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Document of

The World Bank

FOR OFFICIAL USE ONLY Report No: PP3080

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT PAPER

ON A

PROPOSED GRANT

IN THE AMOUNT OF

EUR 1.5 MILLION (US$1.73 MILLION EQUIVALENT)

TO THE

LAO PEOPLE’S DEMOCRATIC REPUBLIC

FOR A

LAO PDR PUBLIC FINANCE MANAGEMENT REFORM GRANT

January 17, 2019

Governance Global Practice

East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2018)

Currency Unit = Lao Kip (LAK)

Currency Unit = Euro (EUR)

LAK 8,494 = US$1

EUR 0.87 = US$1

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

BCM Business Continuity Management BETF Bank-Executed Trust Fund BoL Bank of Lao PDR CoA Chart of Accounts CPF Country Partnership Framework DA Designated Account E-FITS Enhancing Public Finance Management through Information and Communication

Technology and Skills Project EU European Union FM Financial Management FMIS Financial Management Information System GDP Gross Domestic Product GFIS Government Financial Information System GFS Government Finance Statistics GNI Gross National Income GoL Government of Lao PDR ICT Information and Communication Technology IFR Interim Financial Report IMF International Monetary Fund IPF Investment Project Financing IPSAS International Public Sector Accounting Standards LDC Least Developed Country LMIC Low- and Middle-income Country M&E Monitoring and Evaluation MoF Ministry of Finance MoHA Ministry of Home Affairs NSC National Steering Committee NSEDP National Socio-Economic Development Plan NT National Treasury ODA Official Development Assistance PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PIMS Personnel Management Information System PIU Project Implementation Unit POM Project Operations Manual PPSD Project Procurement Strategy for Development PrMO Procurement Monitoring Office RCD Revenue Collection Division RETF Recipient-Executed Trust Fund SAO State Audit Organization SDG Sustainable Development Goal TA Technical Assistance TAXRIS Tax Revenue Information System TF Trust Fund TSA Treasury Single Account

TWC Technical Working Committee UMIC Upper-middle-income Country

Regional Vice President: Victoria Kwakwa

Country Director: Ellen A. Goldstein

Senior Global Practice Director: Deborah L. Wetzel

Practice Manager: Fily Sissoko

Task Team Leader(s): Fanny Weiner

The World Bank Lao PDR Public Finance Management Reform Project (P167661)

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BASIC INFORMATION

Is this a regionally tagged project? Country (ies)

No

Financing Instrument Classification

Investment Project Financing Small Grants

[ ] Situations of Urgent Need or Assistance/or Capacity Constraints

[ ] Financial Intermediaries (FI)

[ ] Series of Projects (SOP)

OPS_BASI CINFO_TABLE _3

Approval Date Closing Date Environmental Assessment Category

31-Jan-2019 13-Mar-2022 C-Not Required

Approval Authority Bank/IFC Collaboration

CD Decision No

Please Explain Small Recipient - Executed Trust Fund below US$5 million.

Proposed Development Objective(s) The development objective is to support the Government of Lao PDR to improve the legal framework and institutional capacity for budget preparation and execution, revenue management, and public procurement.

Components

Component Name Cost (USD Million)

Component 1: Improved domestic revenue mobilization 0.46

Component 2: Enhanced budget preparation and execution and interoperability of government PFM systems

0.52

Component 3: Strengthened public procurement 0.29


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Component 4: Public Financial Management (PFM) Reform and Program Coordination 0.46

Organizations

Borrower :

Lao People's Democratic Republic

Implementing Agency : Ministry of Finance of Lao PDR

PROJECT FINANCING DATA (US$, Millions)

SUMMARY-NewFin1

Total Project Cost 1.73

Total Financing 1.73

Financing Gap 0.00

DETAILS-NewFinEnh1

Non-World Bank Group Financing

Trust Funds 1.73

Free-standing Single Purpose Trust Fund 1.73

Expected Disbursements (in USD Million)

Fiscal Year 2019 2020 2021 2022

Annual 0.24 0.52 0.51 0.45

Cumulative 0.24 0.76 1.27 1.72

INSTITUTIONAL DATA

Practice Area (Lead)

Governance

Contributing Practice Areas

Macroeconomics, Trade and Investment


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Private Capital Mobilized

No

Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF Yes b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment Yes c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes

OVERALL RISK RATING

Risk Category Rating

Overall ⚫ Moderate

COMPLIANCE

Policy

Does the project depart from the CPF in content or in other significant respects?

[ ] Yes [✔] No

Does the project require any waivers of Bank policies?

[ ] Yes [✔] No

Safeguard Policies Triggered by the Project Yes No


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Legal Covenants

Sections and Description Institutional and Other Arrangements (Article II, 2.03 (a) of the Grant Agreement): The Recipient shall maintain the

Project Implementation Unit (“PIU”) within the MoF, and shall maintain it with terms of reference, composition

and resources at all time satisfactory to the World Bank.

Conditions

PROJECT TEAM

Bank Staff

Name Role Specialization Unit

Fanny Weiner Team Leader(ADM Responsible)

TTL GGOEP

Khamphet Chanvongnaraz Procurement Specialist(ADM Responsible)

Procurement GGOPP

Siriphone Vanitsaveth Financial Management Specialist(ADM Responsible)

Financial Management GGOEP

Martin Henry Lenihan Social Specialist(ADM Responsible)

Safeguard Specialist GSU02

Adu-Gyamfi Abunyewa Team Member Procurement Reform GGOPP

Erwin Ariadharma Team Member Change Management GGOEA

Martin Fodor Environmental Specialist Safeguards GENE2

Maxwell Bruku Dapaah Team Member Budget Reform GGOES

Sourignahak Sakonhninhom

Team Member Project Support EACLF

Viet Anh Nguyen Team Member Tax Administration GGOGT

Winston Percy Onipede Cole

Team Member PFM Reform GGOES

Extended Team

Name Title Organization Location


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LAO PEOPLE'S DEMOCRATIC REPUBLIC

LAO PDR PUBLIC FINANCE MANAGEMENT REFORM GRANT

TABLE OF CONTENTS

I. STRATEGIC CONTEXT ...................................................................................................... 6

A. Country Context ................................................................................................................. 6

B. Sectoral and Institutional Context ..................................................................................... 7

C. Higher Level Objectives to which the Project Contributes ............................................. 10

II. PROJECT DEVELOPMENT OBJECTIVES ............................................................................ 10

A. Project Development Objective (PDO) ............................................................................ 10

B. Project Beneficiaries ......................................................................................................... 10

C. PDO-Level Results Indicators ........................................................................................... 11

III. PROJECT DESCRIPTION .................................................................................................. 12

A. Project Components ......................................................................................................... 13

B. Project Cost and Financing ............................................................................................... 17

IV. IMPLEMENTATION ........................................................................................................ 17

A. Institutional and Implementation Arrangements ........................................................... 17

B. Results Monitoring and Evaluation ................................................................................. 19

C. Sustainability .................................................................................................................... 19

V. KEY RISKS ..................................................................................................................... 19

A. Overall Risk Rating and Explanation of Key Risks ........................................................... 19

VI. APPRAISAL SUMMARY .................................................................................................. 20

A. Other Safeguard Policies (if applicable) .......................................................................... 20

B. World Bank Grievance Redress ........................................................................................ 20

ANNEX 1: THEORY OF CHANGE ............................................................................................ 31

ANNEX 2: DETAILED DESCRIPTION OF FINANCIAL MANAGEMENT AND PROCUREMENT UNDER THE PROJECT ....................................................................................................................... 32


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I. STRATEGIC CONTEXT

A. Country Context

1. Over the past two decades, the Lao People’s Democratic Republic (Lao PDR) has achieved rapid growth and impressive poverty reduction. Gross domestic product (GDP) growth rate averaged around 7.6 percent annually since 2000, making it one of the fastest growing economies in the East Asia and Pacific region. The gross national income (GNI) per capita reached US$2,270 in 2017 and in 2018, for the first time, Lao PDR met the criteria for least developed country (LDC) graduation.1 Poverty2 declined from 34 percent in 2002/03 to 23.2 percent in 2012/13, meeting the Millennium Development Goal target of reducing poverty to below 24 percent. However, social development indicators are lagging behind expectations and inequality widened, with an increasing Gini coefficient (currently at 36.2), reflecting lower gains for the bottom 40 percent of the population.

