Lao PDR: Public Expenditure Mangement Review 2008


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Lao PDR: Public Expenditure Mangement Review 2008

  1. 1. Lao People’s Democratic Republic Ministry of FinancePublic Finance Management Strengthening Programme PUBLIC EXPENDITURE AND REVENUE MANAGEMENT REPORT August 2008Jean-Marc LepainPublic Finance SpecialistIntergovernmental Fiscal Adviser
  2. 2. IntroductionPublic Finance Management has made an important contribution to economic development of LaoPDR by promoting macro-economic stability based on improved fiscal discipline and by ensuring thatsectors that are keys to the future of the country were receiving sufficient funding. As a result, allmacro-economic indicators have been positively oriented since 2001, budget deficit have beencontained to a sustainable level with a positive effect on inflation, and overall poverty declined from46% in 1992-93 to 33% in 2002-2003. Based on the Human Poverty Index, the Lao PDR rankingmoved from the 137th position world wide in 2000 to the 130th position in 2005 which was the lastyear that the poverty index was updated. Improvements in road infrastructure, access to cleanwater, children vaccination and increases in education enrolment have been the main factors ofpoverty alleviation during the past years.However, because the scope for increasing public spending is limited by the country’s ability togenerate additional revenue, improvement in public expenditure management will make in future aneven more crucial contribution to economic growth and poverty alleviation by improving efficiency inthe use of funds and by ensuring that all expenditures are in line with the Government strategy.Changes in the international environment will have to be taken into consideration with a growinginflation rate that will require stricter fiscal discipline and an economic slowdown in neighbouringcountries that might affect GDP growth and revenue collection.Whereas the national economy has fully recovered from the 1997-2000 economic crises, such is notthe case of the Public Finance System which had suffered severely of a lack of fiscal discipline,especially at the provincial level. Many social sector programs have not yet fully recovered from thecollapse in funding, and from a decline in real wages of civil servants, despite incrementaladjustments which have been made year after year. The wage bill remains under considerablepressure, limiting the ability of the Government to redeploy and expend its services. This pressurehas been aggravated by an aggressive investment policy in some sector that is not well coordinatedwith the recurrent budget capacity. The efforts made to contain public expenditures have fallendisproportionately on non-wage outlays, resulting in a contraction of expenditures for maintenanceand routine operations. This situation can only be corrected by a multi-year gradual adjustment ofwages, non-wages and investment expenditure guided by a sound fiscal policy based on macro-economic management. It has also highlighted the need for structural and legislative reforms ofpublic expenditure management which have started in 2006-2007 with the promulgation of theRevised Budget and its implementation in 2008.To meet all these challenges, the Government has adopted in November 2005 a multi-year mediumto long-term plan for improving public finance management through the Public ExpenditureManagement Strengthening Program (PEMSP). This program provides a framework forimplementing Government policies and strategies laid out in the “Policy Paper on Governance”, theNational Growth and Poverty Eradication Strategy (NGPES), and the National Socio EconomicDevelopment Plan (NSEDP) 2006-2010. Its implementation started in fiscal year 2006-2007. The mainadvantage of the PEMSP is a prioritization of public finance reforms through a well sequenced plan 2
  3. 3. taking requirements and institutional capacity into account and supported by the donor community.The program has five components: (1) Fiscal Planning and Budget Preparation, (2) Budget Execution,Accounting and Financial Reporting, (3) Local Government Financial Management, (4) FinancialLegislation and Regulatory Framework, and (5) Capacity Building. During fiscal year 2006-2007 theprogram structures have been put in place and have become fully operational. A plan for fiscal year2007-2008 has been drafted and a Multi Donor Trust Fund (MDTF) has been created to support theproject.Since the beginning of the current fiscal year, significant progress have been made toward theimplementation of the reform agenda: The Treasury Centralization project is in its pilot phase, theTreasury Law is being drafted, initial steps have been take to recruit an expert for theimplementation of the Treasury Single Account, a strategy is being laid out for the Treasury Systemimplementation, a revenue sharing system has been put in place and dissemination of the BudgetLaw has started.The present Public Expenditure and Revenue Management Report is not a report that tries to make adiagnosis of Lao public finance weakness. Those are well known and have been fully identified in thePublic Expenditure Review published by a panel of international institutions in May 2007. Neither isthis report about success. The previous paragraph has already listed progresses made since 2006.The list is impressive by itself but there is no need to enter into the details. This report is aboutprocesses, issues and solutions. Until 2006 the Ministry of Finance had focused all its attention onstrategic planning and building the reform legal framework. Now this phase is almost finished. Fromstrategic planning the Ministry of Finance is moving to implementation and implementation is allabout processes. As it could be expected the implementation phase has its own problems. Newunforeseen practical issues emerged as it is the case with the implementation of the VAT, thedefinition of the accounting policy and the finalization of the Chart of accounts, the strengthening ofthe Medium Term Fiscal Framework (MTFF) and its evolution toward a full-fledged Medium TermExpenditure Framework (MTEF), the integration of the reporting system and the emergence of newdata requirements. Other issues will certainly emerge when the outcomes of the pilot phase of theTreasury centralization project will be better known.By reviewing the different sectors of the reform agenda and by identifying the pending issues, thisreport wishes to offer a platform for discussion, be it with the Government side or with the donorcommunity. 3
  4. 4. I. ISSUES AND OBJECTIVES OF PUBLIC EXPENDITURE AND REVENUE MANAGEMENT REFORMS 1. Economic and macro-fiscal outlook in July 2008Since the recovery of the1997-2000 economic crisis macroeconomic performance has remainedstrong. Real GDP increases now at a rate of 8% a year and will continue to do so if the countryeconomy is not negatively impacted by the economic situation of its neighbours. Economic growthremains strongly driven by the development of the service sector (telecommunication, tourism,transport) and of construction, as well as the sizable expansion of mineral production and electricitygeneration. Direct foreign investments, especially in mining and hydro-electricity, have played amajor role in the economy expansion. The country has now entered a virtuous circle in which allmacro-economic indicators are reinforcing each others. The current account deficit is narrowing,reflecting buoyant resource export and rising tourist receipts, and together with higher foreign directinvestments and official development assistance inflows, resulted in an increase in the balance ofpayments and an accumulation of international reserves.However, the economic environment of the country in July 2008 is changing and will requireadjustments in the Government economic and fiscal policy. Inflationary pressure is growing worldwide as a result of a sharp increase in oil and food prices. Inflation is over 8% in Thailand and over20% in Vietnam and Cambodia making for BoL difficult to keep its inflation targets. By July 2008,inflation in Lao PRD was approaching 10%; 2% above the targets set six months ago.Slowdown in the world economy might have also a negative impact on the tourist sector and onexchanges with neighbouring countries. However, despite those negative changes in the countryeconomic environment, the Government remains confident that he can meet its economicobjectives. This confidence is reflected in the 2008-2009 budget which has been approved by theNational Assembly last July. The Government had proposed a budget of 9,951 billion kips,representing a 12% increase from the current fiscal year. The new budget includes a substantialrevaluation of the salaries of government employee in order to take into account last year inflationpressures and to ease economic hardship caused by rising oil prices.There is no doubt that a deteriorating international environment will make of Government fiscalpolicy more policy difficult. Inflationary pressures call for more fiscal discipline. However, theGovernment remains committed to macro-economic stability and to its growth target. 4
  5. 5. 2. Budgeting for economic growthThe fast evolution of market economy requires a new approach to budgeting. The years from 2001 to2005 have taught us the lesson that private investment is the main driver of economic growth, notGovernment investment. Excessive investment in the public sector with the ultimate objective ofboosting GDP growth has been the main reason for unrealistic budget in the past. The quality ofinvestments and their linkage to the economic strategy is as much important as the financial volume.In a market economy the link between planning and budgeting is broken because most of theeconomy depends on private investments. In that perspective, government investments becomelimited to large infrastructures or to the delivery of a limited number of services such as security,health and education with objective of improving the business environment. As a consequence, theaim of budgeting is no longer economic planning. In that context, tax policies and macro-economicpolicies achieve paramount importance. Their objective is to ensure macro-economic stability withlow inflation and to provide an economic and fiscal environment able to stimulate private businessand be conducive to economic growth. New developments taking place at the Fiscal PolicyDepartment are taking into account those changes. However, budgeting procedures have changedlittle during the past decency and are in need of complete reengineering. The present linkagebetween policy-making, planning and budgeting does not take into account changes in our economicenvironment and the need to modernize public expenditure management. In a knowledge economymaterial investment cannot be separated from immaterial investment such as training, capacitybuilding and information technology. Line ministries’ needs for modernization and capacity buildingpose an important challenge across all government agencies that cannot be well addressed by thecurrent policy making and planning procedures. 3. Budgeting and Government prioritiesExpenditures at the central and local level do not always reflect priorities defined by the Governmentin the NGPES and the NSEDP. Basic education, rural roads and basic health have been identified aspriority sub-sectors. However the development of human resources has difficulty to keep pace withthe level of investment and most of the recurrent budget is absorbed by salaries. The role of MoF isto ensure that the recurrent and the investment budgets are in line with each others and that thebudget of each sector provides enough non-wage resources for keeping government servicesoperating and for maintaining infrastructure. Additionally, MoF will pay attention that budgetallocations are in line with the Government’s priorities at the national and provincial level.The difficulties to align central and local budgets with the NGPES can be explained by several factors:  The programmatic approach of NPGES is not translated into a managerial reality that would give managerial autonomy to programmes and allow the introduction of programme budgeting. From a funding viewpoint, NGPES objectives are in competition with more traditional activities of government agencies, especially at the local level. 5
