The document discusses public finance management reforms in Lao PDR. It notes that while macroeconomic indicators have improved, the public finance system suffered during an economic crisis and wage bill pressures limit spending. It highlights the need to [1] improve expenditure efficiency and alignment with strategy, [2] address challenges from inflation and slowing growth, and [3] reform center-province fiscal relations to increase revenue and realign spending. The document reviews progress on a public expenditure management strengthening program and identifies pending issues to discuss with stakeholders.

1. 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

2. 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
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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) 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.
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4. 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.
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5. 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.
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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 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.
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7. 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
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8. 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
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9. 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).
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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 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
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11. 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
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12. 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.
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13. 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
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14. 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.
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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 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.
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16. 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 ;
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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 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,
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18. 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.
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19. 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.
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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 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

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 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.
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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 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
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23. 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)
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24. 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.
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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.
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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 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.
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27. 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

28. 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.
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29. 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
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30. 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.
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31. 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.
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32. 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

33. 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
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34.  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

35. advisor to ensure that all reporting requirements, including NGPES reporting, are taken in
consideration by the coding block system.
The new Chart of Accounts’ requirements will be taken into consideration for preparing the technical
specifications of the General Ledger.
7. Budgetary accounting
The French accounting methodology requires a strict separation between budgetary accounting and
general accounting. The purpose of budgetary accounting is to record the different phases of budget
execution: appropriation notification, accounting commitment, verification, issuance of the payment
orders, settlement. General accounting only records the final phase of budget execution within the
framework of the chart of accounts, and identifies the source of funds and the payment instruments.
The Accounting Department is under the impression that the system which is piloted at the Ministry
of Health and the Ministry of Education does not keep a strict separation between budgetary and
general accounting. Either it is a misunderstanding, and in that case the misunderstanding need to be
clarified to allow the Budget Department to develop the relevant regulation, or there is a real issue
which need to be address when the pilot phase of the project will be evaluated. Further
investigations of this problem are out of the scope of this report.
8. Financial statements
The Financial Statements of the Government are expected to provide a record of the Government’s
financial performance and of its financial position. For a better understanding, financial statements
usually provide a comparison with the previous fiscal year and with the fiscal forecast and give a
snapshot of the progress the Government has made in implementing its fiscal strategy and achieving
its social and economic objectives. However, there are many ways to present financial statements,
depending on different objectives. Financial Statements are developed to serve a purpose and it is
the understanding of this purpose that provides the design guiding principles.
For reasons that have been explained in section 3 of this chapter on accounting policy, the Ministry
of Finance has not been able to finalize Government Financial Statements. Article 36 of the
Accounting Law stipulates that “the financial statements of budgetary units, technical and
administrative units and the public funds include: the balance sheet, the statement of budgetary
revenue and expenditures or the statement of performance, the explanatory notes of the accounting
principles and methods in use”. The law does not say if this article applies to the financial statements
published by the Ministry of Finance on behalf of the State but such is the understanding of the
Accounting Department.
Recognizing that article 36 is too vague to provide guidance for the design of the State financial
statements, the Accounting Department has taken as model the new French Organic Public Finance
Law (LOFT) but in doing so is facing a number of problems that arise because many questions of
35

36. accounting policies and accounting techniques have not been decided yet. The two main problems
are assets and debt recording.
So far the total value of assets used by each Government Agency is unknown and the principles of
asset valuation have not been decided. This includes depreciation.
The same problem arises with the treatment of foreign debt. In a patrimonial approach, the
Accounting Department would like to include domestic and foreign debt in the net position of the
State where as at the moment the accounting system only captures the cash position of the State.
Accrual accounting will solve the problem, but it is not sure yet if GFIS will be able to supply such
information. A simple way to go around this problem could be to publish a separate statement for
the debt position of the State.
These problems arise because the Accounting Department is following too closely the French system
with the objective of producing a Balance Sheet and a Statement of Budgetary Revenue and
Expenditures modelled on the Profit and Loss Account of commercial companies. In the French
system, the (taxable) operating result of the Profit and Loss Account must be absolutely equal to the
variation of assets and liabilities recorded in the balance sheet. In public accounting, there is not such
a direct relation between the Statement of Performance and the Balance Sheet and there is no
reason for the Balance Sheet to be balanced, as balancing assets and liabilities depends on the
valuation of fix assets such as properties, equipments and military assets. Such valuation can be very
subjective. The difference between assets and liabilities is “the State net worth” which is an
adjustment variable difficult to analyse in economic terms. It might take many years before the Lao
PDR can develop a system able to calculate the net worth of the State. It implies solving many very
technical issues such as the definition of State Assets, inventory and valuation of assets and liabilities,
the depreciation policy, the accounting treatment of provisions and special funds, etc.
Clearly, the Ministry of Finance will need to look at alternatives and develop a strategy over a period
of several years before detailed financial statements can be produced. When developing this strategy
the Ministry will need defining clearly the objectives pursued by the publication of the financial
statements and articulate the different information requirements: reporting to the national
assembly, compliance with donors’ requirements, and transparency on the macroeconomic situation
of the country to attract direct foreign investments.
At least for a few years a balance sheet might not be necessary to reach those objectives as long as
the same information is provided in a different format. Two options can be considered:
a) Substituting to the Balance Sheet a number of statements that will provides information on
different categories of assets and liabilities such as a statement of borrowing, a statement on
fix asset variations, a statement on financial assets, a statement of commitments, and a
statement of quantifiable contingent liabilities and contingent assets.
b) Producing a simplified balance sheet that will provide detailed information on the liabilities
side, but will detail only assets on which information is available such as liquidity, loans to
employees, financial investments, etc. The adjustment between assets and liabilities will be
provided by the aggregation of fix asset with the net worth of the state.
36

37. EXAMPLE OF SIMPLIFIED BALLANCE SHEET
ASSETS LIABILITIES
Liquidity Gross Debt
Financial assets Social Liabilities
Other assets Other Liabilities
Fix Assets and Net Worth
Total Assets Total Liabilities
If it is difficult to distinguish capital assets from net worth, such is not the case of the gross debt that
is part of the Government liabilities and must be accounted for precisely. It will be impossible to
produce a balance sheet without a complete borrowing statement, and attention should be given to
this issue.
In the French reporting system, the emphasis is not put on the balance sheet but on the explanatory
notes. Here the Accounting Department might have misread the French law. The importance of the
explanatory notes is not only in its clarification of “the the accounting principles and methods in use”
but more in the level of details on asset and liabilities that they provide. The “explanatory notes”
replace the long list of statements that countries using a different system produce, such as the
statement of borrowing, the statement on fix assets and amortization, etc.
French public accounting considers that the deficit or surplus of the statement of budgetary revenue
and expenditures is equivalent to the operating result of the profit and loss account of a commercial
company. As such the budgetary surplus or deficit appears in the Balance Sheet. Following this model
is a question of accounting policy and MoF should not fill bound to follow the French model in all
aspects. The deficit is financed by a variation in the Government borrowing position and it might be
more important to reflect this variation than to link the balance sheet to the performance statement.
Many countries, like Australia and New Zealand, do not record the budget deficit in the Balance
Sheet, but consider that the variation in the net worth of the State is more significant. The concept of
net worth is very elusive in public accounting and its analysis is particularly difficult. It can be
doubted that the absolute value of the State net worth has a macro-economic meaning (you cannot
compare countries by their net worth), but the relative value of the net worth certainly has. A
declining net worth might indicate that the level of investment is not sufficient to compensate for
asset depreciation or that the national debt is growing too fast. Without a concept of net worth, it
will be almost impossible to produce a balance sheet as we cannot expect to reach the level of
precision required by the French system before a decade.
The recommended strategy will give time to focus on the Statement of Budgetary Revenues and
Expenditures that also requires detailed explanatory notes. The required explanatory notes need to
37

38. be listed in the accounting regulation and summarized in a Statement of Performance. This will
require defining the concepts used in the analysis such as the Operating Balance that might not
include revaluation of assets in the present case. Usually the Operating Balance defines the State
investment capacity. In the case of the Lao PDR, international investments play a major role in
financing the country investment programme and there is the need to calculate an operating balance
before and after international financing.
The Ministry of Finance might be inspired by looking not only at France but also at other countries
that are considered as models of good reporting such as Australia, New Zealand and South Africa.
Explanatory notes might be replaced in some cases by various statements such as the Statement of
Financial Position, the Statement of Movement in Equity, the Statement of Borrowings, the
Statement of Commitments, the Statement of Quantifiable Contingent Liabilities and Contingent
Assets, etc. The Ministry of Finance might also look at the IMF statements included in its Report
under Article IV.
In any case, these technical problems will not be solved without technical assistance. Only an
accounting expert can ensure that the solutions provided are consistent with the country general
accounting policy and might assist in formulating an accounting doctrine. This report does not intend
to provide solutions to accounting policy problems but only to identify policy options to be
investigated.
9. Asset Inventory
In the absence of an asset inventory, it would be impossible to draw a state balance sheet in the
sense of Article 36 of the Accounting Law. At the State level, a balance sheet might not be necessary.
However, line ministries are requested by the law to report on their assets it will be impossible as
long as an asset inventory is not put in place. At the moment the state budget only captures
investments but is not able to determine how much is for new assets and equipments and how much
is for replacement of existing assets.
Having an asset inventory is also important for the Fiscal Policy. Without an asset inventory the
Ministry of Finance is unable to follow the life cycle of assets and equipments and to evaluate
maintenance cost and replacement cost. In practice those costs are systematically underestimated.
The question is even more complex in Lao PDR because many large investments are financed directly
by donors whereas the Ministry of Finance does not have a clear idea of the maintenance cost.
Before an Asset Inventory System can be put in place, the Accounting Department need to prepare
regulations that can be formalized into a Prime Minister Decree. The regulation needs to cover the
following areas:
a) Perimeter of State assets
b) Principles of asset valuation and revaluation
c) Principles of asset depreciation
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39. The first task is to provide a definition of tangible capital assets that must become part of the law or
regulation. Tangible capital assets are usually defined as a significant economic resource managed by
a Government agency and that is a key component in delivering Government services or
implementing Government programmes. The law, beside the definition must provide criteria for
distinguishing tangible capital assets from other assets or from stocks of goods. Usually, tangible
capital assets (a) are held for use in the production or goods and services, for rental to others, for
administrative purposes or for the development, construction, maintenance or repair of other
tangible capital assets; (b) have useful economic life extending beyond an accounting period (to be
defined); (c)are to be used on a continuing basis; and (d)are not for sale in the ordinary course of
operations.
The asset definition will help defining the perimeter of the asset inventory that might include not
only buildings, equipments, monetary assets, financial investments, etc., but also works of arts,
national heritage buildings, state highways, aircraft and navigation equipments, railway network,
electricity generation assets and distribution network, sewage system, commercial forest, mineral
reserves, good will and intangible assets, etc.
Based on a broad definition of assets in general and of tangible capital assets in particular, an asset
classification must be developed for the purpose of asset management. This asset classification will
go into more details than the budget classification and the Chart of Accounts. Governments use
many different types of asset classification, but all are likely to include broad categories such as:
1. Infrastructure assets
2. Community assets
3. Operational assets
4. Non operational assets
5. Military equipments
In a first stage, the Ministry of Finance might consider introducing a distinction between operating
assets and non operating assets and limiting the perimeter of the asset inventory to operating assets.
PFMSP Work Plan for 2008 ha scheduled an activity designated as “upgrade of the capacity of assets
management (information correction statistic and state property management in the nation wide)”
to be undertaken “by the State Property Management Department after the establishment of the
MTDF”. It includes the provision of three months of technical assistance. However, asset
classification needs to be developed jointly with the Accounting Department, as the classification
must be compatible both with the budget classification and the Chart of Accounts.
Asset management is impossible without an IT system and the implementation of such system must
be integrated in the Ministry’s IT master plan.
10. Need for technical assistance and capacity building
The Accounting Department is facing are very complex situation and has limited options. The link
between the Lao accounting system is a legacy that goes back to the colonial period. The department
39