2. The country has been struggling to address fiscal deficits posing pressing challenges for economic management. Efforts to improve fiscal sustainability have been made through moderating wage increases and staff recruitment and by introducing spending cuts. While these measures initially helped tackle the deficit in 2015 and 2016, they were countered by low commodity prices resulting in lower-than-expected revenue income.3 In 2017, the deficit stood at 5.5 percent of GDP and is expected to decline to 4.9 percent of GDP in 2018. The country is in high debt distress with public debt at around 60 percent of GDP in 2017 and is expected to further increase to 62.6 percent of GDP in 2018.

3. Fiscal challenges have been affecting availability and quality of service delivery. The large fiscal deficits have limited the ability of the public sector to allocate budget to social sectors and infrastructure maintenance needed to address the country’s development challenges. Critical sectors remain underfunded and contribute to weak learning outcomes, significant losses from preventable health issues, poor productivity of farmers, and high incidence of malnutrition.

4. Recent increases in spending have improved the availability of public services. However, many indicators related to access to and quality of basic public services for Lao PDR remain closer to the average for low- and middle-income countries (LMICs) rather than upper-middle-income countries (UMICs). Immunization4 is at about 80 percent, similar to the LMIC average, but still behind the UMIC average of about 97 percent. Although the country increased net enrollment in primary education to almost 100 percent in recent years, the dropout rates are high with only 77 percent of pupils starting in grade 1 reaching the last grade of primary school. Consequently, the transition to secondary education is low, as only 45 percent of children enroll in secondary education, compared to 77 percent, on average, in the East Asia and Pacific region. Overall, the quality of education, infrastructure, and access to electricity has slightly decreased over the past years (see Figure 1). While government effectiveness and control of corruption have increased over the past years, a significant gap to the UMIC average persists. While Lao PDR made notable progress on the government

1 In the March 2018 review, the country met the thresholds for GNI per capita and Human Assets Index. If it sustains progress until the 2021 review, graduation will be recommended following a three-year transition period, in 2024. 2 National Poverty Line, based on Lao PDR Expenditure and Consumption Survey. Last available data are from 2012/13. 3 The tax/GDP ratio fell from 16.1 in 2014/15 to 15.1 in 2017. 4 World Development Indicators 2016; immunization refers to the simple average of rates for DPT, HepB3, and measles immunization.


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effectiveness indicator, surpassing the LMIC average, it ranks in the lowest 10 percentiles for control of corruption, lagging far behind the LMIC average (see Figure 2).

Figure 1. Quality of Public Services Figure 2. Governance Indicators

Source: World Economic Forum, Global Competitiveness Report, various issues. Note: On a scale of 1 (worse) to 7 (best).

Source: Worldwide Governance Indicators. Note: Percentile rank (0 to 100).

5. The political environment has been increasingly favorable to reforms reflected in ambitious development targets in the Government’s program. Lao PDR is governed by a single party, the Lao People’s Revolutionary Party. The 10th Party Congress in January 2016 made notable changes in the Politburo, followed by the appointment of a new Government in April 2016. With the change in political leadership, the Government has announced a comprehensive reform program to address governance challenges, promote the rule of law, and improve economic management. With a development vision based on green growth, the objective of the Government’s 2016–2020 8th National Socio-Economic Development Plan (NSEDP) is to reduce poverty and prepare Lao PDR for LDC graduation by 2024 and progress toward the Sustainable Development Goals (SDGs). Achieving these goals will require an efficient and effective public financial management (PFM) system and public sector.

B. Sectoral and Institutional Context

6. Despite notable reform efforts during 2003–2012, Lao PDR’s PFM system still faces significant challenges. Efficiency in public expenditures management is constrained by an outdated information system and procedures, weak cash and debt management, and inefficiencies in wage bill management. In addition, there are still some inconsistencies in the legal and institutional framework governing PFM. Similarly, the 2010 Public Expenditure and Financial Accountability (PEFA) Report on Lao PDR had identified significant weaknesses (rated D or D+) in oversight of aggregate fiscal risk, multiyear fiscal planning, transparency and accountability of the budget process, and internal control mechanisms.5

7. While many of the elements of a core legal and institutional framework of a good PFM system exist, they need to be improved and fully implemented. Most legal prerequisites of a core PFM system are already in place; however, there is no comprehensive Public Finance Management Act, and most existing legislation is not yet implemented. Some of the laws include contradictions and have a limited scope or loopholes, and secondary legislation and regulations have not yet been finalized or require updates. An

5 A new PEFA Assessment is ongoing and expected to be finalized in March 2019. As limited reforms were undertaken since the 2010 PEFA Assessment, ratings and the overall status of the PFM system have not changed significantly since the 2010 Assessment.

0

2

4

6

Quality ofeducation

Quality ofinfrastructure

Quality ofelectricity supply

LAO - 2013 LAO - 2016

0

20

40

60

Governmenteffectiveness

Control of corruption

LAO - 2011 LAO - 2016 LMIC UMIC


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example is the Budget Law 2015 which gives guidance on the budget cycle and the preparation of budget documents; however, secondary legislation has not yet been prepared. Overall, the institutional setup for PFM is fragmented, with sometimes unclear or overlapping responsibilities and accountability.

8. Revenue collection has declined in the past years (mainly due to decrease in mining royalties) and Lao PDR’s revenue/GDP ratio is currently at 15.1 percent. There is significant scope to improve domestic revenues through tax administration and policy reforms. Income tax collection is low, mainly due to generous exemptions to new businesses, listed companies, and businesses in special zones. However, paying taxes is a lengthy and cumbersome process, resulting in Lao PDR being ranked 156 (out of 190 economies) on the 2018 Doing Business ‘Paying Taxes’ indicator.

9. Taking initial steps to follow international practice, the Tax Department has established a Revenue Collection Division (RCD) for tax compliance management of large businesses. The RCD is housed in the Tax Administration’s headquarters and currently administers 559 businesses. The large taxpayers overseen by the RCD currently contribute about 40 percent of total tax revenues, which is a relatively low ratio by international standards. This indicates that through more targeted and improved compliance monitoring, the tax collection of this segment could be increased. However, compliance management is focused on retroactive, often desk-based, audit and enforcement, and sector-specific knowledge and analytical capacity by tax officials has so far been limited to the mining and hydropower sectors.

10. The budget preparation process is characterized by weak links between budget allocations and the country’s development priorities and sector strategies. This is mainly due to the absence of proper planning and forecasting mechanisms. While a medium-term expenditure framework exists, the budget is not being prepared following the revised State Budget Law 2015, which mandates the preparation of a Fiscal and Budget Policy Statement, the introduction of multiyear spending ceilings, and the preparation of medium-term fiscal documents. The budget is being prepared based on the previous year’s budget plan, and proper costing of expenditures or ceilings have not been introduced. This has regularly led to unaffordable and unrealistic budget plans, unaffordable commitments, and increasing arrears and ultimately has resulted in a weak medium-term budget perspective and a missing link to policy priorities. In addition, budget documents are made public with delay and are not in a user-friendly format.

