Lao PDR - Public Finance Management Modernization Program 2016–2018 Program Completion Report (P158659/TF072472) September 11, 2018 World Bank Governance Global Practice Equity, Finance and Institutions (EFI) Vientiane, Lao PDR, East Asia and Pacific Region Contents Executive Summary........................................................................................................................................ i 1. Introduction .............................................................................................................................................. 4 Country Context ........................................................................................................................................ 4 PFM Reforms in Lao PDR........................................................................................................................... 4 The Public Finance Management (PFM) Modernization Program ........................................................... 4 2. Activities Implemented under the Program ............................................................................................. 5 Component 1: Public Finance Development Strategy and Other PFM Reforms ...................................... 6 1.A: Public Finance Development Strategy to 2025 ............................................................................. 6 1.B: Public Expenditure Finance and Accountability (PEFA) Assessment ............................................. 7 1.C: Cybersecurity and ICT Strategy ...................................................................................................... 7 1.D: State Audit Organization (SAO) self-assessment ........................................................................... 8 Component 2: Support Strengthening the Budget Preparation and Execution Processes ...................... 8 2.A: Technical assistance (TA) for improvement of budget preparation processes ............................. 8 2.B: Improved budget execution, including cash management, forecasting, and reporting ............... 9 2.C: Review and improvement of the treasury and budget information systems ............................... 9 2.D: Strengthen the role of the National Assembly in the budget preparation process .................... 10 Component 3: Support Revenue Policy and Management .................................................................... 10 3.A: Institutionalize and strengthen the Large Taxpayers Unit (LTU) through capacity building ....... 10 3.B: Support to VAT Implementation.................................................................................................. 11 Component 4: Preparation of an Action Plan for Comprehensive PFM Reform .................................... 12 3. Lessons Learned ...................................................................................................................................... 12 4. Conclusions and Next Steps .................................................................................................................... 12 Next Steps ............................................................................................................................................... 13 The team wishes to express its appreciation for their support and commitment to the Public Finance Management (PFM) Modernization Program to the management of the Ministry of Finance: H.E. Mme. Thipphakone Chanthavongsa, Vice Minister and Chair of the Steering Committee; H.E. Mr. Bounchom Oubonpaseut, Vice Minister; H.E. Dr. Atsaphangthong Siphandone; Dr. Bounleua Sinxayvoravong, Director General, Fiscal Policy and Law Department; Mr. Sangvone Phanthavilay, Director General, Budget Department; Mme. Vanphone Phommasone, Director General, National Treasury Department; Mr. Phouthanouphet Saysombath, Director General, Tax Department; and Mr. Khanthaly Vongkaysone, Director General, Institute for Financial Information Development. We also would like to extend our gratitude to the technical officials from the Ministry of Finance for their excellent collaboration, contributions, and time; National Assembly: H.E. Dr. Vilayvong Bouddakham, President of the Finance, Planning, and Audit Committee; Mr. Thanta Kongphaly, Vice President of the Finance, Planning, and Audit Committee, and their staff; Ministry of Home Affairs: Mr. Souvanny Rattanavong, Director General, Department of Civil Service Management, Ministry of Home Affairs, and its staff; State Audit Organization: Mr. Bounlerd Thepvongsa, Vice President and his team. The Lao People’s Democratic Republic Finance Management (PFM) Modernization Program was implemented by a World Bank team led by Fanny Weiner (Senior Public Finance Management Specialist) and Saysanith Vongviengkham (Public Sector Specialist). The team included William Dorotinsky (Adviser), Richard Stern (Lead Tax Specialist), Lars Jessen (Lead Debt Specialist), Suraiya Zannath (Lead Financial Management Specialist), Evgenij Najdov (Senior Country Economist), Simon Chenjerani (Senior Procurement Specialist), Erwin Ariadharma (Senior Public Sector Management Specialist), Martin John Bowen (PEFA Secretariat), Guillaume Brule (PEFA Secretariat), Marcelo Roldan (Senior IT Officer, Security, Risk and Compliance), Robert Scrivo (Senior Information Security Officer), Viet