Document of The World Bank FOROFFICIAL USEONLY Report No. 43351-LA PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDIDA GRANT INTHEAMOUNT OF SDR 3.7 MILLION (US$6.0 MILLION EQUIVALENT) TO THE THE LAO PEOPLE'S DEMOCRATICREPUBLIC FOR A CUSTOMS AND TRADE FACILITATIONPROJECT May 15,2008 Poverty Reduction and EconomicManagementUnit East Asia and the Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. GOVERNMENT FISCAL YEAR October 1- September 30 CURRENCY EQUIVALENTS (ExchangeRate Effective as ofMay 2,2008) Currency Unit Kip US$l .oo - 8,721 WEIGHTSANDMEASURES Metric System Vice President: James W. Adams Country Director: Ian C. Porter Country Manager: PatchamuthuIllangovan Sector Director: Vikram Nehru LeadEconomist MathewA. Verghis Task Team Leader: Ekaterina Vostroknutova The Lao PDR Customs and Trade Facilitation Project is prepared by an IDA team lead by Ekaterina Vostroknutova (EASPR) and comprising Gerard McLinden (PRMTR), Ramesh Sivapathasundram (ISGEC), Sengxay Phousinghoa (EASPR), Sirirat Sirijaratwong (EAPCO), SouphanthachackSisaleumsak (EAPCO), Donald Mphande (EAPCO), and RochLevesque (LEGES).Vatthana Singharaj (EASPR) andLynnGross (EASPR) providedadministrativeassistance. Peer reviewers are: Graeme Ludlow (Senior Economist,FiscalAffairs Department,IMF), Enrique Fanta(SeniorPublic Sector Specialist, LCSPS), and Albert Zeufack (Senior Economist, EASPR), and the team are grateful for their guidance. The team is also very grateful for guidance, support, and comments from Vikram Nehru (EASPR), Ian C. Porter (EACTF), PatchamuthuIllangovan(EACTF), Mathew A. Verghis (EASPR), AhsanAli (EAPCO), andChristine Wong (EASPR) as well as to two comprehensivereviews andcomments providedby many departmentsandcolleagues. FOROFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank IT Information Technology AFD Agence Frangaise de Dkveloppement JICA Japan International Cooperation AFTA ASEAN Free Trade Area Agency APEC Asia Pacific Economic Cooperation LBF Lao PDR Business Forum ASEAN Association o f Southeast Asian L P I Logistics Performance Index Nations L C D Lao PDR Customs Department ASYCUDA Automated Systems for Customs Data MDG Millennium Development Goal Management MDTF Multi-Donor Trust Fund AusAID Australian Agency for International M&E Monitoring and Evaluation Development MOF MinistryofFinance BOL Bank o f the Lao PDR MOIC MinistryofIndustryand Commerce CAS Country Assistance Strategy MRC Mekong River Commission CFAA Country Financial Accountability NGO Non-governmental organization Assessment NGPES National Growth and Poverty CIDA Canadian InternationalDevelopment Eradication Strategy Agency NPV Net Present Value CPAR Country Procurement Assessment NT2 Nam Theun 2 hydroelectric dam Report PACSA Public Administration and Civil CPI Committee for Planning and Service Authority Investment PDR People's Democratic Republic CPIA Country Policy and Institutional PETS Public Expenditure Tracking Survey Assessment PFMSP Public Financial Management CPPR Country Portfolio Performance Review Strengthening Program DB Doing Business P F M Public Finance Management DOS Department o f Statistics inthe PFMSU Public Financial Management Ministryo fPlanningandInvestment Strengthening Unit D S A Debt Sustainability Analysis P I U Project ImplementationUnit DTIS Diagnostic Trade Integration Study PRS Poverty Reduction Strategy EC European Commission SECO Swiss State Secretariat for Foreign EFD External Finance Department Affairs FDI Foreign Direct Investment SIDA Swedish International Development FMCBP Financial Management Capacity Agency BuildingProject SOE State Owned Enterprise FMR Financial Management Report TA Technical Assistance GDP Gross Domestic Product TDF Trade Development Facility GMS Greater Mekong Sub-region TOR Terms o f Reference GOL Government o f Lao PDR TRS Time Release Study GPAR Governance and Public Administration UNCTAD UnitedNations Conference for Trade ReformProgram and Development I C A InvestmentClimate Assessment UNDP UnitedNations Development Program ICR Implementation Completion Report WB World Bank IDA InternationalDevelopment Association wco World Customs Organization IMF InternationalMonetary Fund WTO World Trade Organization ISR Implementation Status Report This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. LAO PDR CUSTOMSAND TRADE FACILITATIONPROJECT CONTENTS A. 1. 1 Country and sector issues ................................................................................................................. 1 STRATEGIC CONTEXT AND RATIONALE...................................................................................................... 2. 3 . Rationale for Bank involvement....................................................................................................... 4 Higher level objectives to which the project contributes ................................................................. 5 B. PROJECTDESCRIPTION ................................................................................................................................................. 5 1. 2. 3. Project components .......................................................................................................................... 6 Lending instrument and PDOs........................................................................................................ -5 4. Lessons learned and reflected inthe project design ......................................................................... 8 Alternatives considered and reasons for rejection............................................................................ 9 C. ............................................................................................................................................................. 2. 1. Partnership arrangements ................................................................................................................ IMPLEMENTATION 9 -9 3 . Institutional and implementation arrangements ............................................................................. 10 4. Monitoring and evaluation o f outcomeshesults ............................................................................. 10 10 5. Sustainability .................................................................................................................................. 6. Critical risks and possible controversial aspects ............................................................................ 11 Grant conditions and covenants ..................................................................................................... 13 D. APPRAISAL SUMMARY.................................................................................................................................................. 14 14 2. 1. 16 Fiduciary ........................................................................................................................................ Technical........................................................................................................................................ Economic and financial analyses ................................................................................................... 16 4. 3 . 17 Environment................................................................................................................................... Social.............................................................................................................................................. 17 6. 5. 7. Policy Exceptions and Readiness ................................................................................................... Safeguardpolicies .......................................................................................................................... 17 17 TABLES Table 1: IDA Financingby Component....................................................................................................... 6 8 Table 3: Project-Related k s k s ................................................................................................................... Table 2: Project Financing by Source o f Financing and Component (US$ million) .................................... 11 Table 4: Financial Analysis: IRR............................................................................................................... 15 Table 5: Safeguards Table.......................................................................................................................... 17 ANNEXES Annex 1:Project Background .................................................................................................................. 1. Annex 2: Major Related Projects by the Bank and other Agencies 23 Annex 3: Results and Monitoring Framework ....................................................................................... ..................................................... 30 Annex 4: DetailedProject Description .................................................................................................... 32 Annex 5: Project Costs .............................................................................................................................. 41 Annex 6: Institutionaland ImplementationArrangements .................................................................. 