11. Past reforms led by the National Treasury (NT) to introduce a Treasury Single Account (TSA) and to improve cash management remain incomplete. An earlier attempt in 2011/12 to consolidate government bank balances in the TSA at the Bank of Lao PDR (BoL) based on the zero-balance account mechanism was not successful. While the BoL and commercial banks provide daily information on the balances and daily transactions of all accounts under the control of the NT, account balances are not being consolidated in a single account at the end of each day. In addition, some earmarked fund accounts and donor fund accounts are kept in commercial banks outside the treasury accounts at the BoL. Consequently, the NT is working on a weekly cash cycle, resulting in cash rationing (including delay in salary payments) and taking on expensive short-term borrowing. In the absence of commitment controls, government entities enter into commitments without confirmation of budget availability, which results in payment arrears. Finally, the current PFM system is not able to distinguish sector budget units at the district level from those at the higher (provincial and central) levels, leading to a lack of information and input for policy and decision making at the service delivery level.

12. While progress has been made in updating the Chart of Accounts (CoA), it does not support comprehensive transaction processing, budget management, controlling, and information requirements at


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all levels of government operations. The update of the CoA has set the stage for the adoption of the double entry accounting system, which will enable production of financial statements compliant with the International Public Sector Accounting Standards (IPSAS). One of the main issues is the absence of a comprehensive integrated organization classification, including district codes in the CoA. As a result, budgets cannot be allocated to the various sector budget units at the district level and the unit expenditures cannot be checked against budgets before execution. This hinders the decentralization of transaction entry and budget controls to the district level, where they occur. Direct transaction entry at the district level would reduce time and effort for information generation and processing and would allow provision of timely, reliable, and complete budget reports on expenditures incurred at the district level, by the various sector departments such as education and health.

13. As a result, the NT is struggling to meet the increased demand for comprehensive and timely budget execution information. The existing information is not sufficient for many counterparties (within the Ministry of Finance [MoF], line ministries, and donors), which has resulted in attempts to build parallel data collection and reporting systems not only for tracking budget management at the district level but also at the line ministries.

14. Effective management of public expenditures is constrained by outdated PFM information systems and procedures. While the MoF has initiated many information and communication technology (ICT) initiatives related to development and implantation of business applications to improve service delivery to citizens and businesses, significant gaps remain. The current Government Financial Information System (GFIS) covers only a subset of functionalities required for a fully functioning budget execution system. The GFIS was updated and rolled out to the provincial level in the mid-2000s; however, bank reconciliation is not yet in place and the district offices are not included in the GFIS coverage. The technical ability of the GFIS to include the required updates for full functionality is limited as the technology used for system development is becoming obsolete, and the technical architecture and documentation is poor, leading to challenges in timely and comprehensive budget execution reporting.

15. To address these challenges, the MoF has undertaken major reform efforts on a broad level and developed a comprehensive PFM Reform Strategy: Public Finance Development Strategy 2025 and Vision 2030. The strategy is accompanied by action plans for the first implementation phase 2018–2020. It includes actions commonly recommended as minimum requirements of a core PFM system, such as (a) an adequate regulatory framework, (b) a sound accounting system and treasury-centric budget execution processes, (c) a realistic budget preparation process, and (d) ultimately a core Financial Management Information System (FMIS).

16. A recently completed analytical services, Lao PDR’s Public Finance Management Modernization Strategy [P158658] funded by the European Union [EU TF072472], provided support to the development of the strategy and initial steps toward implementation. The emphasis of this analytical work (implemented between March 2016 and August 2018) has been on exhaustive stocktaking, analytical work, and capacity building. Drawing from this sound groundwork, a reform agenda and concrete action plans have been developed in collaboration with the MoF and laid the foundation to move toward the implementation of its PFM Strategy. These strong foundations serve as the strategic orientation of the second phase of the Trust Fund Program.


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C. Higher Level Objectives to which the Project Contributes

17. The Project is aligned with the World Bank Group’s Lao PDR Country Partnership Framework (CPF) 2017–2021 (Report No. 110813-LA). The CPF supports the global agenda adopted by Lao PDR through the SDGs and the country’s path to reduce poverty and promote shared prosperity in a sustainable manner, based on green growth principles. The PFM reforms are reflected in the cross-cutting theme ‘Enhance effectiveness of public governance and administration’. The contribution of sound public sector administration to improve public financial flows on the revenue side and the expenditure side are recognized throughout the CPF, underscoring the horizontal link of the PFM systems from the central to the sector level. This is reflected in the implementation of the CPF. For example, the Green Resilient Growth DPF (P159956) had prior actions and triggers on tax administration, and PFM has been streamlined into sector activities, such as the Lao PDR Health Sector Programmatic Advisory Services and Analytics (ASA) (P164585).

18. The Project also contributes to the GoL’s high-level development objectives. The MoF’s Public Finance Development Strategy 2025 and Vision 2030 has the objective to strengthen public finances to contribute to sustaining dynamic and stable economic growth and a graduation from LDC status, reflecting the objective of the Government’s 2016–2020 8th NSEDP.

II. PROJECT DEVELOPMENT OBJECTIVES

A. Project Development Objective (PDO)

19. The PDO is to support the Government of Lao PDR to improve the legal framework and institutional capacity for budget preparation and execution, revenue management, and public procurement.

B. Project Beneficiaries

20. The main beneficiaries of the Project are staff from the participating government entities. The direct beneficiaries of the Project will be the MoF staff at the central, provincial, and district levels; civil servants of line ministries’ Finance Departments; and staff from the Ministry of Home Affairs (MoHA), the National Assembly, and the State Audit Organization (SAO). These beneficiaries will benefit from on-the-job training and participation in capacity-building activities. The beneficiaries are expected to increase their knowledge and implementation capacity of core PFM topics and on specific PFM subtopics (that is, treasury or tax administration). The beneficiary feedback indicator will measure perceived knowledge increase through capacity-building activities as reported by training participants in an end-of training evaluation form.

21. Other beneficiaries are businesses that will benefit from more transparency and availability of information on tax procedures and public procurement processes. Businesses, specifically large taxpayers, are expected to benefit from more clarity and structure on tax payment compliance processes through the increased availability of taxpayer information and services from the Tax Department. Similarly, businesses of all sizes will benefit from more transparent and available information on opportunities of public tenders. In the long run, the indirect beneficiaries are the citizens of Lao PDR, who will ultimately benefit from improved service delivery through improved management and more efficient use of public resources.

22. To guide beneficiaries through the reform process, a change management program will be implemented. As with any regulatory and institutional reforms, the envisaged reforms are likely to generate


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a large number of beneficiaries or ‘winners of reform’ while some stakeholders currently exploiting positions of power due to nontransparent rules and regulations could potentially be net ‘losers of reform’, opening the possibility of such stakeholders advocating against and slowing down change. To mitigate this resistance, a change management program will be part of reform implementation.

23. An analysis to identify relevant gaps between male and female main beneficiaries has identified an underrepresentation of women among MoF staff. Government employment statistics from 2017 show that on an aggregate level6 for the central, provincial, district, and village levels, female representation was at 24 percent (2,395 of a total of 10,055 staff), while at the central level, women represent 36 percent of the MoF’s staff (251 of a total of 693)7. At the central level, both at the technical and managerial levels, women are underrepresented, with 36 and 37 percent, respectively (no data are available on gender by positions for the subnational level). Consequently, it seems that while career and promotion opportunities at the MoF central level are similar for men and women, women are overall underrepresented at the MoF. The 2012 Lao

PDR Country Gender Assessment8 came to similar conclusions of a gender gap of women in the overall formal work force.

24. While the gender gap at the MoF has been decreasing, women make use of training opportunities. Since 2011, the recruitment of women has been on the rise and in 2017, 76 percent more women worked at the MoF than in 2011 (2,395 versus 1,363), against an increase of male staff of 40 percent (5,452 versus 7,660). However, the overall female representation rose only from 20 to 24 percent during the same period. As for capacity building, in 2017, 40 percent of participants in the 72 training activities at the MoF central level were women.9 Given the overall lower female representation among MoF central-level staff, women were proportionally overrepresented at training events. However, the Five Year (2016–2020) Strategy for Women Empowerment by the MoF’s Women’s Union Chapter has identified the need for female-targeted capacity-building activities, including training on leadership and IT. While it is out of the scope of this Project to address the underrepresentation of female staff in the MoF, female-targeted trainings will be offered. Gender dimensions will be reflected by tracking the participation of women in the capacity-building activities provided under this Grant and through gender-disaggregated data of the beneficiary feedback indicator.

