industrial tree plantation project · b the project completion report was prepared by y. kobayashi,...

Completion Report

Project Number: 20067 Loan Number: 1295 November 2005

LAO: Industrial Tree Plantation Project

September CURRENCY EQUIVALENTS

Currency Unit – kip (KN)

At Appraisal At Project Completion 31 October 1993 31 January 2005

KN1.00 = $0.0014 $0.0001 $1.00 = KN720 KN10,350

ABBREVIATIONS ADTA – advisory technical assistance APB – Agriculture Promotion Bank BME – benefit monitoring and evaluation BOL – Bank of Lao PDR DAFO – district agriculture and forestry office DOF – Department of Forestry IFRS – International Financial Reporting Standards GIS – geographic information systems GPS – global positioning system Lao PDR – Lao People’s Democratic Republic MAF – Ministry of Agriculture and Forestry MAI – maximum mean annual increment MCTPC – Ministry of Communication, Transport, Post and Construction MOF – Ministry of Finance NAFES – National Agriculture and Forest Extension Service NGO – nongovernment organization NPCC – national project coordination committee O&M – operation and maintenance PAFES – Provincial Agriculture and Forest Extension Service PBP – pilot block plantation PCU – project coordination unit PCR – project completion review PFP – pilot farm plantation PPCU – provincial project coordination unit PPTA – project preparatory technical assistance RRP – report and recommendation of the President SDR – special drawing rights STP – socio-technical profile TA – technical assistance

WEIGHTS AND MEASURES ha (hectare) = 10,000 m2

GLOSSARY

Afforestation

– Establishing forests (by natural regeneration and/or tree planting) in an area where there was no forest before.

Degraded forest lands

– Forested lands with less than 40% tree cover that is allotted or assigned to the population for permanent agriculture, forestry, and livestock production or other purposes.

Intercropping – Planting of annual crops mixed with tree planting

Reforestation

– Reestablishing forests (by natural regeneration and/or tree planting) in areas which were previously forested

Shifting cultivation

– A farming system in which land is periodically cleared, farmed, and then returned to fallow.

Tree plantation

– Forest crop or stand raised artificially either by sowing seeds or planting seedlings

Unstocked forest lands

– Previously forested lands where the crown density has been reduced to less than 20% because of logging or heavy disturbances such as shifting cultivation.

NOTES

(i) The fiscal year (FY) of the Government ends on 30 September. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 30 September 2000.

(ii) In this report, "$" refers to US dollars.

Vice President L. Jin, Operations 1 Director General R. M. Nag, Mekong Department Director U. Malik, Agriculture, Environment and Natural Resources Division,

Mekong Department Team leader J.H. Mir, Sr. Natural Resources Specialist, Agriculture, Environment and

Natural Resources Division, Mekong Department Team member Y. Kobayashi, Principal Project Specialist, Agriculture, Environment and

Natural Resources Division, Mekong Department

CONTENTS Page BASIC DATA ii MAP vii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Project Outputs 3 C. Project Costs 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. TA 2028-LAO: Institutional Support to the Department of Forestry 8 I. TA 2029-LAO: Institutional Support to the Agriculture Promotion Bank 8 J. Consultant Recruitment and Procurement 9 K. Performance of Consultants, Contractors, and Suppliers 9 L. Performance of the Borrower and the Executing Agency 9 M. Performance of the Asian Development Bank 10

III. EVALUATION OF PERFORMANCE 11

A. Relevance 11 B. Efficacy in Achievement of Purpose 11 C. Efficiency in Achievement of Outputs and Purpose 12 D. Preliminary Assessment of Sustainability 12 E. Environmental, Sociocultural, and Other Impacts 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13

A. Overall Assessment 13 B. Lessons Learned 14 C. Recommendations 15

APPENDIXES 1. Achieved Project Scope and Targets of Components 19 2. Area Measurement Surveys 20 3. Issues and Challenges in Tree Plantation 24 4. Summary of Project Cost 27 5. Project Implementation Schedule 28 6. Status of Compliance with Loan Covenants 29 7. Summary of Consulting Services 36 8. List of Vehicles, Equipment and Civil Works Procured for the Project 37 9. Agriculture Promotion Bank’s Role in the Project 38 10. Yield Surveys 44 11. Financial and Economic Analyses 47

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower

5. Executing Agencies 6. Amount of Loan 7. Project Completion Report Number

Lao PDR 1295-LAO(SF) Industrial Tree Plantation Project Lao People’s Democratic Republic Department of Forestry and Bank of Lao PDR Original: SDR8,045,000 Revised: SDR7,527,777 PCR: LAO 876

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Service Charge – Maturity – Grace Period

8. Terms of Relending – Interest Rate – Maturity – Grace Period Second-Step Borrower

– Interest Rate on Subloans – Maturity – Grace Period

21 May 1993 11 June 1993 25 November 1993 27 November 1993 22 December 1993 17 February 1994 18 May 1994 23 August 1994 1 30 September 2001 30 September 2003 1 1% per annum 40 years 10 years 2% per annum 15 years 7 years 7% per annum 8 years (farmers); 12 years (enterprises) 6 years

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9. Disbursements a. Dates Initial Disbursement

13 February 1995 Final Disbursement

8 February 2005 Time Interval 120 months

Effective Date 23 August 1994

Original Closing Date 30 September 2001

Time Interval 85 months

b. Amount ($ million)

Category or Subloan Original Allocation

Last Revised Allocation

Amount Disbursed

Undisbursed Balance

01-Subprojects-Part A 6.970 7.147 7.147 0.000 02A-Civil Works-Part B 0.180 0.193 0.193 0.000 02B-Civil Works-Part C 1.330 0.812 0.812 0.000 02C-Civil Works-Part D 0.500 0.129 0.129 0.000 03-Vehicles & Equipment 0.180 0.387 0.360 0.027 04-Consulting Services 1.010 0.986 0.972 0.014 05A-O&M Part A 0.025 0.006 0.006 0.000 05B-O&M-Part B 0.025 0.005 0.005 0.000 06F-Public Awareness 0.030 0.021 0.021 0.000 06I-O&M-Part C 0.095 0.000 0.000 0.000 06K-Incremental Staff 0.020 0.001 0.001 0.000 06L-Benefit, Monitoring and Evaluation

0.110 0.006 0.006 0.000

07-Unallocated 0.325 0.004 0.000 0.004 08-Service Charge 0.400 0.364 0.364 0.000 Total 11.200 10.061a 10.016 0.045b

a $712,173.08 was canceled on 29 September 2004. b $45,332.90 was canceled on 21 October 2005. 10. Local Costs (Financed) - Amount ($ million) 7.03 - Percent of Local Costs 91.4% - Percent of Total Cost 70.0% C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual

Foreign Exchange Cost 3.130 2.986 Local Currency Cost 10.916 12.415 Total 14.046 15.401

2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower-Financed 0.922 2.322 ADB-Financed 11.200 10.016 Subborrowers 1.924 3.063 Total 14.046 15.401

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3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actual Credit Facility 7.420 11.088 Establishment of Pilot Plantations 0.250 0.984 Improvement of Access Roads 1.417 0.898 Project Management Support 1.830 2.067

Subtotal 10.917 15.037 Contingencies 2.752 Service Charge During Construction 0.377 0.364 Total 14.046 15.401 4. Project Schedule

Item Appraisal Estimate Actual Date of Contract with Consultants February 1994 April 1995 Commencement of Services February 1994 July 1995 Completion of Services June 2000 March 2003 Civil Works Contract (Roads) Date of Award March 1994 June 1996 Completion of Work March 1997 January 1999 Equipment and Supplies First Procurement February 1994 September 1996 Last Procurement September 1994 September 2003 Vehicles First Procurement February 1994 February 1995 Last Procurement September 1994 September 2003 Establishment of Pilot Plantations Commencement of Pilot Block Plantations November 1994 May 1995 Completion/Achievement of Targets November 1996 November 1997 Commencement of Pilot Farm Plantations November 1994 May 1996 Completion/Achievement of Targets November 1996 November 1997 Establishment of Credit Plantations Commencement January 1995 January 1997 Completion/Achievement of Targets February 2001 March 2001 Physical Completion of the Project March 2001 August 2003 5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From August 1994 to December 1995 Satisfactory Satisfactory From January 1996 to December 1999 Satisfactory Satisfactory From January 2000 to December 2001 Satisfactory Satisfactory From January 2002 to September 2003 Satisfactory Satisfactory

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D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Person

s

No. of Person-

Days

Specialization of Membersa

Fact-Finding

22 Oct–14 Nov 1992

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96

a, b, f (2)

Follow-Up Fact-Finding 12–31 Mar 1993 6 114 a (2), b, f (2), h Appraisal 21 May–11 Jun 1993 7 104 a (2), b, c, d, e, g Follow-Up Mission 14–18 Aug 1993 1 5 a Inception 5–9 Apr 1994 2 10 a, g Review 2–9 Nov 1994 1 6 a Review 19–24 Feb 1995 2 12 b, g Review 9–17 May 1995 1 9 b Review 27 Feb–14 Mar 1996 2 28 b, g Review 7–14 Nov 1996 2 16 H, i Midterm Review 6–16 Aug 1997 3 33 h, e, g Review 16–25 Feb 1998 1 10 h Review 29 Jul–6 Aug 1998 2 12 h, g SPA 15–19 Feb 1999 1 5 h Review 25–29 Oct 1999 1 5 j Review 18–28 Jun 2000 2 15 h, j Review 3–7 Mar 2002 1 5 j Review 24 Mar–2 Apr 2003 1 5 j Project Completion Reviewb 17–29 January 2005 3 39 j, f (2) a a = economist, b = forestry specialist, c = counsel, d = programs officer, e = environment specialist, f = staff

consultant, g = local staff member, h = financial analyst, i = young professional; j = project specialist. b The project completion report was prepared by Y. Kobayashi, principal project specialist, Agriculture, Environment,

and Natural Resources Division, Mekong Department.

I. PROJECT DESCRIPTION

1. The forestry sector in the Lao People’s Democratic Republic (Lao PDR) accounts for 42% of the country's total exports, although the sector’s contribution to gross domestic product was 3.14% in 2002.1 At present the forested area is about 10.8 million hectares (ha), or 47% of the country's total land area.2 The country's dependence on forestry exports resulted in a depletion rate of 52,700 ha per annum from 1990 to 2000.3 The area classified as unstocked and degraded forestland exceeds one third of the total land area. To control the rapid depletion of forest, the Government adopted the Tropical Forestry Action Plan (TFAP).4 This plan emphasized the establishment of plantations planted with fast-growing species that would serve as an alternative source of wood raw materials while reducing pressure on natural forests.5 In response to this, the Project was designed to support this new initiative of tree plantations (footnote 5, paras 21-24). 2. The objectives of the Project were (i) to reestablish tree cover on unstocked and degraded forest land, thereby converting such lands to productive use; (ii) to produce wood raw materials for industrial use and as alternative sources of construction and fuel wood; and (iii) to establish a policy and institutional framework for the development of sustainable industrial plantations (footnote 5, para 29). The Project comprised four components: Part A: Credit Facility—provision of subloans to smallholders and private enterprises for the establishment of industrial tree plantations on about 9,000 ha of unstocked and degraded forest land in four provinces, which will lead to average production increases of about 128,000 cubic meters (m3) of wood raw material per year; Part B: Pilot Plantations— establishment of pilot block plantations (PBP) in 8 districts, each district averaging 30 ha, for a total of 240 ha and 40 pilot farm plantations (PFP) for a total of 320 ha; Part C: Access Roads—improvement of 60 kilometers (km) plantation access roads, including drainage structures; and Part D: Project Support—provision of project management support6 to improve capacity of Government agencies and improve the policy environment for industrial tree plantations (footnote 5, para. 30). The Bank of Lao PDR was designated the Executing Agency for Part A; the Department of Forestry (DOF) was designated the Executing Agency for Parts B, C, and D (footnote 5, para. 37). The Agriculture Promotion Bank (APB) was assigned the role of implementing agency of subloans under Part A (footnote 5, paras. 40–45).

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

3. The Project was relevant to achieving both the Government’s strategy for reforestation in denuded and degraded forest lands and Asian Development Bank's (ADB) agriculture sector strategy for reducing slash-and-burn cultivation and strengthening rural development. However,

1 National Statistical Center. 2004. 2003 Annual Statistics, National Statistical Center. 2 Department of Forestry, Ministry of Agriculture and Forestry. 1992.Statistics. 3 ADB. 2004. Country Strategy and Program Update, Manila. 4 Per Prime Minister’s Decree 66/PM 7/9/91, the TFAP was approved in September 1991 to form part of the forest

policy of the Ministry of Agriculture and Forestry, including the classification of forest land into different land use categories and the initiation of tree plantation.

5 ADB. 1993. Report and Recommendation of the President on a Proposed Loan and Technical Assistance Grant for the Industrial Tree Plantation Project. Manila. Para 9.

6 Project support includes nursery improvements, public awareness program, benefit monitoring and evaluation activities, land use surveys, consulting services, and vehicles and equipment.

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the design and formulation of the Project7 was weak in assessing the capacity of DOF and private enterprises. Considering that the planting of eucalyptus and acacia had never been tested on a large scale in Lao PDR, a more careful, phased approach should have been proposed. Since preconditions8 for such investment did not exist in the country, the Project was formulated with an optimistic assumption that the related advisory technical assistance (ADTA) projects9 would help create more favorable conditions. Key participants in the project preparation were not disinterested parties. In designing the components and envisaging sector development, the project preparatory technical assistance (PPTA) appeared to rely too heavily on interested domestic consultants and vested forestry company interests. Although the project's basic premise of encouraging industrial tree planting by facilitating private-sector investments is still valid, the PPTA study should have more carefully analyzed the state of the wood market and of private enterprise in Lao PDR. Use of the newly created APB as a conduit for project credit was done without carrying out proper capacity analysis during project formulation. This is considered one of the major flaws of the project design, and the capacity-building training under ADTA for APB failed to rectify this problem. 4. During project implementation, it was noted that no private enterprises10 met the technical and financial requirements of the Project. Local private enterprises were judged to have poor track records and were lacking (i) sufficient collateral to qualify for credit, (ii) the capacity to contribute the 30% up-front equity required for the investments,11 and (iii) the ability to provide technical assistance to farmers. Moreover, the passage of the ambiguous Decree No. 186/PM (12 October 1994) on Allocation of Land and Forest Land for Tree Plantations and Forestry Plantations made foreign investors hesitant to join the Project.12 The absence of a legal framework13 to secure investments, the lack of adequate land classification/allocation systems to identify suitable plantation sites, and cumbersome customs procedures designed to preserve natural forests also hindered the participation of foreign investors. With few private enterprises participating, ADB in October 1997 approved the Government’s proposal to allocate the entire target of 9,000 ha to individual small farmers, and the inclusion of Champasack and Saravane provinces into the Project. Since this represented an abandonment of the original project design, there should have been a critical review of this new implementation arrangement. 7 ADB. 1990. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao

People’s Democratic Republic for the Third Forestry Development Project. Manila (TA 1418-LAO, approved in November 1990 for $320,000,).

8 A proper legal system for private enterprises to invest, strong institutions to implement the Project, Government support for encouraging tree plantations, market demand, and long-term credit.

9 ADB. 1993. Technical Assistance to Lao PDR for the Institutional Support to Department of Forestry. Manila. TA 2028, approved on 22 December 1993, for $1.55 million. ———. ADB. 1993. Technical Assistance to Lao PDR for the Institutional Support for Agriculture Promotion Bank.

Manila. TA 2029, approved on 22 December 1993 for $450,000. 10 Although some private joint ventures met the requirements, they were excluded from the Project because the

Government deemed that decree No. 186/PM (on the allocation of land and forest for tree plantation and forest protection) restricted the involvement of joint ventures which included foreign companies.

11 Although the loan agreement required enterprises to contribute only 20% up-front equity, APB increased it to 30%. 12 The decree appeared to imply that that foreign investors needed to form joint ventures with state-owned

enterprises in order to obtain concessions (integrated logging and plantation development scheme), except on unstocked forest land. If existing degraded, eroded, or unstocked forest land were used for plantation development, a joint venture with a state-owned enterprise would not be necessary. This interpretation, which was prepared by the project consultant, led the project steering committee in 1997 to allow foreign investors to form joint ventures with private Lao PDR companies or individuals in order to participate in the Project.

13 Regulations introduced to control extraction of wood from natural forests have been applied to wood from tree plantations. Such regulations force wood harvesters to obtain permission from PAFES to cut trees and move wood. The regulations also subject them to log measurement by forest officers, inspection of loaded trucks by forest officers and additional provincial tax and fees.

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5. In 1999 the Government changed its policy to allow participation of foreign–Lao joint enterprises in the Project, resulting in the participation of several joint enterprises. However, the subloan contracts did not include extension to farmers, as required by the Loan Agreement,14 except in the case of one company—KM5. Furthermore, additional four provinces were included in the Project without an adequate feasibility study. As a result, the project area increased from eight districts in four provinces to 32 districts in seven provinces,15 without any concurrent recruitment of additional community organizers. This expansion overstretched the already limited extension staff working at the provincial project coordination units (PPCUs) and the district agriculture and forestry offices (DAFOs). Moreover, no PBPs and PFPs were established in the 24 added districts because DOF assumed that new extension staff could be trained in the existing PBPs. Meanwhile, inclusion in the project of districts removed from the main road (Route 13), combined with a lack of sufficient and adequately trained PPCUs/DAFOs extension staff, led to uncontrolled expansion of tree plantations by farmers and individual investors.16 The current yields of plantations in these remote districts are extremely low because of poor planting and maintenance practices. B. Project Outputs

6. Appendix 1 compares the Project’s scope and targets as anticipated during appraisal in 1993 with the achievement of these targets at project completion in September 2003.

1. Part A: Credit Facility

a. APB Credit Operations

7. This component was not active at the outset of the Project because the credit line could not be implemented until the Government introduced a new accounting system for banks in January 1996.17 No significant work was carried out by project coordinating units (PCUs) of DOF and APB. This delayed start-up activities. When the credit line finally became available in 1996, DOF and ADB determined that no enterprises qualified for the Project; as a result, they allocated the entire plantation target to small farmers.18

14 There was no appropriate communication on this between ADB and the Government. 15 Original project districts were: Thaphabaht and Pakxane districts in Borikhamxay Province; Xaybouri and

Khanthabouly districts in Savannakhet Province; Naxaithong and Xaythany districts in Vientiane Capital; and Phonehong and Thoulakhom districts in Vientiane Province. Additional project districts were: Khamkeut, Pakkading, and Bolikhan districts in Borikhamxay Province; Pathoumphon, Sanasomboon, Bachiangchaleunsook, and Phontong districts in Champasack Province; Thakhek and Mahaxay districts in Khammuane Province; Laongam, Khongxedone, and Saravane districts in Saravane Province; Champhon, Outhoomphone, Xayphoothong, Atsapangthong, and Songkhon districts in Savannakhet Province; Sikhottabong, Sisattanak, Hadsaifong, and Sangthong districts in Vientiane Capital; and Viengkham, Keo Oudom, and Hinherb districts in Vientiane Province.

16 Individual investors came into the Project after the ADB Midterm Review Mission in 1997 determined that individuals and part-time farmers could be considered planters, and thus could participate in the Project.

17 This was a condition for approval of withdrawal approval of application for subloans in schedule 3 to the loan agreement. The Government approved the Decree on the Accounting System of the Bank of Lao PDR on 8 January 1996.

18 During appraisal, it was estimated that 2,000 ha would be planted by small farmers (about 1 ha per farmer) and 7,000 would be planted by commercial enterprises (about 100–500 ha per enterprise). The enterprises were required to assist local farmers in the establishment of tree plantations on farmers’ land. The enterprises were supposed to provide farmers with technical inputs and supervision, and guarantee the purchase of the farmers' trees at a specific price.

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8. Under the subloan agreements, farmers were required to pay 60%19 and enterprises 100% of the interest on the subloans within the 6-year grace period (footnote 5, paras. 43 and 44). However, most farmers claimed they were unable to pay off the interest because they would not receive any income until harvest. Income from intercropping in the first two years after planting was also very limited. Few farmers practiced intercropping because their plantations were located far away from their houses. Some large enterprises also defaulted on their interest payments because of cash-flow problems. According to the review under ADB’s technical assistance (TA) cluster20 to APB, about 87% of the subloans provided under the Project were nonperforming as of December 2003. This was the highest nonperformance rate in APB’s portfolio and seriously undermined APB’s sustainability. APB is now compiling an inventory of defaulters and considering stern actions to improve its portfolio.

b. Plantation Establishment and Management

9. The National Agriculture and Forest Extension Service (NAFES)21 reported in its project completion report that the total area of plantations was 12,940 ha, which would appear to exceed the planned plantation area of 9,000 ha. However, this figure may be inflated. In field measurements, discrepancies have been noted between the reported planted areas financed by subloans, and the actual observed planted areas. These discrepancies were caused partly by delays in allocation of funds for land preparation from APB, and partly by the misuse of subloans by individual investors. The low interest22 rates on these loans also attracted opportunistic borrowers who abused the program. In 2003 APB carried out an investigative survey that confirmed that actual planted areas were as low as 60% of reported planted areas. Moreover, the survey found that some of the plantations had been damaged or totally destroyed by fire or termites. The PCR mission did corroborative measurements in the field and found similar results. Appendix 2 provides details on the APB survey and PCR assessment. 10. Simple cutting, burning, and plowing (if done), may be insufficient to achieve the predicted biomass yields. Deeper soil preparation (by tilling 50 cm deep) may be required. Higher quality seedlings should be used to improve tree quality and improve seedling survival rates that are reportedly lower than 50% at some small- and medium-scale plantations. Plantation sites are often remote and difficult to access for farmers. This causes not only increased costs for maintenance but also, more importantly, higher marketing and distribution costs—costs that could have been avoided if the plantation selection criteria had been properly applied during the socio-technical profile (STP)23 preparation stage (footnote 5, para. 85). Appendix 3 outlines key issues and challenges related to tree plantation in Lao PDR.

2. Part B: Pilot Plantations

11. PBPs were established in the original seven districts, excluding Xaythany District. The demonstration effect of the PBPs was only partly achieved because some PBPs were too remote. However, PBPs proved that shifting cultivation land could be transformed into 19 The remaining 40% of the interest on the subloan was to be deferred during the grace period and paid, together

with the principal, in the 7th and 8th years. 20 ADB. 2000. Technical Assistance to the Lao People’s Democratic Republic for Rural Finance Development. Manila

(TA 3413-LAO, approved in March 2000 for $2.02 million). 21 NAFES was established as a result of Ministry of Agriculture and Forestry's reorganization in 2001. DOF

transferred its responsibility as Executing Agency to NAFES in 2002. 22 Although the loan agreement required APB to set interest rates at prevailing local rates for long-term agricultural

loans, the interest rates of the subloans was set at 7% per annum throughout the project period. 23 An STP was prepared for each plantation or 5 ha or more, and a brief STP was prepared for each plantation

smaller than 5 ha. Approval of an STP by a PPCU is a condition for the release of a subloan.

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productive tree plantation land. Maintenance of PBPs since project completion has ebbed because DOF lacks the funds and commitment to maintaining them. However, PFPs were established during the project in the original eight districts. Because of their close proximity to other farmers’ lands, most PFPs fully achieved their demonstration effect. Maintenance of PFPs in some areas has also been relatively strong because of their small size (1 ha) and their proximity to their owners’ houses. By the end of the Project, 229 ha of PBPs (12 ha below target) and 395 ha of PFPs (75 ha above target) had been established.

3. Part C: Access Roads

12. There were 55.3 km of access roads constructed (4.7 km below target). Access roads totaling 55.3 km were built in the six original districts. Responsibility for maintaining access roads has been transferred to villagers, who periodically fill pot holes and clear the side drains. Villages appreciate this improved access to main roads, which facilitates economic activities. The condition of the new access roads is acceptable, but in the near future they are susceptible to deterioration by trucks overloaded with logs unless suitable regulations are passed and enforced.

4. Part D: Project Support

13. Under Part D, Project provided 4,500 days of training. The initial delay in provision of credit under Part A (see para. 8) held back the expansion of plantation areas. Project consultants provided significant training early on, but training was insufficient after the Project was expanded. To accommodate the new requirements, training program and coverage should have been increased. Lack of proper training for extension staff in the newly included districts resulted in insufficient provision of extension support to farmers and individual investors. Moreover, frequent turnover of project staff reduced the impact of the training initiatives. 14. The project monitoring was carried out by the PCU and PPCUs. Poorly managed plantations were identified, but no follow-up actions were taken to help improve such plantations. The environmental monitoring unit of the PCU prepared semiannual environmental monitoring reports with guidance from the project consultants. No major negative environmental impact was identified. GPS equipment was procured for monitoring, but there is no evidence that it was actually used, PCU staff were unable to locate key software and hardware when requested by the PCR mission. C. Project Costs

15. The total project cost was about $15.4 million, against the appraisal estimate of $14.0 million. This higher cost is partly attributable to changes in currency exchange rates. There were minor cost overruns in all components of the Project. These were covered by allocation of contingency funds. The local cost portion has been increased slightly, and the foreign currency cost reduced. The share of the credit line allocated to farmer-plantations increased significantly, while the share allocated to enterprise-plantations decreased—a result of the farmers' total plantation area increasing from 2,300 ha (appraisal estimate) to 9,900 ha, while enterprises total plantation area decreased from 7,000 ha to 3,000 ha (RRP Appendix 7). Appendix 4 summarizes project costs in detail.

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D. Disbursements

16. Disbursements proceeded very slowly in the first two years of the Project. This was due to delays in the establishment of imprest accounts, delays in consultant recruitment, delays in the introduction of a new accounting system for banks, and delays in arranging an independent external audit of APB. Other constraints that contributed to lower-than-expected disbursements included: (i) insufficient counterpart funds at the outset of the Project; (ii) slow disbursement of funds for project activities; (iii) APB’s failure to understand disbursement procedures; and (iv) lack of coordination between APB and DOF/NAFES. 17. The appraisal disbursement schedule was not realized because initial delays occurred in the operation of Part A by APB. Disbursements peaked in 2001–2002 after all plantations had been established; about 64% of the total loan amount was disbursed during this time. The loan closing date was extended by 2 years, to 30 September 2003, in order to continue supporting APB until the first credit payments became due (at first harvest). Other reasons for the extension: to assist DOF with technical issues during the first harvest, and to allow a large enterprise that joined the Project in 2001 to complete its physical activities. Loan savings were realized because the local currency devalued following the Asian financial crisis, while budget funds earmarked for operation and maintenance of roads and plantations, incremental staff, and benefit monitoring were underutilized. After consultation with the Government, ADB cancelled SDR485,800 worth of loan proceeds, which reduced the total loan amount to SDR7,559,200. Actual loan disbursement amounted to SDR7,527,776.65 ($10,016,057.44 equivalent). E. Project Schedule

18. The Project was to be implemented over a seven-year period, from 1994 to 2001. The project completion date was extended from 31 March 2001 to 31 August 2003. This was due to delays in (i) engagement of project consultants (1-year delay); (ii) establishment of imprest accounts (3-month delay); (iii) establishment of the national project coordination committee (4-month delay); and (iv) operation of credit facility (para. 7), which in turn was caused by late compliance with its loan covenants (2-year delay). Although the project consultants commenced their activities in June 1995, the first use of credit for major plantations did not occur until January 1997. Moreover, consultant inputs were intermittent and insufficient during the latter stages of the project, when they were most needed. The midterm review, which recommended increasing the project area, should have done more to maximize the effectiveness of the consultants. The extension of the loan closing date was granted in order to allow the participation of large enterprises and improve the sustainability of plantation management. During the 2-year extension period, few proposed activities24 were accomplished. The revised project schedule is attached as Appendix 5. F. Implementation Arrangements

19. Handing over the role of community organizer to PPCUs and DAFOs may have negatively impacted the provision of extension to participating farmers and individuals. Originally 16 community organizers were to be recruited at the village level for eight districts (two community organizers per district). This arrangement was dropped at the request of DOF in 24 The following activities were accomplished: (i) strengthening of the credit management capacity of APB;

(ii) consolidating the plantations already developed through further extension work to improve quality; (iii) training initial borrowers in harvesting and coppicing techniques, (iv) facilitating marketing linkages between smallholder farmers and the private sector; (v) strengthening the capacity of project staff to apply new technology for land survey, mapping, and plantation management; and (vi) including Khammuane Province as a project area.