Anh Nguyen (Public Sector Specialist), Minh Van Nguyen (Senior Economist), Khamphet Chanvongnaraz (Procurement Specialist), Keomanivone Phimmahasay (Economist), Kevin Viseth (Information Security Analyst), Ali Hashim (IFMIS/PFM Reform Consultant), Michael Engelschalk (Tax Consultant), Deepak Bhatia (ICT Consultant), Janis Platais (Treasury Consultant), Peter Trepte (Procurement Consultant), Peter Brooke (PFM Reform Consultant), Sylvie Zaitra (PEFA Consultant), Martin Linde (Treasury Consultant), Lynne McKenzie (Budget Consultant), Andre Vinck (Tax Consultant), Stephan Foessel (Tax Consultant), Tomas Sudintas (Tax Consultant), Brandon Lundberg (PEFA Consultant), Soren Davidsen (Wage Bill Consultant), Zachary Mills (Wage Bill Consultant), Robert Buchanan (SAO Consultant), Duangpanya Volavong (Tax Consultant), Saurabh Agarwal (ICT Consultant), Ping Houangsanasay (ICT Consultant), and the WYG Consultancy team. Operational and implementation support was provided by Sourignahak Sakonhninhom (Program Assistant), Laura Pineiro, Anne Boeckmann, Thipphaphone Rattanavong, Thipphaphone Leuanevilay, Marcelo Buitron (Operations Consultants), and Viengmala Phomsengsavanh (Project Management Consultant). The team wishes to express its gratitude to Sally Burningham (former Country Manager), Jean-Christophe Carret (former Country Manager), Fily Sissoko (Practice Manager), Robert Taliercio (former Practice Manager), Nicola Smithers (Practice Manager and former Lead Public Sector Specialist), Shabih Ali Mohib (Program Leader), Cem Dener (Lead Governance Specialist), Leah April (Senior Public Sector Specialist), Viengsamay Srithirath (Country Officer), and Phet Oudom (Program Assistant) for their support and guidance. We also thank the European Union Delegation to Lao PDR, namely H.E. Leon Paul Faber (Ambassador), Bryan Fornari (Head of Cooperation), Julianna Hyjek (Attaché), Joachim Debois (Attaché), Chindavanh Vongsaly and Vatthana Atanaphone (Program Managers), and Baptiste Mandouze (Regional PFM Adviser), for their excellent cooperation and partnership. Acronyms ACH Automated Clearing House BoL Bank of Lao PDR CFPA Committee for Finance, Planning, and Audit (under the NA) CoA Chart of Accounts EU European Union FMIS Financial Management Information System FPLD Fiscal Policy and Law Department GDP Gross Domestic Product GFIS Government Financial Information System GoL Government of the Lao People’s Democratic Republic ICT Information and Communication Technology IFID Institute for Financial Information Development IMF International Monetary Fund JICA Japan International Cooperation Agency LDC Least-Developed Country LT Large Taxpayer LTU Large Taxpayer Unit MoF Ministry of Finance MoHA Ministry of Home Affairs MoU Memorandum of Understanding NA National Assembly NT National Treasury PEFA Public Expenditure and Financial Accountability PEMNA Public Expenditure Management Network Asia PFM Public Financial Management PrMO Procurement Monitoring Office RBA Risk-based Audit RCD Revenue Collection Division SAO State Audit Organisation SDTF Single-Donor Trust Fund TA Technical Assistance TD Tax Department TF Trust Fund TSA Treasury Single Account VAT Value Added Tax Executive Summary This report provides a summary of the activities carried out under the Public Finance Management (PFM) Modernization Program. This Program provided the Government of Lao People’s Democratic Republic (GoL) with technical, analytical, and advisory assistance to strengthen its public financial management (PFM); it was implemented from January 2016 to July 2018 by the World Bank and financed by the European Union (EU). Status of the PFM System in Lao PDR The Budget Law 2015 gives guidance on the budget cycle and the preparation of budget documents; however, the Law has not been implemented yet. In the absence of secondary legislation and relevant budget documents, proper costing of expenditures or ceilings have not been introduced, often leading to unaffordable and unrealistic budget plans. While a medium-term expenditure framework exists, the budget is being prepared based on the previous year’s budget plan, resulting in a weak medium-term budget perspective and a missing link to policy priorities. Past reforms led by the National Treasury (NT) to introduce a Treasury Single Account (TSA) and bank consolidation remain incomplete. While the Bank of Lao PDR (BoL) and commercial banks provide daily information on the balances and daily transactions of all accounts under the control of the NT, account balances are not being consolidated in a single account at the end of each day. Progress has been made in updating the Chart of Accounts (CoA). The update of the CoA has set the stage for the adoption of the double-entry accounting system, which will enable to produce financial statements compliant with the International Public Sector Accounting Standards (IPSAS). A main issue remains—the absence of comprehensive integrated organization classification, including district codes in the CoA. As a result, budgets cannot be allocated to the various sector budget units at the district level and those expenditures cannot be checked against budgets before execution. This hinders the decentralization of transaction entry and budget controls to the district level. The NT is struggling to meet the increased demand for comprehensive