C. PDO-Level Results Indicators

25. The achievement of the PDO will be measured through three PDO indicators, which correspond to the three areas of the PDO and follow the theory of change (see Annex 1).

(a) Aggregate expenditure ceilings (Baseline: PEFA Indicator 16.2, "C" score; 2018 PEFA Report; Target: “B” score for PEFA Indicator 16.2).

(b) Revenue collection from large tax payers collected through a centralized large taxpayer division (Baseline: 40; Target: 50 percent).

6 Management Plan, Organizational Structure and Personnel in the Public Finance Sector by 2025. Ministry of Finance 2018. 7 Personnel Management Information System (PIMS), MoHA (data as of July 2017). 8 World Bank. 2012. Lao PDR Country Gender Assessment (Report No. 704909). This report was prepared by the World Bank and the Asian Development Bank, in consultation with the GoL, as inputs to their respective country partnership strategies. 9 Management Plan, Organizational Structure and Personnel in the Public Finance Sector by 2025. Ministry of Finance 2018.


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(c) Public availability of procurement information (Baseline: PEFA Indicator 24.3, Rating "D", PEFA Report 2018; Target: “B” score for PI-24.3 ).

III. PROJECT DESCRIPTION

26. This Project is the recipient-executed part of the Lao PDR Public Finance Management Reform Program (TF073110) financed by the EU and closely related to the World Bank-executed part of the Trust Fund Program and a proposed IDA operation. The objective of the Trust Fund Program is to support the GoL to implement its PFM Reform, aiming to improve revenue management, budget preparation and execution, and public procurement. The Project is complemented by a Technical Assistance (TA) funded by the BETF10, and the proposed Enhancing Public Finance Management through Information and Communication Technology and Skills (E-FITS) Project (P167534) (see figure 3).

Figure 3. Lao PDR Public Finance Management Modernization Project Structure

27. The Project will complement the TA through local implementation support and the organization of capacity-building and dissemination events. Leveraging the World Bank’s technical and international expertise, the TA also follows the same areas supported under this Project. In fact, the component structure is identical. The Project is meant to support the GoL’s actions for policy implementation, that is, through hiring consultants to work alongside government staff to enhance implementation capacity and through capacity-building and dissemination events organized by the MoF to increase knowledge and facilitate decision making on the reform processes. Most of the capacity-building events are expected to draw on the provision of training content developed, and trainers made available under the BETF.

28. In addition, the Trust Fund Program will be implemented parallel to the proposed E-FITS Project, which focuses on the implementation of a new FMIS. As the proposed project is expected to become effective in Q4 of FY2019, the Trust Fund Program is key to this IDA operation, as it supports preparation activities and will be providing the TA and capacity building for the necessary policy and process changes to set up the new FMIS.

10 Lao PDR Programmatic Public Finance Management Reform Program (P167660).


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29. Activities under the Project are closely coordinated with other donor support and will complement and contribute to the latter. For example, activities are aligned with the Tax Department’s Action Plan 2018–2020, and support is coordinated with the International Monetary Fund (IMF) and the Japan International Cooperation Agency, who are providing support to other areas of the Tax Department’s Action Plan. Also, the upcoming introduction of a new tax management information system (financed by the Korea EXIM Bank) would be leveraged to facilitate integration of data-based management tools, such as risk-based audit selection, into the RCD’s compliance management process. Support to budget reforms are coordinated with the Asian Development Bank and the IMF; in fact, advice to the MoF on the expansion of the CoA is a joint IMF/World Bank activity. Finally, coordination with the Finance, Competitiveness and Innovation Global Practice is ongoing in the support to the BoL, where assistance to the set-up of the Automated Clearing House is provided under the Lao PDR: Financial Sector Development (P160715) Project and the Macroeconomics, Trade and Competitiveness Global Practice in the areas of tax policy and administration.

A. Project Components

Component 1: Improved domestic revenue mobilization (approximately €400,000 million/US$460,000)

30. Subcomponent 1.1. This subcomponent will carry out a program of activities to strengthen the capacity of the MoF’s Fiscal Policy and Legal Department FPLD for (a) the development of tax policies; (b) the drafting of tax legislation and secondary legislation; and (c) undertaking of consultations, dissemination, training, and outreach activities for relevant stakeholders. The MoF’s PFM Strategy foresees the drafting of new and updated legislation for a number of laws, including the general tax law, asset tax, land tax, income tax, housing tax, and environment tax law. This subcomponent will provide support to strengthen the capacity of the FPLD through local expertise for the drafting of the legislative initiatives and undertake consultations, dissemination, and training with the relevant stakeholders and ultimately prepare the submission of draft laws to the National Assembly. The legislative initiatives will contribute to strengthen the current legal framework for taxation and to build a foundation for increasing revenue collection.

31. Subcomponent 1.2. This subcomponent will carry out a program of activities for the improvement of the MoF Tax Department’s organizational and administrative processes, including communication activities and services to taxpayers with a specific focus on the large taxpayer unit. It will support the Tax Department’s RCD in strengthening tax compliance of the large taxpayer segment by introducing a proactive and targeted taxpayer compliance management approach. Activities will include the collection of taxpayer data to set up a systematic, correct, and up-to-date taxpayer database under the new Tax Revenue Information System (TAXRIS); the introduction of improved, risk-based audit approaches; the enhancement of the RCD’s expertise on industries in which large taxpayers operate (for example, banking, hydropower, telecommunication); and the introduction of taxpayer outreach and services. Specifically, this subcomponent will provide support to strengthen the capacity of the Tax Department through local expertise to support improving of taxpayer compliance management, the preparation of a taxpayer communication and service strategy, and conducting of capacity-building activities and stakeholder dissemination events. These activities are expected to increase the share of tax revenues collected from the large taxpayer segment.

http://projportal.worldbank.org/servlet/secmain?menuPK=109012&theSitePK=213348&pagePK=112935&piPK=69345&PSPID=P160715


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Component 2: Enhanced budget preparation and execution and interoperability of government PFM systems (approximately €450,000 million/US$518,000)

32. Subcomponent 2.1. This subcomponent will carry out a program of activities, including (a) improvement of budgetary transparency and budget preparation and execution processes, including readiness activities for a new FMIS; (b) development and implementation of an information security policy, strategy, and procedures for business continuity and disaster recovery; (c) support for the NT in strengthening its capacity for the implementation of reforms to improve payment processes, cash management, and forecasting capacity to ensure short-, medium-, and long-term projections of cash requirements; and (d) the expansion of the CoA to allow for reporting following international standards.

33. This subcomponent will provide support to the Budget Department in the implementation of the revised State Budget Law 2015. Activities include the strengthening of the Budget Department’s capacity through hiring local expertise and carrying out capacity-building activities for, among other things, the preparation of secondary legislation; the preparation of budget documents, including the preparation of the annual budget summary; and the introduction of expenditure ceilings. Similarly, dissemination and publication activities of the State Budget and the Budget Summary will be supported, aiming to contribute to budget transparency and availability of budget information on time.

34. This subcomponent will also include activities supporting the readiness for a new FMIS (to be financed by the Lao PDR Public Finance Management Modernization Project [P167534]), such as the preparation of technical specifications and the improvement of the MoF’s overall ICT capacity and security. Key priorities to prepare for implementation of a new FMIS are the introduction of the use of e-signature at the MoF and the establishment of a robust Business Continuity Management (BCM)11 that takes into consideration the recommendations of the MoF’s Cybersecurity Assessment and follows the guidelines for the Management of IT Security published by the International Organization for Standardization. This subcomponent would support capacity-building activities on IT security policies, including e-signature, and certification of relevant IT staff on the implementation of such policies. The hiring of local expertise for the development and implementation of an information security policy, strategy, and procedures for business continuity and disaster recovery would also be supported. Activities under this subcomponent are expected to facilitate the preparation and implementation of the FMIS.

