Lao PDR: Public Expenditure Mangement Review 2008

Lao People’s Democratic Republic
Ministry of Finance
Public Finance Management Strengthening Programme

PUBLIC EXPENDITURE AND
REVENUE MANAGEMENT
REPORT
August 2008

Jean-Marc Lepain
Public Finance Specialist
Intergovernmental Fiscal Adviser

Introduction

Public Finance Management has made an important contribution to economic development of Lao
PDR by promoting macro-economic stability based on improved fiscal discipline and by ensuring that
sectors that are keys to the future of the country were receiving sufficient funding. As a result, all
macro-economic indicators have been positively oriented since 2001, budget deficit have been
contained to a sustainable level with a positive effect on inflation, and overall poverty declined from
46% in 1992-93 to 33% in 2002-2003. Based on the Human Poverty Index, the Lao PDR ranking
moved from the 137th position world wide in 2000 to the 130th position in 2005 which was the last
year that the poverty index was updated. Improvements in road infrastructure, access to clean
water, children vaccination and increases in education enrolment have been the main factors of
poverty alleviation during the past years.

However, because the scope for increasing public spending is limited by the country’s ability to
generate additional revenue, improvement in public expenditure management will make in future an
even more crucial contribution to economic growth and poverty alleviation by improving efficiency in
the 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 growing
inflation rate that will require stricter fiscal discipline and an economic slowdown in neighbouring
countries that might affect GDP growth and revenue collection.

Whereas the national economy has fully recovered from the 1997-2000 economic crises, such is not
the 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 the
collapse in funding, and from a decline in real wages of civil servants, despite incremental
adjustments which have been made year after year. The wage bill remains under considerable
pressure, limiting the ability of the Government to redeploy and expend its services. This pressure
has been aggravated by an aggressive investment policy in some sector that is not well coordinated
with the recurrent budget capacity. The efforts made to contain public expenditures have fallen
disproportionately on non-wage outlays, resulting in a contraction of expenditures for maintenance
and routine operations. This situation can only be corrected by a multi-year gradual adjustment of
wages, 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 of
public expenditure management which have started in 2006-2007 with the promulgation of the
Revised Budget and its implementation in 2008.

To meet all these challenges, the Government has adopted in November 2005 a multi-year medium
to long-term plan for improving public finance management through the Public Expenditure
Management Strengthening Program (PEMSP). This program provides a framework for
implementing Government policies and strategies laid out in the “Policy Paper on Governance”, the
National Growth and Poverty Eradication Strategy (NGPES), and the National Socio Economic
Development Plan (NSEDP) 2006-2010. Its implementation started in fiscal year 2006-2007. The main
advantage of the PEMSP is a prioritization of public finance reforms through a well sequenced plan
2

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) Financial
Legislation and Regulatory Framework, and (5) Capacity Building. During fiscal year 2006-2007 the
program structures have been put in place and have become fully operational. A plan for fiscal year
2007-2008 has been drafted and a Multi Donor Trust Fund (MDTF) has been created to support the
project.

Since the beginning of the current fiscal year, significant progress have been made toward the
implementation of the reform agenda: The Treasury Centralization project is in its pilot phase, the
Treasury Law is being drafted, initial steps have been take to recruit an expert for the
implementation of the Treasury Single Account, a strategy is being laid out for the Treasury System
implementation, a revenue sharing system has been put in place and dissemination of the Budget
Law has started.

The present Public Expenditure and Revenue Management Report is not a report that tries to make a
diagnosis of Lao public finance weakness. Those are well known and have been fully identified in the
Public Expenditure Review published by a panel of international institutions in May 2007. Neither is
this 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 about
processes, issues and solutions. Until 2006 the Ministry of Finance had focused all its attention on
strategic planning and building the reform legal framework. Now this phase is almost finished. From
strategic planning the Ministry of Finance is moving to implementation and implementation is all
about processes. As it could be expected the implementation phase has its own problems. New
unforeseen practical issues emerged as it is the case with the implementation of the VAT, the
definition of the accounting policy and the finalization of the Chart of accounts, the strengthening of
the Medium Term Fiscal Framework (MTFF) and its evolution toward a full-fledged Medium Term
Expenditure Framework (MTEF), the integration of the reporting system and the emergence of new
data requirements. Other issues will certainly emerge when the outcomes of the pilot phase of the
Treasury centralization project will be better known.

By reviewing the different sectors of the reform agenda and by identifying the pending issues, this
report wishes to offer a platform for discussion, be it with the Government side or with the donor
community.

3

I. ISSUES AND OBJECTIVES OF PUBLIC EXPENDITURE AND REVENUE MANAGEMENT REFORMS

1. Economic and macro-fiscal outlook in July 2008

Since the recovery of the1997-2000 economic crisis macroeconomic performance has remained
strong. Real GDP increases now at a rate of 8% a year and will continue to do so if the country
economy is not negatively impacted by the economic situation of its neighbours. Economic growth
remains 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 electricity
generation. Direct foreign investments, especially in mining and hydro-electricity, have played a
major role in the economy expansion. The country has now entered a virtuous circle in which all
macro-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 direct
investments and official development assistance inflows, resulted in an increase in the balance of
payments and an accumulation of international reserves.