  6. 6.  There is no methodology to link budget formulation to the NGPES. International experience shows that the key elements of such methodology are (a) a programmatic approach of budgeting that provides a strong link between investments and recurrent expenditures, (b) the introduction of a medium term expenditure framework (MTEF), (c) a system of performance indicators linking budgetary inputs to programmes’ outcomes.  Budget reporting is not integrated with NPGES reporting.  Budget control is restricted to the control of spending limits but does not link expenditures to specific activities that can be evaluated. It can only be done if expenditures are linked to well documented programmes, sub-programmes and projects.Planning and budgeting processes suffer from a number of gaps and fractures that presentsnumerous challenges for integrating NGPES and budget, at the formulation, execution, andaccounting and reporting stages. The main problems identified are: a) Institutional fragmentation, with responsibilities for planning and budgeting, and for recurrent and investment expenditures, born by different ministries or different units within the central government and the provinces. As it might be impossible to change institutional arrangements, innovative technical solutions have to be found; b) Fragmentation of reporting processes that reflects the institutional fragmentation, but also results from a lack of integration of the different processes in MoF; c) Lack of result orientation in budget reporting that would require not only a result oriented system of indicators, but a data sharing system between MoF and line-ministries and a new framework for reporting; d) Weak budget execution systems and informality, which create gaps between policies, their implementation, and their monitoring; e) Information gaps, in terms of missing building block for reporting and missing data; and f) Lack of application of existing information to policy making processes.Integrating a national development strategy with budgets is fraught with difficulties. There arebasically two components in the process: an institutional component and a technical component.MoF has control only over the technical component. Solving institutional issues will require highlevel consultation within the Government. However within the existing institutional arrangement,processes must be put in place for sharing information and for consulting on key fiscal issues.Objective should be to have an operational MTFF / TFEF at the end of next fiscal year in 2009. It givesthe Government time to start a discussion on a programmatic approach of budgeting and ondeveloping a system of performance indicators, if those options are considered, that could linked tothe budget norms under preparation. 6
  7. 7. 4. Planning and programme budgetingProgramme budgeting is based on the premise that all budget items can be linked to discrete outputsthat contribute to the achievement of specific policy objectives. The introduction of such anapproach has the aim of increasing the results orientation of budgets through a restructuring of theplanning and budget system. This new approach allows for the creation of explicit links betweenexpenditure on basic activities and their measurable outcome such as the literacy rate, the numberof students enrolled, the percentage of population with access to clean water, reduction of infantmortality, etc.In Lao PDR, due to existing institutional arrangements, converting the whole planning and budgetingsystem to full-fledged programme budgeting does not appear realistic. Moving to a moreprogrammatic approach of budgeting will require a lot of time and need to be done in phase within astrategy planned at the highest level of Government.Planning is not just managing investments. Sector policies can only be implemented by programmeand programmes require well identified sources of financing. As such, planning has become just oneelement of the Government programme policy. Transforming the economy requires transformingGovernment agencies to adapt them to their evolving mission and to improve government servicedelivery. This cannot be achieved by investment only. It requires management improvement, trainingand capacity building, workforce redeployment (especially from the city to the rural areas but alsowithin sectors), use of information technology and better revenue and expenditure management.Better service delivery and improved performance depend on blending all these elements in acoherent strategy. While the Lao PDR has managed to keep a high level of investment during the pastyears, it has not been always able to capitalize on this achievement due to managerial weaknesses,especially in human resources management.Because policy making is the responsibility of line ministries, aspects of planning which are notfinancial should be left to them and a programmatic approach of budgeting should be taken with theobjective of linking together policy-making, planning and budgeting. When sectoral policies aredisaggregated into programmes, each programme must be managed autonomously with cross sectorcontrol. The Finance Department controls all programmes’ finance; the Human ResourcesDepartment controls all programmes’ staffing and capacity building policies, etc. Programme policylinks programmes to identified qualitative and quantitative outputs and objectives, making possiblefor the Ministry of Finance, through the use of programme budgeting techniques, first to ensure thateach programme is allocated enough financial resources to meet its objectives, second, thatGovernment funds are spent wisely in line with the policy defined and approved with sensible andmeasurable results. 5. Local-Central RelationshipUntil 2005, the Lao public finance system has been characterized by vertical imbalance withprovinces collecting around 60% of total revenue and spending 45% of total expenditures. The 7
  8. 8. consequences have been weak control over revenue administration, weak control over treasuryoperations, lack of fiscal discipline, exacerbated horizontal imbalance, lack of prioritization ofexpenditures, poor cash management, lack of accountability of local governments to the centralGovernment resulting in a weakening of State institutions.The reform of the centre-province fiscal relations has been identified as curtail both to increasingtotal tax revenue and to reorientation public spending. With the new budget law implementationand the Treasury centralization project the process for reforming the intergovernmental fiscal systemhas been put in place, and significant progress has been made during the past six months. Howeverconsidering the institutional history of the country, only a gradual approach can be taken. Localownership of the reform agenda has been identified as a critical success factor. Provincialadministrations will cooperate with MoF only if the reform agenda creates a win-win situation.The reform programme should have seven main objectives: a) To improve revenue performance for all categories of taxes, including those assigned 100% to the local budget; b) To ensure the rational distribution of fiscal resources across sub-national (local) jurisdictions in an equitable manner in order to correct disparities in fund allocation between provinces (horizontal imbalance). c) To ensure that local administrations adhere to Government policies and reflect the Government priorities in their budget; d) To improve the use of budgets as instruments for poverty alleviation and for sustaining economic growth; e) To improve financial management at the local level; f) To provide incentive for improving Government service delivery at the local levelThe Budget Law has created the legal instrument for the reform process soon to be completed by theTreasury Law. Based on this legal framework, MoF is now working on regulatory aspects and on achange management strategy for implementing structural and managerial changes. Four broad areasare being tackled:  The implementation of the Treasury Single Account that will centralize both revenue and expenditure and a reorganization of budget execution procedures;  The introduction of an improved Treasury System focused on strengthening budget execution, accounting and reporting;  The centralization of revenue administration in respect of both Customs and Tax;  The introduction of new fiscal and budgetary arrangement between the Central Government and the provinces covering: new revenue assignment, revenue sharing, conditional grants, new budgetary proceduresA pre-condition for the introduction of a rational and equitable system of intergovernmentaltransfers is a successful centralization of control over revenue accounts. Because the implementationof the Treasury Single Account will probably take several years (see section III. 3), the new fiscalarrangements, including revenue sharing, will be implemented before the centralization of revenue 8