35. Finally, activities under this subcomponent aim to support the NT in strengthening its capacity for the implementation of reforms to improve payment processes, cash management, and forecasting capacity to ensure short-, medium-, and long-term projections of cash requirements. In addition, this subcomponent will include the expansion of the CoA to allow for reporting the following international standards. Specifically, this subcomponent will support the hiring of local expertise and the conducting of capacity-building activities. These activities are expected to result in faster and more secure payments, reduce costs, allow for reporting according to IPSAS and IMF Government Finance Statistics (GFS), and reduce out-of-budget spending.

11 BCM is a holistic management process that identifies potential threats to an organization and the impacts to business operations that those threats may cause and provides a framework for building organizational resilience to safeguard the interests of its key stakeholders, reputation, and lines of business.


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36. Subcomponent 2.2. This subcomponent will carry out a program of activities to (a) strengthen the governance capacity of the MoHA, including the provision of ICT equipment, and (b) support the MoHA to implement capacity-building and dissemination activities on topics related to civil service reforms.

37. This subcomponent builds on work previously undertaken under the Governance Programmatic ASA for SEA Lower Middle Income Countries (P161155), which provided recommendations to the MoHA for the rollout of its PIMS to the provincial level to facilitate the set-up of an automated payroll system and its link to the future FMIS. This subcomponent will support capacity building in the use of the PIMS for staff from the provincial departments of line ministries and the purchase of personal computers for subnational offices of the MoHA. Once the PIMS database is completed with provincial personnel data, it will be possible to expand automated payroll calculations and payments to the subnational level and ultimately link it to the future FMIS. An interface between the payroll system and the new FMIS will be established as part of the Lao PDR Public Finance Management Modernization Project (P167534). The expanded scope of the PIMS and automatization of the payroll process is expected to eliminate manual processes and speed up salary payments.

38. Building on the Policy Note on Pay and Compensation Policies, prepared as part of the Lao PDR Public Expenditure Analysis (P158831), this subcomponent will also support the MoHA to conduct capacity-building and dissemination activities on topics related to potential civil service reforms to complement TA and advisory services on institutional reforms under the World Bank-executed part of the Trust Fund Program.

Component 3: Strengthened public procurement (approximately €250,000/US$288,000)

39. Subcomponent 3.1. This subcomponent will carry out a program of activities, including (a) drafting of public procurement law and preparation of a manual for its implementation, including providing a training and certification program for procurement staff of all budget units; (b) support for the adoption of the new procurement framework through dissemination activities for the new law among public and private stakeholders; (c) support for the update of standard bidding documents and the preparation of guidelines and manuals and strengthening of the capacity of the Procurement Monitoring Office (PrMO); and (d) conducting of a spending analysis that will collect, classify, and analyze procurement expenditure to identify areas where new approaches may be implemented to reduce costs of goods and services and transaction costs.

40. This aims to support the adoption of the new procurement framework through dissemination activities for the new law among public and private stakeholders. Moreover, funding will be provided to hire local expertise to support the update of standard bidding documents and the preparation of guidelines and manuals and to strengthen the PrMO capacity. The subcomponent will also support the set-up of a training program for all government procurement staff to build the capacity for the implementation of the new procurement framework. Additional capacity-building activities to strengthen the competency and skills of staff involved in procurement at all levels of government will also be conducted.

41. Funds will also be used to hire local expertise to support a spending analysis that will collect, classify, and analyze procurement expenditure to identify areas where new approaches, such as framework agreements, may be implemented to reduce costs of goods and services and transaction costs. The spending analysis will be conducted jointly between the MoF and the World Bank (under the BETF). These activities will set the foundation for the operationalization of the law and are expected to build the necessary capacity for its implementation and provide input for informed decision making of public procurement approaches.


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42. Subcomponent 3.2. This subcomponent will carry out a program of activities, including institutional strengthening of the procurement monitoring function of the PrMO, including establishment of an accessible public procurement website and an operational complaint mechanism. To enhance the monitoring functions, the capacity of the PrMO will be strengthened through the hiring of local expertise, and capacity building will be provided to the SAO to conduct procurement audits. This subcomponent will also support the establishment of a procurement portal (website) for the publication of procurement information and the introduction of a procurement complaints mechanism. The website is expected to increase the transparency and accessibility of information of public tender opportunities.

Component 4: Public Financial Management (PFM) Reform and Program Coordination (approximately €400,000/US$460,000)

43. Subcomponent 4.1. This subcomponent will carry out a program of activities, including the implementation of the recipient’s PFM reform, including the establishment of a monitoring and evaluation (M&E) system, data collection and consolidation, preparation of progress reports, coordination and dissemination activities, and the preparation and implementation of a change management strategy. This subcomponent will provide support for the establishment of an M&E system for the implementation of the MoF’s PFM Strategy. This includes the provision of local expertise to support data collection and consolidation, the preparation of reform progress reports, and coordination and dissemination activities of the MoF’s PFM Strategy. Coordination activities, including workshops and dissemination activities with relevant government entities and other stakeholders, are also foreseen under this subcomponent. In addition, this subcomponent will support the MoF to prepare and implement a change management strategy to accompany the implementation of the PFM Strategy and to communicate and facilitate the impact of the PFM reform transformations to the MoF staff. After the closing of the Project, or once funds allocated to change management activities under this component have been exhausted, change management activities will be continued under the Lao PDR Public Finance Management Modernization Project (P167534).

44. Subcomponent 4.2. This subcomponent will carry out a program of activities, including preparation and dissemination of the PEFA Assessment 2018 and provision of the local expertise for the preparation of a repeater PEFA Assessment in 2021. This subcomponent will support dissemination activities of the PEFA Assessment 2018, which was prepared under the first phase of the EU Trust Fund. It is envisaged to use the PEFA 2018 Assessment as the baseline for the MoF’s M&E system to measure progress of its PFM reforms. A repeater PEFA Assessment is planned for 2021 and would be prepared jointly by the MoF and World Bank TA provided under the Lao PDR Programmatic Public Finance Management Reform Program (P167660). This subcomponent will provide the local expertise for the preparation of a repeater assessment as well as related capacity-building and dissemination events.

45. Subcomponent 4.3. This subcomponent will carry out a program of activities, including strengthening the Project Implementation Unit (PIU) to manage and implement project activities and provide fiduciary oversight including procurement, financial management, and M&E arrangements. This subcomponent will provide support to the MoF’s PIU through hiring of local consultants, for example, procurement, financial management, M&E, and project management consultants and other advisers, and support to operational costs. It is foreseen that the Project will provide funding for the PIU consultants and operational costs until the end of calendar year 2019. Starting 2020, the PIU activities would be continued under the Lao PDR Public Finance Management Modernization Project (P167534).


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B. Project Cost and Financing

Project Components Project Cost (US$) Trust Funds (US$) Counterpart Funding (US$)

Component 1 460,000 460,000 0

Component 2 518,000 518,000 0

Component 3 288,000 288,000 0

Component 4 460,000 460,000 0

Total Costs

Total Project Costs 1,726,000 1,726,000 0

Total Financing Required 1,726,000 1,726,000 0

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

46. To oversee the implementation of the MoF’s PFM Strategy, a National Steering Committee on PFM Reform and an implementation structure within the MoF were formed. The National Steering Committee (NSC) chaired by the deputy prime minister comprises vice ministers of all line ministries (except public security and defense) and the Governor of the BoL and will ensure the governmentwide coordination of the PFM reform progress. The NSC will meet every six months to monitor and provide overall guidance on the PFM Reform progress and to approve the PFM Reform annual work plan. Within the MoF a PFM Reform Technical Working Committee (TWC) has been established. It is chaired by a deputy minister of finance and comprises director generals of the MoF. It reports to the NSC and has the responsibilities to monitor the implementation of all six reform programs under the MoF’s PFM Strategy, assign responsibilities for reform activities within the MoF, appoint working groups, and appoint the PIU. The TWC is supported by a PFM Reform Secretariat to manage the implementation of the MoF’s PFM Strategy, including the cooperation, financial, and legal aspects with donors, and supervision of the PIU.