However, the economic environment of the country in July 2008 is changing and will require
adjustments in the Government economic and fiscal policy. Inflationary pressure is growing world
wide as a result of a sharp increase in oil and food prices. Inflation is over 8% in Thailand and over
20% 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 on
exchanges with neighbouring countries. However, despite those negative changes in the country
economic environment, the Government remains confident that he can meet its economic
objectives. This confidence is reflected in the 2008-2009 budget which has been approved by the
National 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 substantial
revaluation of the salaries of government employee in order to take into account last year inflation
pressures and to ease economic hardship caused by rising oil prices.

There is no doubt that a deteriorating international environment will make of Government fiscal
policy more policy difficult. Inflationary pressures call for more fiscal discipline. However, the
Government remains committed to macro-economic stability and to its growth target.

4

2. Budgeting for economic growth

The fast evolution of market economy requires a new approach to budgeting. The years from 2001 to
2005 have taught us the lesson that private investment is the main driver of economic growth, not
Government investment. Excessive investment in the public sector with the ultimate objective of
boosting GDP growth has been the main reason for unrealistic budget in the past. The quality of
investments 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 the
economy depends on private investments. In that perspective, government investments become
limited 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, the
aim of budgeting is no longer economic planning. In that context, tax policies and macro-economic
policies achieve paramount importance. Their objective is to ensure macro-economic stability with
low inflation and to provide an economic and fiscal environment able to stimulate private business
and be conducive to economic growth. New developments taking place at the Fiscal Policy
Department are taking into account those changes. However, budgeting procedures have changed
little during the past decency and are in need of complete reengineering. The present linkage
between policy-making, planning and budgeting does not take into account changes in our economic
environment and the need to modernize public expenditure management. In a knowledge economy
material investment cannot be separated from immaterial investment such as training, capacity
building and information technology. Line ministries’ needs for modernization and capacity building
pose an important challenge across all government agencies that cannot be well addressed by the
current policy making and planning procedures.

3. Budgeting and Government priorities

Expenditures at the central and local level do not always reflect priorities defined by the Government
in the NGPES and the NSEDP. Basic education, rural roads and basic health have been identified as
priority sub-sectors. However the development of human resources has difficulty to keep pace with
the level of investment and most of the recurrent budget is absorbed by salaries. The role of MoF is
to ensure that the recurrent and the investment budgets are in line with each others and that the
budget of each sector provides enough non-wage resources for keeping government services
operating and for maintaining infrastructure. Additionally, MoF will pay attention that budget
allocations 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

 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 presents
numerous challenges for integrating NGPES and budget, at the formulation, execution, and
accounting 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 are
basically 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 high
level 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 gives
the Government time to start a discussion on a programmatic approach of budgeting and on
developing a system of performance indicators, if those options are considered, that could linked to
the budget norms under preparation.

6

4. Planning and programme budgeting

Programme budgeting is based on the premise that all budget items can be linked to discrete outputs
that contribute to the achievement of specific policy objectives. The introduction of such an
approach has the aim of increasing the results orientation of budgets through a restructuring of the
planning and budget system. This new approach allows for the creation of explicit links between
expenditure on basic activities and their measurable outcome such as the literacy rate, the number
of students enrolled, the percentage of population with access to clean water, reduction of infant
mortality, etc.

In Lao PDR, due to existing institutional arrangements, converting the whole planning and budgeting
system to full-fledged programme budgeting does not appear realistic. Moving to a more
programmatic approach of budgeting will require a lot of time and need to be done in phase within a
strategy planned at the highest level of Government.

Planning is not just managing investments. Sector policies can only be implemented by programme
and programmes require well identified sources of financing. As such, planning has become just one
element of the Government programme policy. Transforming the economy requires transforming
Government agencies to adapt them to their evolving mission and to improve government service
delivery. This cannot be achieved by investment only. It requires management improvement, training
and capacity building, workforce redeployment (especially from the city to the rural areas but also
within sectors), use of information technology and better revenue and expenditure management.
Better service delivery and improved performance depend on blending all these elements in a
coherent strategy. While the Lao PDR has managed to keep a high level of investment during the past
years, 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 not
financial should be left to them and a programmatic approach of budgeting should be taken with the
objective of linking together policy-making, planning and budgeting. When sectoral policies are
disaggregated into programmes, each programme must be managed autonomously with cross sector
control. The Finance Department controls all programmes’ finance; the Human Resources
Department controls all programmes’ staffing and capacity building policies, etc. Programme policy
links programmes to identified qualitative and quantitative outputs and objectives, making possible
for the Ministry of Finance, through the use of programme budgeting techniques, first to ensure that
each programme is allocated enough financial resources to meet its objectives, second, that
Government funds are spent wisely in line with the policy defined and approved with sensible and
measurable results.

5. Local-Central Relationship

Until 2005, the Lao public finance system has been characterized by vertical imbalance with
provinces collecting around 60% of total revenue and spending 45% of total expenditures. The
7

consequences have been weak control over revenue administration, weak control over treasury
operations, lack of fiscal discipline, exacerbated horizontal imbalance, lack of prioritization of
expenditures, poor cash management, lack of accountability of local governments to the central
Government resulting in a weakening of State institutions.