40. is right when it insists that the coherence of the system should be maintained. However some of the
problems can only be solved in the long term and we need to recognize that it might take a decade
before the Ministry of Finance is able to produce a Balance Sheet on the French model.
What is crucial at the moment is to prepare the secondary accounting regulation that will be
necessary for the full implementation of the new Budget Classification and the new Chart of accounts
on January 1st 2009. Another important task is the finalization of the State Financial Statements. Both
tasks cannot be completed without a clarification of the accounting policy and a better separation
between commercial accounting and public finance accounting. Due to the short span of time left
before January 2009, the Accounting Department is in need of some Technical Assistance and would
like to recruit a consultant familiar with both French public accounting and international standards.
In a near future, the Accounting Department will need to prepare policies for valuation of
Government assets and amortisation. It will need to prepare policies and regulation for special funds
such as the road fund, government bond accounting, equities, etc.
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41. V. CENTRALIZATION OF CUSTOMS AND TAX ADMINISTRATION
Centralization of Customs and Tax Administration is an important component of the implementation
of the Revised Budget Law promulgated in December 2006 by the National Assembly and of the
Ministry modernization plan. This modernization plan is based on the Customs Law approved by the
National Assembly and the Tax Law in May 2005. General orientations for the implementation of the
Customs Law and the Tax Law have been issued by the Ministry of Finance in an instruction circular
entitled “Recommendation of the Ministry of Finance on the Centralization of Customs, Tax and
National Treasury Activities under Vertical Line of Authority” published in July 2007. Those
recommendations have been reinforced by a Prime Minister Decree published in September 2007.
Significant progress has been made during the past six months towards the centralization of tax and
customs administration. A well defined strategy has been put in place through instructions issued by
the Prime Minister and recommendations given to the relevant department by the Minister. These
two documents provide the framework within which the implementation plan is being put in place.
Management structures for the reform process have been put in place. Instructions for
implementation of the laws have been prepared.
1. Customs Administration
The Customs Administration has divided the country into 4 regions with their own offices, creating a
two tiers system. The regional customs office will replace the provincial customs administration. Two
customs offices will be set up in Northern Laos and one in southern Laos. The fourth office will be
established in Vientiane Capital. Customs at Vientiane Capital and Vientiane Province and some
major checkpoints will operate under direct supervision of customs headquarter.
The project has now entered its pilot phase with the Southern Office chosen as a pilot project. As
soon as conclusions would have been drawn from the pilot phase, the project will be rolled over the
three other regions.
A World Bank technical assistance project under the Customs and Trade Facilitation Project has been
prepared and is expected to become effective in autumn 2008. The Ministry has received in July a
grant of 51 billion kip (US$ 6 million) for this purpose. This project will address major institutional and
procedural reform requirements and contribute to the uniform application of customs legislation in
all customs offices and posts.
The customs computer system, Customs 2000, was implemented seven years ago and is
technologically outdated. Adapting the system to customs centralisation will require rewriting the
part of its core program and does not appear feasible. The Customs Department is planning to
migrate to ASYCUDA; a system developed by UNCTAD which has become a standard. A system
41

42. implementation strategy still needs to be put in place with decision to be taken on the environment
within which the ASYCUDA will operate.
The new system will be able to handle all foreign trade procedures and to process electronically
manifests and customs declarations, accounting posting and procedures, transit and suspense
procedures. The system will include a reporting module able to produce on the fly reports providing
the ministry with critical information to manage its revenue flow. The Customs Department is in the
process of recruiting a foreign expert that will supervise the system implementation.
ASYCUDA provides a comprehensive functionality that includes:
 Cargo and manifest processing
 Declaration processing
 Bond and Warehousing
 Transit control
 Transaction and price analysis
 Payment processing and revenue accounting
 Selection intelligence and audit support
 Trade statistics and management information
The system will interface directly to the Treasury Information Management System (TIMS). Customs
transactions will be posted directly in the Treasury General Ledger providing the treasury with real
time information on its cash position. However the banking arrangements that need to be put in
place have yet to be discussed with the banking sector. Like the Treasury Single Account, technical
aspects of those arrangements will depend on option chosen by BoL for the Banking Modernization
Project.
2. Tax Administration
Due to the complexity of tax administration, tax centralization will require more time than customs
for its full implementation. The existing tax centralisation plan does not cover yet all aspects of tax
centralization and only addresses some of the functional issues. Like for customs, a pilot project
strategy has been chosen with the expectation that important lessons will be learnt from the pilot
phase and will help in preparing the overall strategy. The strategy is based on three components:
professional organization, personnel and budget, and finance and materials.
The project has been designed in three phases: phase 1 is the pilot phase, phase 2 the expansion
phase and phase 3 the full coverage phase. The pilot phase has started in three provinces:
Savannakhet, Kammouane and Bolikhamxay. Following this pilot exercise, centralization of Vientiane
capital office and Vientiane Province will follow in early 2009 and by the end of 2009 the
centralization process is expected to be completed. The new organization will require a
42

43. centralization of payroll and recurrent expenditures; a transfer to the central budget is planned for
fiscal year 2008-2009.
It should be noted that centralisation of taxes cannot become fully effective until the Single Treasury
Account has been established. As already highlighted in the section of this report on Treasury
centralization, the Single Treasury Account implementation project is a complex project linked to the
upgrading of BoL IT systems and to the implementation of the Treasury System. As those projects are
expected to take two to three years, the Single Treasury Account will have to be implemented in
phases. The number of phases and the interim arrangements that will be put in place will directly
affect the process of tax centralization. As long as the strategy plan for the Single Treasury Account
implementation is not ready, it is difficult to foresee how it will affect tax centralization.
The current plan that goes until 2009 caters mostly for functional aspects and the transfer of
responsibility from the provincial level to the central level. Broader organizational and procedural
reforms might take more time. When the process of overhauling and modernizing the headquarter
management processes are completed, similar issues at the provincial level will need to be
addressed.
The Central Tax Department is facing an important capacity building challenge. Implementation of
the new tax law and control of the tax collection system not only will require additional staff but also
a significant upgrade of the staff professional qualification. New functions, such has tax collection
supervisions, tax payer compliance, legal affairs management, tax data analysis, reporting, and
revenue forecasting, have to be created or strengthen with additional capacity. The Department is
currently working on a plan for strengthening headquarter management and supervision capacity
and is considering the possibility of transferring some experienced staff from provincial offices to
headquarter. However, serious capacity problems also exist at the provincial level. Such problems
will require several years to be solved and might affect the centralization timetable.
A general tax administration system is under development with the assistance of ICT and SIDA
(Sweden), known as Lao TIS (Lao Tax Information System) and includes six modules: taxpayer
registration, taxpayer management, tax filing, tax payment, tax audit and tax collection. Software
developed in this framework is now in the testing phase and pilot implementation of the whole
system is scheduled to start in the three pilot offices.
It will be important to coordinate any new developments of Lao TIS with the future Treasury
Information Management System. Like all in-house developed system Lao TIS will not beneficiate
from the support of a system vendor and, at the moment, the flexibility of the system cannot be
ascertained. However, in line with the Government policy to increase its tax revenue, major changes
in tax policies can be expected in the forthcoming years.
3. Large Tax Payers Unit
As large tax payers provide the bulk of tax revenues, attention should be paid to the modernization
of the Large Tax Payer Unit (LTU) which is facing problems similar to those of the Tax department in
terms of capacity, computerization and streamlining of procedures. A plan is being laid down for
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44. reforming business processes and upgrading IT infrastructures. This task will be conducted through a
project already financed by SIDA. Under that project an operational manual on taxing large tax
payers has been developed and staff will be trained to use it. LTU is included in a tax computerization
plan and is expected to be one of the initial beneficiaries.
4. Introduction of VAT
Based on the VAT Law approved by the National Assembly in December 2006, and the
implementation decree of October 2007, the Tax Department has prepared a plan for VAT
implementation by January 2009. VAT will have a standard rate of 10% and will replace the turnover
tax which had multiple rates and which was difficult to collect. The threshold for compulsory VAT
registration is 400 million kip. The VAT base has been estimated at 1,800 taxpayers out of 80,000
registered tax payers, included Large Tax Payers managed by LTU. Collection of VAT will be the
responsibilities of the LTU and of provincial tax offices. The Tax Department is now concentrating on
the implementation of the Tax Identification Number (TIN) system that needs an important upgrade.
TINs are still issued by provincial tax offices without a consolidated data base. SIDA is now assisting
the tax department in developing a computerized TIN system which could also be used for the
identification of importers and exporters by the Customs Department.
Following reserves formulated by the IMF and the World Bank regarding the readiness of the
Ministry of Finance to implement VAT in January 2009, MoF has asked an independent consultant to
make an assessment of the tax department capacity to meet its deadlines. The mission has taken
place July 14th to July 24th and concluded that implementation of VAT on the scheduled date of
January represents a challenge which, if not impossible, involves considerable risks.
Several problems have been identified:
 The current VAT Law requires an important amount of adjustment to be made operational.
 The Implementation decree of October has fundamentally redefined the role and
responsibilities of the Directorate General of Taxes, the Provincial and City Tax Divisions and
the District and Municipal Tax Offices respectively, which might require changes in the VAT
Law and the Tax Law.
 The implementation decree leaves a number of issues uncovered, calling for additional
secondary legislation.
 Lao Tax Information System will not be available before the middle of 2009 in the best case
scenario, making implementation of VAT in January extremely difficult.
44