47. Project implementation of the World Bank-financed operations is delegated to the PIU under the oversight of the PFM Reform Secretariat. The PIU will be responsible for the implementation of this Project and the proposed E-FITS Project, and will be the central executing agency responsible for overall project implementation monitoring; fiduciary oversight; and provision of technical, procurement, and financial management support to implementing departments responsible for the technical implementation of project components. In close collaboration and agreement with implementing departments, the PIU will also be responsible for preparing the work plans that will be discussed at the TWC and which the NSC will review and endorse.

48. The PIU will consist of a team of government staff, local consultants, and international advisers. The PIU will be headed by a project director and supported by, among others, a program coordinator, a procurement specialist, a financial management (FM) specialist, an M&E specialist, an ICT specialist, and a change management specialist.


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Figure 4. Overview of Implementation Arrangements

49. Summary of FM assessment. An FM assessment was carried out in accordance with the World Bank’s Directive on Investment Project Financing (IPF), Financial Management Manual for World Bank Investment Project Financing Operations, and related guidance. The main FM risks identified overall are weak capacity and lack of experience and adequate FM systems. The implementing agency lacks qualified FM staff, systems to record and report receipts and expenditure on time, detailed and documented controls and procedures to guide staff, and experience in implementing an official development assistance (ODA) financed project. Further, project activities that the Project will finance comprise considerable amount of soft expenditure, for example, training and dissemination workshops. Soft expenditure is prone to misuse. These are likely to increase risks of noncompliance, delays in submitting financial and audit reports, unsatisfactory accounting records, and misuse of funds. The overall FM risk, before and after the implementation of the proposed mitigation measures, is considered Substantial. Risk mitigation measures include (a) recruiting national FM consultants to support FM work of the project: one senior and one junior consultant; (b) having in place an acceptable FM chapter of the Project Operations Manual (POM); (c) putting in place acceptable accounting software to record and report on project receipt and expenditure until the new FMIS is operational; (d) providing training on disbursement and FM requirements and processes to finance/accounting staff involved in the project implementation after project effectiveness; and (e) engaging qualified auditors with terms of reference acceptable to the World Bank to audit project expenditure annually until the project closes.

50. Procurement arrangements. Procurement under the project will be carried out in accordance with the World Bank’s ‘Procurement Regulations for IPF Borrowers: Procurement in Investment Project Financing’, dated July 1, 2016, revised November 2017 and August 2018. The project will be financed by the EU and the financier has agreed to use the World Bank Procurement Regulations. Procurement under national procurement procedures, as agreed with the World Bank, will be carried out in accordance with national regulations, including Procurement Decree No. 03, dated January 9, 2004; Implementation Rule and Regulations (IRR) No. 0063 issued by the MoF on March 12, 2004, and No. 0861/MOF, dated May 5, 2009 (amended version); and the Procurement Manual dated May 2009. Conditions for use of such procedures will be stipulated in the Procurement Plan.


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B. Results Monitoring and Evaluation

51. To implement the Public Finance Development Strategy 2025 and Vision 2030, the MoF has developed a detailed work plan, stating clear deliverables and responsibilities. This Project will support the MoF in setting up a comprehensive M&E system to track the progress of its PFM Strategy based on its existing work plan and using the upcoming PEFA Assessment as baseline indicators. The results and monitoring framework (see section Error! Reference source not found.) is aligned with the MoF’s work plan and will allow for coordinated feedback on project progress and impact.

52. The progress of project implementation will be monitored by the PIU through the Results Framework (section Error! Reference source not found.). Monitoring of the Results Framework will inform project implementation by providing timely feedback and assisting the PIU in summarizing achievements. The PIU will have the primary responsibility for collecting, compiling, and reporting relevant data to the World Bank through annual project reports. As M&E capacity is still weak, the PIU will be supported by an M&E specialist to ensure effective and efficient implementation of M&E activities and to build general M&E capacity within the MoF.

53. The beneficiary feedback and gender impact will be measured through the evaluation of capacity-building activities by its participants. To track the feedback of the main beneficiaries, an evaluation form will be provided to the participants of each capacity-building activity. Among other things, the evaluation form measures perceived knowledge increase on the topic presented. The aggregated results of all capacity-building events will be used to monitor and report on the perceived knowledge increase. The evaluation form also offers the option of providing feedback for the improvement of the capacity-building activities. The suggestions will be reviewed, and the subsequent capacity-building event will be improved accordingly. The results will be disaggregated by gender to measure gender impact and will also provide the gender distribution of participants.

C. Sustainability

54. The GoL has a high ownership and commitment to the PFM reform program. This is evidenced by the GoL’s PFM Strategy and Vision to 2030 and its intermediate Action Plans, which enjoy high visibility and priority within the MoF. This Project is complemented by a TA and advisory services, and is implemented in parallel to a World Bank operation, which has a longer implementation period than the Project and will continue and institutionalize progress made under the Project once it is closed.

V. KEY RISKS

A. Overall Risk Rating and Explanation of Key Risks

55. The overall risk rating for the proposed Project is Moderate. This risk rating is based on the capacity and implementation challenges and a weak macroeconomic context. The main mitigation measures will rely on close and continuous dialogue with the GoL, capacity building, and World Bank implementation support.

56. The macroeconomic, fiduciary, and institutional capacity for implementation risks are rated Substantial. The country is currently facing a challenging fiscal situation with high deficit and debt levels, which are expected to improve gradually over the coming years. In case of an external or domestic shock,


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Government priorities might shift toward addressing a fiscal crisis and away from the PFM reforms. This is the first World Bank financing to the MoF in several years, and while the GoL has some in-house capacity on project implementation, external consultants will play a crucial role in the implementation as capacity is limited. The MoF will also need to follow the latest Procurement Regulations, which is new to the MoF and consultants on the market. Limited capacity and lack of familiarity with the new Procurement Regulations could also delay the implementation of procurement activities. Limited FM capacity can increase the risk of delay in payments to suppliers/consultants and potential misuse of funds due to high volume of soft expenditure activities.

VI. APPRAISAL SUMMARY

A. Other Safeguard Policies (if applicable)

57. Not applicable.

B. World Bank Grievance Redress

58. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service

http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service

http://www.inspectionpanel.org/


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.

Results Framework

COUNTRY : Lao People's Democratic Republic Lao PDR Public Finance Management Reform Project

Project Development Objectives

The development objective is to support the Government of Lao PDR to improve the legal framework and institutional capacity for budget preparation and execution, revenue management, and public procurement.

Project Development Objective Indicators

Indicator Name Corporate Unit of Measure

Baseline End Target Frequency Data Source / Methodology

Responsibility for Data Collection

Name: Aggregate expenditure ceilings

Text PEFA Indicator 16.2, "C" Score; 2018 PEFA Report

“B” score for PEFA Indicator 16.2

When repeater PEFA is available, and based on annual budget preparation documents

PEFA report/PEFA Methodology

PIU

Description: The target is that the government approves aggregate expenditure ceilings for the budget year and two following years before the first budget circular is issued to meet criteria of “B” score for PI-16.2 based on PEFA Framework.

Name: Revenue collection from large tax

Percentage

40.00 50.00 Annual

MoF/Tax Department’s Tax Revenue Information

PIU


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payers collected through a centralized large taxpayer division

System (TAXRIS)

Description: The baseline has been established based on the share of tax collection by the large tax payer unit at the central level (revenue collection division). With the use of more focused tax compliance tools, it is expected that more taxes can be collected from this group. The large tax payers have been identified by commonly used characteristics of large tax payers (turnover, industry, employees, etc), which was part of Bank assistance. For the tracking of this indicator, the share of tax collection by the same taxpayers through the same or a similar large tax payer division as currently in place, would be used.