43 Annex 7: FinancialManagement and DisbursementArrangements 44 Annex 8: Procurement Arrangements .................................................................................................... ................................................... 53 Annex 9: Financialand Economic Analyses 58 Annex 10: Safeguard Policy Issues .......................................................................................................... ........................................................................................... 61 Annex 11:Multi-Donor Trust Fundfor Trade-Related Assistance "Trade Development Facility" (P109702, TF091201/2/3) .......................................................................................................................... 62 Annex 12: Project Preparation and Supervision 64 Annex 13: Documents inthe Project File ................................................................................................ .................................................................................... 65 Annex 14: Statement of Loans and Credits ............................................................................................ 66 Annex 15: Country at a Glance ................................................................................................................ 67 M A P IBRD33431 FIGURES 18 Annex Figure 2: Lao PDR Logistics Performance Index........................................................................... Annex Figure 1: GDP growth and inflation. 2000-2008 ............................................................................ 21 Annex Figure 3: Implementation Arrangements ........................................................................................ 43 TABLES Annex Table 2: Financial Management RiskAssessment ......................................................................... Annex Table 1: Project Financingby Source of Financing and Component (US$ million) ...................... 32 46 Annex Table 3: Allocation of Project Proceeds ......................................................................................... 52 Annex Table 4: Procurement of Goods ...................................................................................................... 56 Annex Table 5: Procurement of Consulting Services ................................................................................ 56 Annex Table 7: Project Timeline ............................................................................................................... 64 Annex Table 6: Financial Analysis: IRR ................................................................................................... 59 Annex Table 8: Project Team..................................................................................................................... 64 .. 11 LAO PDR CUSTOMS AND TRADE FACILITATIONPROJECT PROJECT APPRAISAL DOCUMENT EASPR 1 Lao People'sDemocratic Republic 0.24 0.00 0.24 2 WorldBank 0.72 5.28 6.00 Total 0.96 5.28 6.24 FY FY09 FYlO FYll FY12 FY13 Annual 1.35 1.54 2.78 0.32 0.02 Cumulative 1.35 2.88 5.66 5.98 6.00 Program implementation period: Start: September 1,2008 End: June 30,2013 Expectedeffectiveness date: September 1,2008 Expectedclosing date: December 31,20 13 Does the project depart from the CAS incontent or other significant respects? Ref. P A D A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? [ ]Yes [XINO Ref. P A D D.3 Have these been approved by Bank management? I s approval for any policy exception sought from the Board? [[ ]Yes [ IN0 ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Ref.PAD C.5 [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Ref. P A D D.7 [XIYes [ ] N o Project development objective Ref. PAD B.2,Annex 4 The objective o f the project i s to facilitate trade by improving the efficiency and effectiveness o f customs 111 ... administration. The project will simplify customs procedures, eliminate duplication and redundancy, reduce transaction costs and time to clear goods, and increase transparency and accountability. Project description Ref. P A D B.3., Annex 4 (a) Implementation o f an automated customs system ASYCUDA World. The Project will finance the acquisition o f equipment, customization and installation including user training o f UNCTAD's ASYCUDA system at headquarters and nationwide at international border checkpoints, in three phases: (1) Development o f prototype; (2) Validation on a pilot site; (3) Replication to remaining regional offices and checkpoint sites. Inaddition, it will provide minor refurbishment o f offices to accommodate the new hardware, related office and auxiliary equipment, as well as training for Lao PDRCustoms Department (LCD) IT Staff to prepare them to maintainand operate the system once implemented. (b) Customs Modernization Support. The Project will finance capacity buildingactivities to assist Lao PDR to implement modern approaches to customs administration as well as meetingrequirements for WTO membership. It will also finance a long term international Customs Reform and Modernization advisor to provide international expertise in the introduction o f new Customs systems and to provide overall change management support including assisting the national management team inquality control and verification. Which safeguardpolicies are triggered, ifany? None Ref. P A D D.6, Annex 10 EnvironmentalCategory: C Loaneffectivenessconditions: A Steering Committee to oversee the reforms has been established with agreed terms o f reference and i s inoperation. 0 A Customs Reform and Modernization Team chaired by Deputy Director General, charged with the day-to-day implementation o f the project i s in operation. 0 Government has issued a notice or letter signed by the Ministero f Finance that agreed inprinciple to an ASYCUDA System User Fee (WTO Compatible) to be established, with revenue escrowed for hardware and software maintenance and operation costs and future development/expansion o f the system. Covenants applicable to project implementation: The Steering Committee will be maintained duringProject implementation to provide oversight, policy guidance, overall coordination, and conflict resolution. 0 The ASYCUDA System User Fee (WTO Compatible) will have been implementedno later than 18 months after project effectiveness. As such, the Ministryo f Finance (MOF) will ensure that the funds collected through the escrowed user fee are allocated to LCD to cover the operating and maintenance costs and to ensure sustainability o f the enhancements achieved through this project. The ASYCUDA contract will have been signed no later than 3 months after Effectiveness. 0 On or about December 2011, the Lao PDR Customs Department(LCD) and the Bank shalljointly carry out a midterm review o f the progress made inimplementingthe Project. 0 The project will operate with an adequate financial management system with appropriate accounts and in accordance with generally accepted accounting principles. 0 The LCD will furnishto the Bank semi-annual reports on the results of monitoring and evaluation activities, on December 31and June 30 every year, starting on December 2008. 0 The Financial Management Reports shall be submitted to the Bank on a timely basis and inthe form and substance agreeable to the Association. 0 Annual audited financial statements for the Project shall be submitted no later than six months after the end of the Project's fiscal year, The Financial Statements shall be: Sources and Uses o f Funds (one of the FMRs)and Balance Sheet. iv A. STRATEGIC CONTEXT AND RATIONALE 1. Country andsector issues 1. Over the past two years, Lao PDR has maintained stable macroeconomic conditions; its economic growth is robust and it is making progress on its Millennium Development Goals (MDGs). Growthhas increased from 6.4 percent in2004 to above 7 percent and remained stable in 2007 and 2008. In particular, outputs expanded in mining, newly emerging processing industries, agriculture, hydropower projects, tourism and other service industries. As Lao PDR i s surroundedby some o f the fastest growing economies inthe world, it has benefited from increased demands for its products and massive investment inflows from neighboring countries, such as China, Vietnam and Thailand. Macroeconomic conditions remain relatively stable, reflecting improved monetary and fiscal discipline, with inflation in single digits for the last several years, public expenditures are under control and the fiscal situation steadily improving. The poverty headcount fell from 33 percent in 2002/2003 to 31 percent in 2005/2006. 2. In 2004, the Government developed a National Growth and Poverty Eradication Strategy (NGPES) that became its first official Poverty Reduction Strategy and the main guideline for the County Assistance Strategy in 2004. The NGPES underlines the Government's commitment to sound macroeconomic policies to sustain growth, and prudent monetary and fiscal policies combined with structural reforms and: (1) acknowledges the importance o f governance challenges; (2) begins to articulate solid strategies for improving service delivery and infrastructure; (3) sets appropriate directions for sustaining growth; (4) seeks to address inequity and vulnerability; and (5) provides a framework for monitoring and implementation. In particular, the NGPES also recognizes the importance o f improving Lao PDR's international competitiveness and attracting foreign direct investment (FDI). 