45. VI. IMPLEMENTATION OF THE NEW BUDGET LAW
The revised State Budget Law was approved by the National Assembly in December 2006. The Law
defines the budget structure, details States Revenue and Expenditures and gives a general
framework for the division of responsibilities between Central and Local Governments. Due to its
complexity the revised Budget Law requires a detailed set of instructions which were codified in an
implementation decree issued by the Prime Minister in February 2008.
Beside aspects that will be covered in the section on Fiscal Policy, the revised Budget Law provides a
new framework for revenue and expenditure assignments that will be implemented gradually during
the next two fiscal years. Many aspects of the budget Law implementation are tied to other projects
such as Treasury Centralization and the centralization of tax and customs.
1. New revenue assignment
The revised Budget Law introduces a new revenue assignment system that divides revenues in three
categories: revenues fully apportioned to the Central Budget (Central Pool), revenues fully
apportioned to the local level (Local Pool), and revenues apportioned between the central and local
level (Shared Pool). The objective of the new revenue assignment is to bring better fiscal discipline
while ensuring that provinces get sufficient funding for delivering basic Government services. Under
the shared revenue system, provinces will benefit from an unconditional transfer. In the event that
the shared revenue transfer combined with local revenues will not be sufficient, provinces will
receive a fiscal grant from the central pool, as mentioned in articles 43 and 44 of the revised Budget
Law. The principles of this grant transfer are still under discussion but might include earmarked
grants to support the implementation of policies set forth by the Government and equalization
grants if shared revenue grants and local revenues are not sufficient to cover recurrent expenditures.
Conditionality might be attached to these transfers.
2. Revenue Sharing
During the past weeks, the Ministry of Finance has finalized a revenue sharing system. This system is
based on a policy framework that defines clear objectives embodied in a revenue sharing formula.
Objectives and constraints for developing the formula have been defined as follows:
 The revenue sharing system must embody principles of fairness and transparency for
apportioning shared revenues between provinces on an equitable basis;
 The system must be based on unquestionable quantitative and objective criteria;
45

46.  The system must be stable and exclude large year to year variations, while remaining flexible
to allow small revisions every three to five years to take into account changes in social and
economic development in the provinces or changes in revenue assignment;
 The System should aim at correcting gradually horizontal imbalance between provinces, i-e
existing disparities in fund allocation and spending per capita;
 The System should be pro-poor with the aim of providing additional resources to the poorest
provinces to accelerate their social and economic development;
 The System should provide incentives for improving the delivery of Government’s services,
the provincial economic environment and good public finance management;
 The Formula should not increase significantly the budget deficit;
 The Formula should not reduce transfers made to any province under the previous budget
law.
Considering the size of the pool of revenues, it has been decided that shared revenues will be split
equally (50%-50%) between the central Government and the provinces.
Based on the above principles and on international experience, three quantitative criteria have been
identified as the main components of the formula, corresponding to three separate grant
components: (1) Population, (2) Land Area and (3) Poverty Level.
The weighting of the component has been determined by the use of a macroeconomic model for
testing various formulae, with the main constrains that the formula, under no circumstance, should
increase significantly the budget deficit or reduce existing transfers to any province. Based on the
test results, it was found that the best weighting of the three components would be 45% for
population, 10% for Land Area and 45% for Poverty Level.
The Population based transfer is given by a population index that represents the provincial
population as a percentage of the total population of the country.
The Land Area based transfer is given by the land area index that represents the land area of one
province as percentage of the country land area.
The Poverty based transfer is given by the poverty transfer ratio which is calculated from the Human
Poverty Index (HPI) published in 2005 by the Statistics Office. Based on the second digit of the
Human Poverty Index, all provinces have been classified in 5 poverty levels. Based on a mathematic
formula, the poverty level has been translated into a poverty ratio which give the percentage of the
transfer to one province.
The introduction of a revenue sharing system is an important step in facilitating long term fiscal
planning by reducing uncertainty in revenue assignments when allocations are being made in an ad
hoc manner. It highlights the necessity for coordination between the short-term budget and the
longer term allocation process that must reflect the socioeconomic strategy of the Government and
it will help in implementing fiscal disciple and rationalizing the allocation of resources.
46

47. 3. Revenue Transfer System
The Revenue Sharing mechanism will be part of a larger intergovernmental transfer system still in the
design phase. The purpose of the intergovernmental transfer system, of which revenue sharing is
the most essential component, is to support important national socio-economic policy objectives,
such as ensuring minimum standards of services across the nation, fulfilling the redistributive
function of the national Government in an equitable manner, fostering solidarity between the
provinces, implementing poverty reduction strategies and supporting economic growth.
The other components of the system will be designed along the same principled as those chosen for
developing the revenue sharing formula. A special attention will be paid at correcting horizontal
imbalance between provinces and disparities in spending by sector.
4. Equalization Grants
Because revenue transferred from the Shared Pool will be insufficient to cover all provinces
expenditures, a system of equalization grant will need to be introduced. The equalization grants will
remain relatively small in comparison with the shared revenue transfer. According to simulation
made on FY 2007-2008, the total need for equalization represents 33% of the total budget of all
provinces. Four provinces (Xekong, Saravanh and Phongsaly) would not need any equalization,
however the fact that those provinces are among the poorest shows how powerful is the leverage of
the poverty component in the revenue sharing formula. However this result is also the outcome of a
very low level of investment: 60 thousand kips when the country average is 130 thousand kips.
Based on this simulation the largest equalization grant should have been given to Oudomxai (15% of
the total), Vientiane Capital (13%) and Xayabury (11%) and Vientiane province (11%). The fact that no
province needs more than 15% of total available for equalization grant shows that the revenue
sharing system is well balanced.
Various factors explain the need for equalization grants. In the case of Vientiane Capital, Vientiane
and Xayabury province, the first factor is the size of the population and its relation with the
geographic areas. However in the case of Oudomxai the main reason is an exceptional level of
expenditure: the Government spends 72 thousand kips per inhabitant when the country average is
47. These variations will make it difficult to find an equalization grant formula that will fit all
provinces. The solution could be to split the grant into two components: one for recurrent
expenditures and the other for investments, and to tie one of the components to local revenue
targets to provide an incentive for revenue collection. Ten provinces are not able to cover their
operating expenditure without an equalization grant. In the case of Vientiane Province the deficit to
be covered represent 36% of the recurrent budget and 34% in the case of Luangphrabang.
47

48. 5. Expenditure need assessment
The main difficulty of the Equalization Grant System is not in the formula that will determine the size
of the grant, but in assessing expenditures needs. Contrary to the revenue sharing system, the
amount of funds available at the beginning of a fiscal year for equalization is not known. It does not
depend only on revenue objectives but also on the size of the budget deficit that is considered
acceptable in relation to the Government economic objectives. The size of that deficit will depend
on four factors: (a) the size of the deficit that is considered sustainable from a macroeconomic
viewpoint, (b) the effort made on prioritizing expenditures, (c) the effort made to correct horizontal
imbalance between provinces, and (d) the impact of budget norms on the total budget.
All these calculations are directly linked to the Medium Term Fiscal Framework (see section VII of this
report) and should be made with a medium term perspective. Without an assessment of expenditure
needs in the perspective of correcting horizontal imbalance, designing the equalization grant system
and introducing budgetary norms will be difficult.
The expenditure need assessment should start from the costing of NPGES which has already been
done. The costing should be translated into an expenditure plan that includes not only investments
but also the investment impact on recurring expenditures with a mechanism for prioritizing
expenditure. Then the expenditure plan should be integrated in the MTFF and later in the MTEF to
ensure its sustainability. Without such a system in place it will be impossible to ensure that
expenditures are in line with Government priorities defined in the NPGES.
6. Budgetary Norms
Budget norms are an important mechanism to ensure that resources are spent in line with the
Government socio-economic strategy and that each province allocates to each sector sufficient
funding for the provision of basic services.
Article 2.11 of the revised Budget Law stipulates that budgetary allocation norms will be
recommended targets in determining allocations to sectors, provinces and localities, based on
standards specified for each sector and adjusted to local conditions such as geographic conditions,
population, land area and development needs. The implementation decree of the Budget Law
specifies that the system will be based on two types of norms: norms for the allocation of recurrent
expenditures and norms for investment expenditures.
Budget norms systems are complex and are usually developed over several years. The Ministry of
Finance thinks that a simple budgetary norm system can be implemented over a two to three year
period of time. A Budgetary Norm System has two components: a policy framework and a set of
norms. Norms can also be used by Inter-governmental system with budgetary norms build in grant
calculation formula.
In a first phase, the Ministry of Finance will work on the policy framework and put in place only high
level norms. Because of time and fiscal constrains the number of norms that can be implemented in
fiscal year 2008-2009 will be limited. In July, the Budget Department has started to work on non-
48