Name: Public availability of procurement information

Text PEFA Indicator 24.3, Rating "D", PEFA Report 2018

“B” score for PI-24.3

When data from repeated PEFA is available or based on availability of other information on publication of procurement documents

PEFA report/PEFA Methodology

PIU

Description: The PEFA Framework 2016 identifies the following key procurement information to be made available to the public: 1) legal and regulatory framework for procurement, 2) government procurement plans, 3) bidding opportunities, 4) contract awards (purpose, contractor and value), 5) data on resolution of procurement complaints, 6) annual procurement statistics.

Intermediate Results Indicators




Name: Revised and new Number 1.00 3.00 Annual MoF/National Assembly PIU


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laws submitted to the National Assembly

Description: The baseline of one law refers to the approval of the revised VAT Law; laws to be developed and approved in the future include the general tax law, asset tax, land tax, income tax, housing tax, and environment tax law.

Name: Status of tax payer communication & services

Text No Tax Payer Communication Strategy

Tax payer communication and service strategy approved (by the MoF) and under implementation

Annual

MoF/Tax Department

PIU

Description:

Name: Implementation of baseline budgeting

Text Incremental budgeting is used

Baseline budgeting has been implemented as part of the budget process

Annual

MoF

PIU

Description:


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Name: Adequacy of Chart of Accounts

Text CoA requires expansion to comply with IMF GFSM 2014 and IPSAS reporting requirements

Expanded CoA complies with IMF GFSM 2014 and IPSAS reporting requirements

Annual

MoF

PIU

Description:

Name: Forecasting time of cash management planning

Text Cash management planning is done on a more-or-less weekly basis

Short-, medium-, and long-term projections of cash requirements are being prepared

Annual

MoF

PIU

Description:

Name: Public access to fiscal information

Text PEFA Indicator PI-9, PEFA Assessment 2018

The government makes available to the public

Annual

PEFA Assessment and MoF website

PIU


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(expected November 2018)

at least four basic documents as defined and in accordance with the timeliness criteria of “C” score for PI-9 based on PEFA Framework

Description:

Name: Coverage of MoHA’s Personnel Information Management System

Text PIMS is covering the national level

PIMS is covering all government levels

Annual

MoHA

PIU

Description:

Name: Status of implementation of a new public procurement framework

Text Public Procurement Law approved in

A training program for procurement staff in

Annual

MoF

PIU


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November 2017

the GoL has been put in place and procurement staff has received training.

Description:

Name: Progress on implementation of MoF’s PFM Strategy

Text PFM Strategy approved, and Action Plans prepared

M&E system established, PFM Reform Progress Reports prepared every six months

Annual

MoF PFM Reform Progress Reports

PIU

Description:

Name: Number of PEFA Assessments

Number 0.00 2.00 Annual

PEFA Reports

PIU

Description: PEFA 2018 is expected to be finalized March 2018 and a repeater PEFA Assessment is planned for 2021

Name: Average of Number 0.00 4.00 Annual Capacity building activity PIU/WB


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reported perceived knowledge increase on the topics presented; disaggregated by gender

evaluation forms

Description: To track the feedback of the main beneficiaries, an evaluation form will be provided to the participants of each capacity building activity. Among other things, the evaluation form measures perceived knowledge increased on the topic presented, measured from 1 (strongly disagree) to 5 (strongly agree). The aggregated results of all capacity building events will be used to monitor and report on the perceived knowledge increase. The evaluation form also offers the option of providing feedback for the improvement of the

Name: Percentage of females participating in the capacity building activities

Percentage

0.00 50.00 Annual

Capacity building evaluation forms

PIU/WB

Description: Baseline will be the female participation rate during the first year as reported on the evaluation forms


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Target Values Project Development Objective Indicators FY

Indicator Name Baseline End Target

Aggregate expenditure ceilings

PEFA Indicator 16.2, "C" Score; 2018 PEFA Report

“B” score for PEFA Indicator 16.2

Revenue collection from large tax payers collected through a centralized large taxpayer division

40.00 50.00

Public availability of procurement information PEFA Indicator 24.3, Rating "D", PEFA Report 2018

“B” score for PI-24.3

Intermediate Results Indicators FY


Revised and new laws submitted to the National Assembly 1.00 3.00

Status of tax payer communication & services No Tax Payer Communication Strategy

Tax payer communication and service strategy approved (by the MoF) and under implementation

Implementation of baseline budgeting Incremental budgeting is used Baseline budgeting has been implemented as part of the budget process


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Adequacy of Chart of Accounts CoA requires expansion to comply with IMF GFSM 2014 and IPSAS reporting requirements

Expanded CoA complies with IMF GFSM 2014 and IPSAS reporting requirements

Forecasting time of cash management planning Cash management planning is done on a more-or-less weekly basis

Short-, medium-, and long-term projections of cash requirements are being prepared

Public access to fiscal information PEFA Indicator PI-9, PEFA Assessment 2018 (expected November 2018)

The government makes available to the public at least four basic documents as defined and in accordance with the timeliness criteria of “C” score for PI-9 based on PEFA Framework

Coverage of MoHA’s Personnel Information Management System PIMS is covering the national level PIMS is covering all government levels

Status of implementation of a new public procurement framework Public Procurement Law approved in November 2017

A training program for procurement staff in the GoL has been put in place and procurement staff has received training.

Progress on implementation of MoF’s PFM Strategy PFM Strategy approved, and Action Plans prepared

M&E system established, PFM Reform Progress Reports prepared every six months

Number of PEFA Assessments 0.00 2.00

Average of reported perceived knowledge increase on the topics presented; disaggregated by gender

0.00 4.00


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Percentage of females participating in the capacity building activities 0.00 50.00


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Annex 1: Theory of Change


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Annex 2: Detailed Description of Financial Management and Procurement under the Project

1. An FM assessment was carried out in accordance with World Bank’s Directive on Investment Project Financing, Financial Management Manual for World Bank Investment Project Financing Operations, and related guidance. The main FM risks identified are weak capacity and lack of experience and adequate FM systems. The implementing agency lacks qualified FM staff, systems to record and report receipts and expenditure on time, detailed and documented controls and procedures to guide staff, and experience in implementing an ODA-financed project. Further, project activities that the Project will finance comprise considerable amount of soft expenditure, for example, training and dissemination workshops. Soft expenditure is prone to misuse. These are likely to increase risks of noncompliance, delays in submitting financial and audit reports, unsatisfactory accounting records, and misuse of funds. Risk mitigation measures include (a) recruiting national FM consultants to support FM work of the project: one senior and one junior consultant; (b) having in place an acceptable FM chapter of the POM; (c) putting in place acceptable accounting software to record and report on project receipt and expenditure until the new IFMIS is operational; (d) providing training on disbursement and FM requirements and processes to finance/accounting staff involved in the project implementation after project effectiveness; and (e) engaging qualified auditors with terms of reference acceptable to the World Bank to audit project expenditure on an annual basis until the project closes. The auditors should be engaged within six months of project effectiveness, and the terms of reference will be agreed upon and confirmed by negotiations. The project’s FM performance will be reviewed at each implementation support mission, scheduled twice a year.

2. Organization and staffing. The FM team is part of the PIU and will be responsible for the project’s financial management and disbursement. The team will comprise an FM consultant (senior accountant level) who will lead the FM team and oversee all the FM work of the project and an assistant (junior accountant level) to provide support to FM consultants. The same finance team will also oversee the implementation of the IDA-financed Lao PDR Public Finance Management Modernization Project (P167534).

3. To ensure capacity is built and sustained within the implementing agency, it is strongly recommended that a government staff member be assigned to support the FM work of the project.

