THE EU AND THE WAGES OF FECKLESS AID IN LAOS

C O N F I D E N T I A L SECTION 01 OF 02 VIENTIANE 000405

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DEPT FOR EB AND EAP/MLS
PASS TO USAID

E.O. 12958: DECL: 05/04/2011
TAGS: EAID ECON PGOV PHUM LA
SUBJECT: THE EU AND THE WAGES OF FECKLESS AID IN LAOS

REF: A. VIENTIANE 76

B. VIENTIANE 152

C. VIENTIANE 212

D. VIENTIANE 302

E. VIENTIANE 307

F. VIENTIANE 360

G. VIENTIANE 321

H. VIENTIANE 367

I. VIENTIANE 396

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Classified By: Ambassador P. Haslach. Reason 1.4 (D)


1. (C) Summary: Feckless aid has long provided a life-line to
the Lao government, despite its failure to meet conditions
set for certain projects and its regular violations of human
rights. Major donors such as the Japanese look set to
continue to bankroll the regime unconditionally, and the EU
has just announced plans to join them in this untoward
course. End summary.

Paving the road to. . .
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2. (C) Refs. A, C, and E are recommended to those interested
in how and why Laos has failed to reform and progress, even
though surrounded by vibrant economies bent on treating it as
their poorest province. Unconditional assistance has been
the main reason for this. The local newspapers on any given
day are full of reports of more aid rolling in. A
half-century of aid from successive generations of donors (of
quite different political stripes) has produced a culture of
aid dependence but has not resulted in anything like levels
of development commensurate with the cost. Despite all the
money and all the good intentions, Laos remains one of the
poorest and least developed countries in East Asia, with one
of the regions most repressive governments -- a perfect
example of the effects of moral hazard.

There's more than one born every minute
--------------

3. (C) Major donors persist in handing money directly to the
Lao Government, along with wispy admonitions that the
denizens of a military dictatorship in Communist garb should
go forth and do good with it. While the GoL admits to about
65 percent of its budget being ODA, informed observers here
reckon that figure at 80 percent or more, with few strings
attached. There is little or no oversight on how such
assistance money is really used. Among the few principles
hard-headed observers here can agree upon is that money given
directly to the GoL quickly escapes from view and is lost to
any real reckoning.


4. (C) The USG gives comparatively small amounts of aid to
Laos, and almost exclusively through NGOs and IOs. We also
require regular accounting and routinely go out to project
sites make sure conditions of the aid are being met. On the
other end of the spectrum Japan (bilaterally),and ADB
(multilaterally) give vast sums and are heedless of
accounting or practical results. The EU, which has always
been somewhere in the middle with a multitude of development
projects - on the whole competently administered - is fixing
to join them.

Look who we're bankrolling
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5. (C) GoL line ministries (Potemkin affairs facing outboard
to receive aid from donors) have been gathering in foreign
aid to the tune of about $500 million annually, while the
real GoL (the military, security apparatus, and upper
echelons of the Communist Party) have focused solely on
remaining in power, violating basic human rights and spending
other people's money along the way. That Laos remains a
military dictatorship behind a ministerial facade was made
abundantly clear this year, when human rights violations
ranging from massacres to imprisoning children have been
regularly reported (Refs. F, H, I and previous; refs. B, E, G
and previous).

A perverse move
--------------

6. (C) In early April the donor community in Vientiane met
for a periodic informal donor's meeting, and several donors
recounted the programs they were pursuing and described their
plans for the future (ref. C and previous described ADB's
plan, annunciated at an earlier meeting). There was talk

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about the GoL's recalcitrance and the need to tighten up on
aid goals and procedures, but main thrust of the discussion
was that donors must find ways to continue giving, despite
declining aid budgets. Lip service only was paid to the
great need for policy reform, strategic issues with leverage
effects, and a strategic dialogue.


7. (C) There was also much discussion of the Poverty
Reduction Support Operation (PRSO) - a document drafted by
the World Bank and GOL that is supposed to represent Laos,
own declared needs and strategies. The World Bank will hold
and monitor donor contributions in a trust fund intended to
support the PRSO. These monies will then go directly to the
GOL. This is meant to be the preferred mechanism for giving
aid to Laos in the future, in order to foster Lao "ownership"
of development programs.


8. (C) The corker was when the EU Resident Representative
announced a European aid strategy for Laos from 2007 to 2013
that will have at its core direct contributions to the PRSO
trust fund, using it to provide direct support for the Lao
budget. This will comprise 70 percent of the EU,s total
bilateral contribution (the real amounts are not yet know,
and will not be until June, at the earliest). The remaining
30 percent will be equally divided among resettlement issues
(forced resettlement is a problem in Laos, and the EU
Resrep's particular issue),trade and economic cooperation
and development, and governance. There will be contributions
to regional efforts as well, under the EC-ASEAN Cooperation
Agreement, and efforts will be made to have the EU
contributions parallel bilateral aid efforts by individual EU
states. However, the project-specific approach followed by
the EU heretofore is to be largely abandoned.

Why Switch?
--------------

9. (C) The EU says the project approach produced results that
EU officials find difficult to quantify. They also note there
has been insufficient delegation of authority to EU sponsored
project field staff, problems with corruption, and
insufficient integration of project goals into the recipient
countries' development goals. Switching to direct
contributions to the budget is also supposed to lessen the
EU's administrative burden. The EU representative defended
this switch as enhancing Lao "ownership" of the aid program,
and a means to ensure that European aid supports Lao
priorities, although to many observers here GoL priorities
are much of the problem. This approach was repeated in the
EU's decision to provide Avian Influenza assistance through a
newly established World Bank trust fund which will bankroll
GOL efforts in this sector.

Comment
--------------

10. (C) No one is prepared to hold the GoL's feet to the fire
in accounting for the assistance they receive. GOL
backsliding on, for example, the conditions of the Nam Theun
II Hydropower project, or the IMF,s Poverty Reduction Growth
Facility (especially in the banking sector and tax/revenue
reform) is conveniently ignored by most embassies. Graver
issues, such as human rights abuse, have never been linked to
aid by major donors. As a whole, the donor community is
content to wring its hands, and then get on with the giving.
The new EU position on aid would be to the good in a country
in which the government acts in good faith and in the
interests of its citizens, but Laos is not that kind of
country. For our part, we continue to remind our fellow
donors that there are consequences for providing
unconditional funding such a government - though the donors,
of course, are not the ones to suffer them. We also repeat
what we have said before: to bankroll a regime such as this
one is to be complicit in its career.
HASLACH