49. wage norms and has decided to focus on the Education and Health sectors. Non wage norms are
important because the wage bill tends to grow faster than the current budget, reducing the
allocation for non-wage recurring expenditures. The consequence is that budget users get
insufficient funding for maintenance and routine operations. For example, according to standards, it
is considered that the minimum allocation for non-wage recurring expenditure should be more than
10% of wage expenditures for a school to operate properly. However, the average in Lao PDR is 5,4%
with some provinces ranking as low as 2,3% (Vientiane Province) or 2.7% (Bolikhamxay).
During the next fiscal year, the strategy of the Ministry is to take a macro-economic approach to the
norm system. Budgetary norms will be used to correct horizon imbalance between provinces and
funding gaps within sectors. As the introduction of sector norms might increase the overall provincial
budgets, in order to maintain fiscal discipline, MoF will ensure that the budget increase that will
result in a number of provinces can be absorbed by the budget increase resulting from GDP growth
without requiring any additional borrowing.
In a second phase, the Ministry of Finance will develop norms at the micro-level to answer problems
specific to a certain sector or to a certain province. For example, the non-wage norm for the
education sector could be desegregated into three non-wage norms for primary education,
secondary education and high education. In the long term the non wage norm should not be based
on the wage expenditures but on the number of students enrolled. Similarly, budgetary norms for
the health sector will be disaggregated by program.
Although the Budget Law distinguish between norms for recurrent expenditures and norms for
investments, recurrent expenditures can play an important role in determining the optimum level of
investment for a given sector. An investment plan is sustainable only if the staff required for
operation can easily be absorbed by the wage bill without reduction of non-wage expenditure. For
example, the pace of school construction should be compatible with the capacity to recruit teachers,
to train them and to pay them without reduction of other non-wage expenditure. Identically,
knowing that the maintenance cost of road is approximately 10% of the construction cost, we should
not build more roads than we have the capacity to maintain.
The budgetary norm system should be designed in a way that is affordable and sustainable. Each
time that a norm is introduced, it generates a small increase in the overall budget. As long as the
increase remains reasonable, it can be absorbed through revenue increase resulting from GDP
growth. However, the risk is to develop norms without a comprehensive system reflecting
Government priories. A budget envelop for budget norms and for correcting horizontal imbalance
should be first identified, then the total amount should be distributed between sectors. Otherwise
the risk is to be too generous with the first norms (non wage expenditure for Health and Education).
Basically, the Government will have to trade off increase in expenditures resulting from correction of
vertical imbalance with an increase of civil servants number and salaries.
However, it should be stressed that the introduction of budgetary norms cannot solve the budget
problems of any sector. Budgetary norms cannot replace a sound sector policy. From that
perspective, it is clear that key sector budget should be completely reengineered in a zero-base
approach with multi-year projections.
49

50. 7. Correcting horizontal imbalance
Budget norms will assist in correcting horizon imbalance but might not be sufficient. Equality in
treatment of provinces is a long term objective. It does not depend only on fiscal justice but also on
absorption capacity. The number of teachers or doctors cannot be raised overnight. Bridges and
roads not only need time to be built but require competent contractors for construction and
maintenance. Development of human capacity takes time. Typically, an underdeveloped region
under spends because its planning and implementing capacity is low. Raising budget allocation must
go hand in hand with raising capacity.
In each case, we need to calculate the financing gap for all provinces and all sectors. Fiscal and
economic reasons for this financing gap must be analysed: typical reasons can be low local revenue
collection, over investment or under investment, mismatch between revenue and expenditures, low
non-wage expenditures, etc.
When the financing gap is known, we need to identify all constrains and bottlenecks. The first type of
constrains is the fiscal constrain: overcoming the financing requires an effort that must spread over
several years. This effort must be integrated into the Medium Term Fiscal Framework and the
Medium Term Expenditure Framework. When fiscal constrains have been identified, they must be
compared to capacity constrains to define time necessary to overcome the horizontal imbalance.
Correcting horizontal imbalance in Lao PDR might take a decade.
8. Local Budgeting
With Treasury centralization and the new Budget Law, budget structures and processes need to be
revised completely. The Budget Law provides little guidance in this area and a framework for reforms
in this area has yet to be developed.
This aspect of budgetary reforms is not expected to start before a year because consequences of
Treasury centralisation must be better known and the basic regulation of the Treasury Single Account
needs to be prepared before significant progress in local budgeting can be made.
Provinces have developed different approaches to local budgeting and the Ministry of Finance needs
first to get a better understanding of the current practices before being able to recommend a path
for reforms. However, the problems of local budgeting are well known by their effects: unrealistic
revenue and expenditure forecasts, tendency to overspend the budget, lack of alignment with
national priorities, lack of budget control, low procurement capacity and low compliance with
procurement regulation.
The treasury centralization process and the implementation of the new budget law will address some
of these problems, but will not solve the structural issues that weaken the local budgeting process.
To solve these structural issues, the Ministry of Finance will put in place a work plan in five points:
a) The Budget Department will undertake an in-depth study of the local budget structure
and budgeting process. The study will examine the current arrangements and provide a
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51. detailed assessment of their impact on service delivery and effective financial
management at the local level. Broad options reforms will be identified;
b) The Ministry of Finance will open a broad dialogue with all stakeholders to share the
analysis and to identify a preferred general option for reforms;
c) The Budget Department will prepare detailed plans for the preferred option for reform
covering both the substance of the reform and the key steps and processes;
d) In parallel with the above work, specific short term proposals will be made regarding
improvements to the provincial budget process;
e) To perform these tasks the Budget Department will build its own capacity and reform its
budget formulation and budget control processes.
9. Standard budget format
The work on developing standard budget format for budget preparation by all line-ministries and
agencies is on-going. It is expected that standardized templates will be used for the preparation of FY
2008-2009 budget.
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52. VII CONTROL OF BUDGET EXECUTION AND AUDITING
Control of the budget execution is part of the general budgetary control system of a country that
includes external and internal control. External controls are the control made by the Parliament and
the Supreme Audit Office and are out of the scope of this discussion. However, it should be
underlined that external and internal controls are based on the same accounting and reporting
capacity. Weak budgetary control systems are usually associated with weak reporting capacity.
Improving the reporting capacity of the Ministry is therefore a prerequisite for a good budgetary
control system and a good audit system.
So far, the practice of budget control in the Treasury has been mostly restricted to the control of cash
limits and commitments given to Government agencies and to ministries. However, in modern
expenditure management, MoF responsibility goes beyond limit and commitment control and
includes control of the expenditure effectiveness. MoF must control that expenditures are made in
conformity with the intention of the law maker when the budget was approved by the National
Assembly and have reasonable outcomes in line with the Government’s social and economic policy.
Expenditure management practices require that a ministry of finance follows budget execution in
real time. It implies that the Ministry of Finance should stay in close contact with all government
agencies, exchanging information on a daily basis. At this stage, not only MoF does not have the
capacity the follow the budget execution in real time, but line-ministries and provinces do not seem
ready to accept that role. This point should be clarified in the Treasury Law. In this context, not only
it is difficult for MoF to monitor the budget execution and perform the necessary control, but no
institutional mechanism exists to put in place the basic reporting from Government’s agencies to
MoF.
1. Responsibility of the Inspection Department
The Inspection Department has the role as a Chief for Ministry of Finance to manage and perform
inspection broadly in public organisations at all levels - state owned enterprises, government
stakeholders and relevant organisations that are involved in public finance both inside and outside
the country.
Among the specific duties for the department are to:
 Define the general audit policy of the ministry
 Defined audit standard to be applied for fulfilling its mission
 Ensure that the implementation of regulations in the area of public finance is properly
performed;
 Prevent any misconduct that infringes the law, regulation and other relevant provision in
order to ensure the security of properties;
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53.  Create plans for inspections based on collective information and activity plan of Ministry of
Finance that has been drafted in each period;
 Finalise a report to the Minister and propose recommendations for obstacles based on
regulation that is currently enforced;
 Carry out any other special assignments as per Minister’s direction.
Inspection Department is also entitled to propose improvements, alterations, abolish rules and
regulations that are inconsistent with current legal framework.
Budget control falls under the purview of the Inspection Department but should remain the primary
responsibility of the Treasury. It is important to clarify respective responsibilities between the
Inspection Department and the Treasury Accounting and Inspection Division to avoid overlap. The
Inspection Department should be responsible for defining audit standards that will be applied by the
Treasury Accounting and Inspection Division.
2. Budget Execution, accounting and financial reporting
The three components of budget control – budget execution, accounting and reporting – show
structural weaknesses that need to be addressed.
 Budget execution processes have been reengineered to fit the new budget law, but are still
in their pilot phase.
 Accounting will be greatly improved by the new budget classification and the new chart of
account. However, section IV of this report has shown that there are still many issues
pending. Accounting regulation needs to be prepared. Accounting manuals need to be
written. Accountants need to be trained.
 Reporting capacity remains very weak due to the technical limitation of GFIS, the lack of
human resources, and the absence of an integrated reporting policy.
The result of this situation is a weak authority and capacity of the Treasury offices at each level of
Government. Authority of the Treasury can be restored only through a strong legal and institutional
framework. Because the Budget Law does not give strong authority to the MoF to organize
expenditure management at all level of the State, including by setting minimum requirement in line-
ministries, it is critical that the new Treasury Law under discussion should give such authority to MoF.
Procurement is another area on which MoF has too little control. Due to the fact that MoF is already
overstretched, probably little can be done in this area until TIMS is implemented. When cash
management will become effective, the Budget Department along with a new Procurement
Department should be able to set authority limits for different volume of procurement and monitor
in real time contract awarding and the resulting disbursements. It implies that MoF will monitor the
procurement activities of all Government agencies.
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54. 10. Nature of budget execution control
The control of budget execution has three levels:
(1) Internal control or management control that comprise the policies and procedures put in
place by the Treasury under the supervision of the Minister to ensure the effective
functioning of all units under the supervision of the Treasury and the proper use of funds
appropriated to budget users.
(2) Internal audit, in turn, has the key function of reporting to the senior management (the
Director of the Treasury Department, the Minister, the heads of agencies, etc.) on the
functioning of the management control systems, and recommending ways for improvement.
(3) External Audit is entrusted to a separate organization (the Supreme Audit Institution) that
has the mandate to investigate most aspects of the Government’s activities and report their
findings to the Legislature. External audit does not focus on the adhesion to procedure but
tries to detect mismanagement of misappropriation of funds. It controls that the use of fund
has been consistent with the approved budget.
The objectives of the budget control system are:
 Assure implementation of the budgetary and other policy decisions;
 Avoid improper use of funds and detect and correct instances;
 Assess the efficiency of operations and seek ways of improving that efficiency;
 Obtain reliable reporting of financial data concerning the execution of budget decision; and
 Gather information about programme/projects implemented by budget users to assess
results and outcomes in a way that can be used to adjust future policy decisions and budgets.
Budget controls must rest on a budget control policy which still remains to be formulated in a budget
execution manual.
Budget execution and internal control policy must be based on a number of principles:
a) The establishment of responsibility
b) The segregation of duties
c) The documentation of procedures
The procedure manual must detail the procedures of the six fundamental stages of budget
execution:
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55. (1) Authorization stage: the allotment process must be consistent with legal appropriation and
must be as precise as possible in the description of what is financed;
(2) Commitment Stage: Commitment must be made as soon as a purchase order has been made
or a contract is signed. The commitment stage offers the possibility to review the
procurement process. Good linkage between commitment management and procurement
management is essential. Ex ante commitment controls can be performed by the Treasury
either at the central or local level. However, such controls should not lead to excessive
interference in the day-to-day management of line-ministries’ budgets leading to payment
delays. A way to avoid this problem is to ask implementing agencies to keep a commitment
register for ex post control. In practice it all depends on the sophistication of the Treasury
system. Considering GFIS capability, commitment control will have to rely on ex post local
control. With TIMS, more centralization can be introduced.
(3) Verification Stage: This might include the verification of the payroll or the verification that
goods have been delivered as per the contract. The verification process must follow a
number of step that need to be clearly identified by the budget execution manual for all
possible occurrences and each step must be documented to leave a paper track that can be
audited.
(4) Payment Authorization Stage: the person who orders the payment must be different from
the person who has authorized the payment and from the person who has verified the
documentation. The officer must verify that all three previous stages have been properly
documented and approved.
(5) Payment stage: the paying officer executes and records the payment identifying properly the
payment instrument.
(6) Accounting Stage: the transaction is recorded in the budgetary system as completed and
posted in the General Ledger. Accounting controls are by nature different from management
controls and more complex. Although accounting can prevent blatant cases of misuse of
appropriation, it will be however presumptuous to consider that they are sufficient to ensure
the integrity of the whole budget execution process. As long as the TSA will not be
implemented allowing reconciliation between the BoL ledger and the Treasury TIMS,
accounting control will remain weak and accounting records will have to be subjected to
regular and comprehensive audits.
Control of the process should be both ex ante and ex post. Ex ante, the central treasury must be able
to exert a minimum of control over the local treasury through the following mechanism:
a) A centralized commitment control system that monitors in real time transaction approvals
b) A centralized control of commitment limits for all budget users
c) A system of cash limits with control of the utilization of cash against commitments
55