and timely budget execution information. The existing information is not sufficient for many counterparties (within the MoF, line ministries, and donors), which has caused attempts to build parallel data collection and reporting systems both for tracking budget management at the district level, but also at the line ministries. Cash management and forecasting are in its initial stage. While the monitoring of the actual cash flows is based on daily bank statements from the BoL and commercial banks, the NT has limited information on the forthcoming payment requirements and revenue forecasts. Consequently, the NT is working on a weekly cash cycle, resulting in cash rationing (including delay in salary payments), and taking on expensive short-term borrowing. In the absence of commitment controls, the Government entities managing commitments without confirmation of budget availability results in payment arrears. The current GFIS covers only a subset of functionalities required for a full functioning budget execution system. Certain core functionalities related to commitment controls and bank reconciliation are not yet in place, and district offices are not included in the GFIS coverage. The technical ability of the GFIS to i include the required updates for full functionality is limited as the technology used for system development is becoming obsolete, and the technical architecture and documentation is poor. The MoF has prepared an information and communication technology (ICT) strategy which comprehensively assesses the current status of the MoF’s ICT environment and architecture and proposes using modern processes and ICT applications, upgrading the technology and infrastructure, and scaling up ICT capacity. With the passing of a Public Procurement Law by the National Assembly (NA) in November 2017, the GoL has embarked on creating a more robust procurement regulatory and legal framework. Since 2004, public procurement has been governed by a Prime Minister’s Decree and was overseen by the Procurement Monitoring Office (PrMO) in the MoF. Complaints handling mechanism remains weak with few complaints registered and no organized institutional setup to handle them. The weak adherence to the decree also led to a number of contracts from unsolicited proposals, especially in the construction sector, which resulted in arrears. Implementing regulation for the new law has been prepared, and after capacity building in 2019, the new procurement framework is expected to be adopted in FY2020. Taking initial steps to follow international practice, the Tax Department (TD) has established a Revenue Collection Division (RCD) for large business tax compliance management. The large taxpayers (LTs) overseen by the RCD currently contribute about 40 percent of total tax revenues, which is relatively low ratio by international standards. This indicates that through more targeted and improved compliance monitoring, the tax collection of this segment could be increased. Compliance management is focused on retroactive, often desk-based, audit and enforcement, and sector-specific knowledge, and analytical capacity by tax officials has so far been limited to the mining and hydropower sectors. Cross-cutting challenges to the improvement of the PFM system are capacity constraints and the availability and reliability of data for informed monitoring, policy analysis, and decision making. Most training and capacity building happens on the job; however, frequent staff rotations result in knowledge drain and continuous need for training new staff. While data (both financial and nonfinancial) are collected by the government staff, it often is kept in siloed systems of different government departments, with no clear protocol or processes for data exchange or consolidation. Records are also often kept as hard copy only and by a single department or even a single person. Similarly, ministries and departments develop their own system, resulting in missed opportunities and inefficient public investments in silo information technology (IT) systems. As a result, policy analysis, decision making, and prioritization are underinformed and affects the Government’s ability to properly identify and target areas of concern. Support to the Public Finance Development Strategy 2025 and Vision 2030 As an important first step, the MoF has prepared its Public Finance Development Strategy 2025 and Vision 2030 (PFM Strategy), which was approved in July 2017. The strategy is accompanied by action plans for the first implementation phase 2018–2020. It includes actions commonly recommended as minimum requirements of a core PFM system, such as (a) an adequate regulatory framework, (b) a sound accounting system and treasury-centric budget execution processes, (c) a realistic budget preparation process, and (d) ultimately a core Financial Management Information System (FMIS). Assistance under the PFM Program has focused on TA and capacity building as well as taking stock of PFM practices. On the expenditure side, activities included (a) advice on budget preparation, particularly the ii steps toward implementing the revised 2015 State Budget Law; (b) TA and an action plan for treasury and cash management; (c) review of the current GFIS and preparation for a new FMIS; and (d) preparation for implementing instruction for the new