The reform of the centre-province fiscal relations has been identified as curtail both to increasing
total tax revenue and to reorientation public spending. With the new budget law implementation
and the Treasury centralization project the process for reforming the intergovernmental fiscal system
has been put in place, and significant progress has been made during the past six months. However
considering the institutional history of the country, only a gradual approach can be taken. Local
ownership of the reform agenda has been identified as a critical success factor. Provincial
administrations 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 level

The Budget Law has created the legal instrument for the reform process soon to be completed by the
Treasury Law. Based on this legal framework, MoF is now working on regulatory aspects and on a
change management strategy for implementing structural and managerial changes. Four broad areas
are 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 procedures

A pre-condition for the introduction of a rational and equitable system of intergovernmental
transfers is a successful centralization of control over revenue accounts. Because the implementation
of the Treasury Single Account will probably take several years (see section III. 3), the new fiscal
arrangements, including revenue sharing, will be implemented before the centralization of revenue

8

become effective. Meanwhile the Treasury will need to put in place an intermediary system that will
ensure that all revenues are deposited in one single account separated from expenditures accounts
and that all provincial bank account are progressively closed.

6. Budget Control at the provincial level

Existing budget execution procedures at the provincial level are too weak to enforce absolute fiscal
discipline. Provinces have taken the habit to offset their expenditures against revenues collected for
the central government without referring to the Ministry of Finance. They also make transfers
between 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 of
provinces to offset their expenditures with revenues. A more detailed plan is presented in section
III.5.

7. Horizontal imbalance

Despite continuous efforts over several years for correcting disparities in fund allocations between
provinces, horizontal imbalance remains a reality. Not only there are still important disparities
between provinces, but there are considerable variations in fund allocation between sectors in the
provinces. 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 mission
by poor knowledge of economic and fiscal conditions existing in the provinces. In order to improve
its budget allocations to provinces, MoF will need to perform detailed analysis of provincial budget
and to collect data on the implementation of Government’s programmes at the local level. At the
present time, the Budget Department does not have the capacity to perform those tasks. This
capacity will have to be built gradually (see section VI. 8).

9

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 collection

What has been said of vertical imbalance in expenditure is also true for revenue collection. The table
below shows considerable variations in revenue collection between provinces. Four provinces
(Vientiane Capital, Savannakhet, Champasak, and Kammouane) have in their jurisdiction a number of
large industries that generate revenue for them. It is the reason that they can cover a high
percentage of their budget through local taxes (from 28.10% to 44.89%). However, variations that we
see in other provinces are more difficult to explain and are not directly linked to the poverty level of
these provinces. Luangnamtha has a very low poverty index (1.23) but covers only 5% of its local
budget when Bokeo, with a similar poverty level, collects 16%. The Ministry of Finance is not in
position to say if such disparities are due to differences in the structure of the tax base, to
differences in the local economic environment or to deficiency in the local tax system. This lack of
information explains why revenue forecasting remains so difficult.

A special mentioned should be made of three provinces (Houphan, Oudomxai and Attapeu) that
cover less than 5% of their budget and will require special attention. All three have a high poverty
index. In a typical case of vertical imbalance, those provinces are totally dependent on the central
Government for covering their expenditure. In such cases, it is clear that a poverty alleviation policy
alone will not solve the economic and fiscal problem of those provinces. Such cases require a

10

proactive investment policy to expand the tax base and create additional revenues for the local
authorities.

These few cases illustrate the need for the Ministry of Finance to tailor its fiscal and revenue policy to
each province. This will be possible only if the Ministry dedicates additional human resources to this
problem and builds up the expertise necessary for monitoring closely revenue collection and budget
implementation 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 reporting

A good reporting system is essential for budget formulation, fiscal policy, budgetary control and
reporting to the Parliament. However, the reporting capacity of MoF remains weak due to several
factors:

 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

Reporting appears extremely fragmented and performed in an ad hoc manner in complete
disconnection with the budget cycle. There is no integration between budget reporting and NGPES
reporting and no integrated system to manage data. Although a lot of progresses have been made to
improve GFIS, the technology on which it was developed limits its reporting capacity. The
introduction of the new Chart of accounts will certainly solve many problems, but GFIS was designed
for ex post control and therefore does not provide the sort of information for making day to day
decision. The implementation of the new Treasury System (TIMS) is expected to change this
situation, but will not become a reality before three to five years. Meanwhile, the MoF needs to
develop an intermediary strategy for improving its accounting and reporting system. This strategy
should list all policy and decision requirements and map them to reporting and information
requirements in order to identify data requirements and develop an integrated reporting system that
follows the budget cycle.

12

II. THE NEW ROLE AND STRATEGY OF THE MINISTRY OF FINANCE

1. A renewed legal framework

The first phase of the Ministry of Finance reform programme has been mostly dedicated to strategic
planning and putting in place the legal framework that will drive the reform agenda. From 2005 to
2007, six important laws have been passed by the National Assembly: the Tax Law (May 2005), the
Customs Law (May 2005), the VAT Law, The Budget Law (December 2006), the Accounting Law (July
2007), and the Audit Law. FY 2007-2008 has been mostly devoted to the preparation of the
implementation decrees that will make those laws effective. The Tax Law and the Customs Law are
already applicable. Implementation of VAT is planned for January 2009 but could be delayed due to
some technical problems. Implementation of the new Chart of Account is also planned for January
2008, but policy issues for application to the public finance sector and more specifically for the
Ministry of Finance might take several months to be solved. In the fourth quarter of 2008 the first
draft 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 the
law itself and enter into more details. This approach gives to the legal framework a lot of flexibility as
it 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 been
prepared more than two years ago, the agenda of public finance reform might not have been as clear
as it is now, and the Treasury Law might offer a new opportunity to strengthen the Ministry authority
vis-à-vis line-ministries and provinces, especially in the areas of budget execution, accounting and
reporting.