  9. 9. become effective. Meanwhile the Treasury will need to put in place an intermediary system that willensure that all revenues are deposited in one single account separated from expenditures accountsand that all provincial bank account are progressively closed. 6. Budget Control at the provincial levelExisting budget execution procedures at the provincial level are too weak to enforce absolute fiscaldiscipline. Provinces have taken the habit to offset their expenditures against revenues collected forthe central government without referring to the Ministry of Finance. They also make transfersbetween programmes and sectors.This problem will not find a complete solution until the Treasury Single Account is implemented.However, it is possible to take preliminary measures that will reduce very significantly the capacity ofprovinces to offset their expenditures with revenues. A more detailed plan is presented in sectionIII.5. 7. Horizontal imbalanceDespite continuous efforts over several years for correcting disparities in fund allocations betweenprovinces, horizontal imbalance remains a reality. Not only there are still important disparitiesbetween provinces, but there are considerable variations in fund allocation between sectors in theprovinces. As the table below shows, when the average spending per capita is 470 thousand kips,variations between provinces go from 250 thousand kips to 760 thousand kips (from 1 to 3).There are many reasons for these disparities such as:  Line-ministries allocating funds to provinces in an ad hoc manner based on historical considerations;  Some provinces have poor absorption capacity and will not be able to use efficiently additional funding. Capacity for implementing new innovative projects remains low;  Provinces have poor planning capacity and are not able to come with workable plans for extending their services;  Budget prepared by provinces are not aligned with Government priorities.MoF is committed to correct horizontal imbalance in the medium term but in impeded in its missionby poor knowledge of economic and fiscal conditions existing in the provinces. In order to improveits budget allocations to provinces, MoF will need to perform detailed analysis of provincial budgetand to collect data on the implementation of Government’s programmes at the local level. At thepresent time, the Budget Department does not have the capacity to perform those tasks. Thiscapacity will have to be built gradually (see section VI. 8). 9
  10. 10. HORIZONTAL IMBALANCE BETWEEN PROVINCES FISCAL YEAR 2007-2008 Poverty Domestic Exp. Operating Exp. Capital Exp. Index /Population /Population /Population Vientiane Capital 1,17 0,45 0,24 0,21 Savannakhet 1,43 0,25 0,22 0,03 Champasak 1,18 0,34 0,26 0,07 Khammoune 1,34 0,32 0,31 0,02 Luangphrabang 1,23 0,36 0,34 0,02 Bolikhamxay 1,29 0,39 0,36 0,03 Houphan 1,52 0,48 0,32 0,17 Oudomxai 1,45 0,72 0,31 0,42 Xayabury 1,25 0,49 0,31 0,18 Xiengkhuang 1,42 0,48 0,42 0,06 Vientiane Pro. 1,19 0,43 0,34 0,09 Bokeo 1,21 0,53 0,38 0,15 Phongsaly 1,51 0,40 0,34 0,06 Luangnamtha 1,23 0,74 0,46 0,27 Saravanh 1,54 0,28 0,23 0,05 Attapeur 1,44 0,76 0,50 0,26 Xekong 1,42 0,60 0,54 0,06 Average 0,47 0,35 0,13 8. Disparities in revenue collectionWhat has been said of vertical imbalance in expenditure is also true for revenue collection. The tablebelow shows considerable variations in revenue collection between provinces. Four provinces(Vientiane Capital, Savannakhet, Champasak, and Kammouane) have in their jurisdiction a number oflarge industries that generate revenue for them. It is the reason that they can cover a highpercentage of their budget through local taxes (from 28.10% to 44.89%). However, variations that wesee in other provinces are more difficult to explain and are not directly linked to the poverty level ofthese provinces. Luangnamtha has a very low poverty index (1.23) but covers only 5% of its localbudget when Bokeo, with a similar poverty level, collects 16%. The Ministry of Finance is not inposition to say if such disparities are due to differences in the structure of the tax base, todifferences in the local economic environment or to deficiency in the local tax system. This lack ofinformation explains why revenue forecasting remains so difficult.A special mentioned should be made of three provinces (Houphan, Oudomxai and Attapeu) thatcover less than 5% of their budget and will require special attention. All three have a high povertyindex. In a typical case of vertical imbalance, those provinces are totally dependent on the centralGovernment for covering their expenditure. In such cases, it is clear that a poverty alleviation policyalone will not solve the economic and fiscal problem of those provinces. Such cases require a 10
  11. 11. proactive investment policy to expand the tax base and create additional revenues for the localauthorities.These few cases illustrate the need for the Ministry of Finance to tailor its fiscal and revenue policy toeach province. This will be possible only if the Ministry dedicates additional human resources to thisproblem and builds up the expertise necessary for monitoring closely revenue collection and budgetimplementation in all provinces. LOCAL REVENUES (100%) AS PERCENTAGE OF EXPENDITURES (FISCAL YEAR 2007-2008) Poverty Local As % of Population Per Capita Indicator Revenue Expenditures Revenue 1 Vientiane Capital 1,17 150782,76 44,89% 749813 0,17 2 Savannakhet 1,43 64682,98 29,51% 886806 0,10 3 Champasak 1,18 61994,75 28,10% 652159 0,17 4 Khammoune 1,34 48141,50 41,29% 362270 0,11 5 Luangphrabang 1,23 29640,92 18,59% 437055 0,12 6 Bolikhamxay 1,29 16822,89 17,95% 241915 0,06 7 Houphan 1,52 6410,50 4,39% 301655 0,02 8 Oudomxai 1,45 6339,56 3,07% 284734 0,02 9 Xayabury 1,25 20487,50 11,54% 363643 0,08 10 Xiengkhuang 1,42 8621,00 6,71% 267498 0,02 11 Vientiane Pro. 1,19 33956,80 18,14% 438544 0,22 12 Bokeo 1,21 13254,00 16,06% 155975 0,07 13 Phongsaly 1,51 5079,67 7,12% 178184 0,03 14 Luangnamtha 1,23 6142,50 5,35% 156025 0,02 15 Saravanh 1,54 15985,40 16,30% 348243 0,13 16 Attapeur 1,44 3161,30 3,45% 120388 0,03 17 Xekong 1,42 5108,85 9,33% 91263 0,06 Average 16,58% 0,08 9. Issues with reportingA good reporting system is essential for budget formulation, fiscal policy, budgetary control andreporting to the Parliament. However, the reporting capacity of MoF remains weak due to severalfactors:  The low reporting capacity of GFIS  Low capacity in the Treasury and Budget Department  Lack of data storage and analysis tools  Lack of an integrated reporting policy 11
  12. 12. Reporting appears extremely fragmented and performed in an ad hoc manner in completedisconnection with the budget cycle. There is no integration between budget reporting and NGPESreporting and no integrated system to manage data. Although a lot of progresses have been made toimprove GFIS, the technology on which it was developed limits its reporting capacity. Theintroduction of the new Chart of accounts will certainly solve many problems, but GFIS was designedfor ex post control and therefore does not provide the sort of information for making day to daydecision. The implementation of the new Treasury System (TIMS) is expected to change thissituation, but will not become a reality before three to five years. Meanwhile, the MoF needs todevelop an intermediary strategy for improving its accounting and reporting system. This strategyshould list all policy and decision requirements and map them to reporting and informationrequirements in order to identify data requirements and develop an integrated reporting system thatfollows the budget cycle. 12
  13. 13. II. THE NEW ROLE AND STRATEGY OF THE MINISTRY OF FINANCE 1. A renewed legal frameworkThe first phase of the Ministry of Finance reform programme has been mostly dedicated to strategicplanning and putting in place the legal framework that will drive the reform agenda. From 2005 to2007, six important laws have been passed by the National Assembly: the Tax Law (May 2005), theCustoms Law (May 2005), the VAT Law, The Budget Law (December 2006), the Accounting Law (July2007), and the Audit Law. FY 2007-2008 has been mostly devoted to the preparation of theimplementation decrees that will make those laws effective. The Tax Law and the Customs Law arealready applicable. Implementation of VAT is planned for January 2009 but could be delayed due tosome technical problems. Implementation of the new Chart of Account is also planned for January2008, but policy issues for application to the public finance sector and more specifically for theMinistry of Finance might take several months to be solved. In the fourth quarter of 2008 the firstdraft of the Treasury Law will be ready and discussions will start with the National Assembly.As important as the laws are the implementation decrees, which are usually more copious than thelaw itself and enter into more details. This approach gives to the legal framework a lot of flexibility asit is easier to change an implementation decree than to modify a law passed in Parliament.An important point will be the articulation of the Treasury Law with the Budget Law. Having beenprepared more than two years ago, the agenda of public finance reform might not have been as clearas it is now, and the Treasury Law might offer a new opportunity to strengthen the Ministry authorityvis-à-vis line-ministries and provinces, especially in the areas of budget execution, accounting andreporting.It is possible that small adjustments will be needed in the law and their implementation decrees tobring more coherence on one hand and to clarify numerous details as it is the case with the VAT Law. 2. A new definition of the role of the Ministry of FinanceThis new legal framework conveys an implicit redefinition of the role of the Ministry of Finance in thepublic finance system of the country. The mission of the Ministry of Finance changes from being thepaying agency of the Government to a twofold mission: (a) planning and managing the Governmentfinance and using the budget as a fiscal policy tool to promote macro-economic stability, povertyalleviation policies and economic growth, (b) controlling all government expenditures to ensure thatthey serve the Government’s objectives, are in line with its policies and socio-economic strategy, andthat the use of funds is efficient and commensurable with expected results and outcomes.The creation in 2000 of the Fiscal Policy Department shows that the first part of the mission is wellunderstood, even if all the instruments of fiscal policy are not yet all in place. The new Budget Law 13
  14. 14. covers partially the second aspect and it is expected that the Treasury Law under discussion willconsiderably reinforce the controlling role of the Ministry of Finance.However, to fulfil completely its new mission, the Ministry of Finance needs to meet threechallenges: (i) Developing its own capacity to perform its new mandate (ii) Having the new role of the Ministry of Finance recognised and accepted by other Government’s agencies; (iii) Strengthening the link between planning and budgeting at the provincial level as well as at the central level of line-ministries.The same effort that has been made for building capacity in the Fiscal Policy Department should bemade for the Budget Department and the Treasury. Capacity problems will not be solved only bytraining and redeployment of the existing staff. International experience has demonstrated thattraining has some inherent limitations; in most cases book keeping officers will not become certifiedaccountants. Cash management is a totally new and highly specialized function usually performed bypeople having an experience in bank or corporate treasury management. Clearly, with the currentlevel of staffing, the Ministry of Finance is not in position to fulfil its mission.The position of the Ministry of Finance in the Civil Service system can be characterized by a strongmission but with a weak legal authority. In order to perform its control mission the Ministry offinance will need to raise its profile and have its new role recognized and accepted by othergovernmental agencies. The revised Budget Law leaves the Ministry of Finance with a weak legalauthority. The drafting of the revised Treasury Law offers the opportunity to correct some of theexisting deficiencies and that opportunity should not be lost. However, the Treasury Law will not beable to address some of the existing issues in the planning and budgeting areas and additionallegislation or regulation must be considered.  The revised Budget Law and revised Treasury Law will not cover all areas of public finance living the role and function of the Ministry of Finance not fully defined.  Article 74 of the revised Budget Law covers the rights and duties of the Ministry of Finance, but only in relation to the “Management and control of the State Budget”. Part IV on the “Division of Responsibilities in Relation with the State Revenue and Expenditures” and Part V on the “Formulation and Execution of the State Budget Plan” clarify the role of the Ministry of Finance in functional terms but do not define explicitly its authority and its responsibilities. Responsibilities are defined in terms of sectors such as the tax sector, the customs sector (art. 55,), the National Treasury (art. 60) and the primary and secondary ordonators (art. 58 and 59). The Budget Law implementation decree has also strengthened the authority of the Ministry in the area of control and inspection (art. 58 and 59). As a result, the Ministry of Finance has a strong role in budget execution but its role in budget planning and budget formulation remains vague. 14
