VZCZCXRO8790
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHVN #0220/01 0780947
ZNY EEEEE ZZH
R 190947Z MAR 07
FM AMEMBASSY VIENTIANE
TO RUEHC/SECSTATE WASHDC 1023
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
UNCLAS E F T O SECTION 01 OF 02 VIENTIANE 000220
SIPDIS
NOFORN
SENSITIVE
SIPDIS
E.O. 12958: DECL: 03/17/2017
TAGS: EAGR EAID EAIR ECON EFIN ELAB EMIN ENRG ETRD
LA, PGOV, PHUM, PREL, SENV, SOCI, TH, UNDP, KFLU, TBIO
SUBJECT: WORLD BANK OFFICIAL EXPRESSES CAUTIOUS OPTIMISM TO
EAP/MLS DIRECTOR
REF: A. VIENTIANE 121
B. VIENTIANE 133
C. VIENTIANE 1155
1. (SBU) Summary: During a March 2 meeting, World Bank
country manager Patchamuthu Illangovan told visiting EAP/MLS
office director Rapson that he is more optimistic than he
used to be about prospects for progress in Laos. The World
Bank's major hydropower project, Nam Theun 2, has brought
dynamism and good practices, although there are still many
"second and third tier companies" that have agreements with
the government in the hydropower and mining sectors. Nam
Theun 2 is going forward in a satisfactory way, although
there have been delays in relocating affected families. The
Lao government has made surprisingly good progress in public
finance reform, in part due to prodding by the newly vigorous
legislature. Corruption appears to be on the rise, and the
Lao have asked the World Bank for help in addressing it. End
summary.
2. (U) At a March 2 meeting with visiting EAP/MLS Director
Robert Rapson, World Bank country manager Patchamuthu
Illangovan provided an overview of current World Bank
priorities and concerns. The World Bank's Laos office is
currently implementing the March 2005 strategy, which
emphasizes capacity development of organizations and
individuals. The office recently created a senior position
dealing exclusively with capacity-building. Investment and
trade capacity-building is a priority for the World Bank and
other donors. The World Bank is prepared to move quickly to
assist the Lao government in addressing avian influenza.
(Note: After this meeting, the World Bank reached agreement
with the Lao government to fund a major poultry culling
operation, currently underway. They continue to review other
assistance requests. End note.)
Public Finance and Governance
-----------------------------
3. (SBU) Mr. Illangovan said he has observed a lot of
dynamism in Laos since the beginning of the Nam Theun 2
hydro-power project. (Note: This is the World Bank's
largest project in Laos. It was approved in 2005. End
note.) Despite his initial skepticism regarding the Lao
government's ability to take on public finance management
reform, there has been encouraging progress. Recent
amendments to the budget law (Ref A) will improve the fiscal
situation by centralizing revenue collection, which
previously took place primarily at the provincial level.
This effort has been led by very committed officials,
including the Vice Minister of Finance. Mr. Illangovan noted
that China and Vietnam undertook similar reforms in the
mid-1980s and mid-1990s, respectively.
4. (SBU) Mr. Illangovan said that there is a sense that
corruption is on the rise. The Lao government has asked for
assistance in addressing this. Anti-corruption efforts,
which heretofore have fallen under the Deputy Prime Minister,
will be moved into an independent unit.
5. (SBU) Mr. Illangovan noted that the National Assembly is
beginning to demand accountability. For example, they pushed
back on government revenue targets. When the government said
there would be shortfalls, National Assembly Vice President
Pany Yathortu retorted that the legislature had passed budget
legislation at the government's request and expected the
government to uphold its own commitments. (Note: Mme. Pany
is a member of the communist party Politburo. End note.)
Trade and Investment Capacity-Building
--------------------------------------
6. (SBU) Mr. Illangovan outlined the goals of the recently
completed Diagnostic Trade and Integration Study, which
articulates the key policy actions to be taken by the Lao
government in order to increase export competitiveness and
promote trade and investment. (Note: Details on the program
can be found in the World Bank's November 2006 "Lao PDR
Economic Monitor," available on the internet. End note.) A
multi-donor trust fund has been established to coordinate
trade-related assistance, including strengthening customs
procedures and developing enterprise regulations. Mr.
Illangovan said that the biggest challenge for donors is that
the Ministry of Industry and Commerce lacks staff members
capable of engaging on these issues.
Hydro-power and Mining
----------------------
VIENTIANE 00000220 002 OF 002
7. (SBU) Mr. Illangovan said that progress on Nam Theun 2
has been satisfactory, despite some setbacks such as delays
in relocating villagers. 100 of 600 households have been
relocated so far. There are concerns about how people who
were previously hunter-gatherers will adjust to being
farmers. The project has committed to doubling household
incomes for affected families from $400 a year to $800. The
main income sources will be agriculture, livestock,
fisheries, and forestry. The next challenge will be ensuring
the integrity of the watershed area. Poaching and logging
(particularly of rosewood) are the biggest threats.
Downstream risks that have to be addressed include dirty
water and rising water levels, which could lead to loss of
fisheries in four to five years.
8. (SBU) Nam Theun 2, Mr. Illangovan said, provided a model
for high-quality investment in the hydro-power sector which
the government hoped to replicate for other projects. This
has not materialized, however. Senior energy and environment
officials in Thailand are aware that they need to pay more
attention to the quality of Thai investments in Laos. Mr.
Illangovan said that there have been concerns that the Nam
Ngum 2 commerical hydropower project was rushed into
operation, causing problems which the company is now trying
to address by retrofitting. Four or five other projects are
scheduled to begin producing energy in the next five to seven
years. Chinese, Korean, and Russian companies have signed
memoranda of understanding. However, some of these projects
"may not see the light of day."
9. (SBU) Mr. Illangovan noted that the Lao government is
concerned about quality of investments in the mining sector,
which was the reason for the recently announced moratorium on
approval of new mining investments (Ref B). The government
is worried that speculators are buying up concessions and
then sitting on them, waiting to sell them to other buyers.
However, the government does not want to discourage
investors. With regard to investment in general, more
competition is needed. Otherwise, Laos will become a
"playground for second and third-tier companies."
Cautious Optimism
-----------------
10. (SBU) Mr. Illangovan said, "A few years ago, I wasn't
that optimistic. But I see improvement. Having come this
far, I don't think they'll want to move the clock back." He
added, however, that getting things done will continue to
require patience. The Lao government places a premium on
consensus-building; moving quickly is not a priority. Donors
are becoming more coordinated, but Laos is not yet where
Cambodia and Vietnam are in terms of aid effectiveness. The
donor community has not yet developed joint sectoral
initiatives. The donor round table (Ref C) is not a
businesslike, efficient process.
11. (SBU) Comment: Mr. Illangovan noted a number of the
same encouraging developments that the embassy has observed,
such as a stronger National Assembly. We also share his
views on obstacles to progress, foremost among them lack of
human capacity. End comment.
MCGEEHAN