It is possible that small adjustments will be needed in the law and their implementation decrees to
bring 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 Finance

This new legal framework conveys an implicit redefinition of the role of the Ministry of Finance in the
public finance system of the country. The mission of the Ministry of Finance changes from being the
paying agency of the Government to a twofold mission: (a) planning and managing the Government
finance and using the budget as a fiscal policy tool to promote macro-economic stability, poverty
alleviation policies and economic growth, (b) controlling all government expenditures to ensure that
they serve the Government’s objectives, are in line with its policies and socio-economic strategy, and
that 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 well
understood, even if all the instruments of fiscal policy are not yet all in place. The new Budget Law

13

covers partially the second aspect and it is expected that the Treasury Law under discussion will
considerably reinforce the controlling role of the Ministry of Finance.

However, to fulfil completely its new mission, the Ministry of Finance needs to meet three
challenges:

(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 be
made for the Budget Department and the Treasury. Capacity problems will not be solved only by
training and redeployment of the existing staff. International experience has demonstrated that
training has some inherent limitations; in most cases book keeping officers will not become certified
accountants. Cash management is a totally new and highly specialized function usually performed by
people having an experience in bank or corporate treasury management. Clearly, with the current
level 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 strong
mission but with a weak legal authority. In order to perform its control mission the Ministry of
finance will need to raise its profile and have its new role recognized and accepted by other
governmental agencies. The revised Budget Law leaves the Ministry of Finance with a weak legal
authority. The drafting of the revised Treasury Law offers the opportunity to correct some of the
existing deficiencies and that opportunity should not be lost. However, the Treasury Law will not be
able to address some of the existing issues in the planning and budgeting areas and additional
legislation 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

 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 the
first decree of the revised Budget Law. The new application decree would address issues related to
budget formulation and its relation to policy making and planning. However solving some of the
pending issues will require long consultation with the Government and all stakeholders. The revised
Budget Law has already set in motion a complete transformation of the public finance sector and it is
not easy to identify all the implications. It will probably require several years before a viable strategy
for linking together policy making, planning and budgeting within a result oriented system can be
formulated.

Contacts between the Ministry of Finance and line-ministries remain limited. The introduction of
budget norms is only one example of the need for a close cooperation. The same way that ministries
need to monitor the implementation of their programmes in the provinces, the same way the
Ministry of Finance needs to monitor the financial aspects of the implementation. It includes the
monitoring of procurement and of budget execution. For such purpose, regular exchanges of
information 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 the
Budget 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 produce
little result unless similar efforts are made in the provinces and in line-ministries. A plan already
exists for improving budget formulation and budget procedures at the provincial level. However a
similar plan should be put in place at the level of line-ministries. Line-ministries have also a control
mission, but the law does not say anything on the authority of sector ministries in controlling the
implementation of sector policies. Line-ministries should give policy guidance to the province for
budget preparation to ensure that local budgets reflect national priorities. It can be expected that
the line-ministries will also experience capacity problems in fulfilling their planning and policy control
mission.

15

3. The Public Financed Management Strengthening Programme

The Public Expenditure Management Programme was approved by the Government in November
2005 and latter renamed Public Finance Management Strengthening Programme (PFMSP) to include
revenue management. The PFMSP provides a framework for implementing all public finance reforms
as well as for developing capacity for implementing Government’s policies and strategies laid out in
the “Policy Paper on Governance”, the “National Growth and Poverty Eradication Strategy” and the
National Socio-Economic Strategy 2006-2010. Recent consultations with AusAID, the European
Commission, the Swedish International Development Agency (SIDA), the Swiss Development
Corporation 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 generated
by the Ministry of Finance reform programme. As a flexible instrument, it allows a quick reaction to
new emerging issues and the PFMP should be used for addressing some of the issues identified in
this report.

Initially, the implementation of PFMSP has gone at a slower pace than envisaged, mainly on account
of inadequate funding, lack of implementation capacity and restructuring of MoF (completed in
2007). During the first three quarters of 2008, progress with PFMSP implementation has remained
broadly on track. Small delays have been experienced due to the difficulty to identify technical
assistance resources, delays in procurement and lack of capacity in the implementing department
that 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 development

The PFMSP is currently working on the implementation of the Work Plan for 2008 as part of the
Medium Term Implementation Schedule 2005-2011 that set the overall direction of the reform
implementation 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

 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 Fund

The Multi Donor Trust Fund (MDTF) will address one of the issues responsible for PFMSP slow
implementation: the lack of adequate and timely funding allowing the programme to provide quick
response to new emerging issues through flexible technical assistance and capacity programs.
Additionally, the MDTF will improve coordination between development partners working on public
finance management reforms and contribute to the harmonization aid policies.