3. The Lao PDR's proposed Poverty Reduction Strategy, the Sixth National Socio- Economic Development Plan (NSEDP) for 2006-2010 aims at poverty reduction through a combination of broad-based economic growth and focused policy interventions. The NSEDP contains a sound set o f policy interventions in the following areas: (1) human development and private sector driven economic growth; (2) competitiveness, trade and regional integration; (3) social development and focused poverty reduction interventions; and (4) good governance. These priorities and the strategic policy directions the plan sets in each o f them are well-suited to deliver on plan objectives. The Joint Staff Advisory Note for NSEDP and its progress report i s currently scheduled to be considered by the Board on June 17,2008. 4. Lao PDR is committed to sustaining a private sector led economy through export- driven growth, and to modern governance while keeping a strong focus on human and social development and equity considerations, through these priority intervention areas in its NSEDP. The World Bank Group's Country Assistance Strategy (CAS) for Lao PDR i s based on the NGPESNSEDP. The current CAS extension till 2011 was discussed by the Board in May, 2007. 5. One of the main elements of the national strategy is to increase non-resource exports growth. Total exports, after stagnating during 2000-2003, increased by around 50 percent in 2006, with most o f it going to ASEAN countries and China. In 2007, exports are expected to grow at a more moderate rate o f about 5 percent. Apart from the mining sector exports that benefited form metal price increases, export growth was driven by agriculture and garments, with both o f these industries increasing by over 20 percent. Implementingthe strategy of increasing non-resource export growth is critically important for sustaining high and shared growth. To achieve this goal, the Lao PDR Government is: Improving Lao PDR's regional integration and market access opportunities through bilateral, regional and World Trade Organization (WTO) accession negotiations; (ii) ExpandingLaoPDR's capacity to tradebyengaging inmultilateral initiatives such as the Integrated Framework (IF) and trade related projects and programs which focus on addressing key supply side constraints and the promotion o f trade and regional integration; and (iii) Improvingexportcompetitivenessbyloweringtradetransactioncosts,addressing specifically those generated by inefficient customs and other agency procedures at both ends o f the line. 6. Lao PDR has become an active partner in the regional and international agreements. Lao PDR participates in the emerging Greater Mekong Sub-region (GMS) Economic Cooperation Program which comprises Lao PDR and its neighboring countries (Thailand, Vietnam, Yunnan province o f China, Cambodia and Myanmar). On a broader level, Lao PDR became a member o f the Association o f Southeast Asian Nations (ASEAN), i s participating in negotiations with the ASEAN Free Trade Area (AFTA) and has initiated accession negotiations to the WTO. Through participation in the ASEAN and GMS initiatives the Government aims at facilitating Lao PDR regional trade through neighbors' seaports. Lao PDR is also participating in the Mekong River Commission (MRC), which explores opportunities for regional cooperation in the Mekong River Basin. Other initiatives include further liberalization of private business registration and o f private investment regulations, without which the private sector cannot exploit the new opportunities for agricultural and manufacturedexports resulting from increasingintegration. 7. Based on other countries' experience, Lao PDR is expanding its capacity to trade. The Integrated Framework is one o f the main external assistance channels through which the Government o f Lao PDR will focus its trade agenda and boost export competitiveness and growth. Lao PDR decided to set up a framework for maximizing the benefit from the assistance provided by development partners including assistance to implement the measures described in the Diagnostic Trade Integration Study (DTIS), carried out with World Bank assistance. The DTIS was approved during the Lao PDR National Validation Workshop on September 12 2006, following extensive stakeholder consultations. The DTIS identifies five priority areas where external assistance and reform should be concentrated: (i) ExportCompetitiveness; (ii) TradeFacilitation; (iii) BusinessEnvironment; 2 (iv) Trade Policy, Trade Agreements and Global Opportunities; and (v) Trade Opportunities for the Poor. 8. The Government of Lao PDR in moving forward in implementinga sector-wide approach in trade to support its trade reform agenda. The Government, including a number o f agencies led by the Ministry of Industry and Commerce and including Ministry o f Planning and Investment, Ministry o f Finance, Ministry o f Agriculture and Forestry, Ministry o f Health, STEA, and representatives from the business associations, has already proposed a plan of activities. An integral part o f this approach i s the Multi-Donor Trust Fund for the "Trade Development Facility" (TDF), administered by the World Bank and with contributions from Australia and European Commission (Annex 11). Considerable bilateral and multilateral efforts are also contributing to this framework, including Japan's support to the L C D and to trade- related infrastructure, ADB's support to regional trade, and support provided by France to the L C D (see Annex 2 for a more detailed description o f trade-related activities). 9. Extensive diagnostic work done with Government by the World Bank and other development partners specifically identify customs procedures as a key constraint and priority to be addressed. The Investment Climate Assessment (ICA) found that exporters experience more severe regulatory burdens than non-exporters, have to go through at least two times more inspections, and spend on average 1.3 percent more o f their time with regulators. In spite o f significant improvements achieved in recent years, both by the L C D and other border- related regulatory agencies, the processing and clearance o f import, export and transit goods in Lao PDR remains relatively inefficient and time consuming, and illegal cross-border trade i s common. The processes rely too much on manual processing of paper-based documentation, followed unevenly across the country. 10. Recent reforms under the PRS04, have introduced significant simplifications in the border procedures; however, challenges in this area remain. Up to ten agencies usedto be operating at the border but the government has taken a decision to limit the number o f agencies present to three (PMO Notice 406, 13 March 2007 refers). While this development is positive, full implementation o f the government decision will take some time. Licenses, approvals and certificates contain similar if not identical information, and documentary and physical inspections are unnecessarily duplicative. This, coupled with excessive face to face interaction between traders and government officials, leads to inefficiency and loss o f process integrity. 11. Lao PDR customs currently applies minimum values to a large number of products, a practice that is not compatiblewith the WTO Valuation Agreement. The MOF intends to implement the provisions o f the WTO Valuation Agreement, phasing out the minimumvalues and to graduallyreplace them with the transaction value provisions o fthe WTO Valuation Agreement. The IMFi s assisting the Government indrafting and implementingrelated regulations. 12. Notwithstanding the efforts to improve customs procedures, the lack of a fully functionalI T system remains a key constraintto implementationof the NSEDP's ambitious export growth goals. While the Lao PDR government has made some progress inimproving the 3 effectiveness o f its customs operations inrecent years and has now taken the difficult decision to centralize all customs operations under one central administration, its efforts continue to be hampered by the lack o f a comprehensive and fully functional customs IT system. As a result, the Government has taken a decision to abandon further development o f its current systemwhich provides extremely limited functionality in favor o f the procurement and implementation o f a proven customs IT system. After undertakingan assessment o f alternative systems' the Ministry o f Finance has decided to procure the Automated Systems for Customs Data (ASYCUDA) World, a system developed by the United Nations Conference for Trade and Development (UNCTAD). There are over 80 installations o f ASYCUDA worldwide,2 includingthat o f several neighboring countries. The Prime Minister endorsed the decision and a formal instruction to this effect was signed in2006. 