Public Procurement Law. On the revenue side, support has been provided on (a) tax policies, such as the revised VAT Law and steps toward its implementation, and (b) the strengthening of the Large Taxpayer Unit (LTU) through recommendations for characteristics of LTs and risk indicators for audit selection. The Program also supported the preparation of a Public Expenditure and Financial Accountability (PEFA) Assessment (ongoing). About 40 technical notes, mission reports, and action plans and 20 workshops were delivered to the Government—the output of over 40 expert visits to Lao PDR. iii 1. Introduction Country Context 1. Lao PDR achieved rapid growth and impressive poverty reduction over the past two decades. The gross domestic product (GDP) growth rate averaged around 8 percent annually since 2000, making Lao PDR one of the fastest growing economies in the East Asia and Pacific Region. Gross national income (GNI) per capita reached US$2,330 in 2017, and in 2018, for the first time Lao PDR met the criteria for Least- Developed Country (LDC) graduation.1 However, social development indicators are lagging behind expectations and inequality widened, with an increasing Gini coefficient (currently at 36.2), reflecting lower gains for the bottom 40 percent of the population. 2. The country has been struggling to address fiscal deficits posing pressing challenges for economic management. Efforts to consolidate the fiscal position have been made through moderating wage increases and staff recruitment and by introducing spending cuts. The country is in high debt distress with public debt at around 60 percent of GDP in 2017 and is expected to further increase to 62.6 percent of GDP in 2018. The large fiscal deficits have limited the ability of the public sector to allocate budget to social sectors and infrastructure maintenance needed to address the country’s development challenges; critical sectors remain underfunded. 3. Lao PDR is governed by the Lao People’s Revolutionary Party (LPRP). In 2016, the Government has announced a comprehensive reform program, to take actions to tackle governance challenges, promote the rule of law, and improve economic management. With a development vision based on green growth, the objective of the Government’s 2016–2020 8th National Socioeconomic Development Plan (NSEDP) is to reduce poverty and to prepare Lao PDR for LDC graduation by 2020 and progress toward the Sustainable Development Goals. PFM Reforms in Lao PDR 4. Between 2003 and 2012, the Government of Lao PDR (GoL) had undertaken reforms to strengthen the public sector and its Public Financial Management (PFM) system. However, in 2012, a turn in the Government’s donor cooperation policy affected further reform implementation. The appointment of the current Government, in 2016 led to a reengagement with the donor community, and initiated the preparation of the ‘second generation reforms’ leading to the preparation of the Public Finance Development Strategy 2025 and Vision 2030 (PFM Strategy), approved in July 2017. Its objective is to strengthen public finances to contribute to sustaining dynamic and stable economic growth and a graduation from LDC status. The Public Finance Management (PFM) Modernization Program 5. The Public Finance Management (PFM) Modernization Program was at the heart of the reengagement and its main vehicle for dialogue. The Program was implemented by the World Bank and funded by the European Union (EU) through a Bank-executed Single-Donor Trust Fund (SDTF) in the 1In the March 2018 review, the country met the thresholds for GNI per capita and Human Assets Index. If it sustains progress until the 2021 review, graduation will be recommended following a three-year transition period, in 2024. 4 amount of €2 million. It aimed to support the efforts of the GoL to strengthen PFM, through the provision of technical, analytical, and advisory inputs. Program activities started in January 2016 and concluded in July 2018. Activities have focused on technical assistance (TA) and capacity building as well as taking stock of PFM practices. About 40 technical notes, mission reports, and action plans were delivered to the Government—the output of over 40 expert visits to Lao PDR. Figure 1: Program overview 6. The main Government counterpart was the Ministry of Finance (MoF), while the Committee for Finance, Planning, and Audit (CFPA) of the NA, and the SAO also benefited from targeted assistance and capacity building. To facilitate Government oversight of the Program, a Steering Committee (SC) was set up. It was chaired by the Vice-Minister of Finance and included the Director Generals of all benefiting departments within the MoF (Fiscal Policy, Budget Department, and Tax Department (TD); National Treasury (NT); and the Institute for Financial Information Development [IFID]). The direct beneficiaries of the Program were the public servants of the participating entities, who benefited from on-the-job training and participated at workshop and training events. During the time of the Program, 19 training events were undertaken, with a total of over 550 participants. To capture gender impact, the gender of participants in workshop and training was tracked, starting from December 2017. It showed that 42 percent of the participants were female. 