56. d) A monitoring of the procurement process through procurement limits and control of the
procedure
Ex post controls are made by the central treasury audit division and by external auditor based on the
regulation, the budget execution manual and the audit manual of the Treasury.
The benefits of multiplying ex ante controls beyond the standard processes of administrative controls
such as those that we have described is often barely perceptible. Ex ante controls generally hinder
efficient management because of bureaucratic procedures and multiple checkpoints that slow down
the budget execution process. The right balance between ex ante and ex post controls must be
found depending on the reliability and capacity of budget execution officers, the robustness of the IT
system, the reliability of accounting procedures, the quality of reporting, etc. As most of those
elements are still in the design phase, it is difficult to make any recommendations.
11. INTOSAI Standards for control and auditing
The International Organization of Supreme Audit Institutions (INTOSAI) has developed standards for
management controls as a framework for countries to use in designing and developing their systems
of management control and as a guide for auditors in assessing those controls. Those standards will
be of great help for developing the Treasury Audit Manuals.
12. COSO Standards for control and auditing
COSO (Committee of Sponsoring Organization of the Treadway Commission) is a nonprofit
commission that in 1992 established a common definition of internal control and created a
framework for evaluating the effectiveness of internal controls. COSO standards have become
worldwide accepted standards and it is highly recommended that MoF Budget Control
System and auditing procedures integrate those standards.
According to COSO, the three primary objectives of an internal control system are to ensure (1)
efficient and effective operations, (2) accurate financial reporting, and (3) compliance with laws and
regulations. This is achieved through five essential components of an effective internal control
system:
(1) The control environment, which establishes the foundation for the internal control system
by providing fundamental discipline and structure;
(2) Risk Assessment, which involves the identification and analysis by management—not the
internal auditor—of relevant risks to achieving predetermined objectives;
(3) Control Activities, or the policies, procedures, and practices that ensure management
objectives are achieved and risk mitigation strategies are carried out;
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57. (4) Information and communication, which support all other control components by
communicating control responsibilities to employees and by providing information in a form
and time frame that allows people to carry out their duties;
(5) Monitoring which covers the external oversight of internal controls by management or other
parties outside the process; or the application of independent methodologies, like
customized procedures or standard checklists, by employees within a process.
This methodology must be used for designing the control system and integrated in the Audit Manual.
13. Mission of the Treasury Accounting and Inspection Division
Audit and budget control within the treasury is the responsibility of the Accounting and Inspection
Division. The audit function has to be put in the wider context of auditing practices within MoF and the
Ministry Audit Department has already produced in May 2007 a Strategy Plan for “Strengthening of
Internal Control that defined the responsibility of the Treasury in relation to internal control.
Based on that document, the inspections performed by the Accounting and Inspection Division are to be
executed based on the following criteria, targets, form and methods:
a) Regularly inspect performance of duties and authority of the treasury at each level in
accordance with an inspection or on an ad hoc basis based on specific queries;
b) Draft and introduce regulations on inspection and internal auditing of the treasury
system in cooperation with the Inspection Department of the Ministry of Finance;
c) The inspection of activities of the National Treasury will encompass implementation
of laws, policies, financial and accounting regulations for the sector including all
activities of the treasury units as prescribed by the regulations. Inspections will result
in a report and make recommendations to management on improvements,
adjustments with the aim of improving operations of the treasury;
d) Sum up results of quarterly, semi-annual inspections of the entire treasury system
for submission to the Director General of the National Treasury, the Inspection
Committee and the Inspection Department of the Ministry of Finance;
e) Draft a detailed inspection-auditing plan based on analysis of the performance of
different entities of the national Treasury;
f) Coordinate the inspection of National Treasuries with the Inspection Department;
g) Coordinate with departments concerned on the formulation and implementation of
the training program on inspection for inspection staff in the entire treasury system;
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58. h) Systematically collect and file documents involved in internal and external
inspection-auditing;
i) Perform other duties as assigned by the Director General of the National Treasury.
14. Designing the Treasury Control System
Control systems must be developed in an integrated manner. It means that the design or
reengineering of the budget execution processes must go hand in hand with the design of
the control system and that both processes should be used to define the reporting
requirements.
The Public Expenditure and Revenue Management Report is not the place where a complete
solution for the Treasury budget execution control system and the auditing process can be
developed. We can only set the policy principles, highlight the methodology and leave to
future technical assistance the responsibility to design a full-fledged system:
Here are some of the basic steps that need to be taken:
1) Prepare a complete risk analysis;
2) List all sources of information and identify processes. Link the processes in a function
hierarchy;
3) Produce a process map of budget execution using process mapping tools;
4) Detail each of the six phases of the budget execution as an independent process and
link all the processes together;
5) Identify each step of the process where a decision needs to be made;
6) Identify each business unit or person involved in the process and define
responsibilities for each of them. Ensure that a proper segregation of duties applies;
7) Identify for each decision the information requirements, check the completeness of
forms that are being used, and ensure that information requirements are properly
documented;
8) Identify all the decision possibilities using the yes/no modeling process and finalize
the map according to all possibilities;
9) Based on the information requirement for each decision, identify the proper control
mechanism;
10) Due a similar process mapping analysis for procurement and ensure that
procurement controls link with budget execution controls;
11) List and detail all reports that need to be produced;
12) Integrate all information in the Budget Execution Manual;
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59. 13) Integrate all information in the Audit Manual and ensure compliance with COSO
standards;
14) Draft a Treasury Instruction that will define how issues indentified in the audit report
will be addressed.
The design of the control system is essential not only for management control but also for
auditing. It should not be based on general principles only, but on an intimate knowledge of
all processes that can be provided only by process mapping. Managers are sometimes
tempted to shortcut the design process and loopholes and flawed controls are frequent in
budget execution control systems. A flawed design may leave the impression of safety but
may overlook important risks or may create unnecessary inefficiency.
15. Internal Audit and Evaluation
The role of internal auditing is to measure and to assess the effectiveness of other controls and to
make recommendations for their improvement. In addition, the internal audit can be used to
examine apparent irregularities. Its findings can serve both as evidence of the need to strengthen the
control systems and as a basis for determining what action may be appropriate against those who
caused the irregularity
The audit of budget execution can be performed either by the Audit Department of MoF or at the
provincial level by a central Treasury Department. With seventeen province, the Treasury must
ensure that its local office are audited a minimum of once a year. When capacity is low more
frequent audits are required.
If the option of having a team of “Treasury Inspectors” to perform on site on audits is taken, it will be
necessary to define the Treasury Inspectors’ responsibilities in relation with the auditor of the
ministry audit department and vice versa.
VIII. FISCAL POLICY
1. Revenue Forecasting
Raising revenue collection to 15% of GDP is one of the most critical success factors of the
Government economic strategy. This strategy requires a reform of the tax policy that is well
underway. In this context, good revenue projections are of paramount importance. Improved and
reliable revenue projections can be considered as one of the most important successes of the Fiscal
Policy Department.
Work on revenue projections started in 2000, but has remained very unreliable until 2005. The main
reasons were: (a) unrealistic GDP projections, (b) unrealistic revenue targets due o an aggressive
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60. investment policy, (c) the difficulty to assess tax evasion and to bring it under control, (d) lack of
macro-economic and fiscal data from provinces.
From 2000 to 2005 the Revenue Division focused on consolidating historical data to identify medium
term trends and issues. A model was developed covering five years from 2000 to 2005. Weaknesses
in the revenue collection system were identified and the Revenue Division assisted in defining the
new tax policy that was formalised in the new tax Law of May 2005.
Structural reforms in MoF starting in 2005 have helped solve some of these problems. Tax
administration and tax collection data quality have improved and tax evasion has been reduced.
Building on the experience of the previous year a model has been developed. The Revenue Division
has developed a comprehensive revenue forecast methodology and a reliable model that is updated
on a regular basis. The model covers FY 2006-2007 to 2010-2011 and will expand soon to 2015.
The methodology is based on the analysis of the different revenue flows. The main flows are
customs, taxes on petroleum products, tax on vehicles, mining, hydropower, over flight fees, tax on
domestic production and salary taxes. For all these revenue flows , specific methodology have been
developed based on production growth, price structure, consumption trends, employment based,
import and export of goods, etc.
The Revenue Forecasting model has become more reliable, but important problems still exist:
 Data collection is difficult and data quality is an issue in the absence of a data sharing system.
Ultimately, data collection is based on the good will of Government agencies and data
manipulation cannot be excluded.
 Because data collection is fragmented and not systematic, cross checking data to assess their
quality is almost impossible.
 Provinces communicate only aggregated data to the central Government. Desegregation of
data is impossible.
 There is no system to analyse production of goods and services at the provincial level.
Revenue forecast is made at a national macro-economic level. Revenue forecast at the
provincial level is impossible. This makes it difficult to assess the tax base of each province.