2. Rationalefor Bankinvolvement 13. The Bank's Country Assistance Strategy (CAS) for Lao PDR updatedin 2007 and a range of analyticalwork underlinethe need to sustain growth, improve competitiveness, facilitate trade and deepen regional economic integration. The CAS explicitly identifies the need to strengthen the capacity o f the L C D as a contribution to the achievement o f these objectives (CAS Pillars 1 and 2). The pressing need to improve the effectiveness of customs' performance in the processing o f import, export and transit cargo i s identified inmore detail in a range o f diagnostic reports which include the Bank's InvestmentClimate Assessment (ICA) and the 2006 Diagnostic Trade Integration Study (DTIS) led by the Bank with strong participation and ownership o f the Lao PDR Government. An approximation o f the current level o f operational effectiveness o f the L C D i s reflected in the 2008 Doing Business report's "Trading Across Borders" chapter, where Lao PDR i s rated 148th out o f 178 countries included in the survey. The World Bank's more customs-specific Logistics Performance Index rates Lao PDR as 117out o f 150 countries on customs performance. 14. This project is an integral part of the World Bank's strategy for Lao PDR, and relates to several CAS sub-pillars, including on trade, private sector development, and public financial management. As part o f a sector-wide approach currently being implemented in the Lao PDR, the WB and a group of development partners are establishing a multi-donor trust fund administered by the WB, designed to support implementation o f the government's trade strategy. One component o f the Multi-Donor Trust Fund for the "Trade Development Facility" (TDF, P109702, TF091201) i s aimed at assisting Lao PDR to improve its performance intrade facilitation. The Facility includes a significant trade facilitation component with specific activities designed to complement the assistance to be provided under this project (see Annex 11). The Bank is also exploring opportunities for further assistance in regional integration activities, both through the ASEAN single window and the GMS trade facilitation initiative (see Annex 2). As such, the Bank i s in a unique position to align activities envisioned inthe TDF and the proposedproject, as well as to relate these to the regional level through alignment of project inputs inLao PDR, Cambodia, and Vietnam to regional integration initiatives and commitments associated with relevant ASEAN and GMS programs. ' Technical support was provided by the French Government under a grant from the Agence Frangaise de Dkveloppement, and also by the IMF. This number refers to all versions of ASYCUDA, o fwhich Worldis the latest. 4 15. In recent years there has been a growing recognition of the importance of an efficient and effective customs administration. A well performing customs administration can play a key role in assisting developing countries to take advantage o f opportunities presented by the global trading system. Customs plays a key role in trade facilitation, revenue collection, community protection and national security and can make a major contribution to national competitiveness. Such a realization has led to trade facilitation and customs reform being included inthe WTO DohaDevelopment Agenda. 16. The Bank supports the Government'stechnicaldecisionto implementASYCUDA World particularly as it is already financing the system's implementation in several countries, including Cambodia. Therefore, it is in an excellent position to support the Government's request with the appropriate financing and related technical assistance support to ensure the system i s implemented in the most cost-effective and efficient manner. The Government's decision to procure the ASYCUDA World system was also endorsed in principle by an expert mission conducted inNovember 2006 which included trade facilitation and customs specialists from the IMF and the World Customs Organization (WCO). 17. The Bank has extensive experience in the institutional reform of customs administrations, having managed over 120 customs-relatedprojects over the past twenty years. The Bank i s also currently financing customs reform and modernization projects with a strong focus on trade facilitation in Vietnam and Cambodia as well as other countries in transition in both Europe and Central Asia. It is able to draw on the lessons learned from all these activities in the preparation and implementation o f this project as well as its strong partnership with the WCO and a range o f activities it i s conducting throughout the world in support o fthe trade facilitation negotiations currently taking place inthe WTO. 3. Higherlevel objectivesto which the projectcontributes 18. The project will contribute to higher level development objectives o f the GOL: increasing exports, sustaining high economic growth, and reducing poverty through improving export competitiveness, by creating more transparent, less costly, and therefore more equitable trading environment for Lao PDR's importers and exporters. B. PROJECTDESCRIPTION 1. LendinginstrumentandPDOs 19. The use of a Specific Investment LendingInstrument(SIL) inthe form o f an IDA Grant i s proposed for this operation. The Project will be implemented within a five year period. 20. The objective o f the Project is to facilitate trade by improving the efficiency and effectiveness o f customs administration. The Project will simplify customs procedures, eliminate duplication and redundancy, reduce transaction costs and time to clear goods, and increase transparency and accountability. 5 21. Key perfonnance indicators for the Project are dividedinto two main groups: Customs Efficiency: Reduction inthe mean import, export, and transit clearance times; Reductioninthe number o f steps to clear commercial shipments. Customs Effectiveness: Increase inthe ratio o f detections/inspections by customs; Increase inthe perception o f customs performance and integrity by clients. 2. Projectcomponents 22. The project will finance consulting services, business and information systems, goods, training and equipment over five years, through two components. The total cost for each project component from IDA i s provided intable below. Financing Objectives Component A US$3.98m from IDA Implementation o f ASYCUDA World Component B US$2.02m from IDA Customs Reform and Modernization Support ComponentA: Implementationof ASYCUDA World (US$4.22 million o f which US$3.98 million IDA) 23. This component will finance installation costs o f the ASYCUDA system and some related activities including translations, modifications, training, equipment, communications infrastructure and implementation o f the system in three phases (see draft TOR in Project Document Files): Phase I A fully functional prototype will be developed by the project team inthe L C D - headquarters inVientiane. As a preliminary to this phase, a mapping o f the current export and import processes has been carried out, to identify all documentation requirements (see TOR inProject Document Files). Phase 2 Upon validation o f the prototype, the system will be deployed in a pilot site. - The process o f installing the computerized system will be accompanied by adaptation and introduction o f procedures and documentation. This will involve substantial interaction with, and training of, the trading community to ensure maximum efficiency and promote the Government's prioritypolicy interms o f liberalization o fthe trading process. Phase 3 Upon validation o f the pilot, the nationwide rollout o f the system to customs - offices will be carried out. 6 24. The implementation o f ASYCUDA will complement Government's decision to centralize customs functions and the reduction of Ministry/Agency functions at border points to no more than three. The centralization, which involves absorbing regional customs duties and personnel, was decreed in October 2007, and i s in the process o f implementation (the broad action plan can be found in the Project Document Files). At the same time, Government is committed to rationalize (and reduce) restrictions on exports/imports through, inter alia, the use o f the Single Administrative Document ( S A D ) proposed by the WCO and implemented in ASYCUDA; this document would capture the information required by all agencies at present operating at the border, and transmit to them the appropriate information. This will permit a drastic decrease inthe formalities today demanded at border checkpoints. 25. It must be emphasized that this project does not intend to be anything other than an important first step in the modernization o f customs. It i s clear that such a modernization program, although critically dependent on information technology, goes far beyond automated systems; nor is this particular automated system expected to be other than a first step permitting later enhancements and improvements. 