2. Activities Implemented under the Program 7. During the past two years of Program implementation, support to the GoL has focused on building a knowledge base of the current PFM practices and processes through extensive analytical work and recommendations. As mentioned earlier, those have been accompanied by capacity building and training in relevant PFM areas, including sharing of international experience. 5 Figure 2: Program Activities by Government Entities 2016–2018 Component 1: Public Finance Development Strategy and Other PFM Reforms 1.A: Public Finance Development Strategy to 2025 8. The ‘Public Finance Development Strategy 2025 and Vision to 2030’ (PFM Strategy) was finalized and signed by the Prime Minister in July 2017 and disseminated through technical workshops with departments of the MoF but also with line ministries and the donor community. The implementation of the PFM Strategy was sequenced and followed a staged approach (see Error! Reference source not found.). Figure 3: Staged Approach 9. Supporting the preparation of the first phase to put in place a core PFM system, a Reform Implementation Plan was prepared, outlining the building blocks for a core PFM system in Lao PDR (see box 1). 6 Box 1: Building blocks for a core PFM System in Lao PDR ▪ The legal framework for a PFM core system is largely in place. However, secondary legislation and regulations have not yet been finalized/require updates. ▪ The MoF/NT should to be directly connected to the National Payment System through an Automated Clearing House (ACH). ▪ To capture all payment transactions, a simple access for transaction entry for all the NT offices (central, provincial, district) needs to be enabled. ▪ The current Chart of Accounts (CoA) requires an update to reflect recent legal changes and to adjust to standards such as International Public-Sector Accounting Standards (IPSAS) and for IMF reporting. ▪ Establishment of a regular information flow on cash requirements and planning between budget units, revenue collecting departments, and the NT. ▪ A Cash Management Committee, a Cash Management Manual, and other procedures to stipulate the requirements and procedures facilitating good government cash management are necessary. ▪ Introduction of budget ceilings. 10. Because of the many changes across ministries and departments accompanying the implementation of a PFM reform, the preparation of a change management program was initiated. The main objective of introductory workshops, which took place in July 2018, was to familiarize the GoL with the concept of change management and its implications. → Support to the implementation of the MoF’s PFM Reform Strategy will be continued under the second phase of the PFM TF Program and the upcoming World Bank PFM operation. 1.B: Public Expenditure Finance and Accountability (PEFA) Assessment 11. PEFA is a tool for assessing the status of PFM and provides a thorough, consistent, and evidence- based analysis of PFM performance at a specific point in time. The objective of the 2018 PEFA is to establish a baseline to measure the MoF’s PFM reform progress in future years. → Finalization and dissemination of the PEFA Assessment 2018 will be part of the activities under the new TF Program. A repeater assessment to measure reform progress is foreseen for 2021. 1.C: Cybersecurity and ICT Strategy 12. The IFID—MoF’s ICT Department—has the mandate to lead the ICT-enabled public finance modernization for the MoF. As part of strengthening the MoF’s ICT environment, an assessment of its information technology infrastructure and security management practices was carried out in March 2017. Results were summarized in the ICT Strategy and areas of focus identified. → Implementation of selected activities identified under the ICT Strategy will be undertaken as part of the second phase of the PFM TF Program and under the upcoming World Bank PFM operation. 7 1.D: State Audit Organization (SAO) self-assessment 13. Support was provided to the SAO in March 2016 to conduct a self-assessment, which identified four areas for future emphasis (see Error! Reference source not found. for main findings). Box 2: Main findings from the SAO Assessment ▪ The SAO has made good progress in building its institutional capacity. ▪ Annual financial audits of all entities in accordance with its legal responsibilities have not been carried out yet. ▪ The introduction of International Standards of Supreme Audit Institutions (ISSAI) into the SAO’s auditing methodology has started. ▪ The SAO has made good progress in developing its human resources planning capability and translating that into its recruitment and training activities. → A new program on Citizen Engagement for Good Governance, Accountability and the Rule of Law (CEGGA) funded by the EU, Switzerland, and Germany will start to support the SAO; therefore, assistance to the SAO will not be included under the new TF Program. Component 2: Support Strengthening the Budget Preparation and Execution Processes 2.A: Technical assistance (TA) for improvement of budget preparation processes 14. The Budget Law 2015 gives guidance on the budget cycle and the preparation of budget documents; however, the Law has not been implemented yet. While a medium-term expenditure framework exists, the budget is being prepared based on the previous year’s budget plan. The Program provided TA to prepare the implementation of the revised State Budget Law, leading to recommendations for drafting the secondary legislation and a proposed road map for the implementation of the Law (see Error! Reference source not found. for road map). Box 3: Road Map for Adoption of the State Budget Law ▪ Institutional arrangements for the reform ▪ Development of Fiscal/Budget Policy Statement and adoption of updated budget preparation documents ▪ Shift from incremental to baseline budgeting ▪ Introduction of ministry-level budget ceilings ▪ Piloting of reforms in specific provinces and ministries → The implementation of budget reforms will be supported by the next PFM TF Program through further TA and capacity building. 