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1994, and community organizers were replaced by employees of the PPCUs and DAFOs.25 However, these employees, after being trained by the project consultants to fulfill the community organizer function, were often moved to other assignments or transferred away from the project districts, leaving them unable to handle a wide range of important activities.26 APB provincial branch staff lacked the capacity to administer long-term credit. Delayed provision of credit negatively impacted seedling planting during the critical two year period after planting. Lack of coordination between the PCU and APB at the central level, and between PPCUs and APB provincial branches at the provincial level, resulted in further delays in approval of subloans. G. Conditions and Covenants

20. In general, most of the covenants were relevant, but it proved impossible to implement a few of them. The following major covenants were not complied with or partially complied with (A detailed description of compliances with conditions and covenants is given in Appendix 6):27

(i) APB consultation with PCU. Very weak in the process of STP approval. This was because APB was included into the Project without proper discussions between APB and DOF on detailed implementation arrangements.

(ii) APB’s subloan appraisal, approval, disbursement, supervision, and collection. The appraisal process was weak. Unqualified farmers who lacked financial, technical, and managerial capacity were included in the Project. Disbursement was often delayed. Collections are extremely low. All of this is attributable to APB’s insufficient loan-supervision capacity.

(iii) Subloan agreements requiring enterprises to assist local farmers in the establishment of tree plantations equal to at least 30% of the area being developed by the enterprise, and to enter into agreements with local farmers. There were no such arrangements incorporated in the subloan agreements. This provision may be considered unrealistic because it represents a huge burden to enterprises.

(iv) The PCU shall recruit community organizers. No community organizers were recruited. Instead, their roles were replaced by employees of the DAFOs. It was thought that DAFOs staff members, if trained, could continue to support the Project (see para. 20).

(v) Operation and maintenance. Many PBPs were not maintained after project completion. No operation and maintenance (O&M) funds have been allocated.

(vi) APB ensures positive real interest rates, based on market rates. A standard interest rate of 7% per annum was applied unilaterally in all project districts, even though market conditions and inflation warranted substantially higher rates. The Government reasoned that the market rate would not attract investors. This fixed interest rate has perpetuated unrealistic expectations throughout the country regarding the cost of credit, making it difficult for APB and microfinance institutions to raise interest rates to sustainable levels without inviting political interference.

(vii) Environmental covenants. Although environmental safeguard regulations were refined by a project consultant, specifying slope limit, some planting and mechanical field preparation still occurred on steep slopes. Environmentally

25 The Government wanted to make use of redundant staff after reorganizing DOF in 1994. 26 The community organizers’ activities included credit and financial management (establishment of farmer savings

groups), silviculture techniques, forest-fire control, agroforestry methods, integrated farming models, primary health care, community development, and benefit monitoring and evaluation.

27 Audited accounts and financial statements often were submitted after the due date.

8

friendly mosaic field structures were not observed at all plantations. Nonetheless, land use and the small size of plantations resulted in an environmentally friendly patchwork of plantations.

H. TA 2028-LAO: Institutional Support to the Department of Forestry

21. The objective of this ADTA was to provide assistance to NAFES (previously called the Plantation Division), under DOF, to (i) plan and prepare a national industrial tree plantation strategy; (ii) develop and formulate an appropriate legal and institutional framework for the expansion of industrial tree plantations by the private sector; (iii) develop the specialized extension capability required to encourage farmers to include industrial tree planting among their integrated farming activities; (iv) develop a training program for industrial tree plantations; and (v) establish a benefit monitoring and evaluation system to assess the impact of industrial tree plantation. 22. The TA consultants performed satisfactorily in assisting DOF/NAFES (PCU)/PPCUs). As a result of the TA, a national plantation strategy was prepared,28 institutional and legal frameworks and extension services were improved, and a comprehensive training program was created. However, the establishment of an annual benefit monitoring and evaluation system was not effective because the data sources were neither reliable nor regular. This was due to a lack of management information systems (MIS) and geographic information systems (GIS). Major lessons learned included: (i) the markets for plantation products should have been identified before embarking on large plantations, (ii) MIS should have included technical plantation data to support the PCU in planning extension activities, and (iii) MIS should have included economic and financial data to support APB in monitoring the credit program. Overall, the ADTA was evaluated as successful by the TA completion report.29 I. TA 2029-LAO: Institutional Support to the Agriculture Promotion Bank

23. The objective of this ADTA was to support APB in (i) preparing a corporate plan, (ii) implementing the accounting system being introduced by the Government for all banks, and (iii) training staff. The TA consultants trained APB staff members in MIS, which was to be used as a management tool. However, the MIS remains underdeveloped and deficient at APB. The staff at APB headquarters has only a limited ability to rapidly access and work with information, while APB provincial branches are even further behind in this area. 24. According to APB staff, the branch managers and credit department heads at its provincial branches received training by TA consultants. However, since those trainees were in managerial positions, they seemed disinterested in the operational training provided by the TA consultants; as a result, the goal of the training was not attained. Trainee selection should have been targeted toward operational staff who could have immediately applied their new skills to their jobs. Moreover, training should have been carried out in Lao language, rather than in English with an interpreter. Overall, the ADTA was partly successful.30

28 A National Strategy for Sustainable Plantation Forestry in Lao PDR was submitted by a TA consultant in October

1995 but was not approved by the Government because no ADB missions followed this up. 29 ADB. 2003. Technical Assistance Completion Report. Manila. 30 No TA completion report (TCR) is required because the TA was completed before the TCR was introduced.

9

J. Consultant Recruitment and Procurement

25. Recruitment of project consultants was delayed by about 1 year, mainly because DOF was unfamiliar with ADB procedures. The recruitment process was in accordance with ADB’s Guidelines on the Use of Consultants. A total of 84 person-months were utilized over 8 years, against the appraisal estimates of 79 person-months over 7 years. This increase was a response to the road engineer's need for additional inputs, and the need for additional monitoring of activities during the project extension period. The consultants have satisfactorily supported DOF/NAFES in monitoring and reporting on the project activities. 26. The extension of the Project necessitated additional consulting inputs to address issues related to sustainability of plantation management. A summary of consulting services is given in Appendix 7. 27. The Government initially reduced the number of vehicles and equipment to be procured under the Project, a result of its decision to use more of its own resources and the existing resources of contractors involved in seedling production and plantation establishment. Because the plantations involved more districts and increase in the number of clients, the need for resources increased. After the midterm review, it was decided to procure additional vehicles and office equipment to facilitate extension work in remote areas. Strengthening the implementation capacity of APB also required additional vehicles and office equipment. Overall, the actual requirements exceeded the appraisal estimates by 88%. Procurement of vehicles and equipment was carried out in accordance with ADB’s Guidelines on Procurement, as summarized in Appendix 8. K. Performance of Consultants, Contractors, and Suppliers

28. Project consultants contributed significantly to project implementation by providing technical advice and training to PCU and PPCU staff. However, frequent project staff turnover reduced the impact of training and made life difficult for the consultants. The big delay in launching the credit facility and the unplanned expansion of the project area further reduced the effectiveness of the consultants. The midterm review report failed to properly evaluate the impact of expanding the project area and actually recommended that the ADB Mission include three additional provinces in the Project. Local contractors constructed access roads satisfactorily, and these are still in relatively good condition. L. Performance of the Borrower and the Executing Agency

29. The Government’s issuance of Decree No. 186/PM in December 1994 restricted participation of private joint ventures in the Project. This resulted in major changes to the scope of the Project. The Government's move to abolish the joint-venture restriction in 1997 facilitated the participation of private enterprises. The PCU (under DOF/NAFES) did all it could but its effectiveness in supervising the Project and providing extension to participating farmers and individuals was limited by staff shortages at the PPCUs and DAFOs. Moreover, the technical capacity of the staff at these offices was weak. This was due to a lack of training, frequent staff turnover, and insufficient assistance from project consultants in the latter stages of the Project. It appears that the PCU put too much emphasis on achieving the physical targets of plantations while paying too little attention to plantation management and, later in the Project, market access for participating smallholder farmers.

10

30. APB was established during project processing in 1993. At the outset it severely lacked the capacity to deliver new long-term loans under the Project. Although ADTA consultants provided training, the capacity of APB staff remained insufficient to properly monitor and advise farmers at the field level. This is partly attributable to insufficient commitment by APB, and the Bank of Lao People’s Democratic Republic to building capacity of APB staff so that it could operate as a genuine bank. Lack of coordination between APB and DOF worsened the situation. The separation of these two agencies hampered efforts to resolve problems. A performance analysis of APB is included in Appendix 9. 31. The capacity of the PCU and PPCUs was also too weak to properly monitor project implementation, despite the training provided by ADTA and project consultants. Training and provision of GPS equipment shows limited evidence of use by DOF. Both the PCU and APB often failed to follow up on recommendations made by ADB during review missions. Overall, the performance of the PCU and PPCUs is rated as partly satisfactory. M. Performance of the Asian Development Bank

32. ADB missions insufficiently assessed APB capacity during loan processing in 1993. Inclusion of APB in the Project significantly delayed project implementation and created many problems throughout project implementation. As a result, the Project ended up saddling APB with a long list of defaulters (see para. 8). The capacity of the PAFOs, DAFOs and DOF should have been more critically evaluated and a more gradual capacity-building program should have been proposed. Assessment of potential participants and development of private enterprises was also inadequate. The project goal of having enterprises perform two thirds of all plantings did not materialize, nor did the covenanted enterprise-farmer relationships. The levels of farmer aptitude and motivation were overestimated. The project premise of mandating close relationships between enterprises and small- to medium-scale farmers through covenants was shortsighted and unrealistic. 33. Although 14 ADB missions led by five different mission leaders were sent to review the Project, only one mission spent more than 10 days reviewing the Project. The frequent turnover of mission leaders31 led to insufficient follow-up on previous recommendations, a lack of expertise and experience among mission members, and a general lack of continuity. After 1996 not one mission included a forestry specialist. Few missions visited project plantations outside of Vientiane. These deficiencies were partly the result of insufficient budget funds and time being allocated to ADB review missions. The inadequate supervision inevitably led to poor decisions, like the one to add additional provinces to the Project without carefully examining the feasibility of their addition. At minimum two review missions per year were required to supervise the Project, yet from July 2000 to February 2002, a period of 20 months, not one review mission took place, jeopardizing the sustainability of the Project.32 If ADB missions had spent more time in the field and provided more resources for specialist staff consultants, they could have identified potential problems and reformulated the Project early on. With close supervision, the following mistakes likely would have been avoided: (i) the unauthorized expansion of project

31 The reasons for the frequent turnover of the mission leaders are reorganization, change of job assignments, and

transfer to other divisions. 32 During this period, disbursement under the to credit component increased rapidly despite its earlier poor

performance. This could have given a wrong signal to the authorities that reform of APB’s operations and accountability was unnecessary.

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districts (from 8 to 32),33 which would have required ADB approval; (ii) significant discrepancies between reported and actual planted areas; and (iii) the lack of proper extension for plantations financed under the Project. 34. ADB’s Midterm Review Mission (made without the input of a forestry specialist) recommended a significant change in project design, which should have been based on a more detailed study by the project consultants. The Midterm Review Mission confirmed the inclusion of “individual” investors (these were neither “private commercial enterprises” nor “farmers”) as beneficiaries of subloans without following the proper review process within ADB. This increased the opportunity for misuse of subloans by opportunistic investors. Without proper allocation of budget and time for review missions, ADB should not have involved itself in such a management-intensive project. Overall, the performance of ADB was rated unsatisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

35. The design of the Project was relevant if implemented according to the original implementation arrangements with capable project staff and institutions. However, a Project designed to introduce a new business (tree plantation) to local farmers who had no previous exposure to that business proved overly optimistic. The project design did not reflect the actual rural, financial, technical, and social environment of Lao PDR. Moreover, the midterm review, instead of proposing a remedial plan, expanded the project area without a thorough examination, which weakened extension support to farmers. In addition, participation of poorly performing “individual” investors worsened the performance of the project plantations. The negative impact of these changes reduced the relevance of the Project significantly. Therefore, the Project was considered partly relevant. B. Efficacy in Achievement of Purpose

36. The Project reestablished some tree cover on unstocked and degraded forest land, but most farmer-plantations have underperformed. Therefore, fulfillment of the first objective of the Project is limited. Production of wood raw materials for industrial use has been limited to successful plantations managed by a small number of farmers, individuals, and large enterprises. Here again, fulfillment of the second objective is only partial. There has been some progress in the establishment of a policy and institutional framework for the development of sustainable industrial plantations. This is reflected in the promulgation of Decree No. 89/PM in 1999 and Decree No. 18/PM in 2002 for Tree Plantation, which has facilitated investment in tree plantations in Lao PDR. Still, more remains to be done in policy and regulation to ease the felling, selling, and transporting of tree-plantation output. Local interpretations of regulations have hampered marketing efforts; as a result, fulfillment of the third project objective—to establish a policy and institutional framework—was also incomplete. On the positive side, the success of a small number of participating farmers has demonstrated that tree plantations can be profitable if properly carried out. This seems to have encouraged other small farmers to plant eucalyptus across the project provinces. However, given the general poor performance of tree plantations, it is unlikely that the Project will contribute significantly in the near future to the Government’s goals of reforestation of unstocked and degraded forest lands, poverty reduction,

33 Originally, 8 districts in 4 provinces were included in the project area (RRP and minutes of loan agreement).

However, additional 15 districts in these provinces were included without ADB’s approval. Moreover, when ADB approved the inclusion of the additional three provinces, the districts to be included were not specified (footnote 14).

12

and increased foreign exchange earnings. In light of these shortcomings, the Project was evaluated as less efficacious. C. Efficiency in Achievement of Outputs and Purpose

37. The Project envisaged the creation of a viable wood-producing plantation sector, with links between farmer-producers and enterprise-producers and easy access to markets (mainly paper pulp and saw mill processors) for both types of producers. The linkages did not develop as planned, and the Project focused more on disbursement, planting, and production. There were three representative borrower groups under the Project: (i) farmers, (ii) individuals (investors and entrepreneurs), and (iii) larger enterprises. Many farmers and individuals were unable to properly maintain their plantations because they received insufficient guidance and the credit program performed poorly. This lack of plantation maintenance led to fields being taken over by indigenous weeds or scorched by fires fueled by unmanaged undergrowth. The indicative financial internal rate of return (FIRR) is 4.7% for farmers, 3.1% for individuals, and 0.2% for enterprises. With yields and revenues too low to cover costs, credit has added interest-payment burden for project participants, many of whom are now indebted. 38. The overall Project economic internal rate of return (EIRR) is -2.0%. In terms of poverty impact, the net effect of the Project was negative. Production was poor and losses were widespread. This is reflected in the very low loan repayment rates. With regard to the credit component, by pursuing targeted and subsidized loans, the Project adversely impacted APB and set back the rural finance sector. In conclusion, the Project was inefficient. D. Preliminary Assessment of Sustainability

39. The Project is not likely to be sustainable for most stakeholders. The exceptions are the enterprise-plantations and the few farmers who have managed to establish and maintain successful plantations. Most farmers and individual investors failed to follow the procedures required to establish productive plantations. Abolition of the position of community organizer reduced total project costs but hampered extension support to farmers and reduced the sustainability of the Project. Farmer-plantations and individual-plantations have, in general, been taken over by weeds and dense undergrowth. There is little chance of bringing these plantations back to productivity since APB will be hesitant to provide more support to improve these plantations in the absence of substantial training, and extension support inputs. There is little evidence that the Government is willing to commit its own resources to pursuing the project goals. Continued activity depends almost solely on externally financed project resources. The sustainability of the Project is therefore evaluated as unlikely. E. Environmental, Sociocultural, and other Impacts

40. Although only unstocked and degraded forest lands were used for plantations, there were some plantations (mostly run by individual investors) where the slope of the land exceeded 15%. However, the environmental damage caused by such plantations was limited because only hole digging was applied for planting seedlings (i.e. no plowing). The project consultant established environmental monitoring systems, including baseline, reviews, and established standards and environmental guidelines for creating tree plantations. The consultant also trained project staff throughout the Project. However, adoption of these instructions by project staff was deficient. The project environmental consultant’s final report states that DOF lacks sufficient environmental monitoring capacity despite extensive training in this area. The report recommends outsourcing monitoring activities.

13

41. To protect adjacent natural forests, paddy fields, and streams, a 10- to 20-m-wide buffer zone of natural vegetation was to be left along the borders of the plantations, resulting in a mosaic structure consisting of small compartments of plantations of less than 50 ha. Most individual- and farmer-managed plantations did not strictly follow this practice. However, these plantations were not large enough to cause environmental damage. Some large individual-planters and enterprise-planters also failed to follow the mosaic structure strictly. The potential for reduced biodiversity was greater in these instances. Moreover, planned distribution of seedlings of indigenous species to farmers was not carried out (Appendix 6). Access roads were properly constructed, with drains on both sides of the roads and active community participation. These roads have been relatively well maintained by the village people. 42. The STPs developed by the PPCUs for each plantation provided baseline socioeconomic data, which were checked by a benefit monitoring and evaluation survey. No negative socioeconomic impact was reported during the Project. PBPs were established on land owned by village or provincial governments. Access roads were built parallel to existing village roads. However, the PCR Mission noted a social conflict between villagers and an individual-planter in Kammouane Province. This was attributable to a lack of proper application of STP in consultation with villagers. The burden of subloans to smallholder farmers will become a social issue if their plantations cannot produce sufficient yields and profits. Determining the indebtedness levels of smallholder farmers would require further review after APB completes an inventory survey. 43. Considering (i) the increased indebtedness of targeted beneficiaries, (ii) the negative impact of the Project on poverty alleviation, and (iii) inadequate compliance with environmental covenants, the effectiveness of the Project in improving environmental conditions in the Project area has been negligible. The effectiveness of the Project in improving the socioeconomic condition of the targeted beneficiaries has likewise been negligible.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

44. The Project was initially implemented in the targeted, accessible eight districts. However, a major expansion in scope after the midterm review resulted in 32 districts being targeted, which made the Project unmanageable. The community organizers should have been recruited from targeted villages in order to sustain and expand extension in the districts covered by the Project. Despite the best efforts of the project consultants to train project staff, insufficient extension support by project extension staff resulted in poor management of plantations. The project area was expanded because the credit facility was underutilized. This was a mistake. Thorough examination of the newly added districts (feasibility studies) should have been carried out before their inclusion. If such studies were to determine that expansion to new districts was viable, PBPs and PFPs should have been established in the new districts to identify suitable eucalyptus species and to train farmers in planting procedures. Meanwhile, involvement of “individual” investors facilitated misuse of subsidized credit. The Project called for a forest MIS to be established in DOF, but this did not happen. Instead, the project consultants prepared a project monitoring system that was not capable of covering the detailed implementation aspects of the Project. Overall, the performance of the Project is assessed as unsuccessful.34

34 This PCR is part of a sample of PCRs independently reviewed by the Operations Evaluation Department. The

review has validated the methodology used and the rating given.

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B. Lessons Learned

45. The project preparation was inadequate in assessing the institutional capacities of the DOF/PCU, PPCUs, DAFOs and APB. ADTAs provided significant training to APB, PCU, and PPCU staff, but these training initiatives fell short of building sufficient capacity. APB was a relatively new institution with extremely limited capacity in commercial and agricultural banking.35 Industrial tree plantation was a new area for DOF. A crash course in plantation establishment provided by project and ADTA consultants did not result in an effective plantation extension system. Capacity building is a gradual process that should be carefully sequenced and planned. Creating capable institutions mid-project is unrealistic. 46. The Project demonstrated the viability of establishing well-managed plantations and cultivating tree crops (mainly eucalyptus) across wide areas of Lao PDR. Farmers and individual investors now understand the potential of tree plantations in the country. However, the Government and ADB should have done more to foster and support existing private sector initiatives. Plantation crop production is a business that requires efficient management, scientific know-how (seedling selection, soil- and water-sufficiency assessment, pest control, etc.), significant capital, marketing savvy, and long-term investment prospects. Therefore, it does not easily lend itself to small- and medium-scale farmers looking to learn the business. But there appears to be some room in the industry for advanced small- and medium-scale farmers who link their activities to the activities of those market leaders. Such farmers should seek close integration (in areas such as management, capital, technical guidance, physical inputs, and marketing) with the larger private enterprises. A logical sequence is: (i) larger, corporate-run plantations are established; (ii) at the same time, the market for plantation trees is developed; and (iii) small- and medium-scale plantations are established and linked to the larger enterprises. 47. ADB should have committed more resources to supervise a project designed to introduce a totally new concept in a country that lacked implementing agencies with sufficient capacity. It was critically important to improve the capacity of project staff about the STP, and environmental and gender issues at the early stage of project implementation. The poorly planned midproject expansion undermined the development of focused, core areas identified in the project preparation. The expansion also overextended APB, PPCU, and DAFO staff. The distant locations of some of the new project sites also added to the challenge of marketing. 48. Targeted and subsidized credit led to abuse and inefficiency, setting back the country's rural credit sector and credit culture. The gross loss and delinquencies significantly damaged APB's portfolio. Farmers were led to believe that impossible gains were attainable. This left most planters heavily in debt, with little chance of paying off their loans. Less costly approaches that would have been less damaging to APB and to the rural financial sector could have been considered. One possible option: providing guidance and grants for inputs (seedlings and fertilizer) directly to participating small farmers in exchange for land preparation and a commitment to maintain the land. 49. The Project gambled that a viable market could be created midproject and sustained. While such gambles are a natural part of private-sector entrepreneurship, they are simply too risky for major public sector investments. More work should have been done in the project-

35 In belated recognition of this, APB has been undergoing an ADB cluster TA to build capacity since 2002. APB is

still in the preliminary learning phase.

15

preparation stage to clarify the policy issues and simplify regulations on cutting, transporting, and marketing the final wood product. 50. Provision of ADB Asian Development Fund (ADF) resources and public-sector subsidized loans to favored large private-sector enterprises raises questions about governance and validity. If the plantation sector is economically viable in Lao PDR, then private enterprises should be willing and able to borrow at market interest rates. As it stands, many of the large enterprises are not current with their debt payments on subloans—despite (or perhaps because of) the favorable loan conditions granted to them. C. Recommendations

1. Project Related

51. If NAFES, the Provincial Agriculture and Forest Extension Service (PAFES) and the DAFOs are to be involved in future extension, the following measures are vital:

(i) suitable sites for tree plantations should be identified in line with proper site-selection and site species-matching criteria;

(ii) demonstration sites should be established, and farmers targeted, in cluster core areas located within reach of regularly visiting PAFES and DAFO staff; targeted farms should also have access to cost-effective marketing channels (i.e., they should be located near large firms/enterprises or raw-material buying centers);

(iii) weeding and tending should be carried out diligently throughout the crop cycle, especially in the first 2–3 years;

(iv) preventative measures should be taken to prevent termite losses; and (v) proper coppicing techniques and successive crop maintenance should be

employed. 52. APB’s efforts to enforce plantation client repayment should be redoubled and implementation of its loan workout plan should be accelerated. APB should make loan-loss provisions according to Central Bank accounting standards for all nonperforming loans, including writing off these loans. Consistent with sound commercial banking practices, it would be a positive step if the Government recapitalizes APB for losses caused by this policy lending.

53. Future Monitoring. Since capacity-building efforts came up short, the Government should consider outsourcing preparation of the more detailed environmental reports and documentation to third parties. Another option would be for DOF to cede environmental monitoring responsibility to others with more expertise, such as the Science, Technology and Environment Agency. Provincial environmental offices still have insufficient capacity. The environmental compliance requirements for plantations should match the scale and magnitude of operations. The requirements for small farmer-plantations should be less rigorous than the requirements for large plantations. 54. Covenants. Most of covenants were relevant and should be maintained. One exception is the covenant requiring selected degraded land to have a slope of less than 15%, which proved impractical (on some plantations trees were planted on slopes steeper than 15%). However, mechanical land clearing should be avoided on steeper slopes to minimize soil erosion.

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55. Further Action and Post-evaluation. DOF needs to develop a follow-up action plan to support project farmers and individuals whose plantations potentially retain some value. First, DOF should carry out a complete survey of project plantations. GIS mapping should be done by the Ministry of Agriculture and Forestry by October 2005. Based on this survey result, DOF should work out a follow-up action plan for each district by February 2006 and make the budget request to MOF for FY2006-2007. DOF should attempt to make the GIS information available to prospective buyers to help link farmers with markets. The project should be considered for post-evaluation in 2007. 56. Additional Assistance. The follow-on project being processed by ADB should reflect the lessons learned from the Project. Since there are still positive prospects for the development of industrial tree plantations, it is recommended that the Government continue its support, but its approach should focus on private sector-driven development. Therefore, the role of the Government should be mainly to improve the investment environment, to provide a supportive policy and regulatory framework, and to facilitate linkages between farmers and established large enterprises.

2. General

57. Lao PDR's tree plantation sector does have a chance to be economically viable. However, the recommended approach to developing the sector involves fostering a supportive environment for private sector development and foreign investments—rather than attempting to lead or push the sector along. The focus should be on creating an enabling institutional, regulatory, and business environment for responsible and reputable foreign direct investment in the sector—both in plantations and processing. The Government should look for ways to facilitate the growth of linkages between large enterprises and surrounding small- to medium-scale farmers. It is through these linkages, rather than through targeted, subsidized APB loans and mass public extension, that small- to medium-scale plantation growth should be pursued. Before investing public funds in private-sector activities, market catchment for plantation outputs should be identified and assessed, and clear market access strategies should be identified.36 Harmonized practices should be established at the provincial and district levels, and bureaucratic impediments to effective tree production, marketing, and export should be minimized. 58. Effective project preparation requires thorough institutional assessment of the key players. Gross shortcomings on the part of these players are not easily fixed by consultants. If institutional capacities are found to be insufficient, the recommended approach is to initiate capacity building—not only of government staff, but also of all relevant stakeholders. At the same time, planning and investment should be undertaken in accordance with a carefully sequenced implementation plan. When institutional capacity is completely lacking, it is a mistake to think that these deficiencies can be overcome during project implementation. 59. The introduction of initiatives such as industrial tree plantation in a developing country with limited previous experience requires major institutional and technical input. To successfully implement such a project, ADB should commit to closer monitoring of the project. Review missions should be sent at least twice a year, and additional special project administration missions should be deployed if required.