The Fiscal Policy Department is not in a position to say if low revenue in a province is due to
weaknesses in the tax base or weaknesses in revenue collection.
 The Tax Department does not have detailed information on tax payers in provinces.
Revenue forecasting at a macro-economic level, obviously has some limitations. With the existing
constrains, and despite some more fine tuning in the near future, the prospect for improvement in
revenue forecasting is limited. To improve revenue collection, the Ministry of Finance needs to look
at its tax policy by province. Having disaggregated data by province will become more and more
critical. This cannot be achieved without a data sharing system between the Central Government and
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61. the provinces or in the short turn an improvement in the reporting from local agencies and the
dissemination of information.
2. The Medium- Term Fiscal Framework
During FY 2003-2004 a basic Medium-Term Fiscal Framework was developed with the assistance of
the Asian Development Bank. The objective of the MTFF is to ensure consistency of the
Government’s budget policy with overall macroeconomic policy targets such as the GDP growth rate,
inflation, exchange rate, balance of trade deficit, debt sustainability, etc.
The ADB project supported the preparation of the MTFF, including the training for the framework
application. Because of its macro-economic aspect, the MTFF is normally a joined effort between the
Ministry of Finance responsible for budget policy and the Central Bank responsible for monetary
policy. However, due to its important role in investment planning, the Committee of Planning and
Investment was also associated with the development of the MTFF. However, the ADB project was
only half a success. The so called MTFF is in reality an expended Medium Term Macro-economic
Framework (MTMM) because it does not provide sector ceilings and the Fiscal Department found it
difficult to maintain after the departures of the foreign experts.
There are several reasons for this situation that require an analysis:
 There has been a lack of ownership of the project outside of MoF.
 The Lao system of planning and of macro-economic management is complex and requires
the collaboration of many institutions. Updating an MTFF on a regular basis will require
collaboration between those institutions to be institutionalized, through for example the
creation of a join committee. Institutional aspects of macro-economic policy and of macro-
fiscal management need to be clarified.
 In the absence of a central repository of fiscal and economic data such as usually provided by
integrated Treasury and Budget Preparation System, the development of the MTFF is a
challenge and will remain as such until TIMS is implemented and proper reporting and
modelling tools are put in place. However, TIMS by itself will not solve all data problems. A
system to collect macro-fiscal data should be considered.
 ADB technical assistance did not provide the tools to manage the MTMM / MTFF in the long
term. In a pilot phase a simplified MTFF can be developed using Excel spreadsheet. However,
in the long term an MTFF requires a small database such as Access Database and modelling
tools that can be developed in house.
 The ADB project was too short. Technical Assistance for a MTFF should cover a least a year of
maintenance to ensure that the local team can update the MTFF for a new budget cycle.
 ADB projects provided good training to a number of individuals; however those individuals
have left the fiscal department.
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62. In its plan to move to a full-fledged Medium Term Expenditure Framework (MTEF) the Fiscal
Department will need to draw conclusions from its previous experience and put in place a
mechanism to update the MTFF on a regular basis. It must also ensure that technical assistance will
not be limited to the design phase of the MTFF.
3. From Fiscal Framework to Expenditure Framework
Transforming a Medium Term Fiscal Framework into a Medium Term Expenditure Framework is a
long process and the difficulty of the task should not be underestimated. The first requirement is a
better MTFF. The Ministry of Finance is conscious of the difficulty and has taken the option of
developing the MTEF gradually by sector. In the first stage, the MTEFF will be prepare for only two
sectors: Heath and Education.
This approach has some limitations of which the Ministry of Finance should be conscious:
 An MTFF limited to two sectors is not a decision making tool, it is just a sectoral model that
will be useful to analyse the sector’s strength and weaknesses.
 Linking the sector policy to the macro-economic framework will be difficult if not impossible.
 A sectoral MTFF requires an approach by programme, but sectoral programs in Lao PRD are
just a concept used in economic planning without a managerial reality.
 In the absence of a performance indicator system, the MTEF will remain focused on financial
inputs, not on results and outcomes. It will not be a tool to measure expenditure efficiency.
Control of outcomes will remain difficult.
 Without a database and modelling tools, the MTEF will remain as difficult to update as the
MTFF. Considering the volume of data necessary to expand the model to all sectors, quickly
it will become impossible to manage it on Excel spreadsheets.
 The Ministry does have the capacity to track poverty-reducing public spending. The Fiscal
Policy Department should take part in discussion with the Treasury to ensure that GFIS/TIMS
coding blocks will provide that capacity.
Although we can expect some very valuable lessons from a sectoral MTEF limited to Heath and
Education, the project should be considered as a learning exercise. The predictive capacity of the
MTEF will be limited to non financial data (number of students, population immunized, number of
hospital beds), therefore expectations should remain low.
Solving the data management problem is a prerequisite to the project’s success. Excel generates two
problems: the rounding of figures and the limited number of tables that can be linked together.
Although a simplified MTMM can be managed on Excel spreadsheets, a detailed MTFF will quickly
rich the limit of the software. For example, the summary of revenue project should be linked to
tables representing the different flows of revenue for each year. Only revenue projections can
require fifteen or twenty tables depending on the complexity of the model.
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63. We should not forget that the MTFF is the foundation of the MTEF. Without a strong and robust
MTFF that can be easily updated, the MTEF will not become a reliable tool for decision making.
Developing a reliable MTFF remains the top priority.
4. Lack of data and data management
Fiscal policy is basically about fiscal and economic modelling and modelling needs data. However the
Fiscal Policy Department face important difficulties in accessing the data it needs. Usually a Fiscal
Department use different sources of data: (a) the General Ledger and the Treasury System, (b) the
Budget Preparation System, (c) the tax and customs system and (d) miscellaneous sources of
economic data such as the Central Bank and other economic agencies.
The GFIS has only a limited reporting capacity. It cannot generate on-the-fly report and answering
specific queries is so difficult that most of the time it is not practical. The GFIS database cannot be
use as a repository of fiscal and financial data. Budget execution data is not very reliable and only
published late in the next fiscal year. Because GFIS records transactions only at a much aggregated
level, it is impossible to draw conclusions from budget execution data.
There is little information sharing culture in the Ministry of Finance. Accessing information from the
Tax Department often requires a written procedure that takes time. The problem gets worse when
MoF wants to access data from other Government agencies. In the information age, data should be
accessible in real time.
This situation is expected to last for a minimum of five years with only gradual improvement. TIMS
will not produce data before 2012 at best. A Budget Preparation System will probably not become
operational before 2015. The tax system will become operational in 2009 but without interface with
TIMS, it will still be difficult to access data.
Considering the internal and external challenges that the Fiscal Department is facing, solving the data
crisis is of paramount importance. As already suggested for the MTFF and MTEF, an Access database
with simple reporting tools could help solving the data crisis. The data base could be structured by
sector and province. Beside budget preparation and budget execution data it could include
“provincial profile”. The provincial profile will be a document offering a synthesis of all economic
data available for a province such population, number of students, health infrastructures, tax base
data, etc. Similar profiles could be developed for sectors.
The creation of a databank used by the Fiscal Policy Department and the development of the MTFF
that also require data storage and data analysis capacity could be merged in one project. The IT
component of the ADB could be used to develop the technical requirements and the same database
could be used.
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64. IX. STATE FUNDS
1. Budgetary scope of the State Funds
The GoL operates six State funds for a total of 364,267 millions kips representing 6% of the total
revenue plan for FY 2007/08. The six funds are:
 The Road Maintenance Fund
 The Reforestation Fund
 The Social Welfare Fund
 The Social Security Fund for Public Sector
 The Environment Protection Fund
 The SMEs Development and Promotion Fund
The main fund is the Road Maintenance Fund that represents 50% of the total revenue plan for
special funds. The second most important fund is the Environment Protection Fund with 20% of the
total. Those two funds receive significant donor contributions. Donors finance 13.8% of the Road
Maintenance Fund and 92.4% of the Environment Protection Fund.
Although the law defines the six funds as extra-budgetary funds, practice has diverged and brought
their management closer to those of de facto off-budget funds. The quality of financial reporting of
those funds has been very low and due to the lack of transparency and accountability there is
concern about their efficiency. It appears now imperative to bring the management of those funds in
line with the macro-economic and fiscal policy of the GoL, the revised Budget Law and the new
Accounting Law.
Public Finance good practices tend to limit the scope and number of extra-budgetary funds because
they have a negative impact on the soundness of fiscal policy and analysis; they undermine
comprehensive budgeting, fragment financial reporting and cash management and raise
transparency, oversight and accountability issues. However, they might be legitimate reasons for
creating extra-budgetary funds, especially in the case of road funds, health insurance and pension
funds or funds which are mainly financed by donor contributions.
The fact that GoL has established those funds as extra-budgetary funds is justified by several
objectives:
 To earmark revenues in order to avoid that certain important activities become under
funded in the annual budget. The establishment of a road fund or an environment protection
fund is a political act of recognition of the importance of these activities.
 To insulate donor funded projects to avoid cash restriction that might occur from time to
time, to facilitate reporting to the donors and to address donors’ fiduciary requirements.
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65.  To increase efficiency in the area of activity covered by the fund by giving more autonomy to
the managers, aligning contracting practices on the commercial market, and simplifying
budget execution procedures.