15. Wage bill forecasting model forecasts wage bill expenditures for a period of five years and could be used to simulate various policies, including changes in base salary, salary scale, allowances, employment numbers, and so on. The model is meant to assist the authorities to ensure a fiscally sustainable wage bill and to provide greater analytical capabilities to support workforce planning. A first 8 working version of the model was introduced, training provided, and feedback from stakeholders in the key sector ministries was solicited. The current version covers only the data from the Central Government, which only represents about 20 percent of the civil service though. → If additional data can be obtained, the model will be updated and translated into Lao under the new TF to facilitate further training to the MoF and Ministry of Home Affairs (MoHA) staff. 2.B: Improved budget execution, including cash management, forecasting, and reporting 16. Past reforms achieved notable improvements, but some elements for efficient budget execution have not been established yet. The monitoring of the actual cash flows is currently based on daily bank statements from the BoL and commercial banks, but the NT has limited information on the forthcoming payment requirements and revenue forecasts. Consequently, the NT is working on a weekly cash cycle. A previous update of the CoA has set the stage for the adoption of the double-entry accounting system. The short-/medium-term activity consisted of setting up an electronic payment settlement interface to connect the NT to the BoL. In the absence of a proper connection from the MoF to the banking sector, many transactions are made in cash and the NT is not able to fully consolidate the Government cash accounts on a daily basis. 17. Other recommendations covered envisaged accounting reforms and the implementation of the new CoA, as well as improvements of the GFIS. The GFIS, currently used by the MoF was developed internally in the mid-1990s and updated in the mid-2000s. Minor improvements to the GFIS such as connecting it to the e-gateway would allow the NT to generate more timely, accurate, and complete data for management and accountability purposes. Another recommendation was the introduction of cash flow forecasts focusing on the cash balances of the NT and the establishment of a Cash Management Committee. To support the implementation of the above recommendations, intensive on-the-job training and workshops were provided to the NT technical team, and a draft Cash Management Manual was prepared. → Support to the NT in the implementation of treasury reforms will be at the core of the next PFM TF Program and the upcoming World Bank operation. 2.C: Review and improvement of the treasury and budget information systems 18. A review on the functionality of the current GFIS in September 2016 found that it covers a subset of functionalities required for a full functioning budget execution system. Plus, the technical ability of the GFIS to include the required updates for full functionality is limited. Based on the review, the GoL decided that a new FMIS based on a commercial-off-the-shelf (COTS) system would be most adequate for replacing the current GFIS system. In preparation for a new FMIS, several reports were prepared providing recommendations regarding the legal framework and design and specifications for the e-payment gateway and web portal. In view of the Government’s consideration to replace the current GFIS for a new FMIS, a knowledge exchange visit to Cambodia was conducted in August 2017. This knowledge exchange established a solid foundation on policy, institutional, and human resource requirements to initiate the implementation of a new FMIS. 9 → The implementation of a new FMIS will be financed through the upcoming World Bank operation; the next PFM TF Program will support the preparation activities for the FMIS readiness. 