The objective of the MDTF is to secure funding for implementing the Government’s reform agenda
for the next four years. So far eight development partners (France, Embassy of Japan, JICA,

17

Sweden/SIDA, AusAID, European Commission, ADB and World Bank) have express their willingness to
support the trust fund. PFMSP has been working with the World Bank to develop the trust fund
structure, including the governance structure and the consultative mechanisms, the financial
structure of the trust fund, the reporting requirements and the supervision arrangements. It is
expected that the MDTF will become fully operational before the end of the year

5. Reform sequencing

The long list of items in the previous sections shows that the main difficulty that arises from the
Ministry of Finance reform programme is the sequencing and coordination of reforms. The PFMSP
has substituted a strategic approach to a piecemeal approach of reforms. However, coordination and
integration of the different project components remain an issue and will require a considerable effort
on the part of the Ministry of Finance.

Hiatus in project execution are unavoidable. The Ministry needs to coordinate four spheres of
actions: (a) the planning and policy making sphere, (b) the legal sphere, (c) the process sphere and
the (d) Information technology sphere.

Laws and regulations can be developed only when objectives of reforms are clear and policies have
been defined. By many aspects, the Ministry of Finance is entering uncharted territories and for that
reason pilot projects are important. However, if the pilot projects are important for the fine tuning of
procedures, they come too late in regard to the legal framework. The Budget Law defines the budget
control procedures and the related authority of the ministry, but leaves out the integration of
planning and budgeting because no clear policy has yet been devised in this area. Financial
statements cannot be finalized before public accounting policy has been fully clarified. Loopholes in
the VAT Law can stop its implementation or make it very difficult. Without well defined process and
procedures computerization is impossible. Upgrading of GFIS requires a precise mapping of
accounting procedures to define technical requirements, not just a chart of account and a budget
classification. The development of accounting codes requires a clear understanding of the relation
between the Chart of Account and the Budget Classification and of budget execution procedures
while some of them have not been designed yet.

Things get more difficult when progress of some MoF projects depend on the cooperation of other
agencies as it is the case in planning and macro-economic policies. Here the main risk is probably
with the Treasury Single Account (TSA). The TSA implementation requires that the implementation of
the Treasury System goes in parallel with the implementation of BoL systems, including its General
System and its payment systems. However implementation of the payment systems will require a
Payment Law and a payment processing strategy with usually includes a Real Time Gross Settlement
System (RTGS) and a Low Value Payment System.

18

III. TREASURY CENTRALIZATION

1. The Centralization process

The Treasury modernization project is essential to the overall modernization of the Ministry of
Finance and hinges on the implementation of two components: the Treasury Single Account and the
Treasury 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) an
information technology upgrade, and (c) a legislative and regulatory framework. The reorganization
of the Treasury functions, including the streamlining of the budget execution functions, should be
seen as a precondition for the implementation of the Treasury Information Management System.

Given the current status of Treasury Systems, capacity, and institutional arrangements, it is
estimated that the effective centralization of the Treasury will take 4-5 years. The procurement and
implementation of the Treasury System is expected to take a minimum of 3 years.

2. The Treasury Law

The Treasury Law will provide the regulatory and operational framework for the Treasury System and
will become the basis of more detailed guidelines, procedures, secondary regulations, forms and
operational manuals for budget execution processes required at all levels of Treasury operations and
for payroll management. It will give authority to the Treasury to issue instructions for recording of all
Government transactions

A committee has been formed for the drafting of the Treasury Law which is following more or less
the same process as the committee that prepared the Budget Law. Consultation is already taking
place at the provincial level. The first draft is expected to be ready by September 2008. In order to
establish a complete legal framework, all aspects of budget execution must be covered. Changes that
will be introduced by the law are expected to be as significant as those introduced by the Budget Law
and will probably require a complex implementation plan.

The new law will define the statute of the Treasury as the only Government payment centre, and it
will clarify the relationship between the central treasury and the provincial treasury. It will make
clear 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 central
administration and provinces for everything related to revenue collection and expenditure
management. 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 public
financial accountability and transparency.

19

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 Account

A Treasury Single Account (TSA) is a mechanism for centralizing all State revenues and expenditures
on 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-national
treasuries to the central treasury. All transactions passing through the TSA are recorded in the
General Ledger of the Central Bank and reconciled with the accounting system of the Ministry of
Finance.

A Treasury Single Account brings a number of tangible advantages:

20

 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 very
much on the progress made on the drafting of the Treasury Law (component (a)). It is the Treasury
Law that will legally establish the Treasury Single Account and will give authority to the Treasury for
issuing secondary legislation. The Treasury Law will establish the basic mechanism of the STA and will
also 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

 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 FMIS

Ownership of the Treasury over the TSA and procedures for managing the TSA are often included in a
Memorandum of Understanding (MoU) signed between the MoF and the central bank. The MoU
must detail the central bank responsibilities in terms of IT infrastructures, on-line access to data and
information, reconciliation procedures, payments instruments and access to the different payment
systems, 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. Basically
the Treasury has the option between a two tiers architecture that will put line-ministries on the same
level as provinces, or a three tiers architecture that will give more responsibilities to line-ministries in
managing 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 municipalities

It is not possible at this stage to say how much time will be necessary for having the TSA fully
operational. The implementation of its technology backbone depends on the BoL. The Bank will need
to implement its own General Ledger as well as a Real Time Gross Settlement System. As it might
take several years, the TSA implementation strategy will need to identify interim arrangements using
existing infrastructures. The best approach would be to have the implementation of BoL systems
going 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 that
MoF can utilize banking as part of the solution architecture. It is essential for the Ministry of Finance

22

that the BoL defines its IT strategy as quickly as possible to be included in the TSA implementation
plan as well as in the requirements for the Treasury Information Management System.