26. In addition, the component will finance the strengthening, through training and provision o f some basic computer equipment, o f the L C D I T staff, to prepare them to maintain and run the ASYCUDA system once in operation. This component will finance PC familiarization and basic computer skills development for L C D staff and other relevant agencies to facilitate the successful adoption and long term sustainability o f the ASYCUDA World system. A staffing plan and a skills development plan will need to be developed and implementedto ensure the smooth operation and sustainability o f the new system. Key officials in other relevant agencies will receive similar technical training inbasic IT skills and relevant application-specific skills. ComponentB: Customs ModernizationSupport (US$2.02 million o f which US$2.02 million IDA) 27. WB experience suggests that while implementation o f the new customs IT system is likely to streamline and rationalize processes and procedures and will provide a sound platform for the introduction o f a range o f internationally agreed standards, it i s unlikely to realize its full potential unless a number o f complementary reforms and supporting operational changes are undertaken in parallel with system implementation. To ensure these complementary measures are introduced in a structured and cost effective manner the project will also finance a range o f capacity building activities and a long term international customs reform and modernization advisor. The Advisor will be responsible for assisting customs management in supervising the introduction o f the new systems, quality control and where necessary verification o f results. The Advisor will also assist inthe overall change managementprocess. 28. With support from the Advisor, a technical assistance (TA) sub-component will be implementedto support the introduction o fthe WTO Valuation Agreement, post clearance audit, a compliance improvement and management strategy, client service charters, intelligence and 7 riskmanagement development, introduction o fan advance rulingsregime, the development o f an integrity and anti-corruption strategy and a cost effective administrative appeals system. Local Foreign Total US$ US$ US$ Project Costby Component million million million A: Implementationof ASYCUDA World 0.35 3.64 3.98 B:CustomsModernizationSupport 0.37 1.64 2.02 Total Project Costs 0.72 5.28 6.00 3. Lessonslearnedand reflectedinthe projectdesign 29. There are several lessons learnt, both from project implementation in Lao PDR (cf. CAS) and with institutional development projects ingeneral, applied to this project. Inparticular, the need for: (i) Ownership.The project has been requested by Minister o f Finance with the direct support o f the Prime Minister. The importance o f the project to the Government can be clearly inferred by the fact that the LCD Director General has assumed the responsibility for managing the project, and that the project will be supported by an existing implementation unit, consistent with the Vientiane Declaration on Aid Effectiveness. (ii)Changemanagement.Experiencewithsimilarprojectshighlightedtheimportance o f change management where political support i s important and risks o f reversal are high. The project will therefore include a customs administration specialist from the start and for the duration o f the program. (iii)Partnershipsto achieve successful outcomes andleveragechange. Theprojectis directly supported and complemented by the work being done by the following development partners: IMF, AFD, EC, WCO, and Australia, and is assisted by parallel projects and tasks financed by the Bank. It was based on a diagnostic carried out jointly by the WB, IF agencies, EC, WCO, and the IMF. (iv) Visible, top management support. Senior management is intimately involved with the project, as seen in (a) above. In addition, a Steering Committee composed o f representatives o f senior management o f affected agencies as well as consultative private sector groups will provide direction and conflict management for the project. (v) Balancethe complexity and the scope of the project.A small, focused project was decided on, to carry out immediate activities, give credibility to customs reform, and provide capacity building for future change while not overwhelming the implementation capacity o f the LCD. 8 (vi) Avoid software development when an `off the shelf' package exists in the market. Given the severe I T capacity constraints facing the LCD and the need to implement procedures in line with existing international standards it was decided to implement an o f f the shelf system rather than finance the development o f a unique Lao PDR-specific applicationwhich involves a significantly higher level of risk. (vii) Simplify the disbursementprocess. The main bulk o f the Bank-financed portion will be a single contract, with a very few other contracts. Complementary activities are financed through other instruments, such as separate bilateral assistance, multi- donor trust fund, and WB's program inpublic finance management. (viii) Sustainability. Ensuringlong term sustainability o f IT systems implementedunder various donor-financed customs reform and modernization projects has frequently proved to be difficult due principally to insufficient budget support for hardware and software maintenance and periodic replacement. To overcome this potential problem the project includes the establishment o f a WTO-compliant ASYCUDA System User Fee and a project effectiveness condition specifying that all income obtained from the fee be retained in a special escrow account specifically dedicated to support the ASYCUDA system. To be WTO-compliant the fee can only cover the cost o f processing the import, export and transit transactions, therefore it i s expected to be modest and unlikely to add significantly to trade transaction costs. Advice from the Lao PDR public finance management team suggests that the approach i s consistent with the broader objectives in the public finance reforms, operations o f the Government, and the ongoing centralization reform. 4. Alternativesconsideredand reasonsfor rejection 30. A more comprehensive project was considered, but rejected due to a need to obtain immediate results for trade facilitation, support the centralization o f customs, and prepare the LCD for future reform activities by increasing the department's implementation and change absorption capacity. Limited managerial capacity and lack o f organization-wide experience in the management o f change precludes large-scale reform. Discrete, selected incremental changes will thus have more chance o f success and be instrumental in laying the foundations for further and more far-reaching future reforms. 31. The more limited project design provides the largest potential benefit for the resources invested and complements work being carried out by other donors (see below). It avoids the fate o f larger over-ambitious projects, profits from very similar work being done in neighboring Cambodia, permits economies o f scale for the Bank in that it consolidates some technical assistance and supervision activities, and complements the on-going TDF. C. IMPLEMENTATION 1. Partnershiparrangements 32. The assistance to trade-related activities in Lao PDR has been growing both in the number o fparticipating development partners and inamounts allocatedto trade (see Annex 2 for a more detailed description). The most direct donor influence on the Project i s the TDF, a Multi- 9 donor Trust Fund for trade-related assistance, to begin operation in July 2008, administered by the World Bank and supported by the EC and Australia. This trust fund will have a trade facilitation component that will support the provision o f trade-related information to related agencies and assist them in rationalizing their procedures to prepare them to utilize information gathered by ASYCUDA. A more detailed description i s given in Annex 11. Alongside this activity, Australia, which i s the IF Facilitator in Lao PDR, and the WB and other donors, are assisting the Government insettingup a sector-wide approach for trade-related assistance. 2. Institutionalandimplementationarrangements 33. Overall responsibility for the project i s vested with the LCD, whose Director General and deputies have assumed the direct responsibility for implementation o f the project and coordination o f development partner activities. They will be assisted by the international customs Advisor and guided by a high level Steering Committee chaired by the Vice-Minister o f Finance and integrated by various stakeholders including the Department o f Statistics in the Ministry o f Planning and Investment (DOS), the Ministry o f Industry and Commerce (MOIC), the Bank o f the Lao PDR (BOL), and representatives o f the private sector (see TOR inthe Project Document Files). The creation o f the Steering Committee i s a condition o f Effectiveness. The project will be implementedover a period o f five years. 3. Monitoringand evaluationof outcomes/results 34. The responsibility for monitoring and evaluation (M&E) rests with the LCD. The monitoring framework will be based on project indicators defined with technical assistance financed by the project preparationbudget and during implementation (see Section B2). Baseline values for the indicators as well as the indicators themselves will be progressively refined and agreed with the Bank duringthe Bank's semi-annual supervision visits. The Director General o f the LCD and his management team will be responsible for monitoring reform outcomes and results with the assistance o f the customs Advisor, under the overall supervision and guidance o f the Steering Committee. The management team will produce quarterly monitoring reports on project implementation performance. 