  15. 15.  The revised budget law is very clear on defining rights and duties of provinces in relation to the Ministry of Finance. It gives to the provinces “ownership in formulating budget” (art. 75) and to the Ministry of Finance the responsibility to control budget execution. However, the law does not say anything on the role of line-ministries in policy making and planning, especially on the relation between the ministries at the central level and their provincial directorates. A better integration of policy making, planning and budgeting will require some clarification that can be provided by secondary regulation.  The revised budget law does not mention explicitly budget circulars. Article 28 of the Implementation Decree mentioned incidentally Budget Circulars as providing instructions for budget planning. The legal authority of the budget circular remains undefined. Article 74 of the revised budget law allows the Ministry of Finance to draft “regulation in finance area” but only “for submission to Government for consideration”. It is important that the drafting committee of the Treasury Law should give full authority to the Treasury to issue “Treasury Instructions” that will apply to all aspects of budget execution.A possible solution for going around those problems could be to issue two implementation decrees:one for the implementation of the Treasury Law when it will be ready and one for completing thefirst decree of the revised Budget Law. The new application decree would address issues related tobudget formulation and its relation to policy making and planning. However solving some of thepending issues will require long consultation with the Government and all stakeholders. The revisedBudget Law has already set in motion a complete transformation of the public finance sector and it isnot easy to identify all the implications. It will probably require several years before a viable strategyfor linking together policy making, planning and budgeting within a result oriented system can beformulated.Contacts between the Ministry of Finance and line-ministries remain limited. The introduction ofbudget norms is only one example of the need for a close cooperation. The same way that ministriesneed to monitor the implementation of their programmes in the provinces, the same way theMinistry of Finance needs to monitor the financial aspects of the implementation. It includes themonitoring of procurement and of budget execution. For such purpose, regular exchanges ofinformation are required which usually go through an appointed “focal point” in each ministry.Capacity for such an exchange of information and for data analysis needs to be strengthened in theBudget Department.The efforts of the Ministry of Finance in developing a new legal framework for public finance,centralizing the treasury, improving budget formulation and developing budget control will producelittle result unless similar efforts are made in the provinces and in line-ministries. A plan alreadyexists for improving budget formulation and budget procedures at the provincial level. However asimilar plan should be put in place at the level of line-ministries. Line-ministries have also a controlmission, but the law does not say anything on the authority of sector ministries in controlling theimplementation of sector policies. Line-ministries should give policy guidance to the province forbudget preparation to ensure that local budgets reflect national priorities. It can be expected thatthe line-ministries will also experience capacity problems in fulfilling their planning and policy controlmission. 15
  16. 16. 3. The Public Financed Management Strengthening ProgrammeThe Public Expenditure Management Programme was approved by the Government in November2005 and latter renamed Public Finance Management Strengthening Programme (PFMSP) to includerevenue management. The PFMSP provides a framework for implementing all public finance reformsas well as for developing capacity for implementing Government’s policies and strategies laid out inthe “Policy Paper on Governance”, the “National Growth and Poverty Eradication Strategy” and theNational Socio-Economic Strategy 2006-2010. Recent consultations with AusAID, the EuropeanCommission, the Swedish International Development Agency (SIDA), the Swiss DevelopmentCorporation and the Word Bank have resulted in the creation of a Multi-Donor Trust Fund (MDTF)that will greatly reinforce the programme efficiency.The PFMSP should remain the main framework for addressing all the problems and issues generatedby the Ministry of Finance reform programme. As a flexible instrument, it allows a quick reaction tonew emerging issues and the PFMP should be used for addressing some of the issues identified inthis report.Initially, the implementation of PFMSP has gone at a slower pace than envisaged, mainly on accountof inadequate funding, lack of implementation capacity and restructuring of MoF (completed in2007). During the first three quarters of 2008, progress with PFMSP implementation has remainedbroadly on track. Small delays have been experienced due to the difficulty to identify technicalassistance resources, delays in procurement and lack of capacity in the implementing departmentthat put the entire burden on a few individuals.The programme is made of six essential components: A. Revenue Sharing, fiscal planning and budget preparation; B. Treasury centralization, budget execution, accounting and financial reporting C. Revenue Policy and administration D. Local government financial management; E. Financial legislation and regulatory framework; and F. Human resources and capacity developmentThe PFMSP is currently working on the implementation of the Work Plan for 2008 as part of theMedium Term Implementation Schedule 2005-2011 that set the overall direction of the reformimplementation agenda. The Work Plan for 2008 focuses on the implementation of the Budget Law,including:  The development of the revenue sharing system and a system grant transfer;  The development of a policy for budget norms and high level budget norms for education and health sectors applicable in FY2008/09;  The preparation of the Treasury Law and related regulations consistent with the new mandate of the Treasury;  The development of a simple macro-fiscal forecasting model at the Fiscal Policy ; 16
  17. 17.  The development of a revenue forecasting model at the Customs and Tax Departments;  the implementation of MTFF and MTEF methodology, including the development of two sectoral MTEF;  The development of a framework for implementation of the Treasury Single Account along with related IT needs assessment;  The standardization of budget procedures through the preparation of standard budget forms in selected ministries and roll-out to all ministries and provinces;  The upgrading of GFIS core system and other technical infrastructures, including improvement in the system reporting capacity through the use of Crystal Report Writer;  The implementation of the new Chart of Account through GFIS to be ready for next fiscal year, and of the new Budget Nomenclature in the education sector for FY2007/08; and across Government for the FY2008/09 budget;  The development of regulation and accounting instructions necessary for the implementation of the Accounting Law in the public sector;  The Development of standard form for consolidated in-year budget execution reports and management reports as part of a consolidated reporting framework;  The development of a borrowing strategy and establishment of a debt management and recording system;  The harmonization of manuals and procedures and the introduction of performance measuring tools in selected agencies;  The upgrading of the capacity of assets management;  The development of a master plan for tax centralization and customs covering all aspects of tax management and tax collection;  The implementation of the Tax Information System and the ASYCUDA system. 4. The Multi Donor Trust FundThe Multi Donor Trust Fund (MDTF) will address one of the issues responsible for PFMSP slowimplementation: the lack of adequate and timely funding allowing the programme to provide quickresponse to new emerging issues through flexible technical assistance and capacity programs.Additionally, the MDTF will improve coordination between development partners working on publicfinance management reforms and contribute to the harmonization aid policies.The objective of the MDTF is to secure funding for implementing the Government’s reform agendafor the next four years. So far eight development partners (France, Embassy of Japan, JICA, 17