36 This Project was based on the premise that the market for plantation products would develop over the course of

the Project. While the amount of buyers grew modestly during the Project, there remains a need for a large-scale producer-processor to anchor the domestic market and provide a visible presence that inspires confidence in local planters.

Appendix 1 17

ACHIEVED PROJECT SCOPE AND TARGETS OF COMPONENTS

Item Appraised Actual %

A. Project Scope 1. Districts 2. Provinces

8 4

32 7

400 175

B. Project Components

C. Part A: Credit Plantations(ha) 1. By Farmers 2. By Commercial Enterprises

9,000 2,000 7,000

12,900a

9,900a

3,000a

143 495

43 D. Part B: Pilot Plantations (ha) 1. Pilot Block (ha) 2. Pilot Farm (ha)

560 240 320

631 229 395

113

95 123

E. Part C: Access Roads 1. Improvement (km) 2. Maintenance (km)

60 60

55.3 55.3

92 92

F. Part D: Project Management Support 1. Project Staff (no.) 2. Community Organizers (p-m) 3. Project Offices (no.)

35 960

3

54 0b 5

154 0

166 G. Office and Farm Equipment 1. Photocopier (no.) 2. Computer/Printer (no.) 3. Tractor 4. Office and Field Equipment

4 4 4 -

1 6 3

16c

25 150

75 -

H. Vehicles 1. Pickup 2. Motorcycles

4 18

8 44

200 244

I. Consulting Services 1. International (p-m) 2. Domestic (p-m)

43 36

43 51

100 142

J. Training 1. International (no.) 2. Domestic (person-days)

12 3,000

66 4,500

550 150

ha = hectare, km = kilometer, no. = number, p-m = person month. a These figures are based on the Department of Forestry’s final report. As explained in the main text, there are

discrepancies between these “actual” figures and actual planted areas measured by APB. b Community Organizers were dropped in favor of regular Department of Forestry staff. c Include typewriters (6), scanner (1), fax modem (3), GPS (3), and drawing board digitizer (3). Source(s): DOF, 2003, Project Completion Report, Vientiane. PCR Mission., January 2005

Appendix 2 18

AREA MEASUREMENT SURVEYS A. Introduction 1. During the Project, allegations began to surface of misuse of credit funds. In response, the Agriculture Promotion Bank (APB) instituted its own investigative survey. There was no mention of this in the Executing Agency Project Completion Report. Upon learning of the APB survey, the Project Completion Review (PCR) Mission requested results, which took some time to produce and were available only at the end of the PCR Mission in-country. Not knowing if the information would be provided and in what form, the PCR Mission launched a small PCR Area Measurement Survey, under the direction of the local forestry consultant. The purpose was to gauge the order of magnitude of discrepancies between the reported area, for which loans were obtained, and the actual area planted. B. APB Area Measurement Surveys 2. APB instituted its own investigative survey during the Project. It focused on the "individual" class of borrowers, for whom lending had been opened late in the Project.1 The survey was therefore targeted towards borrowers for whom there was some suspicion. The sample cannot necessarily be considered representative for all borrowers under the Project. 3. The APB team employed global positioning system (GPS) units to generate computer-assisted maps of borrowers' fields and more accurate measurements than had been possible before. Previously, measurements with tapes and hand drawings had been employed; these were both more expensive and less accurate. Prior to the end of the Asian Development Bank (ADB) PCR Mission, APB provided results of their measurement surveys. Below is a summary.

Table A2.1: Summary of APB-Measured Plantation Areas

Percent of Area (ha) Loan Amount Measured Loan Actual (KN million) Province Plantations Approved Measured Approved Disbursed A. Borikhamxay 1. Pakxane 29 374 133 1,667 1,150 2. Pakkading 12 140 133 628 530 B. Savannakhet 19 551 199 2,733 2,437 C. Vientiane 6 279 116 944 882 D. Champasack 6 156 85 811 810 E. Khammuane 4 325 229 1,879 1,449 Total 76 1,825 895 8,662 7,258 APB = Agriculture Promotion Bank, ha = hectare; KN = kip Source: PCR Mission, January 2005. 4. The APB results show that measurement surveys were undertaken in four provinces (with two districts specified for Borikhamxay Province). For the 76 plantations, a loan amount of KN8.7 billion for 1,825 ha was approved. Subsequently, KN7.3 billion was eventually disbursed.

1 The borrowing class of "individuals" consisted of investors, entrepreneurs, and better-off farmers who had a better

asset base than small farmers. Creating this borrowing class allowed APB to disburse to a group between the small farmers, whose credit demands were relatively limited, and the enterprises, which, up until late in the Project, had not been successful in obtaining loans to finance their activities.

Appendix 2 19

The disbursed loan amount was often reportedly less than the approved amount, because planters often did not cultivate as much as initially intended, according to APB. 5. The area on which disbursement is based is recorded as the "implemented" area. The shortcoming of the data set provided by APB was that it did not report the important implemented area (on which disbursement is based), only the "approved" area. If the implemented area were proportional to the approved currency amounts, then the likely implemented area would be about 1,530 ha. The actual measured area by the APB GPS survey was 895 ha, or only 59% of the estimated implemented area (the area against which disbursement was made). This would imply over-disbursement on an order of magnitude of 40%. C. PCR Area Measurement Surveys 1. Introduction 6. The ADB PCR Area Measurement Survey was initiated to assess (i) the existence and degree of over-disbursement for the Project, outlined by class of borrower; and (ii) the degree of agreement with the APB area survey results. Because of time and resource constraints, the effort was focused in Vientiane Province and the sample size was limited to 10. 2. Approach 7. The PCR Area Measurement Survey was conducted under the direction of the domestic forestry consultant in coordination with Forestry Faculty (Dongdok) and assistants. The first step was to define the sample respondents. The APB provincial branch lending list was used for the sample frame. While the survey was designed to draw sample respondents from all three borrower classes (farmers, individuals, and enterprises), the actual survey captured only farmers and individuals.2 The second major design intent of the survey was to verify the validity of the results of the APB investigative survey. The PCR area measurement surveyors employed handheld GPS measuring devices and walked the boundaries of selected eucalyptus plantations financed by the Project. Information was then retrieved on boundary coordinates so that measurements and maps could be formulated. 3. Findings 8. The table below provides results of the PCR Area Measurement Survey, first, in terms of the GPS-measured area against the APB implemented area (against which disbursement was made).

2 For reasons unknown, but likely due to confusion in translation and the rapidity with which the survey was

conducted within the PCR Mission.

Appendix 2 20

Table A2.2: Loan-Implemented Area vs. PCR Measured Area (Vientiane Province)

Area Approved Area Implemented Area Measured Remark No Name PCR Survey

1 Respondent 1 20 20.0 18.6 individual 2 Respondent 2 2 2.0 0.9 farmer 3 Respondent 3 12 12.0 2.2 individual 4 Respondent 4 7 7.0 4.9 individual 5 Respondent 5 30 30.0 30.0 individual 6 Respondent 6 2 1.5 1.4 farmer 7 Respondent 7 2 1.4 0.3 farmer 8 Respondent 8 20 15.0 6.7 individual 9 Respondent 9 2 1.4 0.3 farmer

10 Respondent 10 2 1.4 1.1 farmer Total 99 91.7 66.3 1 all (n=10) PCR measured / implemented: 72% 2 farmer (n=5) PCR measured / implemented: 52% 3 individuals (n=5) PCR measured / implemented: 74%

PCR = project completion report, Sources: APB ITPP statistics on approved and implemented areas, 2003; PCR measurement survey of Vientiane Province, (January 2004). 9. From the limited sample of 10 respondent field measurements, the survey indicates that actual planted area averaged 72% of the reported implemented area against which APB disbursement was made. The indicated level of over-disbursement appears less than that of the APB investigative survey. In terms of differences by borrower class, the sample size is reduced further to 5 for farmers and 5 for individuals, and therefore, the results are even less statistically significant. The farmers appeared to have planted less against the disbursement areas than the individuals (52% for farmers, and 74% for individuals). 10. Table A2.3 shows the degree to which the APB investigative survey and PCR Area Measurement Survey agree.

Table A2.3: APB and PCR Measured Areas (Vientiane Province)

No. Name APB Implemented

Area APB Survey

Area PCR Survey Area Remark (ha) (ha) (ha) 1 Respondent 1 20.0 22.4 18.6 individual 2 Respondent 3 12.0 12.0 2.2 individual 3 Respondent 5 30.0 30.0 30.3 individual 4 Respondent 6 1.5 2.0 1.4 group 5 Respondent 7 1.4 0.7 0.3 group 6 Respondent 8 15.0 9.3 6.7 individual 7 Respondent 9 1.4 1.2 0.3 group 8 Respondent 10 1.4 0.6 1.1 group

Total 82.7 78.2 60.8 Measured surveys / APB Implemented: 95% 74%

APB = Agricultural Promotion Bank, PCR = project completion report Source: APB ITPP statistics on approved and implemented areas, 2003; APB measurement survey; PCR measurement survey, January 2004.

Appendix 2 21

11. A comparison of the APB investigative survey with the PCR Area Measurement Survey shows that the actual planted area was 95% of the "implemented" area (amount on which disbursal was based) in the APB survey. This would seem to indicate that the APB area assessment was more generous than the PCR survey; as a result, over-disbursal was found to be greater under the PCR survey than under the APB's own investigative survey. However, it must again be emphasized that the sample size was too small to make any statistically significant judgments. The results certainly suggest that further investigation is warranted, but they are not conclusive in themselves.

Appendix 3 22

ISSUES AND CHALLENGES IN TREE PLANTATION

A. Low Yields

1. The yields of project plantations were generally low, with the exception of a few farmer-run eucalyptus pilot farm plantations (PFPs) in Savannakhet Province (yields of most project plantations are estimated to be far below the phase II project preparatory technical assistance (PPTA) suggested break-even yields of maximum mean annual increment (MAI) 16 m3/ha/yr). This is attributable to the following:

(i) delayed provision of loans, which resulted in planting seedlings in latter part of the rainy season;

(ii) lack of timely application of fertilizer in the first year; (iii) poor maintenance (e.g. weeding) was the rule rather than the exception; (iv) insufficient training, guidance and project extension/outreach, which was due to

insufficient numbers of provincial project coordination unit (PPCU) staff members assigned to the Project;

(v) questionable farmer motivation to grow trees as a crop; this led many farmers to skip fertilizer application;

(vi) budget limitations caused by the Agriculture Promotion Bank's (APB) use of single standard rate irrespective of variations in land preparation needs and location; this resulted in low tilling and poor site preparation;

(vii) misapplication of the main criteria (soil type, rainfall, surface soil depth, access to the main road, land slope, termite and weed threats, etc.); this may have resulted in unsuitable lands being planted;

(viii) mixed quality of seedlings, which resulted in low eucalyptus survival rates in Saravane province (Acacia should have been tested here);

(ix) widespread termite losses, which was due to a lack of guidance and financial support for carrying out pre-planting soil treatment (the Nam Souang Silviculture Research Center was not aware of this problem because there was a lack of communication between extension staff and the research center.); and

(x) irregular spacing of seedlings, which made it difficult to use mechanical means to control weeds.

B. Extension Weaknesses

2. Extension services provided by the PPCUs and district agriculture and forestry offices (DAFOs) were weak due high staff turnover and a lack of training from project consultants. The following elements further hindered extension activities:

(i) scattered planting areas and diffusion of extension outreach; (ii) limited follow-up guidance after initial contacts; (iii) training of project staff taking place during the Project, as opposed to prior to

project launch; (iv) no pilot block plantations (PBPs) or pilot farm plantations (PFPs) in the added

project districts; (v) limited use of global positioning system (GPS) equipment despite training under

the Project; and (vi) limited development of databases and monitoring systems to track plantations.

Appendix 3 23

C. Credit Shortcomings

3. APB’s credit operations under the Project faced many problems, most of them attributable to APB’s lack of experience in administering long-term loans and poor coordination between APB and Department of Forestry. The following problems occurred:

(i) frequent credit delays were reported (although officials claimed such problems were eliminated after the first year of credit implementation);

(ii) delays in delivery of seedlings occurred (mainly in the first year); (iii) currency challenges (i.e. amounts approved one year were worth less in the

succeeding year because of the deflating kip); (iv) APB and farmers lacked experience with long-term plantation loans; (v) farmers generally lacked experience with formal credit; (vi) the subsidized loans drew speculators and opportunistic investors; (vii) poor loan-recovery and interest-recovery rates (most interest payments

apparently have not been collected by APB, which claims that farmers will repay interest upon harvest);

(viii) insufficient assessment of client repayment capability/repayment willingness; and (ix) insufficient enforcement of recovery of late interest payments.

D. Limited APB Capacity to Deliver Forestry Loan

4. The following are the constraints of APB which the Project Completion Review (PCR) Mission identified: .

(i) limited staff, training, and outreach (although APB was supported by project and TA consultants, it required enormous strengthening to carry out its tasks);

(ii) dubious capacity to assess/counsel borrowers from the technical side (originally the role of the PPCUs), although some early training on forestry plantation was provided under the Project;

(iii) limited ability to accurately measure planted areas and hold borrowers accountable; and

(iv) limited coordination, other than an opening meeting with the project coordination unit (PCU) and the PPCUs, in delivering extension and credit packages.

E. Inputs Shortcomings

5. Lack of proper inputs resulted in poor seedling quality, plantation survival and yields.

(i) seedling quality reportedly decreased with each successive acquisition; and (ii) land preparation was generally inadequate, partly because APB did not provide

funds for maintenance (e.g. no tilling was done on most farmer-plantations and individual-plantations because of funding constraints; likewise, no mounds were built in drainage-poor areas).

F. Marketing Challenges

6. The PCR Mission identified the following marketing challenges:

(i) the market appears to be developing somewhat (several buying centers now exist in Chaiyo AA – Petchaburi and Phoenix pulp plant in Khon Kaen);

Appendix 3 24

(ii) scattered, distant, and poor production areas remain outside the marketing chain; (iii) the current price of eucalyptus wood supports survival of only the best-run

plantations; and (iv) the database of plantation locations and growth stages is deficient, making it

difficult to attract buyers, which need this information to make informed purchases (proper location maps are also required for promotion and planned provision of logs to buyers).

Appendix 4 25

SUMMARY OF PROJECT COST ($’000)

Appraisal Actual

Item Total Project

Cost

ADB-Financed

Govt-Financed

Sub borrowers

Total Project

Cost

ADB-Financed

Govt- Financed

Sub borrowers

A. Base Cost 1. Credit Facility for Private Tree

Plantations

a. Credit Line for Farmer-Plantations

1,372 1,097 0 274 4,990 3,216 395 1,378

b. Credit Line for Enterprise Plantations

6,048 4,838 0 1,210 6,099 3,931 483 1,685

2. Establishment of Pilot Plantations a. Plantation Establishment 165 115 49 0 706 193 513 0 b. Plantation Maintenance 85 60 26 0 278 6 272 0 3. Improvement of Plantation Access

Roads

a. Road Improvement 1,200 780 420 0 884 812 72 0 b. Road Maintenance 217 141 76 0 13 0 13 0 4. Project Management Support a. Support Services 220 138 82 0 422 161 261 0 b. Vehicles and Equipment 311 288 23 0 433 360 73 0 c. Incremental Staff 608 532 75 0 240 1 239 0 d. Consulting Services 692 692 0 0 972 972 0 0 e. Imprest Funds 0 Subtotal (A) 10,917 8,682 751 1,484 15,037 9,652 2,322 3,063 B. Contingencies Physical Contingencies 350 275 75 0 Price Contingencies 2,402 1,867 96 440 Subtotal (B) 2,752 2,141 171 440 C. Service Charge During

Implementation 377 377 0 0 364 364

Total 14,046 11,200 922 1,924 15,401 10,016 2,322 3,063

Source: PCR mission, January 2005.

26

Appendix 5

PROJECT IMPLEMENTATION SCHEDULE (Planned and Actual)

Appendix 6 27

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference

in Loan Agreement

Status of Compliance

A. Project Coordination 1. Establishment of: (a) Project Coordination Unit (PCU) in Vientiane Prefecture, to be headed by a Project Director; and (b) Provincial Coordination Units (PPCUs) in Phonehong (Vientiane Province), Pakxane (Borikhamxay Province) and Savannakhet (Savannakhet Province), each PPCU to be headed by a full-time Project Manager.

Sched. 6, para. 1

Complied with. PCU established in September 1994. PPCUs established in 1995 in Vientiane municipality, Vientiane province, Borikhamxay and Savannakhet; in 1998 in Champasack and Saravane; and in Khammouane in 2000.

2. Establishment of a National Project Coordination Committee (NPCC), to be chaired by the Vice Minister (Forestry) of MAF.

Sched. 6, para. 2

Complied with. Project steering committee established in 1995, chaired by the Minister of Agriculture and Forestry (MAF); in 1996, chaired by Governor of Bank of Lao PDR (BOL)until project closing.

B. Project Implementation Part A: Credit Facility 3. (a) Execution of the BOL Administration Agreement concerning the supervision and monitoring of Part A of the Project by BOL. BOL shall review the performance of APB on a quarterly and annual basis, and shall submit a report on the findings of each such review to ADB through the PCU. (b) Appointment of a senior officer from the Credit Department, to be responsible for supervising and monitoring APB’s activities under Part A of the Project and for coordination with the PCU. (c) Assessment of the training needs of the credit staff of BOL and APB and preparation of an in-house training program for such staff.

Sched. 6, para. 3(a) Sched. 6, para. 3(b) Sched. 6, para. 3(c)

(a) Not complied with. Performance reviews were not undertaken and reports were not produced. (b) Partly complied with. The Credit Department became the Operations Department. There was a lack of strong leadership at APB. (c) Complied with. Advisory Technical Assistance (ADTA) consultants carried out the assessment

4. APB shall make subloans to eligible sub-borrowers in accordance with its normal lending operations and shall consult with the PCU regarding the technical assessment of subloan applications by sub-borrowers; APB shall be responsible for subloan appraisal, approval, disbursement, supervision and collection. The subloans shall be disbursed in local currency.

Sched. 6, para. 4

Partly complied with. Actual consultation was weak. A socio-technical profile (STP) was passed, but the validity of paper approval is doubtful. Subloan collection is extremely low. APB issued instruction to collect in 1999, but local compliance is very weak.

5. (a) The terms of subloans to private commercial enterprises shall include: (i) a repayment period of not more than 12 years, including a grace period of 6 years; (ii) interest at the prevailing local interest rate for long-term agricultural loans, and (iii) a contribution by the commercial enterprise of at least 20 per cent of the total subproject cost from its own funds.

Sched. 6, para. 5(a)

(a) Partly complied with. Private-sector participation was abandoned in 1997 but revived in early 1999.

28 Appendix 6

Covenant Reference

in Loan Agreement


(b) The subloan agreements also require that such enterprises (i) have made satisfactory arrangements for the sale of the wood to be produced, (ii) will adopt an acceptable mosaic structure for the tree plantations concerned, and (iii) will assist local farmers in the establishment of tree plantations on unstocked and degraded land having an aggregate area equal to at least 30 per cent of the area being developed by the commercial enterprise. Such enterprises shall enter into agreements with local farmers to (i) provide the necessary technical advice and supervision, (ii) guarantee the purchase of harvested trees at a specified price, and (iii) provide inputs in kind, such as seedlings, fertilizers, pesticides, and fencing material, and recover the cost of such inputs at the time the trees are harvested.

Sched. 6, para. 5(b)

(b) Not complied with. (i) Marketing arrangements were not included in the subloan agreements. (ii) The use of mosaic structures was not strictly enforced on private lands. (iii) The 30% provision was not included in the subloan agreements. No enterprises entered into such agreements with local farms.

6. (a) The terms of subloans to farmers shall include: (i) a repayment period of 8 years, including a grace period of 6 years; (ii) interest at the prevailing local interest rate for long-term agricultural loans; (iii) 40 per cent of the interest on the subloan shall be deferred during the grace period, and paid, together with the principal, in the seventh and eighth years; and (iv) a contribution by the farmer of the labor required for establishing the tree plantation. (b) A written agreement between the farmer and a commercial enterprise, regarding the provision of technical advice and the purchase of harvested trees by such enterprise at a specified price, shall be a necessary requirement for the credit application by the farmer.

Sched. 6, para. 6(a)

(a) Partly complied with. (iii) APB set credit terms to capture 60% of interest during grace period. (iv) farmers provided their labor free of charge. (b) Not complied with. No written agreements between farms and commercial enterprises were made.

7. Intercropping activities on tree plantations to be established by farmers participating in the Project shall also be eligible for subloans, provided that such intercropping shall be designed and financed in such a way that it will not adversely affect the commercial viability of the tree plantation concerned.

Sched.6, para. 7

Not complied with. APB judged that farmers could cover intercropping costs from the plantation loan proceeds (estimated at 10–15%).

8. All funds derived from subloan repayments shall be used by APB to provide new loans for industrial tree plantations, subject to the servicing of APB’s repayment obligations under the SLA.

Sched.6, para. 8

Not complied with. Funds captured from illicit borrowers were re-lent. However, recovery of funds was too poor even to cover repayments by ADB to BoL (i.e., there were no excess funds for relending to farmers)

Part B: Pilot Plantations 9. The PCU shall be responsible for establishing one pilot block plantation (PBP) in each of the eight districts in the Project area. The PCU shall (i) ensure that the PBPs are established in a technically, environmentally and commercially sound manner; (ii) establish criteria for the selection of PBP sites and examine the suitability of proposed sites, including an assessment of their

Sched. 6, para. 9

Partly complied with. PBPs started in 1995 and completed in 1997. However, no PBPs for expansion areas. (i) Complied with through the STP. (ii) The STP was used to assess criteria for site selection.

Appendix 6 29

Covenant Reference

in Loan Agreement


environmental sensitivity (in terms of such factors as soil erosion, watershed protection and wildlife); (iii) monitor land lease arrangements and ensure that village communities are involved in the selection of sites where community land is involved; (iv) incorporate research and development trials in the design of PBPs in cooperation with Nam Souang Silviculture Research Center; (v) undertake detailed site-specific planning of each PBP, including mosaic structure with corridors of indigenous vegetation; (vi) select appropriate plantation establishment techniques and tree species for each PBP and ensure that the seedling materials used are of good quality; (vii) prepare the necessary tender documents for the establishment of PBPs; (viii) select and supervise contractors to ensure the timely establishment of the PBPs and their proper management until the trees reach commercial maturity or the PBPs are sold to the private sector; (ix) negotiate contracts of sale with end users of plantation grown wood before the establishment of the PBPs; and (x) design and implement extension programs to enhance awareness among the public and farming community of the role and importance of commercial tree growing.

(iii) Complied with through benefit monitoring and evaluation (BME), but the social conflict in Khammouane was not reported. (iv) Completed in 1996–1997. (v) Not complied with, however PCU reported that they followed the modified recommendations of the consultant. (vi) Complied with (vii) Complied with (viii) Partly complied with. Contractors for establishment selected and supervised; proper management not complied with at some PBP sites. (ix) Not complied (not realistic) (x) Complied with.

10. The PCU shall be responsible for selecting approximately 40 pilot farm plantation (PFP) sites, in consultation with the local village committees, in the vicinity of each PBP. The PCU shall enter into an agreement with each of the farmers involved in the establishment of a PFP, which shall provide that (i) the PCU shall be responsible for the provision of seedlings from the provincial forestry nurseries and all necessary technical support in connection with the planning, establishment and management of the PFP and marketing arrangements, and (ii) the farmer shall be responsible for all operation and maintenance costs and other expenses.

Sched. 6, para. 10

Partly complied with. The establishment of PFPs began in 1995 and was completed in 1997. However PFPs were not established in the project-expansion areas. (i) Complied with. (ii) Not complied with. Some PFPs lack appropriate maintenance.

11. The PCU shall organize programs to promote public awareness of industrial tree plantations through the public media and other means. In addition, the PCU shall organize seminars and workshops in Vientiane Prefecture and Savannakhet Province at least once a year on the various technical, environmental and commercial aspects of industrial tree plantations. The first such workshop shall be held in Vientiane Prefecture at the commencement of Project implementation.

Sched. 6, para. 11

Complied with. Workshop program started in December 1996 and completed in 2002.

Part C: Plantation Access Roads 12. To ensure conformity with national standards in road construction, DOF shall enter into an administration agreement with MCTPC concerning the implementation of Part C of the Project. Pursuant to such agreement, MCTPC shall provide guidance on design requirements (including appropriate erosion prevention measures), preparation of tender documents, selection of consultants and contractors, supervision of engineering and road

Sched. 6, para. 12

Complied with. Department of Forestry (DOF)/Ministry of Communication, Transport, Post and Construction (MCTPC) agreement made in 1995. O&M responsibility has been transferred to villages concerned.

30 Appendix 6

Covenant Reference

in Loan Agreement


construction works, and preparation of road maintenance schedules and budget requirements for maintenance. The Borrower shall ensure that such roads do not interfere with natural drainage systems.

Part D: Project Management Support 13. The PCU shall recruit community organizers to assist the forest extension service staff from the PCU and PPCUs in providing extension services to farmers and commercial enterprises participating in the Project. The community organizers shall organize and train farmer groups in basic credit and financial management, silviculture techniques, marketing, primary health care (including malaria prevention and control) and community development. The community organizers shall coordinate with the relevant nongovernment organizations, village committees, and women and youth organizations to ensure that industrial tree plantation activities are integrated with traditional agricultural and livestock management practices.

Sched. 6, para. 13

Not complied with. No community organizers were recruited. Instead, training was provided to PCU, PPCU and district forest services staff to undertake these tasks. There was no coordination with NGOs, nor integration with traditional agricultural and livestock-management practices.

C. Training 14. The Project Director shall prepare a training program for selected operational staff of the PCU, PPCUs and district forest services, and submit such program to the Bank for approval within six months after the effective date. Training shall be provided through (i) in-house training sessions at the PCU and PPCUs, (ii) field training provided at the PBPs and PFPs, and (iii) training courses. Efficient project management techniques, plantation silviculture, and the design and adherence to maintenance schedules shall be the core subjects of such training. Training shall also be provided for community organizers, benefit monitoring and evaluation surveyors and trainers in accordance with a program acceptable to the Bank.

Sched. 6, para. 14

Partly complied with. The training program was detailed in Working Paper No. 2 of TA 2028-LAO. Training was conducted in eight provinces between 1995 and 2002 on the following topics: plantation techniques, seedling production, gender, STP, BME, environmental monitoring, geographic information systems (GIS), PSP, and finance. Training in adherence to maintenance schedules was lacking.

D. Operation and Maintenance 15. The PCU shall be responsible for the operation and maintenance of the PBPs, plantation access roads and vehicles and equipment during Project implementation. After Project implementation, the Plantation Division of DOF shall be responsible for the operation and maintenance of the PBPs and the vehicles and equipment provided under the Project, and MCTPC shall be responsible for the operation and maintenance of the plantation access roads improved under the Project. The Borrower shall ensure that sufficient funds, to be determined on the basis of annual operation and maintenance programs, are allocated in the DOF budget for operation and maintenance of the Project facilities, both during Project implementation and after Project completion, at standards acceptable

Sched. 6, para. 15

Not complied with. Many PBPs have not been maintained because budget allocation since project completion has been insufficient. No operation and maintenance funds have been allocated to DOF since project completion. Operation and maintenance of roads has been turned over to villages.