35. The Project Team under the leadership o f the Steering Committee will conduct a semi- annual assessment o f progress against the targets o f agreed outputs and against the designed outcomes, identify issues to be addressed, and plans for the next steps in implementation. The Bank will conduct semi-annual implementation support reviews, which may coincide or follow the Steering Committee's assessments. A mid-termreview will be conducted during the third year to assess progress and any need for mid-course adjustments. An implementation completion review will be carried out jointly by the Bank and the Government at the end o f the project implementationperiod for a full evaluation o f accomplishments. 4. Sustainability 36. The introduction o f performance management systems and the strengthening o f management tools will increase accountability and result in more efficient and effective management. This should create a supply-and-demand spiral for increased management 10 effectiveness as the benefits o f improved results-oriented management are felt in day-to-day operations. 37. Change management activities will keep internal and external stakeholders informed on aims and accomplishments o f the project. These will transmit the mission and values o f the LCD, improving transparency and enhancing expectations o f the quality o f services o f the department both externally and internally. 38. The introduction o f an off-the-shelf system with accompanying standardized procedures will provide rigor and structure to customs processes, although a minimum degree o f adaptation to local conditions i s both necessary and contemplated. The new structure will help align unit and individual efforts with the goals o f the customs administration and create ongoing momentum for reform. 39. Escrowing o f a part o f the ASYCUDA user fee will provide for the system's sustainable maintenance and future development. The agreement in principle to establish a mechanism to escrow such fee, ina WTO-compatible way i s a condition o f effectiveness. 5. Critical risks and possible controversial aspects 40. This Section looks into the project-specific risks to the Project Development Objectives and those relatedto implementation. Rating" of Riskfactors Description of risk Ratinga of risk Mitigation measures residual risk Technicalidesign Possible absence o f adequate S Government has provided assurancesto M counterpart budget resources to this effect. Counterpart funding support the project and/or to requirements are modest and critical sustain the operation o f the components o f the project (e.g., customs IT systembeyond the life ASYCUDA) are fully financed by the o f the project. grant. Establishment o f a WTO- compliant fee will support the management, maintenance and operation o f the IT system. Government agreement to establish an escrow account for the fee i s a condition o f effectiveness. Status-quo resistance to customs Centralization was officially begun in centralization reforms or to October 2007 and i s slated for regulatory reform i s possible. completion at the end o f 2009, within While the central Government and the schedule for customs automation M O F as responsible agency are and modernization. Should additional fully committed to these reforms, time benecessary, project and system there are political risks stemming design allow for flexibility regarding from the fiscally decentralized this issue. Residual risk is mitigated by nature o f the Lao PDR's PFM change management activities to be system, and therefore some carried out by an experienced potential resistance to international customs advisor. 11 Ratingaof Riskfactors Description of risk Ratinga of risk Mitigation measures residual risk centralization from the provincial Informationdissemination campaign as authorities. Ifthese risks were to well as staff feedback mechanisms will materialize, they could delay serve to reduce resistance to change. centralization o f customs, which Finally, the fact that the automation may affect the full utilizationo f relies on the introduction o f a well the capacities offered bythe new known off-the-shelf package will automated system. reduce uncertainty with respect to expected changes and results. Implementation Lack o f sustained political S A Steering Committee chaired by the M capacity and commitment to the project or Vice-Minister o f Finance will provide sustainability possible change o f administration, leadership sustainability. An and weak capacity for reform experienced PIU within the M O F will manage the project. Moreover, direct project leadership will be provided by the DGCustoms, supported by a project implementation team and the international customs adviser. The appointment o f the adviser will assist the project team and progressively build internal capacity. Internal and external informationdissemination campaigns will contribute to continuity and reform cohesiveness. 11. Implementatic Risks Financial The initial risk is Substantial as S Cognizant o f the weak environment, M management Project will be implemented ina this project is designed to minimize the weak control environment where FM-related risk: (i)it will be financial management capacity i s implemented in a few procurements a serious constraint. with a large part outsourced to the system provider; (ii)an existing PIU within the M O F will be used; (iii) a computerized accounting system has been installed; (iv) separate bank account for the project funds will be opened; (v) financial management procedures and policies will use a project finance manual acceptable to the Bank; (vi) additional training for financial management staff inthe project will be provided ifneeded at project launch and subsequently. Procurement Weak procurement capacity. H The total number o f procurements M LCD has no prior experience in WE3 procurement. Implementation delays caused by S slow procurement. Social and The safeguards risk rating is L mvironmental considered to be low, as per safeguards Safeguards screening attached. 12 Ratingaof Riskfactors Description of risk 1 Ratinga of risk 1 Mitigation measures residual I risk safeguards risk i s considered to be Corruption Inaweak control environment, S This is a simple project with only a few L potential corruption issues require contracts, the majority allocated to one mitigation. contract for the IT system. A specific component o f the project is directed at developing and implementing an anti- corruption and integrity strategy for customs. Hence the residual risk is low. M 'Rating o f risks on a four-point scale according to the probability o f occurrence and magnitude o f adverse impact: Low (L), Moderate (M), Substantial (S) and High (H). 6. Grant conditions and covenants Conditions of Effectiveness: A Steering Committee to oversee the reforms has been established with agreed terms o f reference and is inoperation. A Customs Reform and Modernization Team chaired by Deputy Director General, charged with the day-to-day implementation o f the project i s inoperation. Government has issued a notice or letter signed by the Minister o f Finance that agreed in principle to an ASYCUDA System User Fee (WTO Compatible) to be established, with revenue escrowed for hardware and software maintenance and operation costs and future development/expansion o f the system. Legal Covenants: 0 The Steering Committee will be maintained duringProject implementation to provide oversight, policy guidance, overall coordination, and conflict resolution. 0 The ASYCUDA System User Fee (WTO Compatible) will have beenimplementedno later than 18 months after project effectiveness. As such, the Ministryo f Finance (MOF) will ensure that the funds collectedthrough the escrowed user fee are allocatedto LCD to cover the operating and maintenance costs and to ensure sustainability o f the enhancements achieved through this project. The ASYCUDA contract will havebeen signedno later than 3 months after Effectiveness. 13 On or about December 2011, the Lao PDR Customs Department (LCD) and the Bank shall jointly carry out a midterm review o f the progress made in implementing the Project. The project will operate with an adequate financial management system with appropriate accounts and inaccordance with generally accepted accountingprinciples. The LCD will furnish to the Bank semi-annual reports on the results o f monitoring and evaluation activities, on December 31 and June 30 every year, starting on December 2008. The Financial Management Reports (FMRs) shall be submittedto the Bank on a timely basis and inthe form and substance agreeable to the Association. Annual audited financial statements for the Project shall be submittedno later than six months after the end o f the Project's fiscal year. The Financial Statements shall be: Sources and Uses o fFunds (one o f the FMRs) and Balance Sheet. Counterpartfunding 41. Counterpart financial participation in the project will take the form o f budget-financed material, travel, workshops, office goods and other expenses; personnel assigned to the project; and the user-fees for maintenance o f hardware and software. D. APPRAISAL SUMMARY 1. Economicandfinancialanalyses 42. Implementation o f customs reform and modernization will yield significant payoffs in terms o f a more effective, efficient, transparent and accountable customs administration that will facilitate trade and improve the level o f voluntary compliance, while improving Lao PDR's investment climate and competitiveness. The project will improve the performance o f customs service by strengthening technical capacity and reducing integrity risks. More focused post- clearance verification and audit, and effective implementation o f risk based approaches to customs administration will reduce smuggling and encourage more traders to participate in the formal economy. A modern, proven integrated IT system, integrated tariff and a streamlined series o f import, export and transit procedures will improve efficiency, reduce clearance times and facilitate information exchange and better coordination with other government agencies. The economic and financialjustifications for the project are based on these benefits. 