4. Separation of revenue accounts from expenditure accounts

As mentioned in section I.6, provinces have taken the habit to offset their expenditures against
collected revenues without referring to the Budget Department, undermining in that way all fiscal
discipline.

Only the implementation of the Treasury Single Account along with the Treasury Information
Management 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 TSA
implementation 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

These dispositions should be integrated in Treasury Instructions and a Prime Minister Decree.

5. The Treasury System

During the past months, the Ministry of Finance has made significant progress in defining its
information technology strategy. As already decided the current Government Finance Information
System 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, among
others, the tax system, the customs system, and the debt management systems. All MoF systems will
be fully integrated though interfaces to the core system, meaning that the TIMS will set the data
standard for all other systems and that there will be only one General Ledger for all types of
transactions. 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 System
that was developed in 1994 with the assistance of the Asian Development Bank and later deployed
in 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 solution
customized to meet MoF specific requirements. It will have modular architecture offering a single
user interface. Five other modules will operate around the General Ledger: Budget Allocation
Management, Cash Management, Receipts Management, Payments Management and Procurement.
Five Departments or Divisions will have access to user interface for data entry: the Budget
Department, the Treasury Department, the Tax and Revenue Department, the Customs Department
and the Debt Management Division. The system will be linked to the BoL Payment System for
payment processing and the BoL General Ledger for reconciliation purposes.
24

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

 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 project
director and will take the lead for developing requirements for technical and functional design, while
the ICT aspects of the system will be developed with the MoF ICT department. Procurement and
financial 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, the
implementation time table, and the management structure to be put in place. Based on the mission
conclusions, the Ministry will start working on the system terms of reference, and the Request
Proposal for the design consultancy. One of the mission recommendations is that a project
preparation committee/unit (PPC) be established. The committee will be responsible for
coordinating all aspects of the project preparation, providing guidance to the contracted consultancy
that will undertake the Functional and System Design (FSD). The PPC will also be charged with
specifying departmental responsibilities and roles in defining business processes and user
requirements and will be responsible for the TIMS bid evaluation. Once the consultant firm that will
assist the in functional design is selected, it is anticipated that PPC role will change to a full-fledged
Project Steering Committee (PSC). The PSC will be responsible for working with the turn-key
contractor 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) system
integration and implementation.

To prepare the system design, the Ministry of Finance will engage a Consultant to undertake the
preparatory analysis to identify the system requirements (Procurement 1). Based on these
requirements the Ministry of Finance will issue Terms of Reference and following the usual
procurement process will identify and select the system provider that will be responsible for the
supply, installation, implementation, training, change management, documentation, data cleansing
and upload, and rollout of the new TIMS.

The system provider implementation team will work under the supervision of a Project
Implementation Support Consultant that will ensure that the system delivered by the vendor meets
all requirement and specification and that the implementation goes according to schedule without
any additional risk (Procurement 2).

Based of the bidding process, a successful contractor will be contracted to provide the turn-key
solution (Procurement 3). Its responsibility will include the phasing out of the GFIS, the supply of
hardware, the solution software, design, development, testing and implementation services, change
management, training, project management, and warranty and contract maintenance support
beyond implementation.

26

In order to accelerate the TIMS project and to facilitate the transition from GFIS to TIMS, the
Treasury 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 System

The debt Management Financial and Analysis System (DMFAS) of UNCTAD has been identified at the
best available solution for the Treasury and work on its deployment will start shortly. The system has
been developed by UNCTAF on the same model as ASYCUDA, with the objective to assist low and
middle-income countries to develop their debt management capacity. Because DMFAS is developed
by a United Nation’s agency, it comes with a technical assistance package that goes beyond
assistance for the implementation of an IT system. It includes advice on institutional and procedural
issues, debt management training, support for debt analysis and the development of debt
management strategies.

Nevertheless, the implementation of DMFAS will represent a heavy task. The implementation plan
should be integrated to the PFMSP schedule and special attention should be given that enough
human resources are committed to the project success.

7. Rationalization of the budget execution process

Before the TIMS can be established, all budget execution procedures must be reassessed and made
compatible with the new system. The system requirements to be included in the terms of references
will be based on those new procedures.

A committee has been established to look at the rationalization of the budget execution process with
the objective to streamline the process, eliminate unnecessary formalities and integrate
requirements of the new Chart of Accounts and of the new standardized budget execution reporting
system. The new arrangements take into consideration modifications introduced in the Government
Financial Information System (GFIS) for the next fiscal year. The reengineering of budget execution
processes has so far focused on a better linkage between the Budget Implementation Plan, allotment
management (cash allocation), commitment management and reducing paperwork by a more
effective use of computerization and of the GFIS capability. Banking arrangements and payment
procedures have not been finalized yet as some of the new processes will depend on decision made
for the Treasury Single Account (TSA) strategy. However, as the TSA will not become operational
27

before FY 2009-2010. The new procedures will strengthen the commitment control mechanism and
budget control effectiveness.