Appendix 6 31

Covenant Reference

in Loan Agreement


to the Borrower and the Bank. The Borrower shall finance an increasing proportion of such operation and maintenance costs during the Project implementation period, in accordance with a schedule to be agreed between the Borrower and the Bank. E. Benefit Monitoring and Evaluation 16. The Project Director shall submit to the Bank for review and approval (i) proposals for the preparation of detailed socio-technical profiles for each subproject area during the first year of Project implementation, and (ii) a detailed program and reporting format for Project benefit monitoring and evaluation (BME). The PCU shall carry out a mid-term BME review (to be incorporated in the Mid-term Project Implementation Review) and a BME review upon Project completion to assess the impact of the respective Project activities, particularly on the rural communities involved. DOF shall also evaluate the benefits of the Project after its completion in accordance with a schedule and criteria to be agreed on by the Borrower and the Bank. The PCU shall coordinate with the monitoring activities conducted under the Forest Management Information System (FMIS) to be established by the Borrower, particularly with regard to the monitoring and evaluation of the Project’s impact on the environment. The monitoring of physical achievements and the impact of establishing tree plantations shall be assisted by an aerial survey to be conducted towards the end of the Project implementation period.

Sched. 6, para. 16

(i) Partly complied with. Modified STP used. (ii) Complied with. FMIS was not established.

F. Mid-term Project Implementation Review 17. Implementation of the Project shall be reviewed periodically by the Borrower and the Bank. A Mid-term Project Implementation Review shall be undertaken jointly by the Borrower and the Bank in the third year of Project implementation, or such other time as may be considered appropriate. The results of such Mid-term Review, including an evaluation of the progress in relation to the various parts of the Project and the mid-term BME review, shall be discussed by the Borrower and the Bank and strategies shall be revised, if required, to ensure more effective implementation of the Project.

Sched. 6, para. 17

Complied with.

G. Agriculture Promotion Bank 18. In order to ensure that APB adopts prudent operational policies, the Subsidiary Loan Agreement shall provide that APB will (i) maintain a capital adequacy ratio of 8 per cent of weighted risk assets at all times; (ii) adopt a prudent loan loss provision policy acceptable to the Bank; (iii) adhere to an interest rate policy for agriculture and rural credit that will ensure positive real

Sched. 6, para. 18

Not complied with. A fixed interest rate of 7% was applied to all subloans regardless of the type of the borrower; this was much lower than the market interest rate.

32 Appendix 6

Covenant Reference

in Loan Agreement


interest rates and adopt an interest rate structure for the sector, for the long term, that is based on market rates; (iv) charge an adequate interest rate spread on all loans to enable APB to cover its administrative costs; and (v) maintain an adequate number of qualified staff at each of its branches and district offices. In addition, any policy lending operation of the Borrower to be carried out by APB shall be separately accounted for and the Borrower shall compensate APB for any losses incurred from such operations.

Lending for tree plantations was considered policy lending by the Government. Therefore, the Government should compensate APB for losses from such operations.

H. Regulatory Framework for Industrial Tree Plantation 19. The Borrower shall ensure that its legal framework for resource management in the forestry sector, and in particular the proposed Land and Forest Legislation, reflects its policy commitment to industrial tree plantations and that such framework does not in any way encumber the development of the subsector. In particular, the Borrower shall ensure that (i) farmers and commercial enterprises are able to obtain the necessary long-term leases to unstocked and degraded forest land for industrial tree plantations, (ii) sufficient land for PBPs is made available as required in accordance with the Project implementation schedule, and (iii) that the acquisition by any party of community land is undertaken in agreement with the village communities concerned and that such communities are appropriately compensated. Particular attention shall be given to ensure that village communities do not lose their right to use an adequate amount of community land.

Sched. 6, para. 19

Partly complied with. New forestry law passed in 1996. Regulations related specifically to the plantation sector have been drafted and are under consideration by the Government. Land for PBPs available in all areas. (i) Long-term leases not provided to farmers. Instead, land-use permits, which can be renewed if farmers are earnest in their practices, were provided. (ii) and (iii) complied with (however, PBPs not established in project-expansion areas)

I. Other Matters 20. The Borrower shall consult the Bank on any proposed policy reforms in the forestry sector, and in particular on issues relating to the development of industrial tree plantations, policy initiatives, institutional reforms and strengthening, incentive measures for farmers and private commercial enterprises, and any other relevant matters which may affect the implementation of the Project.

Sched. 6, para. 20

Partly complied with. There is a land-use dispute in Khammouane Province resulting from a lack of sufficient consultation with villages. There was no consultation before issuance of Prime Minister Decree No. 186, which resulted in major change of project scope.

21. The Borrower shall (i) cause DOF and BOL (together with APB) to maintain separate accounts for those Parts of the Project for which they are responsible; (ii) have such accounts and related financial statements audited annually; (iii) furnish to the Bank, not later than six months after the end of each related fiscal year, unaudited copies of such accounts and financial statements; and (iv) furnish to the Bank, not later than twelve months after the end of each related fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto, all in the English language.

Section 4.06(b) Complied with. However, submission of documents was often after the due date

22. The Borrower shall furnish to the Bank quarterly reports on the carrying out of the Project and on the

Section 4.07(b) Complied with. Submission of these reports were

Appendix 6 33

Covenant Reference

in Loan Agreement


operation and management of the Project facilities, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and the proposed program of activities and expected progress during the following quarter.

often after the deadline.

23. The Borrower shall prepare and furnish to the Bank, not later than 3 months after physical execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under the Loan Agreement and the accomplishment of the purposes of the Loan

Section 4.07(b) Complied with. DOF PCR submitted to ADB in August 2003.

24. The following measures shall be undertaken to minimize the negative impacts of plantation establishment: · Plantations will be on flat or gently rolling lands (up to 15 percent elevation) where no special measures for erosion control will be necessary. · Plantations will be established only on unoccupied, unstocked and degraded forest lands, excluding areas with historical, archaeological and aesthetic value. · Plantations will have a mosaic structure which will increase biodiversity · Plantations shall have variations of species. Seedlings of indigenous species will be made available to farmers.

RRP, para. 87

Not complied with. Environmental regulations were refined by the project consultant during the project. Planting and mechanical preparation on steep slopes were spotted during the PCR mission. Mosaic structure was not strictly applied. Project did not make indigenous species available to farmers. However, modified environmental guidelines that were better suited to the setting were adopted during the Project. The Executing Agency reportedly followed consultant guidance. Indigenous species reportedly regenerated rapidly.

34 Appendix 7

SUMMARY OF CONSULTING SERVICES

Expertise Total Inputs (person-months) Duration

A. Project Implementation Consultants 1. Foreign Consultants a. Plantation Management/Team Leader 36 Jun 1995–Mar 1998 b. Environmental Specialist 7 Dec 1995–Mar 2003 2. Domestic Consultants a. Plantation Operation Specialist 10 May 1995–Aug 1997 b. Nursery Operation Specialist 10 Jul 1995–May 1997

c. Road Construction and Maintenance Engineers (3) 20 Jul 1995–Apr 1998

Subtotal (A) 83

B. Domestic Consultants for Agriculture Promotion Bank

1. Rural Credit Specialist 6 Mar 2001–Aug 2001 2. Computer Specialist 5 Mar 2001–Jul 2001 Subtotal (B) 11 Total 94

Source: PCR Mission, January 2005..

Appendix 8 35

LIST OF VEHICLES, EQUIPMENT, AND CIVIL WORKS PROCURED FOR THE PROJECT

Item/Description Quantity Agency Mode of Procurement

A. Vehicles 1. 4 Wheel Drive Double Cab 1 DOF/NAFES DP / IS 2. Land Cruiser 2 DOF/NAFES IS 3. Motorcycles 34 DOF/NAFES DP 4. 4Wheel Drive Double Cab 5 APB IS 5. Motorcycles 10 APB DP

B. Equipment 1. Farm tractors 3 DOF/NAFES DP 2. Typewriters 6 DOF/NAFES DP 3. Photocopier 1 DOF/NAFES DP 4. Computers 2 DOF/NAFES DP 5. Printer 1 DOF/NAFES DP 6. Drawing Board Digitizer 3 DOF/NAFES DP 7. Global Positioning System 3 DOF/NAFES DP 8. Computers 4 APB DP 9. Printers 4 APB DP 10. Scanner 1 APB DP 11. Fax Modem 3 APB DP

C. Civil Works–Buildings 1. PPCU–Borikhamxay 1 DOF/NAFES LCB 2. PPCU–Champasack 1 DOF/NAFES LCB 3. PPCU–Saravane 1 DOF/NAFES LCB 4. PPCU–Savannakhet 1 DOF/NAFES LCB 5. PPCU–Vientiane Province 1 DOF/NAFES

D. Civil Works–Access Roads Province 1. Ban Songkhom Mai, Pakxane District Borikhamxay MCTPC LCB 2. Ban Song Khon Mai, Pakxane District Borikhamxay MCTPC LCB 3. Ban Than Ngua, Bolikhanh District Borikhamxay MCTPC LCB 4. Ban Phon Sim, Khanthabouly District Savanakhet MCTPC LCB 5. Ban Phon Savon, Khanthabouly District Savanakhet MCTPC LCB 6. Ban Nakha, Naxaithong District Vientiane MCTPC LCB 7. Ban Phon Tong Vientiane MCTPC LCB 8. Ban Paknguan, Paknum District Vientiane MCTPC LCB 9. Ban Nongkhiet, Paknum District Vientiane MCTPC LCB 10. Ban Muk Koua, Hinherb District Vientiane MCTPC LCB

APB = Agriculture Promotion Bank, DOF = Department of Forestry, DP = direct purchase, LCB = local competitive bidding, MCTPC = Ministry of Communication, Transport, Post & Communication, NAFES = National Agriculture & Forest Extension Service, PPCU = provincial project coordination unit. Source(s): DOF. 2003. Project Completion Report PCR Mission, January 2005..

36 Appendix 9

AGRICULTURE PROMOTION BANK’S ROLE IN THE PROJECT

A. Introduction 1. This section looks at the implementing agency, the Agriculture Promotion Bank (APB): its background and performance under the Project. The analysis points to insufficient APB capacity to take on the Project and its poor performance during implementation. The Project appears to have worsened an already weak institution by burdening it with targeted and subsidized loans for the tree plantation sector. The institution did not have the financial, technical or logistical capability to successfully participate in the Project. While technical assistance (TA)1 was designed to build capacity in APB during the Project, probably no amount of institution building would have been sufficient to attain the desired performance in time for project implementation.2 B. Background and Financial Status of APB3 2. APB was established on 19 June 1993, by decree 92/PM, as a bank that specialized in providing credit to the agricultural sector. At the time of the project launch, it was an infant institution. It was formed from agricultural portfolios divested from state-owned commercial banks. An advisory TA, Institutional Support to APB, was approved to assist with capacity building during the Project. 3. Later in 2000, and toward the end of the Project, Asian Development Bank (ADB) TA cluster 3413-LAO Rural Finance Development4 was independently formulated to address weaknesses in the rural finance sector, including weakness recognized in APB. The TA included diagnostic studies conducted in 2002 under subproject 2, which in turn led to a restructuring plan endorsed by the Ministry of Finance on 22 Jan 2003. 4. APB has a head office in Vientiane and has some 17 provincial branches, 1 municipal (Vientiane) branch, and 55 sub-service units in 55 of the country's 141 districts; it has 90 employees in the head office and 570 employees in the branches. The majority of its loans are issued at subsidized rates. One of APB's major weaknesses is that it is too flexible on loan repayment. Terms are often decided by the borrower, who prefers to delay repayment as long as possible, leading to large amounts of unserviceable debt due at the end of the loan period. This key finding of the TA 3413 analysis can be said to be typical for loans under the Project. 5. In a review of 2002 performance (under TA 41355), APB was found noncompliant with Central Bank regulations on capital adequacy, reserves, lending ratios, loan classification, loss provisioning, and reporting.

1 ADB. 1993. Technical Assistance to Lao PDR for Institutional Support to Agricultural Promotion Bank. Manila.

(TA2029, approved on 22 December 1993 for $450,000. 2 Since 2002, APB has been undergoing capacity building through ADB TA cluster and preparing for a program loan

to address gross shortcomings. The assistance is cited below in footnotes 4 and 5. 3 Drawn largely from (i) the Governance Agreement (draft), Appendix F: APB Policy Lending Phase-Out Plan, June

2004, prepared under TA 4135-LAO and (ii) Supplementary Appendix B: APB Financial Performance Review, 5 July 2004, from the draft RRP for the Rural Financial Sector Development Project.

4 ADB. 2000. Technical Assistance to Lao PDR for the Rural Finance Development (TA Cluster). Manila. (TA 3413, approved on 9 March 2000 for $2.02 million.

5 ADB. 2003. Technical Assistance to Lao PDR for Rural Finance Development. Manila. (TA4135, approved on 2 July 2003 for $150,000.

Appendix 9 37

6. An independent audit was undertaken in 2002 according to international financial reporting standards (IFRS) under subproject 2 of the ADB TA cluster 3413-LAO. Moreover, under subproject 5 of the TA cluster, and under TA 4135, a complete portfolio review and financial analysis of APB as of December 2003 was completed. APB's financial performance and health were found to be significantly worse than reported in APB's own financial statements (which showed a reported loss of KN17.5 billion in 2003, and negative equity of KN23.2 billion). After making adjustments, the analysis assessed 2003 loss at KN79.9 billion and negative equity at KN85.2 billion. Nonperforming loans (loans that are in arrears) were adjusted to KN108.4 billion (46% of gross loans), significantly up from APB's own reported KN32.6 billion (13.8% of gross loans). 7. In 2002, APB adopted a new corporate vision to operate as a market-oriented and financially self-sustainable rural finance institution. The 2002 preparation of the APB Restructuring Plan provided a framework for the systematic work-out of non-performing loans, the removal of subsidies, liberalization of interest rates, restructuring of funding sources, management autonomy, end of directed lending, upgrade of ICT systems, and progressive recapitalization based on performance. The plan provided for substantial institution building. 8. In an analysis of APB undertaken under TA 3413 (subproject 5), APB's portfolio was segmented by funding source: a) international funding institutions, b) Bank of Lao PDR (BoL), and c) other sources of policy lending (other ministries and provincial governments). The Project was responsible for 48% by number and 45% by value of policy lending as of 31 Dec 2003 (policy lending accounts for about half of all APB loans). Lending under the Project was about KN58 billion. 9. Of the loans, 87% were classified as nonperforming loans, including 82% that were classified as "loss" (loans with repayments more than 360 days overdue). Table A9.1 presents the classification of the loans made by APB under the Project. The ADB-financed portion of the APB total loan portfolio was 25% (KN58 billion of an APB total loan portfolio of KN235 billion) as of 31 December 2003.

Table A9.1: Classification of the Project Segment of the APB Portfolio (31 December 2003)

Classification Criteria Number

of Loans Principal Balance

Onlent (KN)

Percentage by Number

Percentage by Amount

Pass No Overdues 89 3,908,190,040 13.38 6.73 Special Mention Overdues up to

90 days 28 3,642,964,450 4.21 6.27

Substandard Overdues >90<180 days

20 1,190,062,800 3.01 2.05

Doubtful Overdues >180< 360 days

70 1,644,790,350 10.53 2.83

Loss Overdues > 360 days

458 47,703,992,182 68.87 82.12

Total 665 58,089,999,822 100.00 100.00 Source: Governance Agreement (draft), Appendix F: APB Policy Lending Phase-Out Plan, June 2004, prepared

under TA 4135-LAO.

38 Appendix 9

C. APB Input to the Project Completion Mission 1. General 10. Data requests for the Project Completion Review (PCR) Mission were met with limited success. APB was able to provide their standard tables and format in Lao, but had limited ability to recast data and summarize in forms useful for Mission analysis and interpretation. The table below provides a summary of the credit disbursed by APB during the Project.

Table A9.2: Project Credit Summary

Administrative Area No. of House- holdsa

Individuals Enterprises Total Number of Loans

Total Area

Planted

Amount of Loans

(KN million)

Vientiane Municipality 17 46 6 69 5,402 39,108

Vientiane Province 208 33 0 241 1,159 2,668

Borikhamxay 729 50 1 780 2,359 5,987

Khammoun 0 1 3 4 245 1,439

Savannakhet 565 24 0 589 1,889 4,855

Saravan 502 2 0 504 939 2,070

Champasack 475 10 0 485 904 2,114

Total 2,496 166 10 2,672 12,897 58,240 a Loans to households were mostly done through group loans, so the total number of loans for this borrower class is recorded as less than the beneficiary households.

Source: APB, December 2004. 11. The KN58 billion lent during the Project for plantation development (in various documents, there are slightly varying figures on total loan amount and number of loans by class) corresponds with $7.15 million according to ADB disbursement. There were 2,496 household beneficiaries, 166 individuals, and 10 enterprise loans. Of the administrative areas covered by the Project, Vientiane Municipality had the dominant share (67%) in the lending, followed distantly by Borikhamxay and Savannakhet.6 12. Two main follow-ups were identified for the Mission with regard to APB participation in the Project: (i) performance of loan recovery and (ii) a reported gap between areas for which money was borrowed and areas actually planted.

6 Part of this magnitude is probably due to the lending to large enterprises coursed through the Vientiane municipal

branch, and part is probably due to greater awareness of government projects and stronger government connections in the capital area. This last relationship probably lends credence to the theory that subsidized credit is often acquired by those who have the greatest resources and political connections.

Appendix 9 39

2. Repayment 13. APB generated limited data on subloan interest repayment under the Project. According to the status summary at the end of 2003, only 50% of the interest due was repaid. .

Table A9.3: Project Interest Repayment (KN billion)

Project Area No. of

Loans Loan

Amount Total

Interest Due Total Interest

Paid Interest Not

Yet Paid %

Repayment

All seven provinces 1,379 58.096 10.112 5.083 5.029 50%

Source: APB, Figures as of end of 2003; Project Completion Review, January 2005. 14. For more recent figures than end of 2003, APB was requested to provide a more updated account of repayment, which they responded was not possible within the time constraints of the Mission. Project repayment data was then provided for Vientiane municipality only—one of seven administrative areas covered by the Project.

Table A9.4: Interest and Repayment for Vientiane Municipality

(KP million)

Loan No. Loan Amount Interest Due Interest Repaid Interest Repayment

86 39,613.8 8,754.3 3,648.3 41.7%

Source: APB, Project Completion Review, January 2005. 15. The updated 2005 interest repayment rate of 41.7% for Vientiane municipality is lower than for that reported for the Project as of the end of 2003. A request for an update on principal repayment against principal due (along with other data requests) was not forthcoming.7 In a well-administered bank, this type of information should be quite easily retrievable from the information and technology (IT) system. Given weakness in APB's systems and limited staff capacities, these are among the areas that have been targeted for strengthening under the proposed Rural Finance Sector Development Program. 3. Area Discrepancies 16. During the Project, reports surfaced of discrepancies between the areas reported for borrowing and the areas actually planted. There were several factors to consider. First, APB, based on the Department of Forestry's technical assessment, and upon review of the relevant factors, gave approval for loan amounts considered sufficient to cover 70% of planters' costs. The balance of 30% was to be the borrowers' equity investment (whether in-kind or in cash). 17. Planters often complained that delays in the borrowing and approval process would delay their land-preparation efforts. Given that the kip depreciated by 25%, 63%, and 54% in

7 APB stated the data requests would require substantial time to compile. APB also stated that they were under

pressures created by the presence of multiple international missions (including ADB).

40 Appendix 9

years 1997, 1998, and 1999, slippage by a season could result in decreased buying power and capacity to implement in the following year. So actual planted areas could turn out to be less than the approved planted areas. However, APB reported that they disbursed funds based on actual planted area rather than on approved area. This resulted in APB's recording of "implemented" area—to which their disbursement was tied. APB's disbursements were frequently less than what they would have been had they been based on approved areas. A second factor contributing to the lower-than-expected planted area was fraud. The Mission found many areas scattered and difficult to access, presenting challenges for measuring and monitoring, given the limited resources of APB. Although, APB claims to have measured all farms, there was considerable scope for misreporting. 18. With knowledge of this, APB undertook its own special survey. To facilitate easier, more accurate measurement than was possible by walking plantation areas with tape measures,8 APB employed a team with global positioning system (GPS) training and equipment. The survey was not random. Instead, the survey targeted a suspect class of borrowers. These were the "individual” class of planters, who were not the originally intended farmer-planters, but individuals with other business interests who had become drawn to the program (for access to land, cheap subsidized credit, and/or to attain the benefits of tree plantation). The following results of the survey were provided by APB.

Table A9.5: Summary of APB Measured Plantation Areas

Area (ha) Loan Amount (KN million)

Province No. of

Measured Sample

Loan Approved

Actual Measured Approved Disbursed

Borikhamxay Pakxane 29 374 133 1,667 1,150 Pakkading 12 140 133 628 530 Savannakhet 19 551 199 2,733 2,437 Vientiane Province 6 279 116 944 882 Champasack 6 156 85 811 810 Khammuane 4 325 229 1,879 1,449

Total 76 1,825 895 8,662 7,258 Source: APB, Project Completion Mission, January 2005. 19. The comparison of "approved" versus "measured" area is not entirely relevant, for it is the "implemented" area (not the "approved" area) which APB used as the criteria for loan disbursement. If one were to adjust the "approved" area on the basis of the disbursed-to-approved loan amounts, the "implemented" sample area would be about 1,529 ha. D. Conclusions 20. The inclusion of APB as a project implementing agency was a mistake. They had neither the financial capacity, nor the technical capacity, nor the experience with long-term loans to qualify them for inclusion in the Project. The magnitude of the Project-induced lending was large relative to the lending portfolio of APB. Insufficient institutional assessment was undertaken in the project preparation. APB continues to undergo long-term capacity-building under ADB TA and PPTA to this date. Interest collection for project loans is reported to be about 50% or less,

8 Areas are frequently irregular in shape and may range in size from tens of hectares to hundreds of hectares.

Appendix 9 41

and large losses can be expected for principal payments now becoming due.9 On discrepancies in financed areas, a significant number of the borrowers obtained funds for larger areas than were actually planted, as measured subsequently under APB's own investigative survey.10 Again, limited capacity in APB to technically assess, manage, and monitor the widespread and scattered plantation areas was a major contributing factor to these irregularities. 21. According to APB policy, planters who do not successfully repay their loans should be recorded as bad debtors. APB, in formulating/condoning this poorly conceived credit component, would seem to have played a role in creating the indebtedness of farmers/planters. First, farmers/planters were misled into believing they could reasonably accomplish sufficient yields, sell to markets, and thus pay back loans. Second, APB, an institution that had insufficient capacity to administer the credit component, was saddled with the task of administering an ill-designed credit line.11

9 Lending only began in 1997. Terms were for 8–12 years, with grace periods of 6 years. For many (planters and APB

staff), the understanding (whether real or assumed) is that the loan repayment will only be made at harvest. 10 However, it is also widely reported by farmers that they did not receive sufficient funds to properly carry out land

preparation, planting, and especially maintenance. 11 The DOF extension system was also not up to the task of advising farmers/planters on proper cultivation and

marketing.

Appendix 10 42

YIELDS AND HARVESTS A. Introduction

1. During the Project, there was no systematic yield survey and recording process—seemingly a basic need in the project benefit monitoring and evaluation system. It is true that most of the stands would have been fairly young still, but by close of project in 2003, the early pilot block plantations and the credit-financed plantations of 1997 would have reached sufficient maturity to provide useful yield data. To help overcome this major project monitoring shortcoming, a Project Completion Review (PCR) plantation yield survey was undertaken in December 2004 in advance of the PCR Mission. In addition to the PCR yield survey, another yield survey was undertaken under the project preparatory technical assistance (PPTA)1 for the proposed follow-on project. Finally, the PCR Mission visited 25 plantations in the field and carried out rough yield assessments at that time. These surveys and assessments form the basis for understanding yield performance for the Project. B. PCR Yield Survey

1. Survey Objective, Team, and Area

2. The objective of the PCR plantation yield survey was to gather updated information on yield performance of different classes of plantations undertaken by the Project.2 The survey was directed by a local forestry consultant who had conducted a yield survey in 2002 for PPTA 3794. He worked with forestry faculty (Dongdok) and support teams to accomplish the PCR yield survey. The survey was undertaken with respondent size of 49 stands (47 eucalyptus Camaldulensis stands and two Acacia stands) in seven administrative areas, including the provinces of Vientiane, Borikhamxay, Khammuane, Savannakhet, Saravan, and Champasack, and the municipality of Vientiane.

2. Survey Approach

3. Generally, four to five planters were selected randomly for each class of plantation in the administrative areas. The number of sample plots surveyed depended on the class of plantation: two plots for small farmers, four plots for small- to medium-sized plantations, and eight plots for large-area individual-plantations and enterprise-plantations. At the plantation level, plots were selected through a systematic random approach. Overall there were 172 sample plots measured. Plots averaged 210m2 (21m*10m). The plantation stands varied in age from 2 to 10 years. 4. The yields of the plots were determined by measuring (i) tree diameters at breast height with a measuring caliper and (ii) top heights for six representative trees in the sample by using a "sunto" (height measuring device). The diameters and heights of measured trees in the sample plots were recorded in prepared formats. The yield was then calculated using standard forestry formulas that take into account diameter, height, a form factor, and number of trees per area.

1 ADB. 2001. Technical Assistance to Lao PDR for Tree Plantation for Livelihood Improvement. Manila. TA3794,

approved on 12 December 2001, for $700,000. 2 The classifications include farmers, individuals, enterprises, farmer block plantations, and pilot block plantations

(PBPs).

Appendix 10 43

3. Yield Survey Results

5. The yield survey detailed volume accumulation for stands, which varied by age and by planter classes. In general, the results were poor, regardless of the age of the stand. To get more of an indication of yield at maturity, sub-samples were limited to plantations of 6 years or older (mostly 6- to 7-year-old stands—the period when eucalyptus Camaldulensis in Lao PDR tend to grow the fastest, i.e. register maximum mean annual increment, or MAI, in m3/ha/yr). Several 8-year-old stands and one 9-year-old stand were also sampled. Although sample sizes were quite limited, Table A10.1 provides an indicative picture. The averages within classes are arithmetic rather than weighted.

Table A10.1: Yield Survey Results by Plantation for Eucalyptus

Class of eucalyptus Plantation a

Area (ha)

Average MAI (m3/ha/yr)

Average Age (yrs)

Farmers (n = 9) 14.8 3.5 6.8 Individuals (n = 4) 65.0 4.4 6.5 Enterprises (n = 2) 216.0 13.2 7.5 Pilot block plantation (n = 2) 42.5 15.9 8.0 ha = hectare, MAI = mean annual increment, m3 = cubic meter, n = number, yr = year. a Six years or older. Source: PCR yield survey, December 2004. 6. Data was also gathered for nine plantations that had already conducted harvesting. Again, the respondents' actual harvests were low, which suggests low MAIs even for mature plantations. This sample included two pilot farmer-plantations, which received special guidance from the Project yet demonstrated similarly poor results.