  18. 18. Sweden/SIDA, AusAID, European Commission, ADB and World Bank) have express their willingness tosupport the trust fund. PFMSP has been working with the World Bank to develop the trust fundstructure, including the governance structure and the consultative mechanisms, the financialstructure of the trust fund, the reporting requirements and the supervision arrangements. It isexpected that the MDTF will become fully operational before the end of the year 5. Reform sequencingThe long list of items in the previous sections shows that the main difficulty that arises from theMinistry of Finance reform programme is the sequencing and coordination of reforms. The PFMSPhas substituted a strategic approach to a piecemeal approach of reforms. However, coordination andintegration of the different project components remain an issue and will require a considerable efforton the part of the Ministry of Finance.Hiatus in project execution are unavoidable. The Ministry needs to coordinate four spheres ofactions: (a) the planning and policy making sphere, (b) the legal sphere, (c) the process sphere andthe (d) Information technology sphere.Laws and regulations can be developed only when objectives of reforms are clear and policies havebeen defined. By many aspects, the Ministry of Finance is entering uncharted territories and for thatreason pilot projects are important. However, if the pilot projects are important for the fine tuning ofprocedures, they come too late in regard to the legal framework. The Budget Law defines the budgetcontrol procedures and the related authority of the ministry, but leaves out the integration ofplanning and budgeting because no clear policy has yet been devised in this area. Financialstatements cannot be finalized before public accounting policy has been fully clarified. Loopholes inthe VAT Law can stop its implementation or make it very difficult. Without well defined process andprocedures computerization is impossible. Upgrading of GFIS requires a precise mapping ofaccounting procedures to define technical requirements, not just a chart of account and a budgetclassification. The development of accounting codes requires a clear understanding of the relationbetween the Chart of Account and the Budget Classification and of budget execution procedureswhile some of them have not been designed yet.Things get more difficult when progress of some MoF projects depend on the cooperation of otheragencies as it is the case in planning and macro-economic policies. Here the main risk is probablywith the Treasury Single Account (TSA). The TSA implementation requires that the implementation ofthe Treasury System goes in parallel with the implementation of BoL systems, including its GeneralSystem and its payment systems. However implementation of the payment systems will require aPayment Law and a payment processing strategy with usually includes a Real Time Gross SettlementSystem (RTGS) and a Low Value Payment System. 18
  19. 19. III. TREASURY CENTRALIZATION 1. The Centralization processThe Treasury modernization project is essential to the overall modernization of the Ministry ofFinance and hinges on the implementation of two components: the Treasury Single Account and theTreasury centralization plan, and the Treasury Information Management System.The Treasury has prepared a centralization plan that establishes a focus on four components: (a)Treasury Single Account (TSA) framework, (b) a human resource management strategy, (c) aninformation technology upgrade, and (c) a legislative and regulatory framework. The reorganizationof the Treasury functions, including the streamlining of the budget execution functions, should beseen as a precondition for the implementation of the Treasury Information Management System.Given the current status of Treasury Systems, capacity, and institutional arrangements, it isestimated that the effective centralization of the Treasury will take 4-5 years. The procurement andimplementation of the Treasury System is expected to take a minimum of 3 years. 2. The Treasury LawThe Treasury Law will provide the regulatory and operational framework for the Treasury System andwill become the basis of more detailed guidelines, procedures, secondary regulations, forms andoperational manuals for budget execution processes required at all levels of Treasury operations andfor payroll management. It will give authority to the Treasury to issue instructions for recording of allGovernment transactionsA committee has been formed for the drafting of the Treasury Law which is following more or lessthe same process as the committee that prepared the Budget Law. Consultation is already takingplace at the provincial level. The first draft is expected to be ready by September 2008. In order toestablish a complete legal framework, all aspects of budget execution must be covered. Changes thatwill be introduced by the law are expected to be as significant as those introduced by the Budget Lawand will probably require a complex implementation plan.The new law will define the statute of the Treasury as the only Government payment centre, and itwill clarify the relationship between the central treasury and the provincial treasury. It will makeclear the separation of revenue and expenditure management competencies and responsibilities.The purpose of the law will be to introduce a clear line of management between centraladministration and provinces for everything related to revenue collection and expendituremanagement. It will strengthen the authority of the Treasury offices at each level of Government,especially in the area of commitment management and budget control and it will improve publicfinancial accountability and transparency. 19
  20. 20. The Treasury Law should cover the following areas: (1) General provisions, including references to previous legislation, purpose and scope of the law, validity, entry into force, interpretationdefinitions, Treasury mission and responsibilities, institutional and organizational set-up, secondary legislation and regulation (Treasury Instructions) (2) Appointment and responsibilities of the Treasury officers, Delegation of powers (3) Public money (definition, receipt and deposit in the TSA, immunity, investment, special funds state funds); (4) Functioning of the TSA; (5) Treasury general ledger system and its relation with budget classification, chart of account, and accounting rules or norms (6) Bank accounts (7) Revenue centralization and collection of public monies (8) Budget execution and payments (9) Government borrowing and lending (10)Issuance of guarantees by the State (11)Management of losses and claims (12)Reporting and financial records (13)Internal control of Treasury, budget execution control in other institutions and audit (14)Application of the law to municipalities (15)Miscellaneous (precious metal, gems, disposal of properties found, money and properties held in trust, gifts, donations and sponsorship) 3. The Treasury Single AccountA Treasury Single Account (TSA) is a mechanism for centralizing all State revenues and expenditureson one or two accounts articulated with a set of sub-accounts held in the books of the Central Bank.The TSA uses one single payment system managed by the Central Bank and linking all sub-nationaltreasuries to the central treasury. All transactions passing through the TSA are recorded in theGeneral Ledger of the Central Bank and reconciled with the accounting system of the Ministry ofFinance.A Treasury Single Account brings a number of tangible advantages: 20
  21. 21.  The TSA is a powerful tool for centralizing all revenue collection and budget execution transactions, putting the central treasury in full control of both processes.  It will prevent provinces from offsetting expenditures against revenue collection bringing more transparency in the budget;  It will reduce idle cash and offer an opportunity to introduce cash management leading to a more effective use of financial resources;  It will simplify the reconciliation process between banking statements and transactions posted in the Ministry General Ledger;  It will make possible an integrated expenditure management and reporting system, linking budgetary allotments to the final transactions;Design and implementation of a TSA have usually three components: a) The legal and regulatory framework b) The TSA architecture with the procedures governing the different system levels c) The IT infrastructures (General Ledgers and Payment Systems)At this stage, process on the implementation of the Treasury Single Account (TSA), depends verymuch on the progress made on the drafting of the Treasury Law (component (a)). It is the TreasuryLaw that will legally establish the Treasury Single Account and will give authority to the Treasury forissuing secondary legislation. The Treasury Law will establish the basic mechanism of the STA and willalso detail all changes in institutional arrangements necessary to accommodate the new TSA system,including changes to banking and accounting arrangements.In order for the TSA to become operational, the Treasury Law must provide a number of provision:  It must provide a definition of the TSA. A standard definition could be: “The Treasury Single Account is a mechanism made one or more bank accounts opened in the books of the Central Bank or any other financial institution designated by the Minister of Finance (under the Treasury Regulations) used to centralized (all) budgetary receipts and other non budgetary funds, and to manage authorized payments to budget beneficiaries or other institutions designated by the law.”  It must provide a definition of public money, because public money must be remitted in the TSA.  It must provide a definition of “Consolidated Fund” as a broader category than public money because consolidated funds might include funds which are not deposited in the TSA as it might be the case with State Funds which are extra-budgetary funds. Consolidated fund is not an operational concept like the Treasury Main Account, but rather an accounting concept that list all funds that the Treasury needs to consolidate for accounting purpose.  It must provide a definition of the Treasury Main Account as a component of the TSA. 21
  22. 22.  It must establish the Treasury ownership over the TSA which is a delicate point because the TSA is operated by the BoL. However it is important that the Treasury keep the regulating authority on the TSA. In practice a central bank should be barred of issuing any regulation related to the TSA.The TSA management mechanism should be kept distinct from the budget execution mechanism.The TSA management mechanism should cover the following issues:  Respective responsibilities of BoL and MoF in managing the TSA and public money deposited  Changes in TSA architectures  Responsibilities of provinces in managing their sub-accounts  Recording of TSA transactions  Rules for Managing the TSA liquidity and prioritization of payments  Reconciliation procedures between the BoL’s General Ledger and the MoF’s FMISOwnership of the Treasury over the TSA and procedures for managing the TSA are often included in aMemorandum of Understanding (MoU) signed between the MoF and the central bank. The MoUmust detail the central bank responsibilities in terms of IT infrastructures, on-line access to data andinformation, reconciliation procedures, payments instruments and access to the different paymentsystems, IT security (procedures in case of system failure, backup of data, etc.).Many regulatory concepts will not be clarified before the TSA architecture is established. Basicallythe Treasury has the option between a two tiers architecture that will put line-ministries on the samelevel as provinces, or a three tiers architecture that will give more responsibilities to line-ministries inmanaging their local office funds. A possible architecture could be: Tier 1 : Treasury Main Account Tier 2: Direct Primary Budget Units, including line-ministries and provinces Tier 3: Provincial offices of ministries, districts and municipalitiesIt is not possible at this stage to say how much time will be necessary for having the TSA fullyoperational. The implementation of its technology backbone depends on the BoL. The Bank will needto implement its own General Ledger as well as a Real Time Gross Settlement System. As it mighttake several years, the TSA implementation strategy will need to identify interim arrangements usingexisting infrastructures. The best approach would be to have the implementation of BoL systemsgoing in parallel with the implementation of MoF systems.A significant project has been considered, but not approved, to modernize the Lao banking system.This process may have significant impact on the manner the TSA is implemented and the way thatMoF can utilize banking as part of the solution architecture. It is essential for the Ministry of Finance 22