The reengineering of the budget execution process cannot be dissociated from the design of the
budget control system. More detailed information is provided in section VII.5 of this report “Design
of the Treasury Control System” on the best ways to ensure a good integration of the two processes.

8. Cash Management

A concept note on cash management has been drafted with technical support from the European
Commission. 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 be
one of the last module to be implemented as cash management relies on information coming from
other 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 fully
implemented. The TSA will reduce the amount of cash sitting idle on bank accounts and reduce the
need for borrowing. The present system transfers the responsibility of cash rationing to local treasury
officers, weakening the authority of the central treasury. Presently the Treasury is not able to use
cash potentially available from under spending agencies. The only possibility to correct anomaly in
cash allocation is through a general revision of the budget at the mid-year review.

9. Payroll

Payroll of Government employee represent the largest part of the recurrent budget for all
Government agency, it is therefore important to define a payroll strategy as part of the budget
execution 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 discussed
with banks. The payroll system is limited to basic functions and manages the payment recording and
distribution of MoF salaries. It does not supply any human resource management functions.

28

IV. ACCOUNTING POLICY

1. Mission of the Accounting Department

The 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 is
fulfilled by Accounting Department. In1999, the Accounting Department has created two regulatory
institutions to assist in this work: The Professional Organization of Accountants and Independent
Auditors, and the Accounting Council. However, during the past years legislation has changed and
the bylaws of these two organizations need be revised to make them compatible with the new
Revised Accounting Law.

The Mission of MoF Accounting Department is not limited to setting accounting standards. It also
acquires 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 Framework

A new accounting law has been approved by the National Assembly on July 2nd 2007 and will start to
apply on January 1st 2009. This Law covers both the private and public sector. The revised law
defines the general principles of the accounting system, the structure of the accounting activities and
the structures and principles of accounting control operations.

The Law defines the accounting standards as the basic rules and accounting methods for the
recording of economic and financial transaction as well as the preparation of financial statements,
including reporting, disclosure of financial information, valuation, accounting policies and recognition
of revenues and expenditures.

The Law distinguishes between accounting entities, budget entities, administrative and technical
entities, and Public Funds. Budget entities are defined as a category of accounting entities and
include “all State organizations which are authorized by the Government to prepare and implement
their budget plans and to make accounting summaries about their actual implementation”. To some
extent, budget entities are different from administrative and technical entities which are “the
organizations which use assets as authorized by the Government to serve the society of which
revenue 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 the
State 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 them
fully consistent with modern budget practices.

Because the new Accounting Law is a law on the general principles of accountings, there is little in it
which is specific to the public sector and it has not abrogated the Decree “Pertaining to the
Promulgation of the General Regulation of Public Accounting” also known as Decree No 20 which

29

was issued on August 14th 1991 by the Prime Minister. The decree says very little on accounting
techniques, but is important as it defines the legal status and responsibilities of the Authorizing
Officer and of the Public Accountant - two concepts taken from the French law (L’agent ordonateur
et le comptable public)- and specifies principles of budget execution. With the implementation of the
revised Budget Law many aspects of Decree No 20 have become obsolete, living its legal status in
limbo. The implementation of TIMS will also affect considerably the mission of the public
accountants and their role and responsibilities should be reconsidered.

Most provisions of Decree No 20 should be integrated in the new Treasury Law after their revision
although many details can be left to the application decree of the revised law. Special attention
should be paid to article 72 and 73 of the Decree, as they define the authority of “the chief
authorizing officer for revenue and expenditure” and of secondary authorizing officer. The decree
lacks clarity and integrating those provisions in the revised Budget Law (and not in a Prime Minister
Decree) will help define the relationship between provincial Treasury Officers and Ministry of Finance
officers 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 of
commercial accounting.

3. Accounting Policy

The Lao accounting systems has three characteristics that explain some of the difficulties the Ministry
of Finance is experiencing for finalizing its accounting policy and defining the State financial
statements: (1) it is derived from the French system, (2) it does not make a distinction between
public 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 is
different from the American standards that have influenced the international standards, although
since the 60s efforts have been made to bring the French and other continental European systems
closer to American and international standards. One of the major differences is that accounting
statements are used as tax statements.

Because the French financial statements of commercial companies are used for tax purpose, there is
a strong need to distinguish between commercial accounting and public accounting as Government
agencies governed by public accounting do not generate profit. For this reason, Government
financial statements are different in nature from those of commercial companies.

However, the Lao system does not make a sharp distinction between commercial and public
accounting as both sectors are submitted to the same law. The new accounting law says that “all
accounting 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 to
public funds”. (Art. 20) However, the law does not specify what those standards are. Here one is
obliged to go back to Decree No 20 of 1995 which, by many aspects is obsolete.

30

To solve the problems we need to clarify the difference between commercial accounting standards
and 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 public
accounting inspired from the French system is key for solving some of the difficulties that the
Ministry of Finance is facing in formulating its accounting policy and in designing the State financial
statements.