Table A10.2: Yield Survey Results in 9 Plantations After Harvest

Area Survey Age Harvest Volume

Implied MAI Location District

(ha) (yrs) (ton) (m3/ha/yr)

Type of Owner

Pakxane 1 7 20 2.86 pilot farmer-plantation Thulakhom 6 5 30 1 individual Thulakhom 5 5 30 1.2 individual Pakxane 1.3 7 31 3.41 farmer Pakxane 1.5 7 40 3.81 pilot farmer-plantation Thulakhom 9 6 56 1.04 individual Pakxane 2 7 90 6.43 farmer Thulakhom 16 7 130 1.16 individual Pakngum 35 7 700 2.86 individual ha = hectare, m3 = cubic meter, yrs = years Source: PCR yield survey, December 2004. C. PPTA: "Tree Plantation for Livelihood Improvement Project"

7. As noted, a forestry management survey was designed and undertaken under PPTA 3794 for the follow-on project. It involved a larger sample size of stands, reportedly representing 3,534 ha of plantation area. Its results were not much different from the PCR yield survey results. The PPTA Final Report, however, stated:

Appendix 10 44

"An estimate, based on projections of the MAI curves for the stands measured in the survey and using top height as an indicator, suggests that MAI for a full 7-year rotation will vary between 20 m3/ha/yr for the best stands, and less than 6 m3/ha/yr for the poorest. Approximately 12–14 m3/ha/yr is likely to be the overall average." (p.34, Final Report).

8. This concluding statement does not correspond to the age-constrained results or the actual harvests for the PCR yield survey presented above. D. Field Observations from the PCR Mission of 25 Plantations

9. The PCR Mission visited plantations of all borrower classes. The Department of Forestry steered some of the visits to sites that cooperated the best. However, strictly following this agenda would result in a biased picture, so the Mission targeted other randomly selected respondents as well. It was somewhat costly and difficult to reach some of the randomly selected sites, but this was necessary to get a realistic, unbiased view of the Project. The ADB Mission leaders indicated that such an approach was generally adopted by them because of time and resource constraints. Many of the sites were remote and required traversing difficult terrain. 10. The PCR Mission observed that most farmer- and individual-run plantations were either barren or choked with thick brush, resulting in low yields or no yields. This was due to poor choice of site, poor management, and poor maintenance. The PCR Mission did observe a few well-managed plantations, which affirmed that successful cultivation was possible. However, well-managed plantations were the exception rather than the rule. 11. In conclusion, the PCR Mission field visits indicated that yields were significantly less than what the surveys suggested, and much less than the PPTA phase II "likely" overall average of 12-14 m3/ha/yr. The gap between the PCR Mission observations and the survey results indicates a bias in selection of survey respondents.3 This raises the possibility that the surveys were not entirely random. 12. The uncertainty of previous surveys would normally suggest launching a new, properly planned and adequately funded yield survey overseen by outside, independent foresters. However, the results of the Project were so poor that undertaking such a survey at this juncture might simply be a waste of more resources. A proper yield survey during impact evaluation should have been carried out during the Project by an independent third party. Yet it is also acknowledged that, because forestry projects have long gestations periods, undertaking surveys some years after planting provides more accurate predictions of outcomes at maturity.

3 In fact, the PCR yield survey reported a transport and access bias: It only went to sites accessible by car. Many

sites were not accessible by car. However, even for the sites accessible by car the PCR Mission found many plantations with low yields or no yields.

Appendix 11

45

FINANCIAL AND ECONOMIC ANALYSES

A. Introduction 1. The Project envisaged the development of a viable wood-producing plantation sector, with linkages between farmer-producers and enterprise-producers, and between producers and the market (mainly paper pulp and sawmill processors). The linkages did not develop as planned and the Project increasingly focused on just planting and production. With poor disbursement and limited farmer and enterprise participation through the Project's midterm, loan eligibility was opened to a third class of borrower: "individuals". This class comprised mainly investors and entrepreneurs. Finally, toward the end of the Project, relatively large amounts were lent to larger enterprises and joint ventures. 2. This appendix assesses the project outcome from financial and economic perspectives. The financial evaluation examines costs, production, and revenues by participant borrower classes. Representative models are portrayed for the three borrower types: (i) farmer, (ii) individual, and (iii) enterprise. Then, according to planting areas and borrowing amounts under the Project, the representative models are scaled up and combined with other project indirect costs. These include the costs of (i) administering the project credit portfolio (Part A), (ii) the pilot plantation plots (Part B), (iii) the access roads (Part C), and (iv) the project management support (Part D). From the financial presentation of project outcome, the values are converted to economic equivalents to provide an evaluation of project performance from the perspective of the country as a whole. The section concludes by briefly assessing distribution, poverty, and employment aspects of the Project. B. Approach and Methodology 3. Information to support the analysis includes reports and data gathered from project files and visits to the field,1 participant and agency interviews, data from secondary sources, results from the phase II project preparation technical assistance report,2 and PCR-commissioned yield and measurement surveys. The framework employed in the economic analysis is presented below. A domestic price numeraire is used; The Lao People's Democratic Republic (PDR) kip is the unit of account with a constant

price year of 2005; The shadow exchange rate factor (SERF) is 1.11, consistent with conversion factors

employed in other recent evaluations for the country; A shadow wage rate factor of 0.9 is applied to unskilled labor to reflect unemployment and

underemployment in the rural Project area;3 Tradable commodities have been border priced; Specific cost conversion factors have been formulated for key categories based on

estimated shares of foreign exchange content, domestic content, and unskilled labor; and Transfer payments such as taxes, duties, and interest are excluded from the economic

analysis. 1 In field trips, the Project Completion Review (PCR) Mission visited 25 plantations, consisting of all types of

participants. The visits consisted of both targeted and random visits. 2 ADB. 2001. Technical Assistance to Lao PDR for the Tree Plantation for Livelihood Improvement. Manila.

(TA 3794, approved on 12 December 2001 for $700,000). 3 Consistent with the appraisal approach for Smallholder Development Project Loan 1949-LAO, for $12 million,

approved on 28 November 2002.

Appendix 11 46

4. A list of project-related prices is presented in Table A11.1.

Table A11.1: Prices (KN'000)

Item Unit Financial Economic A. Inputs 1. Fertilizer (NPK blend, medium quality) /50 kg bag 120 132 Lower quality /50 kg bag 90 99 2. Agrochemical Seedling dip /ha seedlings 5 5 Field application '000/ha 45 49 3. Plant material Seedlings /seedling 0.4 0.4 Seedling transport /seedling 0.1 0.1 4. Fencing Poles /pole 4 4 Barbed wire /role 65 70 Nails /kg 8 9 5. Labor Foreman/manager /mon 2,000–4,000 2,000–4,000 Skilled labor /day 50–100 50–100 Unskilled /day 15 14 6. Harvest /m3 40 37.9 B. Outputs 1. Stumpage for pulpwood (standing crop, before harvest) /t 67 76.6 2. Pulpwood at roadside /t 127 145.3 3. Charcoal at roadside (Lao avg kg conversion at 8:1) /t 800 800 4. Saw logs, diameter 15–30 cm, at purchasing center, avg. /m3 265 303 5. Fuelwood /t 40 40 C. Others 1. Land (potential for plantation) a. Somewhat remote from Vientiane > 50 km /ha 1,035 1,035 b. Medium access to Vientiane 35–50 km /ha 2,070 2,070 c. Good access to Vientiane 35 km /ha 8,746 8,746 2. Transport Log / pulp wood by truck /m3-km 0.466 0.517 Foreign Exchange Ratesa KN/$ 10,350 baht/$ 38.4 KN/baht 270 Conversion Factors SERF 1.11 SWRF 0.9 ha = hectare, {Please alphabetize and define all abbreviations used in Table A11.1.}kg = kilogram, km = kilometer, KN = kip, m3 = cubic meter, SERF = shadow exchange rate factor, SWRF = shadow wage rate factor, t = ton a Taken by the PCR Mission in January 2005. Source: PCR Mission, January 2005.

Appendix 11

47

C. Financial Analysis 1. Representative Tree Crop Budgets

a. Cultivation Practice

5. Under the Project, eucalyptus (camaldulensis) was the tree judged most suitable and it was also the predominant tree most used by borrowers. It generally achieves maximum growth rates in years 6 to 7, after which growth rates tend to decline. The most widespread practice is to grow the eucalyptus for 7 years and then harvest it for the pulpwood market. However, in well cultivated stands, thinning may be practiced while letting bigger trees stand for up to 10 years, at which time the trees might have sufficient diameter to qualify as higher-priced saw logs. Representative tree crop budgets were assessed for the three classes of borrowers under the Project: (i) farmers, who were either members of a group borrowing unit or borrowers for their own account; (ii) individuals, who generally were better endowed entrepreneurs or investors; and (iii) enterprises; which were companies engaging in larger-scale production. Plantation sizes for the farmers were generally small, from less than 1 hectare (ha) to several hectares. The individual borrowers' holdings consisted of a wide range of plantations, from several hectares to several hundred hectares. Enterprises were generally in the range of 100 ha to more than 1,000 ha.

6. The cost structure for each class also varied. The National Agriculture and Forestry Extension Service (NAFES) recommended cultivation practices, which have been revised and updated periodically to reflect experience. From the wide range of visits to plantations, the Mission also assessed actual cultivation costs based on the observed performance (generally poor) and discussions with planters. Finally, these outcomes were compared with the amounts lent by the Agriculture Promotion Bank (APB), which suggested even different investment levels by planters. The tree crop budgets and analysis are thus based on three separate perspectives: (i) "recommendations," (ii) field assessment of actual practice ("PCR-estimates"), and (iii) implied plantation expenditure based on loan amounts taken from APB ("APB-implied"). The outcomes have many similarities as well as some significant differences. Tables A11.2, A11.3, and A11.4 present the crop budgets under the three frameworks for each of the plantation classes (farmers, individuals, and enterprises).

7. The "recommended" cost levels by NAFES are judged to be generally on the high side. NAFES has provided a full unit basis to cover all costs. However, in reality, some planters (especially small farmers and some individuals) can provide labor and supplies at lower rates, whereas large planters (such as enterprises) can achieve economies of scale.

8. The "PCR-estimates" for the tree crop budgets take into account NAFES recommendations, the actual performance in the field, feedback from planters themselves, and lending statistics from APB.

Appendix 11

48

Table A11.2: Tree Crop Budgets Based on Official Recommendations Plantation Class A. Farmers Plantation B. Individual Plantation C. Enterprise Plantation # Work Description Unit Qty. Cost/

Unit Total (KN)

$ Equiv

Qty. Cost/ Unit

Total (KN)

$ Equiv

Qty. Cost/ Unit

Total (KN)

$ Equiv

Year 1 1 Land clearing,

burning and cleaning, leveling-bulldozera

ha 1 400,000 400,000 39 1 400,000 400,000 39 1 2,000,000 2,000,000 193

2 Soil preparation ha 1 1,000,000 1,000,000 97 1 1,000,000 1,000,000 97 3 Labor for digging ha 1,666 150 249,900 24 1,666 150 249,900 24 1,666 200 333,200 32 a. Fencing b. Poles poles 200 4,000 800,000 77 200 4,000 800,000 77 200 4,000 800,000 77 c. Barbed wire roll 12 90,000 1,080,000 104 12 90,000 1,080,000 104 12 90,000 1,080,000 104 d. Nails kg 3 8,000 24,000 2 3 8,000 24,000 2 3 8,000 24,000 2 e. Labour poles 200 2,000 400,000 39 200 2,000 400,000 39 200 2,000 400,000 39 4 Planting seedlings 1,666 100 166,600 16 1,666 100 166,600 16 1,666 200 333,200 32 5 Weeding #/ha 2 250,000 500,000 48 2 250,000 500,000 48 3 250,000 750,000 72 6 Fertilizing seedlings 1,666 100 166,600 16 1,666 100 166,600 16 1,666 150 249,900 24 7 Seedlings (+20%) seedlings 1,999 400 799,680 77 1,999 400 799,680 77 1,999 400 799,680 77 8 Seedlings transport seedlings 1,999 100 199,920 19 1,999 100 199,900 19 1,999 100 199,900 19 9 Fertilizer bag 5 90,000 450,000 43 5 90,000 450,000 43 5 120,000 600,000 58 10 Firebreak established meter 400 500 200,000 19 400 500 200,000 19 400 500 200,000 19 Subtotal 5,436,700 525 6,436,680 622 8,769,880 847 Year 2 1 Weeding #/ha 2 250,000 500,000 48 2 250,000 500,000 48 2 250,000 500,000 48 2 Firebreak clearing

(3m width, ln m/ha) m 400 375 150,000 14 400 375 150,000 14 400 375 150,000 14

Subtotal 650,000 63 650,000 63 650,000 63 Year 3 1 Weeding #/ha 1 250,000 250,000 24 1 250,000 250,000 24 1 250,000 250,000 24 2 Firebreak clearing

(3m width, ln m/ha) m 400 375 150,000 14 400 375 150,000 14 400 375 150,000 14

Subtotal 400,000 39 400,000 39 400,000 39 Years 4–6 1 Firebreak clearing 3

m width, ln m/ha m 400 375 150,000 14 400 375 150,000 14 400 375 150,000 14

Total (less harvesting) 6,636,700 641 7,636,680 738 9,969,880 963 Equiv = equivalent, ha = hectare, kg = kilograms, KN = kip, m = meter, Qty = quantity a leveling by bulldozer is for Enterprise Plantation only. Sources: NAFES recommendations revised and refined 3 times during the Project forestry consultant input, PCR Mission in January 2005.

Appendix 49

Table A11.3: Tree Crop Budgets Based on PCR Mission Estimates

Plantation Class A. Farmers Plantation B. Individual Plantation

# Work Description

Unit Qty Cost/ Unit

Total (KN)

$ Equiv

Qty Cost/ Unit

Total (KN)

$ Equiv

Year 1 : Establishment 1 Land clearing, burning

and cleaning ha 1 90,000 90,000 9 1 288,000 288,000 28

2 Soil preparation 1 720,000 720,000 70 3 Labor for digging ha 1 56,228 56,228 5 1 159,936 159,936 15 4 Fencing Poles poles 90 4,000 360,000 35 160 4,000 640,000 62 Barbed wire roll 5 90,000 486,000 47 10 90,000 864,000 83 Nails kg 1 8,000 10,800 1 2 8,000 19,200 2 Labor ha 1 90,000 90,000 9 1 256,000 256,000 25 5 Planting ha 1 37,485 37,485 4 1 106,624 106,624 10 6 Weeding (2X) ha 1 250,000 250,000 24 1 400,000 400,000 39 7 Fertilizing (1 time) ha 1 37,485 37,485 4 1 106,624 106,624 10 8 Seedlings (+20%a) seedlings 1,999 400 799,680 77 1,999 400 799,680 77 9 Seedlings transport seedlings 1,999 100 199,920 19 1,999 100 199,900 19 10 Fertilizer bag 2.3 90,000 202,500 20 4 90,000 360,000 35 11 Firebreak established ha 1 100,000 100,000 10 1 160,000 160,000 15 Miscellaneous other

expenses lump sum 0 150,000 0 0 0 300,000 0 0

Subtotal-Establishment costs 2,720,098 263 5,079,964 491 Year 2 : Maintenance 1 Weeding (2X) ha 0 250,000 0 0 0.5 400,000 200,000 19 2 Firebreak clearing ha 0 100,000 0 0 1 120,000 120,000 12 Subtotal 0 0 320,000 31 Year 3 : Maintenance 1 Weeding (1X) ha 0 125,000 0 0 0 200,000 0 0 2 Firebreak clearing ha 0 100,000 0 0 0 120,000 0 0 Subtotal 0 0 0 0 Years 4–6 : Maintenance 1 Firebreak clearing ha 0 100,000 0 0 0 120,000 0 0 Total (before harvesting) 2,720,098 263 5,399,964 522 a for individual plantation only. Equiv = equivalent, ha = hectare, kg = kilograms, KN = kip, m = meter, Qty = quantity Sources: NAFES recommendations, revised and refined three times during the Project; forestry consultant input; PCR Mission, January 2005.

Appendix 11

50

Table A11.3 (continued)

Plantation Class C. Enterprise Plantation

# Work Description Unit Qty Cost/ Unit Total (KN) $ Equiv

Year 1 : Establishment 1 Land clearing, leveling-bulldozer ha 1 1,600,000 1,600,000 155 2 Soil preparation 1 800,000 800,000 77 3 Labor for digging ha 1 333,200 333,200 32 4 Fencing a. Poles poles 200 3,200 640,000 62 b. Barbed wire roll 12 72,000 864,000 83 c. Nails kg 3 6,400 19,200 2 d. Labor ha 1 400,000 400,000 39 5 Planting ha 1 333,200 333,200 32 6 Weeding (3X-mechanized) ha 3 200,000 600,000 58 7 Fertilizing (2x) ha 1 249,900 249,900 24 8 Seedlings (+10%) seedlings 1,833 320 586,432 57 9 Seedlings transport seedlings 1,833 80 146,608 14 10 Fertilizer bag 5 120,000 600,000 58 11 Firebreak established ha 1 200,000 200,000 19 Miscellaneous other expenses lump sum 1 300,000 300,000 29 Subtotal-Establishment costs 7,672,540 741 Year 2 : Maintenance 1 Weeding (mechanized) ha 2 200,000 400,000 39 2 Firebreak clearing (mechanized) ha 1 120,000 120,000 12 Subtotal 520,000 50 Year 3 : Maintenance 1 Weeding (mechanized) ha 1 200,000 200,000 19 2 Firebreak clearing (mechanized) ha 1 120,000 120,000 12 Subtotal 320,000 31 Years 4–6 : Maintenance 1 Firebreak clearing (mechanized) ha 1 120,000 120,000 12 Total (before harvesting) 8,632,540 834

Equiv = equivalent, ha = hectare, kg = kilograms, KN = kip, m = meter, Qty = quantity Sources: NAFES recommendations, revised and refined three times during the Project; forestry consultant input; PCR Mission, January 2005.

Appendix 11

51

Table A11.4: Tree Crop Budgets Implied from APB Lending

A. Farmers Plantation

# Work Description Unit Qty Cost/Unit Total (KN) $ Equiv Year 1: Establishment 1 Land clearing, burning and cleaning ha 1 90,000 90,000 9 2 Labor for digging ha 1 56,228 56,228 5 3 Fencing a. Poles Poles 90 4,000 360,000 35 b. barbed wire Roll 5 90,000 486,000 47 c. Nails Kg 1 8,000 10,800 1 d. Labor ha 1 90,000 90,000 9 4 Planting ha 1 37,485 37,485 4 5 Weeding (2X) ha 1 250,000 250,000 24 6 Fertilizing 1 time ha 1 37,485 37,485 4 7 Seedlings (+20%) seedlings 1,999 400 799,680 77 8 Seedlings transport seedlings 1,999 100 199,920 19 9 Fertilizer bag 2.3 90,000 202,500 20 10 Firebreak established ha 1 100,000 100,000 10 11 Miscellaneous other expenses lump sum 1 7,107 7,107 1 Subtotal Establishment Costs 2,727,204 263 Year 2 : Maintenance 1 Weeding (2X) ha 0 250,000 0 0 2 Firebreak clearing ha 0 100,000 0 0 Subtotal 0 0 Year 3 : Maintenance 1 Weeding (1X) ha 0 125,000 0 0 2 Firebreak clearing ha 0 100,000 0 0 Subtotal 0 0 Years 4–6 : Maintenance 1 Firebreak clearing ha 0 100,000 0 0 Total (before harvesting) 2,727,204 263 Equiv = equivalent, ha = hectare, kg = kilograms, KN = kip, m = meter, Qty = quantity Sources: NAFES recommendations, revised and refined three times during Project; Forestry consultant input; PCR Mission, January 2005. Note: Crop budget amounts implied for APB lending based on representative sized loans plus 30%-required equity contribution.

Appendix 11 52


B. Individual Plantation

# Work Description Unit Qty Cost/ Unit Total (KN) $ Equiv.

Year 1 : Establishment 1. Land clearing, burning and cleaning ha 1 288,000 288,000 28

2. Soil preparation ha 1 720,000 720,000 70 3. Labor for digging ha 1 159,936 159,936 15 4. Fencing a. Poles Poles 160 4,000 640,000 62 b. Barbed wire Roll 10 90,000 864,000 83 c. Nails Kg 2 8,000 19,200 2 d. Labor ha 1 256,000 256,000 25 5. Planting ha 1 106,624 106,624 10 6. Weeding (2X) ha 1 400,000 400,000 39 7. Fertilizing ha 1 106,624 106,624 10 8. Seedlings (+20%) seedlings 1,999 400 799,680 77 9. Seedlings transport seedlings 1,999 100 199,900 19 10. Fertilizer bag 4 90,000 360,000 35 11. Firebreak established ha 1 160,000 160,000 15 12 Miscellaneous other expenses lump sum 1 2,895,323 2,895,323 280 Subtotal Establishment Costs 7,975,287 771 Year 2 : Maintenance 1 Weeding (2X) ha 1 400,000 200,000 19 2 Firebreak clearing ha 1 120,000 120,000 12 Subtotal 320,000 31 Year 3 : Maintenance 1 Weeding (1X) ha 0 200,000 0 0 2 Firebreak clearing ha 0 120,000 0 0 Subtotal 0 0 Years 4–6 : Maintenance 1 Firebreak clearing ha 0 120,000 0 0 Total (before harvesting) 8,295,287 801 Equiv = equivalent, ha = hectare, kg = kilograms, KN = kip, m = meter, Qty = quantity Sources: NAFES recommendations, revised and refined three times during Project; Forestry consultant input; PCR Mission, January 2005. Note: Crop budget amounts implied for APB lending based on representative sized loans plus 30%-required equity contribution.

Appendix 11

53


C. Enterprise Plantation # Work Description Unit Qty Cost/Unit Total $ Equiv.

Year 1 : Establishment 1. Land clearing, leveling - bulldozer ha 1 1,600,000 1,600,000 155

2. Soil preparation ha 1 800,000 800,000 77 3. Labor for digging ha 1 333,200 333,200 32 4. Fencing 0 0 a. Poles Poles 200 3,200 640,000 62 b. Barbed wire Roll 12 72,000 864,000 83 c. Nails Kg 3 6,400 19,200 2 d. Labor ha 1 400,000 400,000 39 5. Planting ha 1 333,200 333,200 32 6. Weeding (3X-mechanized) ha-weeding 3 200,000 600,000 58 7. Fertilizing (2 times) ha 1 249,900 249,900 24 8. Seedlings (+10%) seedlings 1,833 320 586,432 57 9. Seedlings transport seedlings 1,833 80 146,608 14 10. Fertilizer bag 5 120,000 600,000 58 11. Firebreak established. (mechanized) ha 1 200,000 200,000 19 12. Miscellaneous other expenses lump sum 1 9,437,471 9,437,471 912 Subtotal Establishment Costs 16,810,011 1,624 Year 2 : Maintenance 13. Weeding (mechanized) ha-weeding 2 200,000 400,000 39 14. Firebreak clearing (mechanized) ha 1 120,000 120,000 12 Subtotal 520,000 50 Year 3 : Maintenance 15. Weeding (mechanized) ha 1 200,000 200,000 19 16. Firebreak clearing (mechanized) ha 1 120,000 120,000 12 Subtotal 320,000 31 Years 4-6 : Maintenance 17. Firebreak clearing (mechanized) ha 1 120,000 120,000 12 Total (before harvesting) 17,770,011 1,717 Equiv = equivalent, ha = hectare, kg = kilograms, KN = kip, m = meter, Qty = quantity Sources: NAFES recommendations, revised and refined three times during Project; Forestry consultant input; PCR Mission, January 2005. Note: Crop budget amounts implied for APB lending based on representative sized loans plus 30%-required equity contribution.

Appendix 11 54

9. For the "APB-implied" tree crop budgets, these figures were arrived at in a two-step procedure to ensure consistency. First, APB supplied representative lending amounts for each borrower class (Table A11.5). The loan amounts were added to the 30%-equity required of borrowers to provide the total level of plantation investment. These representative investment amounts were brought to constant 2005 values, then combined with the reported plantation areas by each class to arrive at total implied APB disbursement for the Project in constant 2005 values (Table A11.6). This amount was then cross-checked with actual Asian Development Bank (ADB) disbursement (in constant 2005 values) for the Project, and found to be very close. The APB representative crop budgets were then scaled only slightly to achieve full consistency with the actual ADB Project disbursement for credit. Since the money lent by APB and disbursed by ADB is the record for project expenditure, it is on these amounts that model performances and overall Project results are evaluated.

10. The plantation production costs consist mainly of (i) establishment (land clearing and soil preparation, planting, cultivation, and protection); (ii) maintenance in the years from establishment to harvest (consisting largely of weeding and firebreak clearing); (iii) harvest (felling and gathering for market); and (iv) reestablishment, after harvest, for subsequent growth (fertilizing, weeding, and firebreak clearing).

11. Plantation Establishment. Establishment is the most expensive and important stage in plantation development. The cost structure for cultivation increases from farmers, to individuals, to enterprises. For farmers, the assumption is that the size of holding is generally smaller and many of the labor-intensive activities can be accomplished by the family or through sharing labor within groups. Individuals, with their small- to medium-sized holdings, have some of the same advantages as farmers when it comes to labor, but must hire a much greater share of their labor, increasing the unit costs for most activities. Individuals can use some mechanization to replace labor, however. For enterprises, all labor is hired and mechanization replaces unskilled labor for several activities. In its lending standards, APB made allowances for these cost distinctions. It was assumed that farmers would achieve a comparable outcome in site preparation at lower cost by substituting labor.4

12. By plantation class, the table below summarizes plantation establishment costs based on: (i) "recommendations," from NAFES and forestry specialists, (ii) the "PCR-estimates," based on field observations, and (iii) the "APB-implied" investments.

4 However, given that bulldozers and tractors are employed by enterprises and some individuals, it seems a flawed

assumption that the farmer can attain a comparable field preparation of similar quality. And, in the field, PCR site visits revealed farmer site preparation and performance were substandard.

Appendix 11

55Table A11.5: APB Representatives Loan and Investments

(KN Constant 2005)

I. APB collection of representative lending cases in years 2000 /2001—Lending per task (Kip ‘000) # / ha

Category Land clearing manual

Land clearing mechanized

Fencing / barbed wire

Seedlings Labor Fertilizer

A. Farmers 1 Farmer group 1 2 Farmer group 2 2,000 4,000 5,000 0 1,012 3 Farmer group 3 2,025 5,697 3,812 1,139 2,000 Subtotal 7,425 0 17,497 14,612 5,139 5,359 32 = Total ha for

subsample

Kip ‘000 average per ha:

232 0 547 457 161 167

B. Individual Investors 1 Individual 1 14,400 308,700 40,500 59,392 80,931 32,077 2 Individual 2 30,000 148,840 14,038 79,960 78,554 55,000 3 Individual 3 12,000 69,000 8,580 23,988 31,432 18,000 Subtotal 56,400 526,540 63,118 163,340 190,917 105,077 230 = Total ha for

subsample


245 2,289 274 710 830 457

C. Enterprises 1 Enterprise 1 47,769 280,000 232,200 81,000 710,000 44,000 2 Enterprise 2 630,000 831,803 134,000 317,700 480,147 61,191 3 Enterprise 3 612,800 1,469,500 1,497,927 300,650 1,367,8

86 702,400

Subtotal 1,290,569 2,581,303 1,864,127 699,350 2,558,033

807,591

1,017 = Total ha for subsample


1,269 2,538 1,833 688 2,515 794

Appendix 11 56


I. APB collection of representative lending cases in years 2000 /2001—Lending per task (Kip ‘000)

# / ha Category Main- tenance

Main- tenance

Main- tenance

Main- tenance

Main- tenance

Main- tenance

Main- tenance

Total

#1 #2 #3 #4 #5 #6 #7 A. Farmers 1 Farmer group 1 23,347 2 Farmer group 2 12,012 3 Farmer group 3 14,673 Subtotal 50,032 32 = Total ha for subsample Kip ‘000 average per ha: 1,564 B. Individual Investors 1 Individual 1 536,000 2 Individual 2 406,392 3 Individual 3 163,000 Subtotal 1,105,392 230 = Total ha for subsample Kip ‘000 average per ha: 4,806 C. Enterprises 1 Enterprise 1 1,394,969 2 Enterprise 2 186,000 2,640,841 3 Enterprise 3 543,343 128,000 6,622,506 Subtotal 543,343 314,000 10,658,315 1,017 = Total ha for subsample Kip ‘000 average per ha: 534 309 10,480 Source: Forestry Consultant along with APB, January 2005.