43. The economic benefits, resulting fkom the project are numerous; however, not all o f these are quantifiable. Some benefits, such as reduction in cost to traders as a result o f faster cargo clearance, are measurable while other benefits, such as economic impact o f reduced corruption, improved international competitiveness, greater transparency and higher level o f national security, are difficult to quantify. The project development objectives do not target increased customs revenue specifically, however, experience in other countries suggests that 14 improved customs procedures and practices, and the more effective use o f risk management and automation, will contribute to revenue increases. Financial analysis 44. The roll out o f a modem customs management system will be accompanied by improved customs practices. For instance, risk management will be improved leading to better targeted documentary and physical inspections, debt management and special import regimes will be more closely followed, and trader compliance will improve. These improved practices will benefit not only the customs duties levied by customs but also the domestic indirect taxes, whether the present turnover taxes or the value added taxes that may replace these turnover taxes inthe future. 45. By making some assumptions about the probable revenue-enhancing effects it is possible to calculate the internal rate o f return (IRR) and the net present value (NPV) o f the project investment. As suggested in the table below, an increase o f 2 percent o f revenue as o f 2010 would yield an IRRo f 22 percent and a NPV o f US$1.6 million. Ifrevenues are increased byfive per cent as o f2010 the R Rincreases to 188percent and the NPVto US$15.3 million. Two percent gain Three percent gain Five percent gain Internalrate of Return (IRR)inpercent 22 61 188 Net Present Value (NPV) inUS$ million 1.6 6.2 15.3 Economic analysis 46. Economic benefits are expected to result from lowering administrative and compliance costs and from the time saved by traders whose goods will be processed faster. Inthe absence o f hard data, this exercise has used best estimates based on the international literature on trade facilitation and the cost o f levying taxes both from the taxpayer and from the tax authorities' points o f view. 47. Rolling out a customs management system should result in an overall improvement in performance o f customs operations. This is expected to lead to reduced clearance times and greater levels o f predictability. Operating costs will be reduced for traders, who will need a lower inventory and thus less operating capital. They will also benefit from their ability to better satisfy their customers. Simplified customs procedures will reduce the compliance costs o f the users o f the customs services. Also customs administration costs will drop, as a result o f greater operational efficiency due to the introduction o f the new customs management system, largely because customs operating costs will not need to increase commensurately with the expected increase intrade volume. Annex 9 details the assumptions usedto quantify these cost savings. 48. Most o f the economic benefits are derived from the reduction in clearance times. Two assumptions were made. Inthe base case it i s assumed that clearance times are reduced by half a day and that the value o f a day saved i s equivalent to 0.25 percent o f the value o f the cargo 15 cleared. This yields an IRR o f 170 percent and a NPV o f US$176 million. Assumingthe same reduction in clearance time but taking for value o f a day saved in clearance as 0.5 percent rather than 0.25 percent o f the value o f the cargo cleared increases the IRRto 250 percent and the NPV to US$347 million. These estimated values would be even higher if it were assumed that the clearance times were to bereduced by more than half a day. 2. Technical 49. ASYCUDA i s a mature system with a proven track-record o f over 70 installations world-wide. UNCTAD has extensive experience in implementing the system in similar environments. No technical constraints exist. Additional technical assistance to be financed by the project is in keeping with international standards and the WCO's capacity building framework. 3. Fiduciary FinancialManagement 50. The initial risk i s Substantial as Project will be implemented in a weak control environment where financial management capacity i s a serious constraint. Cognizant o f the weak environment, this project i s designedto minimize the FM-related risk: (i) it will be implemented in a few procurements with a large part outsourced to the system provider; (ii) existing PIU an within the MOF will be used; (iii) computerized accounting system has been installed; (iv) a separate bank account for the project hnds will be opened; (v) financial management procedures and policies will use a project finance manual acceptable to the Bank; (vi) additional training for financial management staff in the project will be provided if needed at project launch and subsequently. These mitigation measures and the experience that the existing staff o f the PFMSU have picked up duringthe implementation o f the FMCBP are adequate to lower the Project's risk to Moderate after mitigation. Procurement 51. Procurement for the proposedproject shall be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits"; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreements for the proposed Project and as per the agreed procurement plan. The L C D has weak procurement capacity as it has no prior experience managing World Bank projects. However, the project has been specifically designed with only a few procurements to mitigate this risk. Procurement activities will be carried out by the LCD, with the assistance o f the Public Finance Management Strengthening Unit (PFMSU) to provide guidance and facilitate the procurement/ selection process leading to the signing of the contracts, whereas the technical inputs will be provided by the customs technical experts. Therefore, the overall procurement risk i s expected to be `Moderate'. 16 4. Social 52. The project does not include activities that may have significant social risks or deal directly with the population at large. A side benefit o f the project would, however, be reduced transaction costs therefore creating an incentive for higher levels o f trader compliance. The reduction in compliance costs for traders, in terms o f faster clearance times and less corruption may be transferred to consumers inthe form o f lower prices o f goods. 5. Environment 53. The Project will finance consulting services, goods, information systems, and training. There are no civil works or any activity that will have negative environmental implications. The project i s classified under category C. 6. Safeguard policies 54. There are no adverse social safeguards implications (involuntary resettlement, Indigenous Peoples, etc.). Table 5: Safeguards Table Safeguard PoliciesTriggered by the Project Yes No Environmental Assessment (OPIBPIGP 4.01) [I [x 1 NaturalHabitats (OPIBP 4.04) [I [x 1 Pest Management (OP 4.09) [I [x 1 Cultural Property (OPN 11.03, being revised as OP 4.11) [I [x 1 Involuntary Resettlement (OP/BP 4.12) [I [x IndigenousPeoples(OD 4.20, being revised as OP 4.10) [I [x Forests(OP/BP 4.36) [I [x Safety of Dams (OP/BP 4.37) [I [x 1111 ProjectsinDisputedAreas (OP/BP/GP 7.60)' [I [x 1 Projectson International Waterways (OPIBPIGP 7.50) [I [x 1 7. Policy Exceptions and Readiness 55. None. * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputedareas. 17 Annex 1: Project Background Country context 1. The economic outlook for Lao PDR remains favorable, but rising inflation poses a risk. GDP growth remained stable at above 7 percent in 2007 and this is expected to continue into 2008. The inflation rate, however, that had earlier fallen to 4.5 percent in2007 (compared to 6.8 percent in 2006) has been climbing in recent months and reached about 6.5 percent in January 2008. The government's fiscal position continued to improve in FY2006/07 owing to higher-than-targeted revenue collection and lower-than-planned expenditures, while implementation o f the public finance management reform agenda has been steady. And although the legal framework is in place to support international trade and private sector activity, implementationremains incomplete. 