  23. 23. that the BoL defines its IT strategy as quickly as possible to be included in the TSA implementationplan as well as in the requirements for the Treasury Information Management System. 4. Separation of revenue accounts from expenditure accountsAs mentioned in section I.6, provinces have taken the habit to offset their expenditures againstcollected revenues without referring to the Budget Department, undermining in that way all fiscaldiscipline.Only the implementation of the Treasury Single Account along with the Treasury InformationManagement System will be able to ensure that budget execution regulation cannot be violated.Meanwhile, the Treasury can take some intermediary measures that are in fact part of the TSAimplementation plan: a) Close all accounts in commercial banks and centralise all accounts at the central bank (In practice it does not require the TSA to be operational); b) Separate revenue accounts from expenditure accounts; c) Create three revenue accounts: one for provincial revenues (100%), one for shared revenues and one for central revenues with different persons responsible for their management; d) Create two distinct lines of management for revenue accounts and expenditure accounts e) Maintain a strict distinction of responsibility between the person who order the payment (authorizing officer or ordonators) and the person who execute the payment (the paying officer or the accountant), with the impossibility for the Head of the Treasury to become ordonator. f) Maintain a strict distinction of responsibility between the person who establish the tax base, the person who actually collect the money and the person who manage the revenue account. g) Specify rules for managing the shared revenue accounts. The rule might include:  A cash limit above which the funds are automatically transferred to the Treasury central account;  Daily reporting of the cash position to the Treasury;  No other transfer to other accounts allowed;  Possibility for the Treasury to centralize available funds at any time;  No authority of the Governor over shared revenue account and central government,  Severe disciplinary sanction for violation of the regulation under articles 86, 87 and 88 of the Budget Law (to be reinforced by the Treasury Law) 23
  24. 24. These dispositions should be integrated in Treasury Instructions and a Prime Minister Decree. 5. The Treasury SystemDuring the past months, the Ministry of Finance has made significant progress in defining itsinformation technology strategy. As already decided the current Government Finance InformationSystem will be replace by a new system named “Treasury Information Management System” (TIMS).The TIMS will serve as the core system for all MoF Finance applications that will include, amongothers, the tax system, the customs system, and the debt management systems. All MoF systems willbe fully integrated though interfaces to the core system, meaning that the TIMS will set the datastandard for all other systems and that there will be only one General Ledger for all types oftransactions. As a result, the TIMS will become the repository of all MoF financial data. When fully deployed, the TIMS will replace the current Government Financial Information Systemthat was developed in 1994 with the assistance of the Asian Development Bank and later deployedin all 37 ministries and their 17 provincial departments across provinces.The GFIS system suffers from a number of limitations:  Its technology has become obsolete. It runs on a Sybase database not capable of handling multiple users. It connectivity is provided by a dial-up system and can be slow and unreliable. The system cannot easily interface other systems and therefore cannot be used as the core treasury system.  The system does not generate checks and is incapable of cross referencing revenue receipts in any automated manner.  Because the system does not function in real time, it will not be compatible with the management requirements of the Treasury Single Account.  Because of the previous limitations, the system is not compatible with modern cash management techniques.  Due to the limitation of its database, the system has limited reporting capacity and is not able to produce the type of reports that are necessary for budget control and fiscal analysis.  Scalability problems will not allow the system to cope with large volume of data. The GFIS will reach its operational maximum by 2011 and it is critical that the new system be ready by that time.The new TIMS will overcome all these difficulties. The TIMS will be an off-the-shelf solutioncustomized to meet MoF specific requirements. It will have modular architecture offering a singleuser interface. Five other modules will operate around the General Ledger: Budget AllocationManagement, Cash Management, Receipts Management, Payments Management and Procurement.Five Departments or Divisions will have access to user interface for data entry: the BudgetDepartment, the Treasury Department, the Tax and Revenue Department, the Customs Departmentand the Debt Management Division. The system will be linked to the BoL Payment System forpayment processing and the BoL General Ledger for reconciliation purposes. 24
  25. 25. The new Treasury Information Management System (TIMS) will bring the following benefits:  The new system, combined with the TSA, will ensure that fiscal discipline is fully enforced at all levels of Government. The budget execution system will be based on a system of limits represented by warrant allocations. Expenditure limits will be set for line ministries by program and by chapter, using the new budget classification code. The line-ministries, provincial governorates and other spending agencies will in turn distribute the warrant allocation to spending units using the same classification code by issuing sub-warrants. No budget unit will be able to overspend. Transfer of funds from one program to another will be possible only with central government control.  The system will streamline all procedures and eliminate unnecessary paperwork, overlapping processes and manual cross-checking of transactions. The automation of data processing will eliminate most errors and make data and reports extremely reliable. As a result, budget execution procedures will become prompt and payment delays will be reduced.  The system will make effective the implementation of the new Chart of Accounts and the new budget classification, allowing the government to follow in a timely manner execution of the approved budget through economic categories.  The system database will provide a repository for all fiscal data that will facilitate reporting. At any time, the Budget Department and the Fiscal Policy will be able to access multi-year data to perform ad-hoc analysis and to prepare reports. On-the-fly reports will become a reality to answer any question at any time. As a result, the timeliness and quality of financial information will be greatly improved.  The improvement of information in budget execution will be reflected in budget preparation. With comprehensive information the Budget Department will be in better position to negotiate budget appropriations with line-ministries. This will allow more effective allocations and a better use of funds.  The System will enable the Government to be in position to determine overall financial / liquidity position on a daily basis. This will allow the Treasury to put in place cash management procedures. Idle cash will be moved between the different sub-accounts of the TSA, reducing the need for liquidity and borrowing.  Monitoring of revenue collection will be greatly improved, not only by providing timing information for cash management, but by also allowing early detection in any anomaly in tax collection. The tax department will be in position to monitor in real time collection against projections and to cross-check revenue collection as reported by the revenue agencies with actual revenue checks banked.  Any revenue / expenditure miss-match will be detected at a very early stage allowing the Government to react swiftly and fully informed, thereby improving budget execution. 25
  26. 26.  The System will allow the Government to comply with the provision of the new Audit Law which requires finalization of the Government budget execution report within one quarter of the end of the fiscal year.The Treasury will take ownership of the system implementation. The Treasury will appoint a projectdirector and will take the lead for developing requirements for technical and functional design, whilethe ICT aspects of the system will be developed with the MoF ICT department. Procurement andfinancial support will be provided by the Public Finance Management Strengthening Unit.In July, a World Bank mission was conducted to start discussion on the system design, theimplementation time table, and the management structure to be put in place. Based on the missionconclusions, the Ministry will start working on the system terms of reference, and the RequestProposal for the design consultancy. One of the mission recommendations is that a projectpreparation committee/unit (PPC) be established. The committee will be responsible forcoordinating all aspects of the project preparation, providing guidance to the contracted consultancythat will undertake the Functional and System Design (FSD). The PPC will also be charged withspecifying departmental responsibilities and roles in defining business processes and userrequirements and will be responsible for the TIMS bid evaluation. Once the consultant firm that willassist the in functional design is selected, it is anticipated that PPC role will change to a full-fledgedProject Steering Committee (PSC). The PSC will be responsible for working with the turn-keycontractor to implement TIMS as well as performing project administration functions.The System implementation will be conducted in two major phases: (1) system design and (2) systemintegration and implementation.To prepare the system design, the Ministry of Finance will engage a Consultant to undertake thepreparatory analysis to identify the system requirements (Procurement 1). Based on theserequirements the Ministry of Finance will issue Terms of Reference and following the usualprocurement process will identify and select the system provider that will be responsible for thesupply, installation, implementation, training, change management, documentation, data cleansingand upload, and rollout of the new TIMS.The system provider implementation team will work under the supervision of a ProjectImplementation Support Consultant that will ensure that the system delivered by the vendor meetsall requirement and specification and that the implementation goes according to schedule withoutany additional risk (Procurement 2).Based of the bidding process, a successful contractor will be contracted to provide the turn-keysolution (Procurement 3). Its responsibility will include the phasing out of the GFIS, the supply ofhardware, the solution software, design, development, testing and implementation services, changemanagement, training, project management, and warranty and contract maintenance supportbeyond implementation. 26