Appendix 11 57

Table A11.5 (continued) Price Index Conversion Exchange Rates MUV Year Factor Exchange 95.75 2000/2001 1.00 Year Rates 92.99 2002 0.97 2000 7,887 96.75 2003 1.01 2001 8,954 96.39 2004 1.01 ‘00/’01 average: 8,421 97.87 2005 1.02

II. Summary Kip/ha lending amounts by borrower class and activity(2000/2001, current values, Kip '000)

III. Amounts in $ (2000/2001, current values)

III. Amounts in $ (2005, constant values)

Loan value/activity Loan Amount (2001-2002) Loan Amount (2005)

No

Activities

Average Farmer Kip/ha

Average Individual

Kip/ha

Average Enterprise

Kip/ha

Average Farmer

$/ha

Average Individual

$/ha

Average Enterprise

$/ha

Average Farmer

$/ha

Average Individual

$/ha

Average Enterprise

$/ha 1 Land clearing manual 232 245 1,269 28 29 151 28 30 154 2 Land clearing mechanized 2,289 2,538 272 301 278 308 3 Fence (pole, bb wire) 547 274 1,833 65 33 218 66 33 222

Land prep >

4 Seedlings 457 710 688 54 84 82 55 86 83 5 Labour 161 830 2,515 19 99 299 19 101 305 6 Fertilizer 167 457 794 20 54 94 20 55 96 7 Maintenance year 1 534 63 65 8 Maintenance year 2 309 37 37 9 Maintenance year 3 10 Maintenance year 4 11 Maintenance year 5 12 Maintenance year 6 13 Maintenance year 7 1,564 4,806 10,480 186 571 1,245 190 583 1,272 Notes: 1. APB policy on the subloans was to lend only 70% of the investment value, with an equity contribution requirement of 30% of the investment. 2. These implied investments amounts are tied to the lending assumptions. It is possible, in some cases, that planters brought more of their own equity and

contribution to the investment, which would imply a higher cost structure. 3. The implied loan and investment amounts for enterprises, for establishment alone (netting out the loans for maintenance), would be (Kip '000/ha) : 12,108 ('000

Kip) for loan, and 17,297 ('000) for total investment.

58 Appendix 11


Conversion Exchange Rate Loan to Investment Ratio Exchange 70% : APB loan amount of Year Rates total investment Jan 2005 10,350

IV. Amounts in $ (2005, constant values)(consolidated

heading for Land prep)

V. Amounts in KN (2005, constant values, Kip '000)

VI. Total Implied Investment Amount (2005, constant values)

Loan Amount 2005 Loan Amount 2005

No. Activities Average Farmer

$/ha

Average Individual

$/ha

Average Enterprise

$/ha


Average Individual

Kip/ha

Average Enterprise

Kip/ha


Average Individual

Kip/ha

Average Enterprise

Kip/ha

1 Land clearing manual

Land prep >

2 Land clearing mechanized

28 308 462 292 3,184 4,783 416 4,549 6,833

3 Fence (pole, bb wire)

66 33 222 687 345 2,303 981 493 3,290

4 Seedlings 55 86 83 574 892 864 820 1,275 1,234 5 Labour 19 101 305 202 1,043 3,160 288 1,490 4,514 6 Fertilizer 20 55 96 210 574 998 301 820 1,425 7 Maintenance year 1 65 671 959 8 Maintenance year 2 37 388 554 9 Maintenance year 3 10 Maintenance year 4 11 Maintenance year 5 12 Maintenance year 6 13 Maintenance year 7 190 583 1,272 1,964 6,038 13,167 2,806 8,626 18,810

Appendix 11 59

Table A11.6: Assessed and Actual Disbursement Levels, and Implied Plantation Establishment Loans

(Constant 2005 Kip)

Item Areaa PCR Estimated Establishment

Costs from Field

Assessment

Implied Loan

Amount at 70% of

Investment

Implied Project Total

Credit Requirements

"APB-FC" Estimated

Average Loan Amountsb for

Establishment

APB Implied Credit

Disbursal

Actual ADB Part A. Credit

Disbursalc

Scaled "APB-FC"

Loan Amountsd

(per ADB)

Estimated Project Total

Credit Requirements

(per ADB) Plantation Category (ha) (KN K/ha) (KN K/ha) (KN B) (KN K/ha) (KN B) (KN B) (KN K/ha) (KN B) Companies/ enterprises 3,000 7,673 5,371 16 12,108 36 ---- 11,767 35 Individuals/ Investors 4,500 5,080 3,556 16 6,038 27 ---- 5,868 26 Farm Households 5,400 2,720 1,904 10 1,964 11 ---- 1,909 10

Subtotal or Average 12,900 4,695 3,287 42 5,744 74 72 5,583 72

ADB = Asian Development Bank, APB = Agriculture Promotion Bank, FC = PCR forestry consultant From PCR field observations and assessment, actual tree crop budgets were estimated for borrower class. The assessed plantation establishment costs under the Project for each borrower class are shown in c3. The implied average loan amount for each borrower class, at 70% of the investment (30% equity contribution by owner required by APB), is shown in c4. The implied Project lending requirements, based on these levels, are then shown in (c5). APB estimated average loan amounts by borrower class are shown in (c6). APB average loan amounts per borrower class, when combined with reported areas by borrower class (c2), result in an APB amount disbursement of (c7). Almost equivalent to the amount disbursed by ADB (c8). This suggest the average APB amounts are, indeed, representative. In (c9) are the scaled "APB-FC" average loan amounts of (c6), to fit the actual Project disbursements according to ADB record. ADB/APB disbursement estimated by plantation category is then presented in (c10). a Area reported against lending by APB. b Average loan amounts estimated by APB for a sample for 2000/2001 borrowers -- updated to constant 2005. c Total ADB disbursement under part A. Credit, updated to constant 2005 Kip. ADB records (c8) not differentiated by borrower class. Source: APB data and estimates; PCR assessment and analysis (January/February 2005).

Appendix 11 60

Table A11.7: Plantation Establishment Costs (KN'000/ha, constant 2005 values)

Borrower Type Recommendeda PCR-

Estimates APB-Implied Investment

I. Farmer HH 5,437 2,720 2,727 II. Individual 6,437 5,080 7,975 III. Enterprise 8,770 7,673 16,810 {Please alphabetize and define all abbreviations used in Table A11.7.} a NAFES guidelines and forestry specialist consultations. Source: PCR Mission, January 2005.

13. For the farmer-plantations, the "PCR-estimates" and "APB-implied" amounts are significantly less than the NAFES-recommended levels. Field inspections revealed that poorly established plantations were the rule rather than the exception. Deficient land and soil preparation and improper spacing were common. Farmers claimed that they were frequently constrained by inadequate or delayed credit disbursement, which led to insufficient soil preparation, acquisition of poor quality seedlings, and late plantings (seedlings planted too late to capitalize on the rainy season in the critical establishment period). Insufficient guidance from the extension services was another factor. Improperly planted seedlings were overcome by weeds or fell prey to termite attacks. Farmers commonly reported losses of 50-100% to the PCR Mission in field visits. Some farmers also may have been practicing a low-input, low-risk strategy in response to an unfamiliar and uncertain long-term investment.

14. For individual borrowers, the level of effort indicated by "PCR-estimated" budgets also appeared to be less than the "recommendations." By contrast, the "APB-implied" investments exceeded the "recommendations." In the field, however, results were generally so bad that one had to wonder whether the credit funds were spent on cultivation or were actually used for other purposes.

15. The divergences in establishment costs are most stark for enterprises. The "recommendations" suggest an effort associated with about KN8.8 million/ha ($ 850/ha). The "PCR-estimate" for enterprise establishment was equivalent to $740/ha (which allows for some economies of scale by enterprises in procurement and harvest). The "APB-implied" amounts for enterprise-plantation establishment are equivalent to more than $1,600/ha. During a Mission interview, an international forester in Lao PDR placed enterprise-plantation establishment in the range of $500-$1,000/ha.5 These figures suggest that APB significantly over-lent to the enterprise borrowers, or that the costs of establishment in Lao PDR are substantially higher than in other parts of the world. However, given the in-country assessments of NAFES and others, it appears that excess funding was provided to enterprise borrowers, raising questions, again, about how those funds were used.

16. In summary, establishment efforts by farmers and individuals were generally poor and the sites chosen were frequently inappropriate (even though the socio-technical profiles were approved by the provincial project coordination units). For enterprises, the amounts allocated by APB significantly exceeded requirements. For both individuals and enterprises, it is likely that the amounts disbursed were not applied solely to the intended activities.

17. Plantation Maintenance. After land preparation and planting, weeding is critical in the early stages to allow the eucalyptus seedlings to establish successfully. Once the trees have 5 Internationally, a rate of about $600–$800 is said to be standard in the industry.

Appendix 11

61

attained sufficient growth, a canopy forms and blocks out sunlight to the weeds, and the eucalyptus root system deepens substantially. Weeding is suggested for the first three years, but is most important in the period immediately following establishment. Taking into account Lao PDR's prolonged dry season, it is also critical to keep firebreaks and underbrush clear. There was a considerable amount of fire damage reported. Weeding and clearing firebreaks are labor intensive activities for farmers and individuals. Enterprises can accomplish these maintenance activities mechanically (as long as they have planted their trees with proper spacing).

18. In practice, farmers and individuals performed little if any maintenance, which was largely beyond their aptitudes and means. Poor maintenance was mainly the result of insufficient guidance and contacts from the project extension service, but it was also tied to the credit program. APB did not provide lending for maintenance to farmers and individuals; therefore, even planters who were inclined to weed and maintain their plantations may have been unable to finance that crucial activity. Some of the larger enterprises visited by the PCR Mission better understood the importance of maintenance and practiced it more diligently. Overall, however, this critical activity was too often omitted, leading to heavy weed and/or fire damage. 19. Harvest and Reestablishment. Harvesting is a significant cost for plantations and is based on volume. It is frequently contracted out by farmers and individuals. Alternatively, pulpwood buyers may offer labor in exchange for the right to purchase a plantation owner's standing crop at a discount. The cost of harvesting can amount to about one-third of the gross revenue of the harvest. 20. Reestablishment after a harvest involves weeding, fertilizing, and firebreak maintenance. Reestablishment costs are only about 12-14% of the more intensive initial establishment costs for individuals and enterprises, according to the "PCR-estimated" costs. For farmers who properly maintain and harvest their initial tree crops, reestablishment costs should thus be about KN487,000/ha ($47/ha). However, in most cases this was not the result. 21. Summary. The "APB-implied" plantation establishment costs under the Project range from as low as KN2.7 million/ha ($260/ha—under investment) for farmers, to as high as KN16.8 million/ha ($1,620/ha—over investment) for enterprises. Plantation establishment by farmers and individuals was generally poor, and frequently took place in inappropriate settings. While enterprises demonstrated better establishment practices, their expenditures, as indicated by their borrowings, were extremely high. Plantation maintenance expenditures for most farmers and for many individuals were negligible—a sign that many of them did not even bother with maintenance. Enterprises did a better job of maintaining their plantations. For enterprises, maintenance costs amounted to about KN500,000/ha ($48/ha) for the first year after establishment (indicating multiple weeding sessions), KN300,000/ha ($29/ha) for the second year, and KN120,000/ha ($12/ha) annually for each succeeding year through harvest.

Appendix 11 62

b. Yields and Production 22. Prior to heading into the field, the PCR Mission commissioned a yield survey (see Appendix 2). In this survey, 71 plantations, aged 2 years old to 9 years old, were visited, of which 26 had either failed or been harvested. The mean annual increment (MAI) in cubic meters per ha per year (cu.m./ha/yr) for the 45 plantations was determined and plotted against the MAI growth curves6 constructed from the sample plot measurements made during the PPTA in 2002. While no firm conclusions were drawn as to the yield for different plantations, it was shown that enterprises belong to yield class (YC) 14, individuals to YC 12 and farmers to YC 8. This means that at 8 years old (the base age used in the yield curve) the average MAI for enterprises is 14 cu.m./ha/yr, the average MAI for individuals is 12 cu.m./ha/yr, and the average MAI for farmers is 8 cu.m./ha/yr. 24. For its part, the PCR Mission visited 25 plantations. Some sites were randomly selected, others were targeted. The majority of these showed low production potential to no production potential as a result of poor establishment techniques and a complete lack of maintenance. The Mission's field visits found that yield attainment is generally lower than perceived.7 By contrast, two NAFES-selected plantations that were visited had productive stands. One of these, not surprisingly, was a project-supported Pilot Farm Plantation located along the main road. The other was an individual-plantation that was demonstrating good production at 5 years. Of course both of these were model cases—exceptions, rather than the rule. It might also be noted that these are exactly the types of plantations the Mission might have been steered to by project officials had the Mission not made a concerted effort to visit randomly selected planters. Nonetheless, these two exceptions demonstrate that higher production levels can be attained with good management. 25. Neither the samples from 45 plantations, nor the reported harvest results, nor the PCR Mission site visits are large enough to provide statistically significant conclusions. Taken together, however (and taking into account discussions with forestry officials, planters and specialists in the field) they present a reasonably indicative picture. Yields for farmers and individuals were far below appraisal estimates, which predicted MAIs of 15 to 16 cu.m/ha/yr for 7-year harvests for farmers and enterprises. In contrast to the yields achieved by farmers and individuals, the yields (but not the costs) achieved by enterprises during the Project appear closer to appraisal estimates. 26. For the purpose of the PCR, the findings of the survey team were utilized to determine the growth and production of different categories of plantations. At rotation age of 7 years, the expected MAI of enterprise-plantations is 13.20 cu.m./ha/yr, the expected MAI of individual-plantations is 11.0 cu.m./ha/yr, and the expected MAI of farmer-plantations is 7.0 cu.m./ha/yr. The corresponding production or harvest figures at the end of the 7-year rotation are 92.4 cu.m./ha for enterprises, 77.0 cu.m./ha for individuals, and 49 cu.m./ha for farmers. It is acknowledged that higher yields are attainable, and were attained by some plantations under the Project. However, strong-performing farmer-plantations and individual-plantations are the exception rather than the rule, and the representative models employed here are better indicators of the overall averages. 6 An MAI growth curve represents the mean annual increment in cu.m./ha/yr at various ages of the plantation

belonging to a particular yield class; the yield class is the MAI of the plantation at a given base age (8 years was the base age used for these yield curves).

7 Many of the farmer fields are scattered and distant. As the PCR Mission found out during its search for plantations, it could take up to a half a day to reach some sites and locate the owners. Project and government personnel seldom visit these sites, which were poorly managed and exhibited poor production.

Appendix 11

63

c. Market and Prices

27. Harvesting has already occurred at some of the first plantations established under the Project. Prices are reported at KN127,000/t ($12.30/t) for pulpwood cut. In accessible areas it is stacked roadside for pickup. For sellers of standing trees, buyers provide the labor for harvesting and pay KN50,000–KN67,000/t ($4.85–$6.50/t) for stumpage. Over a 20-year period, this price has remained relatively constant. However, in recent years, because of increasing fiber-supply constraints in neighboring countries, pulpwood prices have fluctuated between $20/t and $30/t. 28. The recent rise in pulpwood price is attributable to declines in pulpwood production in Thailand, with Thai buyers now going further and further into forest interiors to extract supplies.8 This in turn has adversely affected the supply of eucalyptus saw logs for Lao PDR sawmills. On the plus side, Thailand has been demanding more of the output of Lao PDR plantation owners. However, this may hurt Lao PDR sawmills by increasing the cost of saw-log acquisition. 29. The PCR Mission visited two Lao PDR sawmills that process eucalyptus. The sawmills, which are capital intensive, are operating significantly under-capacity, which implies they are losing money. The competing pulpwood buyers provide immediate cash to plantation owners for stands of younger trees. This places the sawmills at a disadvantage, as they do not provide direct cash payment, and the trees needed for the sawmills must be older and larger than for pulpwood.

d. Model Outcomes 30. Financial models for farmers, individuals, and enterprises focus on the assumption of a 7-year rotation for eucalyptus. This is consistent with the fact that most eucalyptus production in Lao PDR is now supplying the pulpwood market.9 One model for an enterprise with a 10-year rotation is also presented in order to demonstrate the impact of a deferred harvest with a greater share of saw logs (as opposed to pulpwood). 31. For farmer and individual models, it is assumed that 100% of production is marketed as pulpwood. For enterprise models, an allowance is made for better production management; harvest can thus be divided between pulpwood and a small percentage of saw logs (about 5% for a 7-year harvest and 10% for a 10-year harvest).10 Saw logs bring a higher price, but must attain a minimum diameter to be satisfactory for processing as lumber. Between harvest and buyer pick-up of pulpwood, there is assumed to be a 15% loss in weight due to drying. This varies by season and time, but the adjustment is assessed as a fair average. Pulpwood is purchased by weight, whereas saw logs are bought by volume. The harvest model assumptions are portrayed in Table A11.8.

8 Buyers from both Petchaburi and Khon Kaen processing plants are now established in Lao PDR. 9 It is acknowledged that more refined management (such as producing for optimal mixes of pulpwood and saw logs)

could produce slightly better returns, but the difference is not of an order of magnitude to justify additional models under this evaluation.

10 With higher yields, a greater proportion of trees are of sufficient diameter to meet the requirements for saw logs. For example, for a 10-year harvest and MAI of 20 cu.m./ha/year, 25% of the volume should qualify as saw logs.

Appendix 11 64

Table A11.8: Harvest Quantities and Values

Item Unit Quantity Value/Unit Total I. Farmers Plantation (7-year cycle) 1. Mean Average Increment tree growth m3/ha/yr 5 2. Tree production cycle years 7 3. Production fresh wood m3/ha/cycle 35.0 4. Ninety-five percent for pulpwood m3/ha/cycle 33.3 5. Five percent to fuelwood m3/ha/cycle 1.8 6. Conversion pulpwood vol>weight m3/t 1 7. Avg. m3 fresh to roadside dry pickup wt loss 15% 8. Dry pulpwood pick-up weight at roadside t/ha 28.3 9. Harvest costs per volume Kip/m3 40,365

10. Harvest costs per ha Kip/ha 1,412,775 11. Of that, unskilled labor (75%) Kip/ha 1,059,581 12. Of that, non-unskilled labor costs (25%) Kip/ha 353,194 13. Unit value of pulpwood at roadside Kip/t 127,000 14. Gross value of pulpwood at roadside Kip/ha 3,589,338 15. Unit value of fuelwood at roadside Kip/t 40,000 16. Gross vale of fuelwood at roadside Kip/ha 59,500 17. Gross value all Kip/ha 3,648,838 18. Net value (less harvest cost) at roadside Kip/ha 2,236,063 II. Individual Plantation (7-year cycle) 1. Mean Average Increment tree growth m3/ha/yr 10 2. Tree production cycle years 7 3. Production fresh wood m3/ha/cycle 70 4. Ninety-five percent for pulpwood m3/ha/cycle 66.5 5. Five percent to fuelwood m3/ha/cycle 3.5 6. Conversion pulpwood volume>weight m3/t 1 7. Avg. m3 fresh to roadside dry pickup wt loss 15% 8. Dry pulpwood pick-up weight at roadside t/ha 56.5 9. Harvest costs per volume Kip/m3 40,365

10. Harvest costs per ha Kip/ha 2,825,550 11. Of that, unskilled labor (75%) Kip/ha 2,119,163 12. of that, non-unskilled labor costs (25%) Kip/ha 706,388 13. Unit value of pulpwood at roadside Kip/t 127,000 14. Gross value of pulpwood at roadside Kip/ha 7,178,675 15. Unit value of fuelwood at roadside Kip/t 40,000 16. Gross vale of fuelwood at roadside Kip/ha 119,000 17. Gross value all Kip/ha 7,297,675 18. Net value (less harvest cost) at roadside Kip/ha 4,472,125 ha = hectare, m3=cubic meter, t = ton, yr = year Note: Saw log shares as function of MAI and age: Source: PCR Mission. Forestry Consultants, January 2005.

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Table A11.8 (continued) Item Unit Quantity Value/Unit Total III.a. Enterprise Plantation (7-yr cycle) 1. Mean Average Increment tree growth m3/ha/yr 15 input1 2. Tree production cycle years 7 input2 3. Production fresh wood m3/ha/cycle 105 4. Ninety-five percent for wood processing m3/ha/cycle 99.8 5. Five percent to fuelwood m3/ha/cycle 5.3 6. Of wood processing output, share to saw logs % 5.0 output 7. Volume to saw logs m3/ha/cycle 5.0 8. Volume to pulpwood m3/ha/cycle 94.8 9. Conversion pulpwood vol>weight m3/t 1

10. Avg. m3 fresh to roadside dry pickup wt loss 15% 11. Dry pulpwood pick-up weight at roadside t/ha 80.5 12. Harvest costs per volume Kip/m3 40,365 13. Harvest costs per ha Kip/ha 4,238,325 14. Of that, unskilled labor (75%) Kip/ha 3,178,744 15. Of that, non-unskilled labor costs (25%) Kip/ha 1,059,581 16. Unit value of sawlogs at roadside Kip/t 229,627 17. Unit value of pulpwood at roadside Kip/t 127,000 18. Unit value of fuelwood at roadside Kip/t 40,000 19. Gross value of saw logs at roadside Kip/ha 1,145,264 20. Gross value of pulpwood at roadside Kip/ha 10,229,612 21. Gross value of fuelwood at roadside Kip/ha 178,500 22. Gross value all Kip/ha 11,553,376 23. Net value (less harvest cost) at roadside Kip/ha 7,315,051

Appendix 11 66


Item Unit Quantity Value/Unit Total III.b. Enterprise Plantation (10-year cycle) 1. Mean Average Increment tree growth m3/ha/yr 15 input1 2. Tree production cycle years 10 input2 3. Production fresh wood m3/ha/cycle 150 4. Ninety-five percent for wood processing m3/ha/cycle 142.5 5. Five percent to fuelwood m3/ha/cycle 7.5 6. Of wood processing output, share to saw logs % 10.0 output 7. Volume to saw logs m3/ha/cycle 14.3 8. Volume to pulpwood m3/ha/cycle 128.3 9. Conversion pulpwood volume>weight m3/t 1

10. Avg. m3 fresh to roadside dry pickup wt loss 15% 11. Dry pulpwood pick-up weight at roadside t/ha 109.0 12. Harvest costs per volume Kip/m3 40,365 13. Harvest costs per ha Kip/ha 6,054,750 14. Of that, unskilled labor (75%) Kip/ha 4,541,063 15. Of that, non-unskilled labor costs (25%) Kip/ha 1,513,688 16. Unit value of sawlogs at roadside Kip/t 229,627 17. Unit value of pulpwood at roadside Kip/t 127,000 18. Unit value of fuelwood at roadside Kip/t 40,000 19. Gross value of saw logs at roadside Kip/ha 3,272,183 20. Gross value of pulpwood at roadside Kip/ha 13,844,588 21. Gross value of fuelwood at roadside Kip/ha 255,000 22. Gross value all Kip/ha 17,371,770 23. Net value (less harvest cost) at roadside Kip/ha 11,317,020 ha = hectare, m3=cubic meter, t = ton, yr = year Note: Saw log shares as function of MAI and age: Source: PCR Mission. Forestry Consultants, January 2005.

MAI: 13 15 20yr % fresh cut volume of saw logs 7 0 5 108 0 5 159 0 10 20

10 0 10 25Source: PCR Mission, Forestry Consultants, January 2005.

32. Unit models were developed for each plantation category. From the unit models, representative plantation model sizes of 2 ha for farmers, 20 ha for individuals and 150 ha for enterprise were developed. Volume of stumpage and gross revenues at rotation age are summarized below.

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Table A11.9: Plantation Revenues

(KN'000/ha)

Plantation Type Production (Stumpage)

(cu.m/ha) Stumpage Value/Ha

I. Farmer HH 49 3,312

II. Individual 77 5,205

III. Enterprise 92.4 6,649 {Please alphabetize and define all abbreviations used in Table A11.9.} Source: PCR Mission, January 2005. 33. Differences in production at the end of a rotation cycle are attributable to the quality of site, management, and maintenance, as well as to other inputs that affect production process. Because of poor management and maintenance, farmer-plantations generally have lower stumpage volume at rotation age than individual-plantations and enterprise-plantations. 34. Plantation management and maintenance under individuals, while still deficient, is modeled as slightly better than management and maintenance for farmers. For the enterprise model, it is assumed that adequate management and maintenance activities are provided annually. Moreover, there are economies of scale for some unit production costs (such as for bulk buying of material inputs and harvesting). Hence, enterprises have higher expected yields. 35. In line with the RRP, the period of analysis, or project life, for all categories is set at 25 years. This means that for a 7-year rotation, there would be two or three harvests, depending on the year of planting. Since eucalyptus is known to regenerate by coppice, it is assumed that harvest volumes after the first rotation will be about 15% more than the first-rotation values. In addition, since there will be no need to plant seedlings, total regeneration or reestablishment costs are significantly lower than in the first rotation. Annual costs for management and maintenance, however, are assumed to be the same as in the first rotation. 36. Finally, for all models, the residual value of a plantation at the end of the project life (or period of analysis) is calculated by growing the final cycle until it reaches rotation age, and discounting it to the end of the project life. Table A11.10 below shows the financial internal rates of return (FIRR) of unit models, while Table A11.11 presents the financial outcomes for the model plantations using the APB-lending crop budget estimates. These outcomes are taken from Tables A11.12, A11.13, and A11.14, which illustrate the cash flow and the FIRRs for the farmer, individual, and enterprise models based on the "APB-implied" investments.

Table A11.10: Financial Internal Rates of Return of Unit Models

Borrower Type FIRR (%) I. Farmer HH 4.7 II. Individual 3.1 III. Enterprise 0.6 FIRR = financial internal rate of return, HH = household Source: PCR Mission, January 2005.