2.D: Strengthen the role of the National Assembly in the budget preparation process 19. The program provided TA to the CFPA of the NA on implementation of Article 55 of the State Budget Law. A review of the functions performed by the CFPA found strengths and gaps in the CFPA’s capacity and operations to comply with its role foreseen in Article 55 of the revised State Budget Law (see Error! Reference source not found. for recommendations). Box 4: Recommendations: Improvement in the Budget Oversight Process by CFPA ▪ Definition of roles, responsibilities, and power of the CFPA and communication to the executive, particularly to the MoF ▪ Development of Guidance and Operational Manual on the functions of the CFPA and the Secretariat ▪ Division of departments within the CFPA to perform the function of Estimate Committee and Public Accounts Committee (PAC) ▪ Development of Memorandum of Understanding (MoU) between the CFPA and SAO ▪ Development of MoU between the CFPA and the Inspection Authority 20. Five capacity-building workshops have been carried out to enhance the knowledge of the CFPA’s members on the topics of public debt management, budget oversight, overview on the Lao economy and development challenges, public investment management (PIM), tax administration and revenue collection, and public procurement. The NA representatives were also invited to many of the capacity- building workshops carried out with the MoF and participated in the study visit on FMIS implementation and PFM reforms to Cambodia. → The program on Citizen Engagement for Good Governance, Accountability, and the Rule of Law (CEGGA), mentioned before, will support the NA in the future. However, NA representatives will be invited to participate at selected and relevant workshops of the next PFM TF Program. Component 3: Support Revenue Policy and Management 3.A: Institutionalize and strengthen the Large Taxpayers Unit (LTU) through capacity building 21. Revenue collection has declined in the past years (mainly due to decrease in mining) and Lao PDR’s revenue/GDP ratio is currently at 17.3 percent. Income tax collection is especially low. The GoL is currently undertaking actions to strengthen the tax legislative framework through a revised VAT Law and ongoing updates of the excise and tax administration laws. 22. Typically, a small percentage of the overall taxpayers contributes the bulk of taxes, in many countries, the percentage is around 70 percent (typically large taxpayers). Tax administrations in many countries therefore have created special LTUs to improve the monitoring and to strengthen voluntary compliance of this taxpayer segment. In Lao PDR, the Revenue Collection Division (RCD) in the Tax Department is tasked with the compliance monitoring of LTs, and currently oversees more than 500 companies. A first analysis showed that in Lao PDR, the top 10 taxpayers were responsible for 66 percent of total large business tax collection in 2017, and the top 50 taxpayers represent almost 90 percent of 10 total LT collection. This percentage increases to almost 95 percent for the top 100 businesses in the RCD, and to 97 percent for the top 200 businesses. This indicates that, in principle, the collection performance of the RCD would not be negatively affected by reducing the number of businesses administered by the RCD by half. As a second step, the generally accepted criteria for determining the LT segment, such as the business turnover and/or the value of business assets, were applied to companies in strategic sectors (hydropower, mining, banking) to assess which taxpayers should be monitored by the RCD (for report conclusion, see Error! Reference source not found.). Applying these criteria to the current set of taxpayers under the RDC results in 288 LTs. Box 5: Recommendations for Selection Criteria of LTs ▪ Increase the current turnover threshold of 5 million kip (US$600,000) to 20 billion kip (US$2.4 million). ▪ Adjust the definition of strategic sectors to those with high importance for revenue management and with high complexity of business operations, that is, the (a) financial sector (banks and insurance companies), (b) telecom sector, and (c) electro/hydro sector. ▪ Include additional LT criteria, such as (a) contribution to tax revenues, (b) value of business assets, and (c) international businesses. 23. The second activity to strengthen LT compliance was the preparation of a risk-based approach and model. The RBA is commonly used as an instrument for compliance management and the case selection for a tax audit. Based on a set of risk criteria, the RBA model allows prioritizing and ranking taxpayers by different tax risks and to focus its resources on the taxpayers that are most risky from a compliance perspective. On the operational level, the RBA is also used to support taxpayer services and revenue collection processes in the tax administration. → Further support to strengthen the compliance management of LTs, including the preparation of the taxpayer service and communication strategy, is planned to be carried out under the next PFM TF Program. 3.B: Support to VAT Implementation 24. The implementation of the VAT is a priority for the MoF as it is regarded as a promising tool to raise revenue collection. As a first step to implement the 2015 VAT Law, support in drafting the Implementation Instructions of the 2015 VAT Law was provided during 2016. The instructions were approved in January 2017, and a high-level event with participation of line ministries and the private sector was organized in March 2017 to officially launch the Implementing Instructions. Following an eight- day training on the instructions of the VAT Law, a Technical Note was prepared and shared with the MoF, providing recommendations to update the VAT Law. Consequently, the GoL decided to revise the VAT Law. → Further support to VAT implementation is currently not envisaged; however, the new TF Program provides the scope to consider continuation in case of strong Government interest. Potential further support under the abovementioned ‘Second Trade Development Facility Project’ to assist with drafting the Implementing Instructions under the revised VAT Law is being discussed. JICA is also providing VAT-related training and assistance. 