  27. 27. In order to accelerate the TIMS project and to facilitate the transition from GFIS to TIMS, theTreasury has taken a number of dispositions:  To avoid any problems with the new Chart of Accounts implementation that might interfere with TIMS implementation, the Chart of Accounts will be implemented using GFSI in order to test the consistency of accounting procedures. The Ministry of Education and the Ministry of Health have been selected as pilots during the current fiscal year.  Leased lines to connect the provincial treasury office and the line ministries to the central treasury have been already procured and put in place.  The Oracle database with database modelling tools has been purchased.  368 desktop computer and 21 Notebooks have been purchased to be deployed in provincial treasury offices. 6. Debt Management SystemThe debt Management Financial and Analysis System (DMFAS) of UNCTAD has been identified at thebest available solution for the Treasury and work on its deployment will start shortly. The system hasbeen developed by UNCTAF on the same model as ASYCUDA, with the objective to assist low andmiddle-income countries to develop their debt management capacity. Because DMFAS is developedby a United Nation’s agency, it comes with a technical assistance package that goes beyondassistance for the implementation of an IT system. It includes advice on institutional and proceduralissues, debt management training, support for debt analysis and the development of debtmanagement strategies.Nevertheless, the implementation of DMFAS will represent a heavy task. The implementation planshould be integrated to the PFMSP schedule and special attention should be given that enoughhuman resources are committed to the project success. 7. Rationalization of the budget execution processBefore the TIMS can be established, all budget execution procedures must be reassessed and madecompatible with the new system. The system requirements to be included in the terms of referenceswill be based on those new procedures.A committee has been established to look at the rationalization of the budget execution process withthe objective to streamline the process, eliminate unnecessary formalities and integraterequirements of the new Chart of Accounts and of the new standardized budget execution reportingsystem. The new arrangements take into consideration modifications introduced in the GovernmentFinancial Information System (GFIS) for the next fiscal year. The reengineering of budget executionprocesses has so far focused on a better linkage between the Budget Implementation Plan, allotmentmanagement (cash allocation), commitment management and reducing paperwork by a moreeffective use of computerization and of the GFIS capability. Banking arrangements and paymentprocedures have not been finalized yet as some of the new processes will depend on decision madefor the Treasury Single Account (TSA) strategy. However, as the TSA will not become operational 27
  28. 28. before FY 2009-2010. The new procedures will strengthen the commitment control mechanism andbudget control effectiveness.The reengineering of the budget execution process cannot be dissociated from the design of thebudget control system. More detailed information is provided in section VII.5 of this report “Designof the Treasury Control System” on the best ways to ensure a good integration of the two processes. 8. Cash ManagementA concept note on cash management has been drafted with technical support from the EuropeanCommission. However, as long as the Treasury Information Management System is not implemented,progress in cash management will be slow and incremental. The Cash Management system will beone of the last module to be implemented as cash management relies on information coming fromother modules such as the General Ledger, Budget allocation, Receivables and Payable.The Ministry cash management policy will only become effective when the TSA will be fullyimplemented. The TSA will reduce the amount of cash sitting idle on bank accounts and reduce theneed for borrowing. The present system transfers the responsibility of cash rationing to local treasuryofficers, weakening the authority of the central treasury. Presently the Treasury is not able to usecash potentially available from under spending agencies. The only possibility to correct anomaly incash allocation is through a general revision of the budget at the mid-year review. 9. PayrollPayroll of Government employee represent the largest part of the recurrent budget for allGovernment agency, it is therefore important to define a payroll strategy as part of the budgetexecution process.As with the other systems developed by the ICT Department, there is a payroll system for MoF staff.Development of payment mechanism through ATMs as a salary collection option is being discussedwith banks. The payroll system is limited to basic functions and manages the payment recording anddistribution of MoF salaries. It does not supply any human resource management functions. 28
  29. 29. IV. ACCOUNTING POLICY 1. Mission of the Accounting DepartmentThe Ministry of Finance is responsible for setting all accounting standards for the public sector,private companies, State Owned Enterprises and Non for Profit Organizations. This responsibility isfulfilled by Accounting Department. In1999, the Accounting Department has created two regulatoryinstitutions to assist in this work: The Professional Organization of Accountants and IndependentAuditors, and the Accounting Council. However, during the past years legislation has changed andthe bylaws of these two organizations need be revised to make them compatible with the newRevised Accounting Law.The Mission of MoF Accounting Department is not limited to setting accounting standards. It alsoacquires the mission of conducting surveys on behalf of the Ministry. With a staff of 23 employees,but only 8 accountants, the Department is under-staffed and in need of additional capacity. 2. The Accounting Legal FrameworkA new accounting law has been approved by the National Assembly on July 2nd 2007 and will start toapply on January 1st 2009. This Law covers both the private and public sector. The revised lawdefines the general principles of the accounting system, the structure of the accounting activities andthe structures and principles of accounting control operations.The Law defines the accounting standards as the basic rules and accounting methods for therecording of economic and financial transaction as well as the preparation of financial statements,including reporting, disclosure of financial information, valuation, accounting policies and recognitionof revenues and expenditures.The Law distinguishes between accounting entities, budget entities, administrative and technicalentities, and Public Funds. Budget entities are defined as a category of accounting entities andinclude “all State organizations which are authorized by the Government to prepare and implementtheir budget plans and to make accounting summaries about their actual implementation”. To someextent, budget entities are different from administrative and technical entities which are “theorganizations which use assets as authorized by the Government to serve the society of whichrevenue and expenditures are planned in the annual Budget.” In addition “Public Funds” are“organizations created under the authorization of the Government to collect revenue in favour of theState Budget and to settle expenditures according to the regulation authorized by the Government.”The drafting of the Treasury law might offer a chance to clarify those concepts and to make themfully consistent with modern budget practices.Because the new Accounting Law is a law on the general principles of accountings, there is little in itwhich is specific to the public sector and it has not abrogated the Decree “Pertaining to thePromulgation of the General Regulation of Public Accounting” also known as Decree No 20 which 29
  30. 30. was issued on August 14th 1991 by the Prime Minister. The decree says very little on accountingtechniques, but is important as it defines the legal status and responsibilities of the AuthorizingOfficer and of the Public Accountant - two concepts taken from the French law (L’agent ordonateuret le comptable public)- and specifies principles of budget execution. With the implementation of therevised Budget Law many aspects of Decree No 20 have become obsolete, living its legal status inlimbo. The implementation of TIMS will also affect considerably the mission of the publicaccountants and their role and responsibilities should be reconsidered.Most provisions of Decree No 20 should be integrated in the new Treasury Law after their revisionalthough many details can be left to the application decree of the revised law. Special attentionshould be paid to article 72 and 73 of the Decree, as they define the authority of “the chiefauthorizing officer for revenue and expenditure” and of secondary authorizing officer. The decreelacks clarity and integrating those provisions in the revised Budget Law (and not in a Prime MinisterDecree) will help define the relationship between provincial Treasury Officers and Ministry of Financeofficers at the provincial level to the Central Government and the local authorities.Decree No 20 fell short of establishing the principles of public accounting as distinct from those ofcommercial accounting. 3. Accounting PolicyThe Lao accounting systems has three characteristics that explain some of the difficulties the Ministryof Finance is experiencing for finalizing its accounting policy and defining the State financialstatements: (1) it is derived from the French system, (2) it does not make a distinction betweenpublic and private accounting, and (3) it is cash based until the 2007 law is implemented (Art.5).The Lao accounting system is based on the French accounting system of the 60s. As such it isdifferent from the American standards that have influenced the international standards, althoughsince the 60s efforts have been made to bring the French and other continental European systemscloser to American and international standards. One of the major differences is that accountingstatements are used as tax statements.Because the French financial statements of commercial companies are used for tax purpose, there isa strong need to distinguish between commercial accounting and public accounting as Governmentagencies governed by public accounting do not generate profit. For this reason, Governmentfinancial statements are different in nature from those of commercial companies.However, the Lao system does not make a sharp distinction between commercial and publicaccounting as both sectors are submitted to the same law. The new accounting law says that “allaccounting entities (including Government agencies) are to apply the national accounting standards”.The standards of the Government accounting apply to the budgetary and administrative unit and topublic funds”. (Art. 20) However, the law does not specify what those standards are. Here one isobliged to go back to Decree No 20 of 1995 which, by many aspects is obsolete. 30