 To dissociate the planning process of the fund from the planning process of the supervising
ministry for greater flexibility and efficiency.
However, the freedom of action to take decision about both operational management and the
planning and use of resources may open door to new set of risks if the governance and public
financial management arrangements of these bodies are poorly designed. Those risks include:
 Inefficient use of public money due to a lack of oversight and control;
 Public money and public assets being used for purpose not intended by government and
National Assembly;
 New opportunity for corruption or misappropriation of funds;
 Procurement mismanagement;
 Inefficient staffing and lack of oversight of personnel cost;
 Accountability arrangement such as transparency, financial reporting and auditing being
neglected;
Recently there has been a growing concern in the international community about the proliferation of
extra-budgetary and off-budget funds. The OECD has published recommendations that include the
establishment in each country of a comprehensive framework for the governance and financial
management of public agencies, including social funds and off-budget funds. This framework covers
areas such as: the control and management of assets, revenue raising policies and borrowing,
earmarked contribution, budget formulation and budget approval, oversight of human resource
management, budget execution and control, performance management, accounting and reporting.
Additionally the IMF’s Government Statistic Manual, the IMF’s Manual on Fiscal Transparency and
the IMF’s Guideline on Public Expenditure Management give a comprehensive set of
recommendations and accounting norms for extra-budgetary fund management. The
recommendations that we present at the end of this document are mostly based on these four
sources of information.
Within the short timeframe given for the preparation of this report, it has not been possible to
analyse in details the operations of all the six State Funds. More attention has been given to the Road
Maintenance Funds because this fund represents 50% of all extra-budgetary funds and was
considered by the MoF as reflecting well issues encountered in other funds. Additionally, regulation
of the Forest and Forest Resource Development Fund has been reviewed to confirm that there were
no important discrepancies between institutional and financial arrangements of that fund and those
of the Road Maintenance Fund.
Because no financial statement has been reviewed, this report focuses more on the financial
regulatory framework and international best practices. A complete management solution of extra-
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66. budgetary funds would require on site investigation and a complete review of by-laws and financial
statements.
2. State Funds and the Revised Budget Law
Under the revised Budget Law, State funds are budgetary unit submitted to the same rules regarding
the management of their revenues and expenditures. Article 3 gives a definition of State funds as “an
organization unit established with the authorization of the Government for the purpose of extending
services to the society, and total revenue and expenditure of these agencies shall be reflected in the
annual budget plan.” Article 10 stipulates that “Revenues and expenditures of the State’s Funds shall
be recorded in the annual state budget plan, executed at the National Treasury to be used for
expenditures in accordance with the funds’ regulations approved by the Government. All revenues
and expenditures of the funds shall fall under the management, monitoring and control by the sector
concerned and by the finance sector.”
Based on the review of the Road Maintenance Fund and the Forestry Fund, it does not appear that
the decrees are in contradiction with the budget law. However, the essential reason is that the
decrees say very little on budget execution, financial reporting and auditing.
It will pertain to the new Treasury Law to define how the Treasury will oversee budget execution in
the State Funds. The recommendation is that the budget execution rules for States Funds should be
aligned as much as possible on the rules for other budget users. The Treasury should be given the
powers to audit budget execution procedures and budget accounting in all State Funds, leaving audit
of general accounting and financial statements to MoF’s Audit Department and to the Supreme Audit
Institution.
3. State Funds and the new Accounting Law
The new Accounting Law defines State funds, also called “Public Fund” as “accounting entities” (Art.
3) and gives a definition of public funds close to the definition provided by the Budget Law. Article 1
stipulates that public funds are submitted to the same accounting rules as other accounting entities.
As a consequence, Article 36 establishes that public funds as accounting entities must publish
financial statements that include a balance sheet, a statement of budgetary revenue and
expenditures and explanatory notes. Additionally, Article 34 stipulates that “the budgetary units,
administrative and technical organizations, and public funds, being the subject to book-keeping must
establish a monthly and quarterly statement of budgetary revenue and expenditures or the
statement of performance”.
The two funds’ decrees that have been reviewed do say any thing on the organization of accounting
in State Funds. The Road Fund Prime Minister Decree and the subsequent ministerial decree do not
have any provision for accounting. The Forestry Fund decree says only that the “Secretaries
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67. Committee” “manages the Fund’s accounting system” (Article 11.2). The recommendation is that
specific accounting instructions should be given to all State Funds.
5. Integration of State Funds into Budgetary Accounting and General Accounting
Because State Funds are not off-budget funds, their accounting should be managed like any other
primary budget user. Their transactions should be recorded in a separate sub-set of books in
GFIS/TIMS. No valid reason can justify letting them to develop separate accounting systems. Strict
separation between budgetary accounting and general accounting should be maintained (we have
not been able to check if the funds follow the general practice for budgetary accounting). However,
to meet their statutory obligations, the funds should be given full responsibility for producing their
financial statements according to the requirements of the accounting law
6. The Road Maintenance Fund
As already said, due to time constrains, only the Road Maintenance Fund has been analysed in
details. However, we have good reasons to believe that many remarks made on the Road
Maintenance Fund are also valid for the other fund. As could be expected, the issues are not only a
weak reporting capacity, but also a lack of transparency in the planning and budgeting process and
the incapacity of MoF to measure the fund performance.
6.1 International Practices
Roads have to compete for their preservation and maintenance for funds against other visible and
popular sectors like agriculture, health and education. This usually places them at a considerable
disadvantage in the annual budget debate. Many countries have responded to the growing shortage
of finance by earmarking selected road related taxes and charges and depositing them into a special
off-budget account, or road fund, to support spending on road maintenance.
Road funds are critical because the average annual maintenance cost of road is around 10% of the
construction cost. However, if maintenance is neglected, the repair cost raise exponentially with 30%
after two years without maintenance. Depending on climate, the total investment can be lost within
five years.
The first generation of road funds were not entities as such but national budget line items managed
by the sector ministries. The performance of such funds was however mixed, and generally quite
poor. Some of the common problems cited were poor financial management, absence of
independent audits, extensive use of funds for unauthorized expenditures, diversion of funds, and
weak oversight.
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68. To answer these issues, many road funds have been reformed and established as independent
entities. A critical dimension of this second generation road funds was the creation of a specific legal
and institutional framework which would assure proper management of the funds and accountability
to users and government. The Lao PDR’s Road Maintenance Fund appears clearly to be of the second
generation and its institutional arrangements are sound and well in line with international best
practices.
The idea behind the road fund is that roads were to be managed like a business having its own
independent source of funding through duties and charges levied on road users. Common sources of
funding are:
 Fuel levy
 Bridge, ferry and road tolls
 Vehicle licence and inspection fees
 International transit fees
Ideally resources earmarked to the fund should be enough to cover all the fund expenditures without
any need for transfer from the central budget. The Lao PDR RMF has sources of funding that cover all
the range of usual fees and levies.
The establishment of a road fund answer an important fiscal policy question: what is the optimum
size of the road network that a country can afford? Considering the high maintenance cost of roads
in a traditional approach, the main constrain on the size of the network is the size of the budget.
With a road fund, the size of the network is determined by the preferences of road users and their
willingness to contribute to the road fund. Although those funds should remain part of the budget,
and submitted to the same budgeting rules, special arrangement can be made for budget execution
and reporting.
6.2 Structure and financing of the Road Maintenance Fund
The Road Maintenance Fund (RMF) was established in 2001 on a user-pay principle. The RMF is
managed by an advisory board, which comprises seven representatives of the MCTPC, the Ministry of
Finance, the Ministry of Commerce, the State Fuel Company, the Chamber of Commerce, the State
Bus Company, and a private owned freight forwarding business. Other institutional arrangements are
considered by the international community as structurally sound. The responsibility for road
management is divided among the MCTPC, its provincial departments and the district offices.
Funding for road maintenance of national road is determined by the RMF Board, and provincial
department of MCTPC make decision at the local level.
For many years, the GoL has made road development a high priority and used road spending as a
policy instrument to achieve socio-economic objectives. The result has been a high level of
investment in new roads until fiscal year 2004/5, with annual expenditures for roads ranging from
20% to 35% of the national budget, and a very insufficient level of funding for maintenance. Since
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69. 2004/5 the level of funding for maintenance has rose to 29% of total road expenditures. However,
maintenance is not yet fully funded.
Since 1990, donors have contributed more than 80% of all public expenditure on road. However,
during the last years, revenues from domestic from domestic sources have been increasing steadily.
6.3 Problems the RMF is facing
The RMF is facing three major problems:
(a) Insufficient funding for road maintenance;
(b) Horizontal imbalance in fund allocation;
(c) Lack of capacity for financial management in general and accounting and reporting in
particular.
The main reasons for the lack of funding are:
(a) Insufficient fuel levy;
(b) The small number of road users;
(c) The size of the required road network to link all urban centres in a low population density
and mountainous country;
(d) The vulnerability of roads during the rainy season.