Like the Lao system, the French system assumes that public and commercial accounting are upheld
by common principles. The current French public chart of accounts implemented in 1988 derived
from the chart of accounts for commercial companies of 1982 and Article 133 of “General Regulation
for Public Accounting (Réglement Général sur la Comptabilité Publique) says that the State Chart of
Accounts “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 two
charts of accounts: (a) class 3 is significantly different because the State does not have a commercial
inventory, 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 of
public accounting regulations and in 2006 a new organic law has been implemented to bring French
accounting techniques completely in line with international standards. As a result, the State balance
sheet, the statement of budgetary revenues and expenditures and the Cash Flow Statement have
become in nature completely different from those of commercial companies. Clearly, the Accounting
Department will need to develop a similar corpus of regulation if the new Chart of Accounts is to be
applied to all Government entities.

31

In Government, the distinction between capital and revenue is almost non existent. It only plays a
role when assets are sold, and more specifically land, buildings or state owned enterprises. Selling
assets to cover operating expenditures is not considered good policy and proceeds of asset sales
should either be reinvested or used to reduce Government’s debts. However, in practice, it is
impossible to distinguish which expenditures (operations or investments) are financed by borrowing
or 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, giving
the Accounting Department additional time to prepare the law on public accounting.

4. The new Budget Classification

The system previously used did not make a strict difference between the Chart of accounts (CoA) and
Budget Classification. As a consequence, categories used for budget preparation not only are not
consistent with international standards, but create difficulties for reporting and budget analysis. In
practice, governments use two types of accounting: budget accounting and financial accounting. One
uses a single entry system, the other a double entry system. The coherence between budget
classification and the Chart of Accounts is embodied in the code structure that will be used for
posting transactions in the General Ledger.

The Ministry of Finance has finalized the new budget classification which is fully consistent with
international standards such as COFOG (system of Classification of the Function of Government) and
GFS (IMF Government General Statistics Manual). The new classification is now in its pilot phase at
the Ministry of Education and the Ministry of Health. The code structure that links the budget
classification to the Chart of accounts is also in its testing phase.

5. Budgeting Financial Coding Blocks1

Classifying expenditure is important in policy formulation and the identification of resource
allocation among sectors, the identification of activities of the government and the level at which

1
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 and
Budget Nomenclature; Workshop on Draft Changes to Treasury Functions”.

32

performance should be assessed, the establishment of accountability for compliance with legislative
authorization, 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 Classification

This four coding blocks are enough to link the budget classification to the chart of accounts, however
the system might not be detailed enough to link expenditures to the National Growth and Poverty
Eradication Strategy. Compatibility of the coding block structure with NGPES reporting requirements
need 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 classification

The functional classification organizes government activities according to their purposes (e.g.
education, health, social security) independently from government organizational structure already
reflected in the administrative classification. Structure of the functional organization is usually
provided 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

 Source of found

 Economic classification

It seems that in the coding system under development sector, organization, and location have been
aggregated under one coding block. It is also possible to aggregate programmes, sub-programmes
and projects, provided that the coding blocks have enough digits. However if the system can only
report by coding block, and if the coding block cannot be disaggregated, reporting by the four types
of classification will be difficult. It is possible that GFIS has some technical limitations that restrain the
number of coding blocks and the number of digits by coding block. At this stage, with the limited
information available it is impossible to make a complete evaluation of the coding block system. Full
compatibility of the system with NGPES reporting requirements need to be demonstrated.

6. The new Chart of Accounts

The revision of the Chart of Accounts is an important component of the modernization of the
Ministry of Finance as it is an essential requirement for the implementation of the integrated
Treasury System.

The current Chart of Accounts and budget classification reflect the need of a centrally planned
economy and mix up administrative and economic classification concepts. It does not have any
functional (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 for
overwork” and “family allowance” which in fact are part of the employee compensation. The
consequence is that the wage bill is systematically underestimated. Similar remarks can be made for
the reimbursement of loans by SOEs that are treated as revenue, or the treatment of amortization
above the line. Such distortions make international comparisons very difficult and eventually
undermine the Government credibility in the face of the international community and investors
seeking guarantees of fiscal sustainability and macro-economic stability.

The Ministry has formed an inter-departmental committee for the revision of the Chart of Accounts
in 2007 which has finalized the new Chart of Accounts (CoA) in a way that makes it consistent with
international standards, including Generally Accepted Accounting Practice (GAAP), the Government
Finance Statistics Manual (GFS), the International Public Sector Accounting Standards and the
International System of Classification of the Function of Government (COFOG). The committee has
also 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 detailed
Chart of Accounts. The Ministry recruited a CoA technical advisor and a training advisor with support
from the Financial Management Capacity Building Project for assisting in the implementation of the
Chart of Accounts and the budget functional classification. The Government has started piloting the
revised Chart of Accounts at the Ministry of Education. It is expected that the new Chart of Accounts
will be fully implemented for the next fiscal year. It will be the responsibility of the CoA technical

34

Lao PDR: Public Expenditure Mangement Review 2008

Lao PDR: Public Expenditure Mangement Review 2008

Recommended

Recommended

More Related Content

What's hot

What's hot (17)

Viewers also liked

Viewers also liked (6)

Similar to Lao PDR: Public Expenditure Mangement Review 2008

Similar to Lao PDR: Public Expenditure Mangement Review 2008 (20)

More from Jean-Marc Lepain

More from Jean-Marc Lepain (20)

Recently uploaded

Recently uploaded (20)

Lao PDR: Public Expenditure Mangement Review 2008