11 Component 4: Preparation of an Action Plan for Comprehensive PFM Reform 25. The PFM Program supported the meeting of the Budget Community of Practice (B-CoP) of the Public Expenditure Management Network Asia (PEMNA), in Vientiane, November 27–29, 2017. It brought together practitioners from 11 countries (Brunei, Cambodia, Indonesia, Korea, Malaysia, Mongolia, Myanmar, Philippines, Thailand, Vietnam, and Lao PDR). The event was translated into Lao which opened it up to a wider audience of Government staff, whose participation in conferences outside of Lao PDR and exposure to regional good practice is limited due to the lack of English skills. 26. With the passing of a Public Procurement Law by the NA in November 2017, the GoL has embarked in creating a more robust procurement regulatory and legal framework. Following a request from the MoF in December 2017, the PFM Program started to provide guidance and technical support on the draft Public Procurement Law and its secondary legislation. Support to the finalization of the Law and to drafting the secondary legislation was provided. Once the secondary legislation has been approved by the MoF, the new procurement framework would be implemented countrywide. → The implementation of the new Procurement Law, including training, update of procurement documents, introduction of a complaints-handling mechanism, and setup of a procurement website will be supported through the next TF Program. 3. Lessons Learned Several lessons can be drawn from the last years of PFM reform in Lao PDR: • Overall the reengagement benefited from high commitment and the presence of champions on several levels. • Recent experience and lessons learned, indicate that allowing enough time to move from establishing the legal framework to implementation is crucial. The same applies to choosing a limited number of reform initiatives and focusing on those where sufficient capacity, government commitment, and a reform champion is present • It is paramount to ensure the availability of skilled human resources, hence capacity building and on the job training played an important role in project implementation • Besides the benefits of donor-provided funding and TA, long-term engagements between the GoL and the donor community is facilitating the country’s transition process. The support through international experts and access to regional and international practitioner networks and experience are paving the way. • For hands-on support and regular follow-up, continuous in-country presence emerged as a critical success factor. 4. Conclusions and Next Steps The active reengagement with the GoL over the past two years, led to a strong partnership between the development partners and the MoF. TA and capacity-building activities were successfully launched and 12 well received by the government partners. The emphasis of the current TF program has been on exhaustive stocktaking, analytical work, and capacity building, which resulted in about 20 training activities and 40 technical notes, mission reports, and action plans. Drawing from this sound groundwork, a reform agenda and concrete action plans have been developed in collaboration with the MoF and laid the groundwork for the MoF to move toward the implementation of its PFM Strategy. A knowledge base has been well established. However, the reform implementation envisaged under the new TF will require further capacity building and training to ensure a successful and efficient transition from reform preparation to implementation, and ultimately to visible reform outcomes. Some elements, such as the regulatory framework, basic budget and treasury management, and accountability are in place but further targeted support will ensure sustainability. Next Steps 27. A follow-up SDTF Program, financed by the EU and implemented by the World Bank, is under preparation and will provide continuity in supporting the GoL in the implementation of its PFM Strategy. The EU-financed SDTF in the amount of €5 million and a duration of four years is expected to start end 2018. The next PFM TF Program will consist of a World Bank-executed and a recipient-executed portion, whereas the World Bank-executed part will provide TA and advisory services leveraging the World Bank’s technical and international expertise, and the recipient-executed grant will support the GoL’s actions for policy implementation. 28. This TF Program it is being prepared and will be implemented in parallel with a World Bank- financed operation. The Public Finance Management (PFM) Modernization Project will focus on investments in a new FMIS and the strengthening of training structures. The SDTF complements this operation by providing TA and capacity building for the necessary policy and process changes to set up a core PFM system creating the necessary reform environment. The new SDTF will also allow for the start of several project-related activities during project preparation, namely, the start of change management activities, the preparation of the bidding documents, and the setup and start of a Project Implementation Unit (PIU) in the MoF. 13