A complete evaluation of the maintenance cost of the road network in Lao PDR is not available, and
the Public Expenditure Review of 2007 has only produced a “guestimates” that the RMF covers only
45% of the maintenance need. This could put the funding need as high as $95M. A previous estimate
in 2006 was putting the total cost at $69M, with a total value of the road network of $3 billions.
However it should be noted that when maintenance is neglected, repair cost grow exponentially
from year to year.
Traffic remains small in comparison with other countries. Lao PDR has a low population density of 23
inhabitants per square kilometre and very few large urban centres. Only 9.4% of national roads carry
1000-3000 vehicles per day (including motorcycles). As a consequence, the tax base for fuel levy
remains very small.
The current fuel levy remains one of the lowest in the world and the current objective to raise it to
300 kip per litter in FY 2008/9 is still more 50% below the average in countries with comparable
development level.
The challenge of maintaining roads in Lao PDR has clearly a macro-fiscal dimension. Insufficient
funding of road maintenance can result in the complete loss of the initial investment and raising
transport costs that impact negatively the economic growth. Solving this problem is beyond the
ability of the RMF and will require MoF’s direct involvement. The Ministry of Finance should consider
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70. the possibility to provide additional funding to the RMF either by raising progressively the fuel levy to
the required level or by identifying other source of funding, including the general budget and donors’
funding. The first step should be to produce an estimate of maintenance and repair cost of the entire
road network.
Determining the adequate level of fuel levy is a fiscal policy issue that should be solved using the
MTFF and a sector MTEF as it might impact negatively inflation, especially at a time when oil prices
are raising.
The Fiscal Policy Department should assist the Ministry of Communication, Transport, Post &
Construction (MCTPC) to determine the optimal size of the road network whose maintenance is
fiscally sustainable. No investment should be undertaken in the road sector unless maintenance
funding has been initially identified and secured.
The table below shows that the same type of horizon imbalance that exist for domestic expenditure
exist also for road maintenance with a strong bias in favour of the poorest Northern provinces.
Road Local Road Expenditure expenditure
Province Poverty Population Area Length Expenditure per km per person Domestic Exp./
Index (sq km) (km) (mil. Kip) (mil. Kip) Population
Oudomxai 1,45 264 830 15 370 1 089 75 654 69,47 0,29 0,72
Xekong 1,42 85 316 7 665 510 26 915 52,77 0,32 0,60
Vientiane Capital 1,17 695 473 3 920 1 696 78 116 46,06 0,11 0,45
Phonsali 1,51 167 181 16 270 773 26 357 34,10 0,16 0,40
Luangphrabang 1,23 405 949 16 875 1 088 30 685 28,20 0,08 0,36
Khammouan 1,34 336 935 16 315 2 654 39 698 14,96 0,12 0,32
Bokeo 1,21 145 919 6 196 759 10 340 13,62 0,07 0,53
Luangnamtha 1,23 145 231 9 325 925 12 431 13,44 0,09 0,74
Xaisomboun n.a. 38 549 7 105 494 3 751 7,59 0,10 n.a.
Bolikhamxai 1,29 225 167 14 863 1 247 8 747 7,01 0,04 0,39
Champasak 1,18 603 880 15 415 2 378 16 118 6,78 0,03 0,34
Houaphan 1,52 338 044 16 389 1 262 7 864 6,23 0,02 0,48
Xayaburi 1,25 280 780 16 500 1 555 5 699 3,66 0,02 0,49
Saravanh 1,54 324 470 10 691 1 311 3 667 2,80 0,01 0,28
Attapeu 1,44 112 171 10 320 650 1 703 2,62 0,02 0,76
Savannakhet 1,43 824 662 21 774 4 347 9 622 2,21 0,01 0,25
Xiengkhouang 1,42 228 882 15 880 1 476 3 226 2,19 0,01 0,48
Vientiane Province 1,19 386 558 15 927 1 769 1 052 0,59 0,00 0,43
5 609 997 236 800 25 983 361 645 13,92 0,06
The imbalance coefficient is 117.8 for maintenance expenditure per kilometre against an imbalance
coefficient of only 1.7 for domestic expenditure per capita, suggesting that horizontal imbalance is
very much aggravated for road maintenance.
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71. 7. Other funds and general recommendations for extra-budgetary fund management
Although the institutional arrangement of State Funds appear to be sound, the existing regulatory
framework fails to provide detailed instructions for financial management in general, and for budget
execution, accounting and reporting in particular.
Following the OECDE and IMF general recommendation for the management of extra-budgetary
funds, the Lao PDR should put in place a regulatory framework that will be common to all State
Funds. As it seems that there is no contradiction between the funds’ bylaws and the revised Budget
Law, this new regulatory framework could take the form of a few dispositions in the new Treasury
Law under discussion and a Prime Minister Decree that will cover accounting, reporting and auditing
issues.
The regulatory framework should:
 Clarify and harmonize the legal status of all State Funds;
 Define the concept of “consolidated funds” and “consolidated budget” and rules for
presenting State Funds’ budgets in the annual presentation of the budget to the National
Assembly;
 Subject State Funds to at least the same degree of scrutiny as on-budget spending, including
issues of outcomes, efficiency and effectiveness within a detailed budget review process;
 Clarify common requirements for accounting, internal control, internal audit, and reporting;
 Redefine MoF responsibility in the budgeting process.
It should be stress that the State Funds being extra-budgetary funds should be submitted to the
same scrutiny as other budget users during budget preparation. That includes the integration of the
funds in the MTEF and the MTFF.
Additionally, a number of dispositions should be integrated either in the Treasury Law or in a Prime
Minister decree:
 All State Funds account must be opened at BoL and MoF must have access to the banking
statements. All banking arrangements must be approved by MoF. Accounts at the provincial
level must be consolidated.
 Although integration in the TSA might not be possible (this point need further discussion and
investigation), integration of their budgetary and general accounting in GFIS/TIMS and the
central public management system must be pushed as far as possible. In cases where a
separate system for management and control is required, the system should meet the same
requirements as those of FGIS/TIMS, especially in relation to control and fiscal reporting.
 State Funds should follow the same type of accounting arrangement as line-ministries and
other budget users. The accounting should be centralized as much as possible. The Treasury
should be responsible for keeping separate sets of books for State Funds. The Accounting
Department must provide guidance and regulation for State Funds’ accounting.
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72.  Classification of State Funds’ expenditures must be fully compatible with GFS standards (this
point needs to be verified) and links with the NGPES must be identified for reporting
purpose;
 As stipulated by the Accounting Law, State Funds must publish a balance sheet, a statement
of performance and explanatory notes. Responsibilities between the Funds and the Treasury
should be clearly identified. The Board of each fund should be responsible for approving the
financial statements.
 State Funds must be included in the annual budget presentation to the Parliament as part of
the “Consolidated Budget” with the same amount of details as other budget users.
 MoF should set budget ceilings for State Funds like for any other budget users and general
budgetary orientations for the sake of fiscal policy. Within the budget ceiling, State funds
should prepare their budgets independently with the minimum of interference from the
supervising ministry or from MoF. However in the Budget Execution Report, MoF must
publish an appraisal of State Fund financial performance and identify any potential issue.
 For preparation of the MTFF and MTEF, State Funds must be integrated in the relevant
sector.
 State Funds should be integrated in the consolidated fiscal position of the Government.
 A more detailed audit policy should be prepared and integrated in the regulatory framework.
 Financial performance of the State Funds should be evaluated every year and included in the
budget execution report.
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73. X. CAPACITY BUILDING
This report has demonstrated that the mission of the Ministry of Finance is changing because the
economic and social environment is changing. A number of factors have been identified:
 The economy has moved from a centrally planned organization to a market driven
organization requiring a better linkage between policy making, planning and budgeting
 Because economic growth, inflation and exchange rates are affected by external factors,
budget policy has become the government’s best tool for achieving its economic objectives
and to implement its poverty reduction strategy.
 Treasury centralization in the provinces will require the Treasury Department to adapt its
structure to the new situation.
 Fiscal policy will play a major role in budget formulation and must develop decision making
tools such as the MTFF and the MTFF
 Fiscal discipline has become vital for macro-economic stability and fiscal discipline cannot be
enforced without budget control procedures.
 With the implementation of new information system the business environment of the
Ministry of Finance is changing completely. Simple bookkeeping tasks will progressively
disappear and be replaced by control and analysis tasks requiring more qualifications of the
staff.
 New control functions will have to be created to monitor carefully budget execution
During the past eight years, the Ministry of Finance has made significant efforts to build capacity in
the Fiscal Policy Department. A similar effort must be made now in the Treasury and the Budget
Department. Capacity building has many aspects: staffing, training and technical assistance. Those
components must be integrated into an overall plan.
The Capacity Building plan to be developed will comprise of six main activities:
 Developing of a capacity building strategy covering all key areas of MoF reforms such as
Treasury centralization, accounting, reform of the budget formulation process, provincial
budgeting, budget control, macro-economic policy, etc.
 Accessing staffing need, potential for staff redeployment and other human resource
management issues;
 Creating an in-house structure to manage the capacity building plan;
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74.  Converting the capacity building strategy into a work plan with an implementation
timetable;
 Identifying technical assistance necessary for developing the capacity building plan;
 Implementing of the work plan.
Technical Assistance is the easiest part because it can be provided through PFMSP. Staffing is the
most difficult issue. Clearly, the Budget Department and the Treasury are overstretched. In their
present organization and structure they are not in position to expend their mission as required by
the reforms that have been undertaken. It is necessary for MoF to bring new in-house expertise.
Financial constrain must be identified at an early stage. Although the Multi-Donor Trust Fund will
finance most of the activities, the MoF will need to expand its staff at the central and local level. This
must be discussed within the Government because capacity building is not an issue limited to MoF.
Most line-ministries are under staffed at the central level with the implication that policy making,
planning, budgeting and overall control of ministries activities in the provinces weak. Solving the
problem in MoF will be a step in the right direction, but will not be enough to correct some of the
present weaknesses. A good starting point could be to prepare a plan to strengthen expenditure
management capacity in the line-ministries.
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