4. An acceptable FM chapter of the POM shall be in place by appraisal. Staff involved in the project’s FM will be trained in World Bank disbursement and project FM requirements in line with the FM chapter of the POM once the financing becomes effective.

5. Budgeting and planning. The project budget will be prepared by departments and agencies involved in the implementation of project activities, covering all sources of financing and based on the approved annual work plan. The budget will cover the period of the Government’s fiscal year, that is, January to December. The annual budget will also clearly identify the sources of financing to which each activity will be financed to ensure the eligibility of expenditure under each financing source. The budget shall be reviewed by the respective line of reporting before consolidation into the project budget by the PIU. The annual work plan and budget shall be reviewed, and no-objection provided by the World Bank. The quality of budgeting and forecasting will be strengthened as part of the support provided by the FM consultant. This will facilitate the use of variable ceiling of the Designated Account (DA) based on a six-month cash forecast. The FM chapter of the POM will elaborate the process and timing for the preparation, review, and approval of the annual work plan and budget.


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6. Funds flow. A DA will be opened to receive funds. The DA will have a variable ceiling based on a six-month expenditure forecast. Withdrawal and payments made from the DA will follow the documentation and approval requirements of the NT, MoF. Funds will be provided to implementing departments and agency on an activity basis and will be treated as advance. Detailed requirements and procedures for requesting and reporting the use of funds will be elaborated in the FM chapter of the POM.

7. Funds flow and reporting are depicted in figure 2.1.

Figure 2.1. Funds Flow

8. Accounting policies and procedures. Cash basis of accounting will be used by the project. The project will follow Generally Accepted Accounting Principles that apply to ODA-financed projects in Lao PDR as there is no national standard and IPSAS cash standards is not fully implemented. The project will initially use these Generally Accepted Accounting Principles and later shift to IPSAS cash standards when the MoF fully implements the standard and IFMIS is fully operational. Off-the-shelf computerized accounting software will also be used initially to record transactions and produce financial reports for the project. Once the IFMIS becomes operational, project transactions will be recorded in and financial reports produced from the IFMIS. FM policies and procedures to be used under this project will follow those mentioned in the FM chapter of the POM. Original supporting documents will be retained where transactions occur during the life of the project or until at least the later of (a) one year after IDA has received the audited financial statements covering the period during which the last withdrawal was made or (b) two years after the closing date.

9. Financial reporting. The project will follow the GoL fiscal year (January to December). Interim unaudited financial reports will be prepared by PIU, reporting on receipts and expenditure for the whole project. Each interim financial report (IFR) will cover six months. The IFR will be submitted to the World Bank by the PIU no later than 45 days after the end of each six-month period. The IFR will report at the minimum receipts, expenditure, fund balances, and uses of funds by project components/activities. Variance analysis between actual and budgeted expenditure will be performed and reported as part of the IFR. The IFR format will be discussed and agreed. At the end of each fiscal year, the PIU will prepare annual financial statements for the project audit.

MoF Departments and MoHA

Cash advance

Trust Fund

DA - managed by MoF

Fund flows Reporting


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10. Audit arrangements. The project will be subject to an annual audit by qualified auditors with terms of reference acceptable to the World Bank. The PIU will be responsible for arranging project audit. The audit will cover all sources of financing to the project. The audit report, together with a Management Letter, will be submitted to the World Bank no later than six months after each fiscal year end. Audited financial statement and audit opinion will also be subject to public disclosure in accordance with the World Bank’s Access to Information Policy. The mechanism for disclosure will be through uploading on the MoF’s website. Upon receipt of the report, the World Bank will also make the audit report available on the World Bank’s website.

11. Disbursement arrangements. A DA will be opened at the BoL to receive funds. The DAs will have variable ceilings based on a six-month cash forecast. Applicable disbursement methods will include (a) advance, (b) reimbursement, (c) direct payment, and (d) special commitment. Minimum application value for direct payment and reimbursement will be US$100,000. Reporting of expenditure paid from the DA will be based on submission of statement of expenditure. Frequency of reporting of expenditure will be monthly but not greater than three months. Eligible expenditure will be disbursed to the following category:

Table 2.1. Eligible Expenditure Category

Expenditure Category Amount (US$ million) Percentage of Expenditure to

Be Financed (inclusive of taxes)

Goods, consulting services, Training and Workshops, and Operating Costs under the Project

1.73 100%

Total 1.73

12. Operating cost. This indicates reasonable expenditures directly related to the project, incurred by the recipient (which expenditure would not have been incurred in the absence of the project), including expenditure on travel, lodging and per diems, office supplies, publication services, translation services, and operations and maintenance of office equipment but excluding salaries, bonuses, fees, and honoraria or equivalent payments of members of the recipient’s civil service.

13. The project will have a disbursement deadline date (documentation on the use of Grant proceeds already advanced) of four months after the project closing date. This ‘grace period’ is granted to permit the orderly project completion and closure of the Grant account through the submission of applications and supporting documentation for expenditures incurred on or before the closing date. Expenditures incurred between the closing date and the disbursement deadline date are not eligible for disbursement. All documentation for expenditure forwarded to IDA for disbursements will be retained and made available to the external auditors for their annual audit and to IDA and its representatives, if requested. If auditors or the IDA implementation support missions find that disbursements made were not justified by the supporting documentation or are ineligible, IDA may, at its discretion, require the recipient to (a) refund an equivalent amount to IDA or (b), exceptionally, provide substitute documentation evidencing other eligible expenditures.

14. Procurement arrangements. Procurement under the project will be carried out in accordance with the World Bank’s ‘Procurement Regulations for IPF Borrowers: Procurement in Investment Project Financing’, dated July 1, 2016, revised November 2017 and August 2018. The project will be financed by the EU and the financier has agreed to use World Bank Procurement Regulations. Procurement under national procurement


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procedures, as agreed with the World Bank, will be carried out in accordance with national regulations, including Procurement Decree No. 03, dated January 9, 2004; Implementation Rule and Regulations (IRR) No. 0063 issued by the MoF on March 12, 2004, and No. 0861/MOF, dated May 5, 2009 (amended version); and the Procurement Manual dated May 2009. The conditions for use of such procedures will be stipulated in the Procurement Plan.

15. The MoF has prepared a Project Procurement Strategy for Development (PPSD) with support from the World Bank team, and the document has been agreed with the World Bank before negotiation. The PPSD presents how major procurement activities under the project will support the PDO and deliver the best value for money under a risk-based approach. In addition, the PPSD includes the rationale for procurement decisions, including the selection of the approach to market and procurement methods. The PPSD shall be updated once the major contracts in the project have been identified, and the Procurement Plan of the project shall be regularly updated, as appropriate, during the project implementation.

16. The PPSD shows that procurement activities for goods and consulting services are considered of substantial risk because they are critical to the project, which has multiple consultancy contracts. It also demonstrates that both goods and consulting services contracts are attractive to the market. Most of the project’s activities involved the hiring of consultants to provide technical support to various departments within the MoF and organizing of training, workshops, and knowledge exchange events and only one package of IT equipment. There will be no major procurement package under the project. The procurement arrangement is summarized in table 2.2.

Table 2.2. Procurement Arrangement

Contract Title, Description, and Category

Estimated Cost (US$) and Risk Rating

Prior Bank Oversight

Procurement Approach/

Competition

Selection Methods

IT equipment 50,000 No National Request for quotations

PIU Coordinator 36,000 No National Individual Consultant

PIU Assistant 15,000 No National Individual Consultant

Financial Management Specialist

36,000 No National Individual Consultant

Procurement Specialist 36,000 No National Individual Consultant

Procurement Assistant 15,000 No National Individual Consultant

Accountant 24,000 No National Individual Consultant

M&E Specialist 30,000 No National Individual Consultant

Change Management Specialist

30,000 No National Individual Consultant

External Audit Firm 30,000 No International Firm

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