Appendix 11 68

Table A11.11: Financial Returns

Borrower Type Before Financing FIRR

(%) I. Farmer HH 4.7 II. Individual 3.1 III. Enterprise a. 7-year cycle b. 10-year cycle

0.2 1.7

FIRR = financial internal rate of return, HH = household a Negative cash flow. Source: PCR Mission, January 2005. 37. The outcomes may be explained by the large differences in the cost of establishment. For farmer-plantations, the establishment cost is only about one-third of the cost for individual-plantations, and about one-sixth of the cost for enterprise-plantations. The establishment cost for individuals is less than one half of that for enterprises. Thus, while plantation yields are higher for enterprise-plantations, their establishment costs are also higher, resulting in low FIRR.

Appendix 11 69

Table A11.12: Two-Hectare Model for Farmers’ Plantations: Financial Cash Flows (KN ‘000) and Rates of Returns (Based on APB Lending)

Item 1 2 3 4 5 6 7 8 9 10 11 12 13 Costs Establishment Costs1 5,454

Maintenance Costs 700 450 200 200 200 200 700 450 200 200 200 Land Rent

Regeneration Costs 2,034 Overhead Costs Total Costs 5,454 700 450 200 200 200 200 2,034 700 450 200 200 200 Yield at Rotation

Rotation (yrs) 7 M.A.I.(m3 ha/yr)2 7.0 Total Yield Distribution 98

Saw logs 0 0 Pulpwood 1 98 Fuelwood 0 0

Benefits Stumpage Value Price/m3

Sawlogs 67.594 0 Pulpwood 67.594 6,624 Fuelwood (6.365 0

Residual Value Total Benefits 0 0 0 0 0 0 0 6,624 0 0 0 0 0 Net Benefits (5,454) (700) (450) (200) (200) (200) (200) 4,590 (700) (450) (200) (200) (200) Taxes 0.05 230 Cash Flow Before Financing (5,454) (700) (450) (200) (200) (200) (200) 4,361 (700) (450) (200) (200) (200)

70 Appendix 11

Table A11.12 (continued) Item 14 15 16 17 18 19 20 21 22 23 24 25 26 Costs Establishment Costsa

Maintenance Costs 200 700 450 200 200 200 200 0 700 450 200 200 Land rent

Regeneration Costs 2,034 2,034 Overhead Costs

Total Costs 200 2,034 700 450 200 200 200 200 2,034 700 450 200 200 Yield at Rotation

Rotation (yrs) 7 M.A.I.(m3 ha/yr)b 7.0 Total Yield Distribution 112.7 112.7

Saw logs 0 0 0 Pulpwood 1 112.7 112.7 Fuelwood 0 0 0

Benefits Stumpage Vaue Price/m3

Sawlogs 67.594 0 0 Pulpwood 67.594 7,618 7,618 Fuelwood (6.365 0 0

Residual Value 6,218 Total Benefits 0 7,618 0 0 0 0 0 0 7,618 0 0 0 6,218 Net Benefits (200) 5,584 (700) (450) (200) (200) (200) (200) 5,584 (700) (450) (200) 6,018 Taxes 0.05 279 279 301 Cash Flow Before Financing (200) 5,305 (700) (450) (200) (200) (200) (200) 5,305 (700) (450) (200) 5,718 Notes: Stumpage price per m3 = (value at roadside - harvest cost); Fuelwood: -6,365; Pulpwood: 67,594 Weight loss is assumed to be 15% at pick up, thus I m3 is equal to .85 ton at roadside. Residual value is estimated by taking the discounted value (at 7%) of the next expected harvest after project life. a Based on tree cop budget estimated by PCR Mission b Based on the Yield Class 8 for farms as reported by PCR mission Source: PCR Mission, January 2005.

Appendix 11 71

Table A11.13: Twenty-Hectare Model for Individuals’ Plantations: Financial Cash Flows (KN ‘000) and Rates of Return

Item 1 2 3 4 5 6 7 8 9 10 11 12 13 Costs Establishment Costsa 159,500

Maintenance Costs 6,400 6,400 2,400 2,400 2,400 2,400 6,400 6,400 2,400 2,400 2,400 Land rent

Regeneration Costs 20,340 Overhead Costs

Total Costs 159,500 6,400 6,400 2,400 2,400 2,400 2,400 20,340 6,400 6,400 2,400 2,400 2,400 Yield at Rotation

Rotation (yrs) 7 M.A.I.(m3 ha/yr) 11.0 Total Yield(m3) Distribution 1,540.0

Saw logs 0 0.0 Pulpwood 1 1,540.0 Fuelwood 0 0.0


Sawlogs 67.594 0 Pulpwood 67.594 104,095 Fuelwood (6.365) 0

Residual Value Total Benefits 0 0 0 0 0 0 0 104,095 0 0 0 0 0 Net Benefits (159,500) (6,400) (6,400) (2,400) (2,400) (2,400) (2,400) 83,755 (6,400) (6,400) (2,400) (2,400) (2,400) Taxes 0.05 4,188 Cash Flow Before Financing (159,500) (6,400) (6,400) (2,400) (2,400) (2,400) (2,400) 79,567 (6,400) (6,400) (2,400) (2,400) (2,400)

Note: Stumpage price per m3: Value at roadside - harvest cost; Fuelwood: -6,365; Pulpwood: 67,594 Weight loss is assumed to be 15% at pick up, thus I m3 is equal to .85 ton at roadside. Residual value is estimated by taking the discounted value (at 7%) of the next expected harvest after project life. a Based on tree cop budget estimate of PCR Mission Source: PCR mission, January 2005.

72 Appendix 11


Item 14 15 16 17 18 19 20 21 22 23 24 25 26 Costs Establishment Costs1

Maintenance Costs 2,400 6,400 6,400 2,400 2,400 2,400 2,400 0 6,400 6,400 2,400 2,400 Land rent

Regeneration Costs 20,340 20,340 Overhead Costs

Total Costs 2,400 20,340 6,400 6,400 2,400 2,400 2,400 2,400 20,340 6,400 6,400 2,400 2,400 Yield at Rotation

Rotation (yrs) 7 M.A.I.(m3 ha/yr) 11.0 Total Yield(m3) Distribution 1,771.0 1,771.0

Saw logs 0 0.0 0.0 Pulpwood 1 1,771.0 1,771.0 Fuelwood 0 0.0 0.0


Sawlogs 67.594 0 0 Pulpwood 67.594 119,709 119,709 Fuelwood -6.365 0 0

Residual Value 97,718 Total Benefits 0 119,709 0 0 0 0 0 0 119,709 0 0 0 97,718 Net Benefits (2,400) 99,369 (6,400) (6,400) (2,400 (2,400) (2,400 (2,400) 99,369 (6,400) (6,400) (2,400) 95,318 Taxes 0.05 4,968 4,968 4,766 Cash Flow Before Financing (2,400) 94,401 (6,400) (6,400) (2,400) (2,400 (2,400) (2,400) 94,401 (6,400) (6,400) (2,400) 90,552

Note: Stumpage price per m3: Value at roadside - harvest cost; Fuelwood: -6,365; Pulpwood: 67,594 Weight loss is assumed to be 15% at pick up, thus I m3 is equal to .85 ton at roadside. Residual value is estimated by taking the discounted value (at 7%) of the next expected harvest after project life. 1 Based on tree cop budget estimate of PCR Mission Source: PCR mission, January 2005

Appendix 11 73

Table A11.14: One Hundred Fifty-Hectare Model (7-Year Rotation) for Enterprise's Plantations: Financial Cash Flows (KN '000) and Rates of Return (Based on APB Lending)

Item 1 2 3 4 5 6 7 8 9 Costs Establishment Costsa 2,521,500

Maintenance Costs 78,000 48,000 18,000 18,000 18,000 18,000 78,000 Land rent 7,800 7,800 7,800 7,800 7,800 7,800 7,800 7,800 Regeneration Costs 152,550 Overhead Costs

Total Costs 2,521,500 85,800 55,800 25,800 25,800 25,800 25,800 160,350 85,800 Yield at rotation

Rotation (yrs) 7 M.A.I.(m3.ha/yr) 13.2 Total Yield (m3) Distribution 13,860.0

Saw logs 0.05 693.0 Pulpwood 0.95 13,167.0 Fuelwood 0 0.0


Sawlogs 154.81795 107,289 Pulpwood 67.594 890,010 Fuelwood -6.365 0

Residual Value Total Benefits 0 0 0 0 0 0 0 997,299 0 Net Benefits (2,521,500) (85,800) (55,800) (25,800) (25,800) (25,800) (25,800) 836,949 (85,800) Taxes 0.05 41,847 Cash Flow Before Financing (2,521,500) (85,800) (55,800) (25,800) (25,800) (25,800) (25,800) 795,102 (85,800) Notes: Stumpage price per m3: Value at roadside - harvest cost; Fuelwood: -6,365; Pulpwood: 67,594; Logs: 154,818

Weight loss is assumed to be 15% at pick up, thus I m3 is equal to .85 ton at roadside Residual value is estimated by taking the discounted value (at 7%) of the next expected harvest after project life. a Based on tree cop budget by PCR Mission Source: PCR Mission, January 2005.

74 Appendix 11


Item 10 11 12 13 14 15 16 17 18 Costs Establishment Costsa

Maintenance Costs 48,000 18,000 18,000 18,000 18,000 78,000 48,000 18,000 Land rent 7,800 7,800 7,800 7,800 7,800 7,800 7,800 7,800 7,800 Regeneration Costs 152,550 Overhead Costs

Total Costs 55,800 25,800 25,800 25,800 25,800 160,350 85,800 55,800 25,800 Yield at rotation




Sawlogs 154.81795 123,382 Pulpwood 67.594 1,023,512 Fuelwood -6.365 0

Residual Value Total Benefits 0 0 0 0 0 1,146,894 0 0 0 Net Benefits (55,800) (25,800) (25,800) (25,800) (25,800) 986,544 (85,800) (55,800) (25,800) Taxes 0.05 49,327 Cash Flow Before Financing (25,800) (55,800) (25,800) (25,800) (25,800) 937,217 (85,800) (55,800) (25,800)

Notes: Stumpage price per m3: Value at roadside - harvest cost; Fuelwood: -6,365; Pulpwood: 67,594; Logs: 154,818 Weight loss is assumed to be 15% at pick up, thus I m3. is equal to .85 ton at roadside Residual value is estimated by taking the discounted value (at 7%) of the next expected harvest after project life. a Based on tree cop budget by PCR Mission Source: PCR Mission, January 2005.

Appendix 11 75


Item 19 20 21 22 23 24 25 26 Costs Establishment Costsa

Maintenance Costs 18,000 18,000 18,000 0 78,000 48,000 18,000 18,000 Land rent 7,800 7,800 7,800 7,800 7,800 7,800 7,800 7,800 Regeneration Costs 152,550 Overhead Costs

Total Costs 25,800 25,800 25,800 160,350 85,800 55,800 25,800 25,800 Yield at rotation




Sawlogs 154.81795 123,382 Pulpwood 67.594 1,023,512 Fuelwood -6.365 0

Residual Value 936,207 Total Benefits 0 0 0 1,146,894 0 0 0 936,207 Net Benefits (25,800) (25,800) (25,800) 986,544 (85,800) (55,800) (25,800) 910,407 Taxes 0.05 49,327 45,520 Cash Flow Before Financing (25,800) (25,800) (25,800) 937,217 (85,800) (55,800) (25,800) 864,887

Notes: Stumpage price per m3: Value at roadside - harvest cost; Fuelwood: -6,365; Pulpwood: 67,594; Logs: 154,818 Weight loss is assumed to be 15% at pick up, thus I m3 is equal to .85 ton at roadside Residual value is estimated by taking the discounted value (at 7%) of the next expected harvest after project life. a Based on tree cop budget by PCR Mission Source: PCR Mission, January 2005.

Appendix 11 76

38. Table A11.15 provides a summary of unit costs, revenues, rates of return, and conditional hurdle results. Given the "APB-implied" cost structure under the Project, significant increases in yield would be required to accomplish reasonable returns. To reach a 12% FIRR,11 farmer yields would have to rise 1.8 times (assuming better maintenance, reestablishment, and three 7-year rotations). For the individual cost structure, yields would have to increase 2.4 times (again, assuming better maintenance, reestablishment, and three 7-year rotations). Lastly, because of the extremely high average enterprise investment costs, enterprise yields would have to rise by 3.7 times—to unrealistically high levels for Southeast Asia. 39. If it is assumed that the actual amounts expended were less than the loans indicate, then the "PCR-estimated" tree crop budgets would provide a different basis for judging the yield hurdles. For farmers, the cost structure for the "APB-implied" and "PCR-estimated" tree crop budgets is similar, so there is little variance in findings here. However, the "APB-implied" investment levels by individuals and enterprises are considerably in excess of what practices in the field would suggest, and what is generally acknowledged as required for plantation establishment. This would imply that APB-lent funds in these plantation classes were wasted or diverted to other uses. For the lower "PCR-estimated" investment levels, much more modest and realistic increases in yields would be required. Lastly, Table A11.15 highlights the required yield increases under the "recommended" cultivation practices and tree-crop budgets. Substantial increases from current levels (and relatively high yields) are required for financial viability under this cost framework. 40. Credit. Since the FIRRs were all less than the loan interest rate, in all cases credit simply made the cash flows worse by adding an interest burden to the initial amount borrowed. The borrowing terms were 7% per annum, with interest payment due throughout the loan period. There was a grace period on principal repayment until harvest for farmers and individuals, and a slightly longer grace period allowed for enterprises. Borrowers were to provide at least 30% of the value of investment as owner equity. With inadequate returns, the credit has indebted all borrower participants. Unfortunately, many of the farmer-borrowers were encouraged by government staff to join the program, with unrealistic prospects of high future yields and prices.12 41. Most of the borrowers under the loan are in default (see Appendix 9 on APB). Much has been made about farmers not being able to make interest payments. First off, from the Mission visits, the farmers selected for the program were generally not poorly off. Most were leading citizens and community leaders in the villages—persons with some land and assets. Second, it is not only the farmers who are not making repayment. Many of the individuals and all of the enterprises have considerable assets, and they too are non-performing. It is thought that poor repayment under the Project has as much to do with borrower resentment toward joining a disappointing investment scheme as with borrower ability to repay. Lastly, because of a culture of policy lending and soft public sector recovery, the rural finance context in Lao PDR also contributes to the poor recovery.

11 This is considered a modest return given the natural risks, price uncertainty, cost of capital, economic environment,

and duration of the investment. See the ensuing section on credit for a discussion of rates. 12 In a number of independent settings, farmers said they were told by government staff working for the Project to

expect harvest prices for pulpwood of over $30/cu.m., versus an actual harvest price of about $12/cu.m. The $30 figure is not without basis, however, as it happens to be the buying price for pulpwood at factories in distant Khon Kaen, Thailand. It is, therefore, quite possible that farmers were misled due to confusion or other reasons by staff.

Appendix 11 77

Table A11.15: Summary of Model Analysis (KN'000)

APB-Implied Actuals PCR Estimates Official Recommendations Item Farmer Individual Enterprise Enterprise Farmer Individual Enterprise Enterprise Farmer Individual Enterprise Enterprise

Rotation 7 7 7 10 7 7 7 10 7 7 7 10 Cost/ha

Establishment 2,727 7,995 16,810 16,810 2,720 5,080 7,672 7,672 5,437 6,437 8,770 8,770 Maintenance

Second yr 350 520 520 520 350 520 520 520 650 650 650 650 Third yr 225 320 320 320 225 320 320 320 400 400 400 400 Fourth to sixth yr 100 120 120 120 100 120 120 120 150 150 150 150

Regeneration 1,017 1,017 1,017 1,017 1,017 1,017 1,017 1,017 1,017 1,017 1,017 1,017 Land rent 0 0 52 52 0 0 52 52 0 0 52 52

MAI 7 11 13 14 7 11 13 14 7 11 13 14 Revenue/ha 3,312 5,205 6,649 10,074 3,312 5,205 6,649 10,074 3,312 5,205 6,649 10,074 FIRR before financing 4.7% 3.1% 0.2% 1.7% 4.7% 5.8% 4.7% 6.0% (1.1%) 3.2% 3.4% 4.9% FIRR after financing 4.0% 2.0% (1.6%) 0.4% 4.0% 5.4% 4.0% 5.7% (2.7%) 2.1% 2.3% 4.3%

Needed yield to attain 12% FIRR 12.4 26.5 48.6 52.0 12.4 19.0 25.9 27.4 21.9 24.6 29.8 31.3

Multiple of base yield needed 1.8 2.4 3.7 3.7 1.8 1.7 2.0 2.0 3.1 2.2 2.3 2.2

APB = Agriculture Promotion Bank, FIRR = financial internal rate of return, ha = hectare, MAI = PCR = project completion report, yr = year Source: PCR Mission, January 2005.

Appendix 11 78

42. Another feature of the poor credit recovery worth noting is that APB and rural borrowers only had experience with short-term credit prior to the Project. The Project introduced long-term credit, and with it the obligation to service the loan throughout its life. This was a new and foreign concept for rural borrowers, who generally are used to paying off agricultural-production loans within a season or, in the case of equipment or livestock loans, servicing the loan over several years of a relatively fast investment payback period. The Project processors in appraisal failed to adequately assess the impact of rural folk's short-term time preference for money and their lack of familiarity with long-term credit.13 43. As for the subsidy of the Project interest rate, the kip fell against the dollar at an average rate of 35% per annum over the project period. The biggest falls occurred during the Asian economic crisis. Steep inflation followed, with rates peaking at 90 and 128 percent per annum. For the period of the Project, another proxy for inflation would be the implicit GDP deflator. It averaged 33 percent for the full period. 44. To compare "market" interest rates over the course of the project period would require an environment where competing suppliers and borrowers come together and a rate is freely determined. Those conditions did not and do not exist in Lao PDR. A market-based interest rate would also take account of (i) cost of funds (in a rational banking system, usually some margin over inflation); (ii) provision for risk or loan losses; (iii) cost of administration (in APB's reported case, about 8%); and a margin for profit (or return to shareholders). Putting this together would yield a figure far in excess of the 7% per annum charged on ITPP subloans. 45. During the Project, formal sector interest rates as high as 34% were reported, and the range of rates for the full project period is estimated by a Lao bank official to be 18-34%. However, these nominal rates don't say anything about actual access to funds. Long-term loans (the type required for tree plantations) are scarce in Lao PDR, so a form of informal credit rationing is in place. There is little opportunity to obtain loans with maturities longer than several years. 46. Intercropping. It was envisaged that intercropping or raising cattle on plantations would ease the financial burden of the interest payments. However, this seemingly facile approach did not occur for good reasons. Many of the plantations are far removed from farmer residences and primary farm plots. Whereas choice farmland is generally near farmer residences, degraded forest land for plantations is not. That remoteness poses maintenance and security issues for anyone considering cultivating crops or tending livestock. Secondly, intercropping has to be done carefully to ensure that crops do not compete with the fledgling eucalyptus seedlings. It was relayed that in the few cases where upland rice was broadcast, the effect on eucalyptus establishment was negative. 47. Prospects. Overall, while the model analysis tends to point to a negative outcome, it should still be noted that profitable cultivation is possible given (i) efficient use of investment, (ii) efficient use of resources and a commitment to annual maintenance, and (iii) a well-managed production plan that maximizes the value of the output mix (between pulpwood and saw logs 13 Lastly, for credit, it should be noted that in a period of inflation or currency depreciation, borrowers are at an

advantage with traditional fixed-rate repayment schedules. Funds from credit can generally be applied to immediate income-producing activities, while interest and loan principle become payable at deflated values through time. The project implementation period was one of significant currency depreciation and corresponding inflation. With all the adversities in project plantation noted, borrowers' real exposure was lessened because of these macroeconomic conditions.

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and the optimal harvest patterns and periods). All of these were objectives of the Project, but were not satisfactorily accomplished. 48. It is worth noting that the studies reviewed on tree plantations account only for direct production costs, and not for overheads. This is an oversight in any business undertaking. Taking account of overheads will imply higher costs, but the unit costs of overhead decline with scale of production. In addition to routine overheads, there are many other hidden management costs for organizing plantation establishment, negotiating loan contracts, arranging harvest and marketing, and accounting for taxes and incentives. Arranging permits, registrations, clearances, credit, etc. can all be costly and time-consuming. There is a need in Lao PDR to work to simplify these official processes. e. Project Outcome 49. For the Project as a whole, all areas reported as planted under the different categories were considered. However, the Mission had been alerted to allegations of widespread misuse of credit. Upon following up, it was learned that APB had launched its own investigative survey to assess credit borrowed against actual planted area. The results of that survey showed that, for the sample surveyed, actual area planted was substantially less than that reported (and for which funds were released; see Appendix 2 on Area Measurement and Appendix 9 on APB). The target group for the APB survey largely consisted of the individual class of borrowers. The PCR Mission launched its own survey in an attempt to match and corroborate the findings of the APB survey, and to secure additional measurement data on farmer borrowers. From that limited survey, the Mission found similar discrepancies, but a slightly higher degree over-reporting.

Table A11.16: Plantation Area by Planting Category

Plantation Category Areaa (ha)

Area Share

(%)

Estimate of Over-Reportingb

(%) Adjusted Areac

(ha) Companies/enterprises 3,000 23 20% 2,400 Individuals/Investors 4,500 35 30% 3,150 Farm Households 5,400 42 30% 3,780

Subtotal 12,900 100 28% 9,330 Pilot Block Plantations 229 37% 0% 229 Pilot Farm Plantations 395 63% 0% 395

Subtotal 624 100% 0% 624 Total 13,524 9,954

ha = hectare. a APB statistics and EA PCR, 2003. b Separate APB and PCR measurement surveys, and consultant assessment, January 2005. c Adjusted plantation area estimate. Source(s): {Please provide source(s) here. 50. Moreover, the PCR Mission noted that substantial numbers of farmer-plantations have failed. Estimates provided by the Mr. Thongthanh, a domestic consultant with the PCR Mission, show that 25.8% of farmer-plantations and 1.2% of individual-plantations had failed. No failures were reported among enterprise-plantations. Table A11.17 provides details on areas reported as planted in different years, by category, and the areas reaching harvestable age, after correcting for over-reporting and plantation failure.

Appendix 11 80

51. Table A11.17 provides the basis for determining the annual total direct cost of the Project (establishment and maintenance costs) and the annual project benefits during the life of the Project. Added to these costs are the production costs for the pilot farmer plantations,14 the production from the pilot block plantations, and the indirect project costs. The overall project costs include (i) administration of the credit component (Part A), (ii) development and maintenance of pilot block plantations (Part B), (iii) construction of access roads (Part C), and (iv) project management support (Part D). All costs are expressed in constant 2005 values (Table A11.18). 52. Table A11.19 shows the cash flow after considering all the project costs and revenues. The project FIRR for the combined productive components is –2.4%. D. Economic Analysis 53. Economic analysis extends to the country as a whole. In this framework, the premium on foreign exchange is accounted for, domestic resource distortions are avoided, and taxes and transfers are subtracted. For tradable commodities, border pricing is employed (Table A11.20). For other project inputs and outputs, the contents are broken down into unskilled labor, a domestic resource component, and a foreign resource component. Foreign resource components are revalued by using the shadow exchange rate factor (SERF), domestic resource components are valued at par, and unskilled labor is valued at the shadow wage rate. 54. Accounting for the economic costs and returns, the Project economic internal rate of return (EIRR) is –2.0%. The economic cash flow and EIRR of the Project is shown in Table A11.21. EIRR is slightly higher than FIRR for two main reasons. First, a premium is placed on foreign exchange earnings, and the main project output, pulpwood, is an export commodity that generates foreign exchange. Second, plantation establishment, maintenance and harvest have large cost components of unskilled labor. Rural labor is not employed fulltime due to (i) the seasonality of agriculture and (ii) limited work opportunities in the rural sector. Rural labor is thus shadow priced in the economic analysis at less than the financial wage. 55. The EIRR of –2.0% compares unfavorably with the appraisal EIRR of 13%. The variance is explained by the following. First and foremost, the appraisal forecasted MAI of 15–16 cu.m./ha/yr for 7-year rotation was well above the actual MAIs at harvest of 7 cu.m./ha/yr for farmers, 11 cu.m./ha/yr for individuals, and 13.2 cu.m./ha/yr for enterprises. Second, the appraisal for the Project envisioned that enterprise-plantation establishment costs would be approximately $631 per ha (updated to constant 2005 value). Given that the "PCR-estimate" establishment costs were $740 per ha, $631 is probably not an unreasonable estimate. However, APB lending under the Project implied that enterprise-establishment costs were $1,620 per ha—2.6-times the appraisal amount. The project's individual-plantation establishment costs were also much more than the amounts appraised for both farmers and enterprises.15 The cost of farmer-plantation establishment is fairly close to both the appraisal costs and the actual costs, and the appraisal price for pulpwood was fairly close to what it is today. Lastly, the appraisal made allowances for a premium associated with plantation wood use being substituted for natural forest exploitation. The PCR Mission saw no evidence of any 14 Pilot farmer plantations and pilot block plantations were relatively minor demonstration components with the

Project. As a simplification, the pilot farmer plantations are assumed to have an individual cost structure and enterprise yields. pilot block plantations are explicitly provisioned under Part B of the Project and are assumed to take on the enterprise yield level.

15 The appraisal only had these two categories of borrowers—it did not have an "individual" category. This borrower category was added during Project implementation.

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81

substantive substitution effect, and therefore makes no premium allowance for preserving natural forests. On the contrary, one could make the argument that the Project removed degraded forest lands from their natural succession and progression toward natural forests. This is indeed happening at large, poorly managed plantation sites, where weeds and indigenous species are overwhelming the sparse remains of eucalyptus plantings. D. Poverty, Employment, and Distribution of Impact 56. There were about 2,500 farmers who borrowed under the Project and 166 individual-borrowers. Most have been adversely affected by participation in the Project, as their indebtedness has increased because they owe both interest and large principal payments on their investments. 57. Even the enterprise-plantations have not explicitly profited from the Project. Average yield levels have not been high enough to break even. Once again, the amounts borrowed appeared to exceed the requirements significantly. Those excess borrowed funds may have been wasted, placed in other investments, or applied to other unreported plantation expansions. It is beyond the reach of the PCR Mission to make a judgment on this. 58. The Government (and by extension the public of Lao PDR) was another large loser under the Project, mainly because of the huge losses sustained by APB. A portion of the unrecoverable loans will have to be written off. The country's rural-finance culture has been set back by a program that misguidedly emphasized targeted and subsidized loans, many of which have not been repaid and may never be repaid (see Appendix 9 on APB and project credit). 59. The Project had a negative impact on poverty alleviation. However, this was not a project targeted at poverty. Loan applicants were screened closely by both NAFES and APB, and most farmers and individuals who qualified for the loans were not particularly poor. The farmers owned farmland, livestock, and various other assets. The individuals had assets and were frequently engaged in other business activities (sometimes large business activities). The enterprise-borrowers, of course, were extremely wealthy by Lao standards. 60. Wage labor created by potentially sustainable plantations has a positive impact on poverty alleviation. It is estimated that about 150 person-days per ha are generated over the course of plantation establishment (less if mechanical means are employed), while 10 person days per ha are generated annually for maintenance. Overall that computes to about 3,500 person-years of work in plantation establishment and about 3,300 person-years of employment in maintenance activities generated from Project-related investments.