  31. 31. To solve the problems we need to clarify the difference between commercial accounting standardsand public accounting standards:The main difference between government accounting and commercial accounting are:  The Government borrowing capacity is not determined by the size of its balance sheet;  There is no need to distinguish between the original capital and other assets, or between capital reserves and revenue reserves as those reserves cannot be distributed;  The net worth of the State is only the difference between assets and liabilities. It is an adjustment variable;  Distinction between capital accounts and operating accounts is essential in public accounting;  Asset depreciation does not impact cash flow and capital;  Public accounting does not have a concept of profit;  Public accounting financial statements do not need to take into consideration taxation;  Whereas commercial accounting should use only one accounting methodology, public accounting can combine different accounting methods in a creative way that must be made explicit in Treasury circulars and accounting secondary regulation;  In the public sector the cost of services delivered is a fundamental concept and should be tracked easily.Understanding how those differences between public and commercial might apply to the Lao publicaccounting inspired from the French system is key for solving some of the difficulties that theMinistry of Finance is facing in formulating its accounting policy and in designing the State financialstatements.Like the Lao system, the French system assumes that public and commercial accounting are upheldby common principles. The current French public chart of accounts implemented in 1988 derivedfrom the chart of accounts for commercial companies of 1982 and Article 133 of “General Regulationfor Public Accounting (Réglement Général sur la Comptabilité Publique) says that the State Chart ofAccounts “is inspired from the general chart of accounts” (s’inspire du plan comptable général).However, “ inspired” does not mean similar. Important differences exist in the structure of the twocharts of accounts: (a) class 3 is significantly different because the State does not have a commercialinventory, whereas there is a need to describe various transfers between Government agencies, (b)class 9 describes budgetary operations and class 0 translate concepts such as “profit and loss” and“retained income” in budgetary terms. Since 1986, France has developed an impressive corpus ofpublic accounting regulations and in 2006 a new organic law has been implemented to bring Frenchaccounting techniques completely in line with international standards. As a result, the State balancesheet, the statement of budgetary revenues and expenditures and the Cash Flow Statement havebecome in nature completely different from those of commercial companies. Clearly, the AccountingDepartment will need to develop a similar corpus of regulation if the new Chart of Accounts is to beapplied to all Government entities. 31
  32. 32. In Government, the distinction between capital and revenue is almost non existent. It only plays arole when assets are sold, and more specifically land, buildings or state owned enterprises. Sellingassets to cover operating expenditures is not considered good policy and proceeds of asset salesshould either be reinvested or used to reduce Government’s debts. However, in practice, it isimpossible to distinguish which expenditures (operations or investments) are financed by borrowingor by tax revenues.To solve the present difficulties, the Government has two options: (1) It can repeal Decree No 10 and integrate most of its provisions in a new Treasury Law, living the details of the accounting procedures to a Prime Minister Decree. (2) It can repeal Decree No 10, integrate the provision related to Budget execution in the new Treasury Law and prepare a law on public accounting distinct from the law on general accounting.In practice, the two options are not mutually exclusive: option 1 can be implemented quickly, givingthe Accounting Department additional time to prepare the law on public accounting. 4. The new Budget ClassificationThe system previously used did not make a strict difference between the Chart of accounts (CoA) andBudget Classification. As a consequence, categories used for budget preparation not only are notconsistent with international standards, but create difficulties for reporting and budget analysis. Inpractice, governments use two types of accounting: budget accounting and financial accounting. Oneuses a single entry system, the other a double entry system. The coherence between budgetclassification and the Chart of Accounts is embodied in the code structure that will be used forposting transactions in the General Ledger.The Ministry of Finance has finalized the new budget classification which is fully consistent withinternational standards such as COFOG (system of Classification of the Function of Government) andGFS (IMF Government General Statistics Manual). The new classification is now in its pilot phase atthe Ministry of Education and the Ministry of Health. The code structure that links the budgetclassification to the Chart of accounts is also in its testing phase. 5. Budgeting Financial Coding Blocks1Classifying expenditure is important in policy formulation and the identification of resourceallocation among sectors, the identification of activities of the government and the level at which1 Unfortunately, Mr. Pradeep was on leave when this report was prepared and could not be interviewed.Information used in this section comes from one of his PowerPoint presentation: “Chart of Accounts andBudget Nomenclature; Workshop on Draft Changes to Treasury Functions”. 32
  33. 33. performance should be assessed, the establishment of accountability for compliance with legislativeauthorization, policies and performance, economic analysis, and day-to-day budget administration.The coding system developed by the Treasury uses only four coding blocks:  Organization  Project  Source of Funds  Economic ClassificationThis four coding blocks are enough to link the budget classification to the chart of accounts, howeverthe system might not be detailed enough to link expenditures to the National Growth and PovertyEradication Strategy. Compatibility of the coding block structure with NGPES reporting requirementsneed to be demonstrated.Advanced accounting and reporting systems use four types of classification in their coding blocks: (1) Administrative classification (2) Economic classification (3) Functional classification (4) Programme classificationThe functional classification organizes government activities according to their purposes (, health, social security) independently from government organizational structure alreadyreflected in the administrative classification. Structure of the functional organization is usuallyprovided by the National Poverty Reduction Strategy, in the case of Lao PDR, the NGPES.Countries having good reporting systems usually use the following coding blocks.  Organization  Sector  Programme  Sub-Programme  Project  Poverty alleviation strategy or other expenditure  Location 33
  34. 34.  Source of found  Economic classificationIt seems that in the coding system under development sector, organization, and location have beenaggregated under one coding block. It is also possible to aggregate programmes, sub-programmesand projects, provided that the coding blocks have enough digits. However if the system can onlyreport by coding block, and if the coding block cannot be disaggregated, reporting by the four typesof classification will be difficult. It is possible that GFIS has some technical limitations that restrain thenumber of coding blocks and the number of digits by coding block. At this stage, with the limitedinformation available it is impossible to make a complete evaluation of the coding block system. Fullcompatibility of the system with NGPES reporting requirements need to be demonstrated. 6. The new Chart of AccountsThe revision of the Chart of Accounts is an important component of the modernization of theMinistry of Finance as it is an essential requirement for the implementation of the integratedTreasury System.The current Chart of Accounts and budget classification reflect the need of a centrally plannedeconomy and mix up administrative and economic classification concepts. It does not have anyfunctional (sectoral) classification, making reporting and budget control very difficult. For example,the concept of “salaries” does not capture all wage flows as it does not include “allowances foroverwork” and “family allowance” which in fact are part of the employee compensation. Theconsequence is that the wage bill is systematically underestimated. Similar remarks can be made forthe reimbursement of loans by SOEs that are treated as revenue, or the treatment of amortizationabove the line. Such distortions make international comparisons very difficult and eventuallyundermine the Government credibility in the face of the international community and investorsseeking guarantees of fiscal sustainability and macro-economic stability.The Ministry has formed an inter-departmental committee for the revision of the Chart of Accountsin 2007 which has finalized the new Chart of Accounts (CoA) in a way that makes it consistent withinternational standards, including Generally Accepted Accounting Practice (GAAP), the GovernmentFinance Statistics Manual (GFS), the International Public Sector Accounting Standards and theInternational System of Classification of the Function of Government (COFOG). The committee hasalso worked on a realignment of budget classification to make it compatible with the GFS.The structure of the Chart of Accounts has been approved by the Minister of Finance in April 2007.Based on that approved structure, the Inter-departmental Committee has now finalized the detailedChart of Accounts. The Ministry recruited a CoA technical advisor and a training advisor with supportfrom the Financial Management Capacity Building Project for assisting in the implementation of theChart of Accounts and the budget functional classification. The Government has started piloting therevised Chart of Accounts at the Ministry of Education. It is expected that the new Chart of Accountswill be fully implemented for the next fiscal year. It will be the responsibility of the CoA technical 34