develop and implement the following software/database/system: - Dam Maintenance Management Software (for DEM) - Planning Software, Reservoir Sediment Assessment & Transport Analysis (for DEPP) Functional specifications for the Dam Maintenance Management Software will be dependent on the dam safety guidelines and will be discussed with DEM. • Consultants mentioned that they understand from PSO that MEM is in process of appointing an IT Consultant for Document Management System (DMS). In that respect, the consultants will share with the Project Coordinator the name of some commercial DMS software that is available in the market. Task 5 • Consultants mentioned it was discussed and agreed with PSO in June’17 that On the Job Training (OJT) will be undertaken in 2 levels. First level will be basic training in certain identified areas and second level will be actual OJT related to tasks. They further suggested that while the first level would be general training aimed at junior staff, it would be open to all, and second level would only be for 49 | P a g e Aide Memoire – August 2017 identified key focal persons. For this, the Consultants had already submitted the plan and started Level 1 training in Aug’17. Certificates would also be given to Level 1 participants. • DEB suggested that Consultants should consider some of the OJT areas in Level 2 such as Feasibility Study Review, Cost Estimation Model, Financial Analysis, CA Negotiation to be more focused so that the participants can take forward the recommendations of the consultants once the project is over. • It was discussed and agreed that for Level 2 training, the consultants will send their travel plan including OJT areas to be taken up to the respective focal points at least a week in advance. Based on this information, the Project Coordinator will ensure that counterparts are available for the OJT. • For ToT, DEB mentioned that they have already sent the letters to different departments for nominating 3 staff from each department. With respect to content of ToT, DEB mentioned that they will come up with some suggestions. Task 6: • Consultant mentioned that they are working on revising the MoU and PDA templates based on the draft review report already submitted. On this, DEB mentioned that revision of PDA template is to be prioritized and a draft version to be shared by middle of September. • With respect to drafting standard domestic PPA, DEB mentioned that they will require support on areas like operating procedures based on grid code and plan parameters, transmission arrangement, market rules, etc. for which the consultants need to bring in respective experts with adequate techno- commercial understanding. Consultants agreed to look into this and further suggested that there is a need to conduct a workshop/ round table discussion on many of the features of the PPA (e.g. tariff structure, foreign currency denominations, operating procedures, etc.). • It was agreed that the Consultants will commence work on background research and analysis required for drafting the template PPA. A workshop/ round table discussion will be arranged and the tentative date for the same will be communicated to DEB soon. Task 7 Project Cost Estimation Model: • DEB suggested that standard cost data templates to be prepared by the Consultants, based on the Cost Estimation Model, which will be attached with the Feasibility Study ToR. These standard cost data template should be filled in by the developer when they submit the Feasibility Study report. DEB further mentioned that this template should be submitted by the Consultants as soon as possible so that it can be applied for testing. • DEB suggested that the option to provide quantifiable estimate based on data can be explored to be included in the model. • Entura highlighted that electro mechanical expert and geologist visited Laos and OJT was on the agenda. The visit was not successful as client counterpart from DEM was not available. Representative from DEB suggested that schedule of experts to be provided to all the departments so that time for experts are not wasted. This will, henceforth, be coordinated through the Project Coordinator. Early Project Screening Methodology: • The PwC Team Leader explained the work which has already been carried out on the Early Screening Methodology and how it can be used to prioritize projects through scoring. • The use of the Early Screening Methodology was discussed given that as per the E’Law amendment Laos will now need to develop a National Power Development Plan and such a planning exercise will 50 | P a g e Aide Memoire – August 2017 involve the use of other forecasting tools and methodologies depending on the agency who will carry out the planning exercise. • It was agreed that for unsolicited mode of project allocation, the Early Screening Methodology can be used during the initial stages of the project (i.e. during Screening of Developers or MOU or PDA stages – depending on availability of data) to evaluate the suitability and appropriateness of the project. This needs to be integrated with the SOPs. Task 8 • Consultants mentioned that there has been considerable loss of time due to delay in procurement of Chinese standards (English version) by DEM. They further mentioned that recently Chinese standards have been procured by DEM and handed over to the Consultant. The Consultant will start reviewing these standards and take into account while revising the LEPTS. It was informed that review of LEPTS by expert panel followed by high level round table would be held towards the second half of October. • GRID Code - On DEB's enquiry Bank mentioned that developing/ revising the grid code is not part of the current scope. This is another potential area of support under the contemplated SEED-TA advisory. Task 9 • During project initiation it was assumed that there are existing dam safety guidelines in place and the Consultants will review those for incorporating in the LEPTS. However, it was further seen that no such dam safety guidelines were in place and it was primarily only recommendations pertaining to dam safety (as provided by USAIDS). • During Bank mission in February, it was decided that DEM will provide two counterpart staff to assist with the development and detailing of Dam Safety guidelines. Despite numerous reminders, no counterparts have been provided so far and progress on Dam safety guidelines have been slow. Given the manpower shortage in DEM, it is clear that they would not provide two counterparts. • WBG clarified that the counterparts would benefit from capacity building through OJT. The primary responsibility for drafting could only remain with the consultant expert on dam safety. • Consultants mentioned that preparing the guidelines will require additional budget and time. It was agreed that Consultants will submit a proposal for the additional budget and time by next week. Task 10: NUOL course (Task X) - Consultants mentioned that this task has been satisfactorily completed. DEB mentioned that the course material should be shared with them. General • Consultants mentioned that 3rd Interim Report is due for submission on 15 September 2017. Consultants informed that along with report they will submit the updated work plan taking into account the priorities of different agencies for the balance duration of the project. • The Consultants will share schedule of visit of experts in advance with the Project Coordinator and focal points in other agencies to enable Level 2 OJT and plan and facilitate the different task streams. • Communication regarding task streams related to departments other than DEB should be marked directly to the focal points of the respective department. The Project Coordinator should be copied on all such communications. 51 | P a g e