82 Appendix 11 Table A11.17: All Project Plantations: Total Area Planted and Volume Harvested (Correction factor for area planted is 30% for farmers and 60% for individual and enterprises)

Year Category 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Area Planted (ha)

Enterprise 0.00 0.00 0.00 137.00 96.00 298.00 344.00 1,392.00 530.00 191.00 12.00 Individual 0.00 0.00 0.00 205.00 144.00 447.00 517.00 2,088.00 795.00 286.00 18.00 Farmer 0.00 0.00 0.00 246.00 173.00 537.00 620.00 2,506.00 954.00 343.00 21.00 PBP 24.00 24.00 117.00 64.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 PFP 0.00 0.00 46.00 225.00 124.00 0.00 0.00 0.00 0.00 0.00 0.00

Area Harvested (ha) Enterprise 0.0 0.0 0.0 109.6 76.8 238.4 275.2 Individual 0.0 0.0 0.0 141.8 99.6 309.1 357.6 Farmer 0.0 0.0 0.0 127.8 89.9 278.9 322.0 PBP 24.0 24.0 117.0 64.0 0.0 0.0 0.0 PFP 0.0 0.0 46.0 225.0 124.0 0.0 0.0

Volume Harvested (m3) Pulpwood

Enterprise 0.0 0.0 0.0 9,620.7 6,741.5 20,926.8 24,157.1 Individual 0.0 0.0 0.0 10,916.9 7,668.5 23,804.2 27,531.9 Farmer 0.0 0.0 0.0 6,260.8 4,403.0 13,667.0 15,779.4 PBP 2,106.7 2,106.7 10,270.3 5,617.9 0.0 0.0 0.0 PFP 0.0 0.0 4,037.9 19,750.5 10,884.7 0.0 0.0

Sub-total 2,106.7 2,106.7 14,308.1 52,166.9 29,697.6 58,397.9 67,468.3 Sawlogs

Enterprise 0.0 0.0 0.0 506.4 354.8 1,101.4 1,271.4 PBP 110.9 110.9 540.5 295.7 0.0 0.0 0.0 PFP 0.0 0.0 212.5 1,039.5 572.9 0.0 0.0

Subtotal 110.9 110.9 753.1 1,841.5 927.7 1,101.4 1,271.4

Appendix 11 83

Table A11.17: All Project Plantations: Total Area Planted and Volume Harvested (Correction factor for area planted is 30% for farmers and 60% for individual and enterprises)

Year Category 15 16 17 18 19 20 21 22 23 24 25 26 Area Planted (ha)

Enterprise Individual Farmer PBP PFP

Area Harvested (ha) Enterprise 1,113.6 424.0 152.8 119.2 76.8 238.4 275.2 1,113.6 424.0 152.8 119.2 76.8 Individual 1,444.1 549.8 197.8 154.2 99.6 309.1 357.6 1,444.1 549.8 197.8 154.2 99.6 Farmer 1,301.6 495.5 178.2 138.7 89.9 278.9 322.0 1,301.6 495.5 178.2 138.7 89.9 PBP 24.0 24.0 117.0 64.0 0.0 0.0 0.0 24.0 24.0 117.0 64.0 0.0 PFP 0.0 0.0 46.0 225.0 124.0 0.0 0.0 0.0 0.0 46.0 225.0 124.0

Volume Harvested (m3) Pulpwood

Enterprise 97,751.8 37,218.7 13,412.8 10,463.4 6,741.5 20,926.8 24,157.1 97,751.8 37,218.7 13,412.8 10,463.4 6,741.5 Individual 111,192.7 42,336.3 15,230.4 11,875.5 7,668.5 23,804.2 27,531.9 111,192.7 42,336.3 15,230.4 11,875.5 7,668.5 Farmer 63,779.2 24,279.9 8,729.6 6,795.3 4,403.0 13,667.0 15,779.4 63,779.2 24,279.9 8,729.6 6,795.3 4,403.0 PBP 2,106.7 2,106.7 10,270.3 5,617.9 0.0 0.0 0.0 2,106.7 2,106.7 10,270.3 5,617.9 0.0 PFP 0.0 0.0 4,037.9 19,750.5 10,884.7 0.0 0.0 0.0 0.0 4,037.9 19,750.5 10,884.7

Sub-total 274,830.4 105,941.6 51,680.9 54,502.6 29,697.6 58,397.9 67,468.3 274,830.4 105,941.6 51,680.9 54,502.6 29,697.6 Sawlogs

Enterprise 5,144.8 1,958.9 705.9 550.7 354.8 1,101.4 1,271.4 5,144.8 1,958.9 705.9 550.7 354.8 PBP 110.9 110.9 540.5 295.7 0.0 0.0 0.0 110.9 110.9 540.5 295.7 0.0 PFP 0.0 0.0 212.5 1,039.5 572.9 0.0 0.0 0.0 0.0 212.5 1,039.5 572.9

Subtotal 5,255.7 2,069.8 1,459.0 1,885.9 927.7 1,101.4 1,271.4 5,255.7 2,069.8 1,459.0 1,885.9 927.7 Correction for overreporting of areas planted and success rate Category overreporting success Correction Factors Farm 0.7 0.742 0.5194 Individual 0.7 0.988 0.6916 Enterprise 0.8 1 0.8 Source: PCR Mission, January 2005, crop budget based on PCR Mission Estimates.

Appendix 11 84

Table A11.18: Project Cost Aggregation by Year, and Current to Constant Values

I. ADB ($'000, current) Year Component 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total A. Credit Facility for Private

Tree Plantations 0 0 94 143 703 850 3,562 1,333 462 0 7,147 1. Credit Line for Farmer Plantations 2. Credit Line for Enterprise

Plantations B. Establishment of Pilot Plantations 0 116 78 0 0 1 0 0 0 4 199

1. Plantation Establishment 0 116 77 0 0 0 0 0 0 0 193 2. Plantation Maintenance 0 0 1 0 0 1 0 0 0 4 6

C. Improvement of Plantation Access Roads 0 47 276 281 96 108 0 0 0 4 812 1. Road Improvement 0 47 276 281 96 108 0 0 0 4 812 2. Road Maintenance 0 0 0 0 0 0 0 0 0 0 0

D. Project Management Support 250 158 277 184 76 98 0 0 0 450 1,493 1. Support Services 0 2 2 13 76 28 0 0 0 40 161 2. Vehicles and Equipment 0 83 0 25 0 0 0 0 0 252 360 3. Incremental Staff 0 1 0 0 0 0 0 0 0 0 1 4. Consulting Services 250 72 275 146 0 70 0 0 0 158 971

Subtotal 250 321 725 608 875 1,057 3,562 1,333 462 458 9,651 Service Charge 5 9 14 24 32 42 57 88 93 0 364 Total 255 330 739 632 907 1,099 3,619 1,421 555 458 10,015 II. Borrower Co-financing ($'000, current) @30% equity contribution of investment 0 0 40 61 301 364 1,527 571 198 0 3,063 III. GoL-reported costs ($'000, Current)

1994/ 1995/ 1996/ 1997/ 1998/ 1999/ 2000/ 2001/ 2002/ 2003/ Component 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total

A. Credit Facility for Private Tree Plantations 0 0 371 150 97 59 57 55 45 44 879

B. Establishment of Pilot Plantations 203 385 198 0 0 0 0 0 0 0 785

C. Improvement of Plantation Access Roads 30 47 3 4 2 0 0 0 0 0 86

D. Project Management Support 184 138 130 44 26 14 12 9 8 7 573

Total 418 569 702 198 125 73 69 64 53 51 2,322

Appendix 11

85

Table A11.18 (continued) IV. Total Project Costs, All Cofinanciers ($'000, current)

1994/ 1995/ 1996/ 1997/ 1998/ 1999/ 2000/ 2001/ 2002/ 2003/ Component 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total

A. Credit Facility for Private Tree Plantations 0 0 506 354 1,102 1,273 5,146 1,959 705 44 11,089

B. Establishment of Pilot Plantations 203 501 276 0 0 1 0 0 0 4 984


D. Project Management Support 434 296 407 228 102 112 12 9 8 457 2,066

Subtotal 668 890 1,467 867 1,302 1,494 5,157 1,969 713 509 15,036 Service Charge 5 9 14 24 32 42 57 88 93 0 364 Total 673 899 1,481 891 1,334 1,536 5,214 2,057 806 509 15,400 MUV Index (with 2005 as base year = 1.0): 1.20 1.14 1.06 1.02 1.01 0.99 0.96 0.95 0.99 0.98 1.00

V. Total ($'000, constant 2005) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Component Total A. Credit Facility for

Private Tree Plantations 0 0 535 361 1,118 1,264 4,959 1,861 697 43 10,838

B. Establishment of Pilot Plantations 243 570 292 0 0 1 0 0 0 4 1,109


D. Project Management Support 519 336 431 232 104 111 11 9 8 450 2,212

Subtotal 798 1,013 1,552 883 1,320 1,484 4,970 1,870 705 501 15,097 Service Charge 6 10 15 24 32 42 55 84 92 0 360 Total 804 1,023 1,567 907 1,353 1,525 5,025 1,954 797 501 15,457

VI. Total (Kip million, constant 2005) Component Total A. Credit Facility for

Private Tree Plantations 0 0 5,535 3,733 11,567 13,086 51,327 19,265 7,213 448 112,174

B. Establishment of Pilot Plantations 2,511 5,895 3,018 0 0 10 0 0 0 41 11,475

C. Improvement of Plantation Access Roads 377 1,103 3,052 3,000 1,028 1,110 0 0 0 41 9,711

D. Project Management Support 5,377 3,482 4,460 2,405 1,071 1,150 116 93 81 4,659 22,895

Subtotal 8,264 10,480 16,065 9,138 13,666 15,356 51,443 19,358 7,295 5,189 156,254 Service Charge 62 106 153 253 336 432 569 865 952 0 3,727 Total 8,326 10,586 16,219 9,391 14,002 15,788 52,011 20,224 8,246 5,189 159,981 VII. GoL-reported amount for credit administration only (Kip million, constant 2005) 0 0 4,065 1,581 1,023 606 571 538 460 448 9,293 Notes: ADB figures from disbursement, GoL figures from EA, and Borrowers based on APB-required 30% equity share of total investment. PCR Mission, Jan '05. Project period was a time of significant price and exchange rate variability due to the Asian financial crisis.

86 Appendix 11

Table A11.19: All Project Plantations: Financial Costs and Return (KN million)

Year Category 1 2 3 4 5 6 7 8 9 10 11 12 13 Costs Direct Costs Establishment Enterprise 0.0 0.0 0.0 1,051.1 736.5 2,286.3 2,639.2 10,679.4 4,066.2 1,465.4 92.1 Individual 0.0 0.0 0.0 1,041.4 731.5 2,270.8 2,626.4 10,607.0 4,038.6 1,452.9 91.4 Farmer 0.0 0.0 0.0 669.1 470.6 1,460.6 1,686.4 6,816.3 2,594.9 933.0 57.1 PBP 184.1 184.1 897.6 491.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PFP 0.0 0.0 352.9 1,726.2 951.3 0.0 0.0 0.0 0.0 0.0 0.0 Maintenance Enterprise 0.0 0.0 0.0 71.2 93.8 202.1 302.2 897.6 826.0 524.5 432.0 373.7 Individual 0.0 0.0 0.0 65.6 111.7 213.7 350.4 929.1 1,080.1 729.4 604.3 525.3 Farmer 0.0 0.0 0.0 86.1 115.9 251.5 379.7 1,112.2 1,055.4 718.3 590.9 507.2 PBP 12.5 20.2 71.4 76.5 40.3 27.5 24.6 21.7 7.7 0.0 33.3 20.5 PFP 0.0 0.0 23.9 131.7 142.0 72.2 47.4 47.4 41.9 14.9 117.0 136.5 Regeneration Enterprise 0.0 0.0 0.0 111.5 78.1 242.5 Individual 0.0 0.0 0.0 144.2 101.3 314.4 Farmer 0.0 0.0 0.0 129.9 91.4 283.7 PBP 24.4 24.4 119.0 65.1 0.0 0.0 PFP 0.0 0.0 46.8 228.8 126.1 0.0 Total Direct Costs 184.1 196.6 1,270.7 5,074.1 3,321.1 6,521.3 7,718.9 29,231.5 13,732.1 7,028.0 2,907.3 2,174.4 2,403.7 Indirect Cost A. Admin. of Credit

Facility 0.0 0.0 0.0 4,065.0 1,581.0 1,023.0 606.0 571.0 538.0 460.0 448.0 B. PBP 0.0 2,511.0 5,895.0 3,018.0 0.0 0.0 10.0 0.0 0.0 0.0 41.0 C. Access Roads 0.0 377.0 1,103.0 3,052.0 3,000.0 1,028.0 1,110.0 0.0 0.0 0.0 41.0 D. Management

Support 0.0 5,377.0 3,482.0 4,460.0 2,405.0 1,071.0 1,150.0 116.0 93.0 81.0 4,659.0 Total Indirect Costs 0.0 8,265.0 10,480.0 14,595.0 6,986.0 3,122.0 2,876.0 687.0 631.0 541.0 5,189.0

Appendix 11 87

Year Category 1 2 3 4 5 6 7 8 9 10 11 12 13 Revenues (Stumpage Sale) Enterprise 0.0 0.0 0.0 728.7 510.6 1,585.0 Individual 0.0 0.0 0.0 737.9 518.3 1,609.0 Farmer 0.0 0.0 0.0 423.2 297.6 923.8 PBP 159.6 159.6 777.9 425.5 0.0 0.0 PFP 0.0 0.0 305.8 1,495.9 824.4 0.0 Residual Value Total Revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 159.6 159.6 1,083.7 3,811.3 2,151.0 4,117.9 Net revenue/cash flow (184.1) (8,461.6) (11,750.7) (19,669.1) (10,307.1) (9,643.3) (10,594.9) (29,758.9) (14,203.6) (6,485.3) (4,285.0) (23.4) 1,714.2 FIRR -2.4% FIRR = financial internal rate of return, PBP = pilot block plantation, PFP = pilot farm plantation Source: PCR Mission, January 2005.

88 Appendix 11

Table A11.19 (continued): All Project Plantations: Financial Costs and Return (KN million)

Year

Category 14 15 16 17 18 19 20 21 22 23 24 25 26 Costs Direct Costs Establishment Enterprise Individual Farmer PBP PFP Maintenance Enterprise 416.7 329.7 742.5 662.3 419.6 357.0 314.0 365.7 312.1 737.6 662.0 419.6 357.0 Individual 530.2 374.2 679.1 749.2 504.5 431.9 387.1 412.3 333.5 667.8 748.5 504.5 431.9 Farmer 513.0 329.0 614.1 550.2 373.1 328.4 292.4 329.2 265.7 596.6 549.2 373.1 328.4 PBP 7.7 7.7 20.2 27.8 71.4 76.5 40.3 27.5 24.6 34.2 27.8 71.4 76.5 PFP 66.7 41.9 41.9 41.9 38.8 131.7 142.0 72.2 47.4 47.4 41.9 38.8 131.7 Regeneration Enterprise 279.9 1,132.5 431.2 155.4 121.2 78.1 242.5 279.9 1,132.5 431.2 155.4 121.2 78.1 Individual 363.6 1,468.6 559.2 201.2 156.8 101.3 314.4 363.6 1,468.6 559.2 201.2 156.8 101.3 Farmer 327.5 1,323.7 503.9 181.2 141.0 91.4 283.7 327.5 1,323.7 503.9 181.2 141.0 91.4 PBP 0.0 24.4 24.4 119.0 65.1 0.0 0.0 0.0 24.4 24.4 119.0 65.1 0.0 PFP 0.0 0.0 0.0 46.8 228.8 126.1 0.0 0.0 0.0 0.0 46.8 228.8 126.1 Total Direct Costs 2,505.3 5,031.8 3,616.4 2,734.9 2,120.4 1,722.5 2,016.3 2,177.9 4,932.6 3,602.3 2,733.0 2,120.4 1,722.5 Indirect Cost A. Admin. of Credit Facility B. PBP C. Access Roads D. Management Support Total Indirect Costs

Appendix 11 89

Year

Category 14 15 16 17 18 19 20 21 22 23 24 25 26 Revenues (Stumpage Sale) Enterprise 1,829.7 7,403.9 2,819.0 1,015.9 792.5 510.6 1,585.0 1,829.7 7,403.9 2,819.0 1,015.9 792.5 510.6 Individual 1,861.0 7,516.0 2,861.7 1,029.5 802.7 518.3 1,609.0 1,861.0 7,516.0 2,861.7 1,029.5 802.7 518.3 Farmer 1,066.6 4,311.1 1,641.2 590.1 459.3 297.6 923.8 1,066.6 4,311.1 1,641.2 590.1 459.3 297.6 PBP 0.0 159.6 159.6 777.9 425.5 0.0 0.0 0.0 159.6 159.6 777.9 425.5 0.0 PFP 0.0 0.0 0.0 305.8 1,495.9 824.4 0.0 0.0 0.0 0.0 305.8 1,495.9 824.4 Residual Value 34,840.8 Total Revenue 4,757.3 19,390.6 7,481.5 3,719.2 3,976.0 2,151.0 4,117.9 4,757.3 19,390.6 7,481.5 3,719.2 3,976.0 36,991.8 Net revenue/cash flow 2,252.0 14,358.8 3,865.1 984.3 1,855.6 428.6 2,101.6 2,579.4 14,457.9 3,879.1 986.2 1,855.6 35,269.4 FIRR FIRR = financial internal rate of return, PBP = pilot block plantation, PFP = pilot farm plantation Source: PCR mission, January 2005.

Appendix 11 90

Table A11.20: Border Pricing for Pulpwood (Pulpwood, derived from nearest processing center – Khon Kaen, Thailand)

Item Value/Quantity Unit 1. Economic Price Price delivered at Factory (Khon Kaen, Phoenix Paper Pulp) 31 $/t Border to Khon Kaen 200 km Total transport costs 9 $/t Border clearance and documentation 5 $/t Price at border 17 $/t Price at border (SERF adj'd) 195,305 KN/t Financial buyer handling and margin of which: 12,186 KN/t

tradable (x SERF) 4,058 KN/t labor (x SWRF) 1,097 KN/t non-tradable (no adj.) 7,312 KN/t Shadowed margin 12,466 KN/t Shadowed price to buyer - In 182,838 KN/t

Financial transport to border of which: 23,288 KN/t tradable (x SERF) 12,925 KN/t labor (x SWRF) 2,096 KN/t non-tradable (no adj.) 9,315 KN/t Shadowed transport 24,335 KN/t Shadowed price loaded 158,503 KN/t

Financial loading, measuring and handling of which: 13,477 KN/t tradable (x SERF) 4,488 KN/t labor (x SWRF) 6,064 KN/t non-tradable (no adj.) 2,695 KN/t Shadowed loading, measuring and handling 13,247 KN/t

Shadowed price pulpwood at roadside 145,255 KN/t Shadow conversion factor 1.14 2. Financial Price Price delivered at Factory (Khon Kaen, Phoenix Paper Pulp) 31 $/t Border to Khon Kaen 200 km Total transport costs 9 $/t Border clearance and documentation 5 $/t Price at border 17 $/t Price at border 175,950 KN/t Buyer handling and margin 12,186 KN/t Buyer handling and margin 7% share Price to buyer - In 163,764 KN/t Transport to border 23,288 KN/t Transport avg distance 50 km Loading, measuring and handling 13,477 KN/t Price pulpwood at roadside 127,000 KN/t Sources: PCR Mission, January 2005, PPTA October 2003.

Appendix 11

91

Table A11.21: All Project Plantations: Economic Costs and Returns (KN million)

Year Item 1 2 3 4 5 6 7 8 Costs

Direct Costs Establishment

Enterprise 0.0 0.0 0.0 2,457.9 1,722.3 5,346.4 6,171.7 24,973.9 Individual 0.0 0.0 0.0 1,768.1 1,242.0 3,855.4 4,459.1 18,009.0 Farmer 0.0 0.0 0.0 837.6 589.1 1,828.5 2,111.1 8,532.9 PBP 430.6 430.6 2,099.1 1,148.2 0.0 0.0 0.0 0.0 PFP 0.0 0.0 825.3 4,036.7 2,224.7 0.0 0.0 0.0

Maintenance Enterprise 0.0 0.0 0.0 74.3 97.7 210.6 314.8 Individual 0.0 0.0 0.0 129.2 173.7 376.8 569.6 Farmer 0.0 0.0 0.0 155.0 208.6 452.7 683.5 PBP 13.0 21.0 74.4 79.6 41.9 28.6 25.6 PFP 0.0 0.0 24.9 137.3 147.9 75.2 49.4

Regeneration Enterprise 0.0 Individual 0.0 Farmer 0.0 PBP 27.8 PFP 0.0

Total Direct Costs 430.6 443.6 2,945.4 10,348.0 6,353.4 11,700.1 13,885.8 53,186.5 Indirect Costs A. Admin of Credit

Facility 0.0 0.0 0.0 4,110.0 1,598.0 1,034.0 613.0 577.0 B. PBP 0.0 2,461.0 5,778.0 2,958.0 0.0 0.0 10.0 0.0 C. Access Roads 0.0 370.0 1,083.0 2,997.0 2,946.0 1,009.0 1,090.0 0.0 D. Management

Support 0.0 5,802.0 3,757.0 4,813.0 2,595.0 1,156.0 1,241.0 125.0 Total Indirect Costs 0.0 8,633.0 10,618.0 14,878.0 7,139.0 3,199.0 2,954.0 702.0

Revenues (Stumpage Sale)

Enterprise 0.0 Individual 0.0 Farmer 0.0 PBP 235.8 PFP 0.0 Residual Value Total Revenue 0.0 0.0 0.0 0.0 0.0 0.0 0.0 235.8

Net Revenue/Cash Flow (430.6) (9,076.6) (13,563.4) (25,226.0) (13,492.4) (14,899.1) (16,839.8) (53,652.6) EIRR (2.0%)

EIRR = economic internal rate of return, PBP = pilot block plantation, PFP = pilot farm plantation. (Source: PCR Mission, January 2005, crop budget based on APB Lending Estimates)

Appendix 11 92


Year Item 9 10 11 12 13 14 15 16 17 Costs


Enterprise 9,508.7 3,426.7 215.3 Individual 6,856.9 2,466.8 155.3 Farmer 3,248.4 1,167.9 71.5 PBP 0.0 0.0 0.0 PFP 0.0 0.0 0.0

Maintenance Enterprise 935.4 860.2 546.3 450.0 389.2 434.1 343.5 773.7 689.6 Individual 1,668.1 1,582.8 1,077.4 909.0 790.9 834.3 591.7 1,208.4 1,097.9 Farmer 2,002.0 1,899.6 1,292.9 1,063.7 913.0 923.4 592.3 1,105.3 990.4 PBP 22.6 8.0 0.0 34.7 21.3 8.0 8.0 21.0 29.0 PFP 49.4 43.6 15.5 122.0 142.1 69.4 43.6 43.6 43.6

Regeneration Enterprise 0.0 0.0 126.9 88.9 276.1 318.7 1,289.5 491.0 176.9 Individual 0.0 0.0 110.2 77.4 240.2 277.8 1,122.0 427.2 153.7 Farmer 0.0 0.0 77.2 54.3 168.5 194.5 786.2 299.3 107.6 PBP 27.8 135.5 74.1 0.0 0.0 0.0 27.8 27.8 135.5 PFP 0.0 53.3 260.6 143.6 0.0 0.0 0.0 0.0 53.3

Total Direct Costs 24,319.2 11,644.4 4,023.1 2,943.5 2,941.4 3,060.2 4,804.6 4,397.3 3,477.6 Indirect Costs A. Admin of Credit

Facility 544.0 466.0 453.0 B. PBP 0.0 0.0 40.0 C. Access Roads 0.0 0.0 40.0 D. Management

Support 101.0 88.0 5,028.0 Total Indirect Costs 645.0 554.0 5,561.0


Enterprise 0.0 0.0 1,076.9 754.6 2,342.5 2,704.1 10,942.3 4,166.2 1,501.4 Individual 0.0 0.0 1,121.0 787.5 2,444.4 2,827.2 11,418.2 4,347.5 1,564.0 Farmer 0.0 0.0 551.1 387.5 1,202.9 1,388.9 5,613.8 2,137.1 768.4 PBP 235.8 1,149.6 628.9 0.0 0.0 0.0 235.8 235.8 1,149.6 PFP 0.0 452.0 2,210.9 1,218.4 0.0 0.0 0.0 0.0 452.0 Residual Value Total Revenue 235.8 1,601.6 5,588.8 3,148.1 5,989.9 6,920.2 28,210.0 10,886.6 5,435.4

Net Revenue/Cash Flow (24,728.4) (10,596.8) (3,995.3) 204.6 3,048.5 3,860.0 23,405.4 6,489.3 1,957.8 EIRR

EIRR = economic internal rate of return, PBP = pilot block plantation, PFP = pilot farm plantation. Source: PCR Mission, January 2005, crop budget based on APB Lending Estimates.

Appendix 11

93


Year Item 18 19 20 21 22 23 24 25 26 Costs


Enterprise Individual Farmer PBP PFP

Maintenance Enterprise 437.0 371.9 327.0 381.0 325.1 768.6 689.3 437.0 371.9 Individual 745.2 656.2 584.1 657.4 530.7 1,191.5 1,096.9 745.2 656.2 Farmer 671.6 591.2 526.3 592.6 478.2 1,073.8 988.6 671.6 591.2 PBP 74.4 79.6 41.9 28.6 25.6 35.6 29.0 74.4 79.6 PFP 40.4 137.3 147.9 75.2 49.4 49.4 43.6 40.4 137.3

Regeneration Enterprise 138.0 88.9 276.1 318.7 1,289.5 491.0 176.9 138.0 88.9 Individual 119.8 77.4 240.2 277.8 1,122.0 427.2 153.7 119.8 77.4 Farmer 83.8 54.3 168.5 194.5 786.2 299.3 107.6 83.8 54.3 PBP 74.1 0.0 0.0 0.0 27.8 27.8 135.5 74.1 0.0 PFP 260.6 143.6 0.0 0.0 0.0 0.0 53.3 260.6 143.6

Total Direct Costs 2,644.8 2,200.3 2,311.9 2,525.8 4,634.7 4,364.3 3,474.5 2,644.8 2,200.3 Indirect Costs A. Admin of Credit

Facility B. PBP C. Access Roads D. Management

Support Total Indirect Costs


Enterprise 1,171.3 754.6 2,342.5 2,704.1 10,942.3 4,166.2 1,501.4 1,171.3 754.6 Individual 1,219.5 787.5 2,444.4 2,827.2 11,418.2 4,347.5 1,564.0 1,219.5 787.5 Farmer 598.1 387.5 1,202.9 1,388.9 5,613.8 2,137.1 768.4 598.1 387.5 PBP 628.9 0.0 0.0 0.0 235.8 235.8 1,149.6 628.9 0.0 PFP 2,210.9 1,218.4 0.0 0.0 0.0 0.0 452.0 2,210.9 1,218.4 Residual Value 50,734.7 Total Revenue 5,828.6 3,148.1 5,989.9 6,920.2 28,210.0 10,886.6 5,435.4 5,828.6 53,882.8

Net Revenue/Cash Flow 3,183.7 947.7 3,678.0 4,394.4 23,575.4 6,522.3 1,960.9 3,183.7 51,682.5 EIRR

EIRR = economic internal rate of return, PBP = pilot block plantation, PFP = pilot farm plantation. Source: PCR Mission, Feb 2005, crop budget based on APB Lending Estimates.

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