2. Notwithstanding a more challenging international economic environment, the economy is expected to maintain a rapid growth rate. Real GDP growth i s estimated at 7.1 percent in 2007 and projectedto rise to 7.6 percent in2008. Only around 2 percentage points o f this growth is expected to come from new hydro and mining projects (see Figure below), including construction o f four hydro-power dams and a large copper plant. The remaining 5 percentage points i s expected to come through investments in plantations for agricultural crops and industrial forestry, steadily rising tourism revenues, and newly emerging food and nonfood processing industries. Annex Figure 1: GDP growth and inflation, 2000-2008 Source: recent staff estimates andprojections. 3. Having dropped to historical lows in 2007, inflation picked up recently to around 6 percent, the target set by the BOL for all of 2008. This upwardtrend i s due mostly to higher oil and food prices -the latter the result o f low grain harvests caused by badweather in2007 and by culling poultry at risk o f propagating avian flu. The rise inthe food CPI has slowed inrecent months although food inflation remained highat 6 percent inJanuary 2008. 4. High commodity prices have proved to be a mixed blessing. Fuel prices pushed up the cost o f transport, construction, land clearing, and agriculture. But strong non-oil commodity prices have proved to be a net benefit, since Lao PDR exports metals (copper, gold, tin, and other) and non-metal commodities (rubber, sugar and other ago-industrial products). Inthe last 18 two years, production and exports o f Lao agricultural products (maize, coffee, rice, fi-uits and vegetables) have also increased due to growing demand from neighboringcountries. 5. Given recenttrends, the government-setinflationtarget of 6 percentwill be difficult to meet. This is partly due to a highlevel o f circulation o f U S dollars and Thai baht in the Lao PDR economy, that limits effectiveness o f the BOL's monetary policy. Notwithstanding this, the Government has established an inter-agency committee with each agency assigned tasks to help tackle the inflation problem. Included inthis committee are the B O L to maintain tight monetary policies and stable exchange rates, MOF to sustain good fiscal Performance and revenue management, Ministry o f Agriculture and Forestry (MAF) to promote food and agricultural production, and Ministry of Industry and Commerce (MOIC) to monitor retail prices in the country andwarn o f incipient price increases. 6. The kip has appreciatedagainstthe US dollar but remainedsteady againstthe baht, and the respective real exchange rates have moved similarly. Foreign exchange reserves increased sharply to about US$540 million in 2007 (more than 5 months o f non-resource imports) and are expected to rise further given expected trends in the prices for mining and agricultural exports, tourism receipts, and FDI inflows. At the same time, imports associated with large mineral and hydro projects in the pipelinewill exert pressure on the external current account deficit. 7. The government's fiscal position has continued to strengthen as a result of which external debt ratios have retreated slightly from their elevated levels. The government achieved its revenue targets for a second consecutive year; with revenues increasing from 12.7 percent o f GDP in 2005/06 to about 13.8 percent in2006/07. Ifexpenditures remain unchanged, the overall budget deficit is likely to be close to 3 percent o f GDP in FY2006/07. Lao PDR's external public debt burden remains elevated. At end-2006, Lao PDR's stock o f public and publicly guaranteed external debt in present value terms was equivalent to 70 percent o f GDP, 135 percent o f exports, and 377 percent o f fiscal revenues. All three debt stock indicators exceed the indicative sustainability thresholds for countries with comparable CPIA ratings, placing Lao PDR at "high risk o f debt distress" according to IDA'Sdebt sustainability framework. However, debt servicing indicators remained under indicative thresholds due to the high concessionality o f debt (75 percent). The proposedproject will offer measures that will impact on revenue increases andcollection rates. 8. The reform agenda for public financialmanagementis beingimplementedsteadily. A new Budget Law was promulgated in early 2007 allowing recentralization o f the Treasury, Customs and Tax Departments, including work on a new revenue sharing mechanism. The proposed project plays an important role inthe process o f customs centralization. Progress on a revised Chart o f Accounts (COA) i s progressing well and i s expected to be deployed in the FY2008/09 budget. To strengthen audit performance and oversight o f the State Owned Enterprises, a new Audit Law was promulgated by the National Assembly in July 2007 to allow the Supreme Audit Office (SAO) to directly report to it insteado f the Prime Minister. 9. Progress is being achieved in reforming private sector and trade policies but implementation continues to lag. The Negative List o f Business Activities under the new 19 Enterprise Law was approved in November 2007. The new Mining Law and implementing decree of the Tourism Law are other important contributions. To facilitate cross-border trade, the government reduced the number o f agencies at border check points from sixteen in2006 to three (immigration, customs and quarantine) in 2007. A new Commercial Banks Law was endorsed and amendments to the Presidential Decree on Foreign Exchange and Precious Metals were adopted in2007. It i s now important these new laws andimplementingdecrees are implemented. Sector Context 10. The NSEDP estimates that necessary level of investment to achieve targeted economic growth rate will be around 26-28 percent of GDP, out o f which 16-17 percent i s expected to be mobilized from the private sector, including FDI. Currently, the country enjoys similar volumes o f FDI, but most o f it comes to the natural resource sector, and investment in other sectors would be neededto achieve targeted growth. The NSEDP sets an ambitious growth target o f 7 percent per year for 2006-2010, with the objective o f graduating from the least developed country (LDC) status by 2020. 11. Private sector still faces significant constraints to doing business and exporters face higher regulatory burden than non-exporters. These constraints include poor infrastructure, cumbersome regulations, discretionary taxation, limited access to finance, and limited access to essential information and business support services. Two analytical studies conducted by the World Bank in close cooperation with other development partners, identify and prioritize the key constraints to a strong investment climate and export competitiveness in Lao PDR. The Joint WB/ADB ICA identified key investment climate constraints that private enterprises face. According to the studies, priorities in improving the investment climate should be to improve infrastructure, especially electricity transmission lines, streamline regulations, eliminate discretion in taxation, improve access to formal sources o f finance, and to improve regulations and processes specific to exporting and importing goods. The studies also highlighted the differences between investment climate for exporters and non-exporters and identified trade- relatedregulations and processes as key constraints. 12. Lao PDR ranks 117 out of 150 economies, with respect to its Logistics Performance Index (LPI)3 (see figure below). Exposure to international competition is growing with the gradual opening o f the domestic market following trade liberalization commitments made under AFTA and inpreparation for future membership inthe WTO. Although Lao PDR is performing better than most landlocked countries, to become competitive in the region, significant improvement will need to be made, especially inthe weakest LPIindicators such as the ability to track and trace shipments, infrastructure quality, and efficiency and effectiveness o f customs and other border procedures. A DTIS led by the World Bank and MOIC provided analytical background for the ongoing reforms intrade-related sectors. LPIaggregates the performance inseven areas, including efficiency and effectiveness o f customs and other border procedures, logistics costs (including freight rates), and infrastructure quality, the ability to track and trace shipments, timeliness inreaching a destination, and the competence o f the domestic logistics industry. 20 13. In spite of significant improvements achieved in recent years, both by the LCD and other border related regulatory agencies, the processing and clearance of import, export and transit goods in Lao PDR remains relatively inefficient and time consuming and presents a significant obstacle to traders engaged in legitimate cross border commercial activity. The current regulatory regime and clearance processes are administratively complex, heavily dependent on inefficient and resource intensive physical inspections, excessively reliant on manual processing o f paper-based documentation, characterized by excessive face to face interaction between traders and government officials, and are hampered by a lack o f uniformity intreatment across the country. Inaddition, the institutional capacity of the LCD and other key government agencies to apply internationally accepted approaches to modem border management i s relatively weak. Traders, regardless o f their volumes, transaction history, compliance record and corporate governance arrangements are subject to essentially the same excessive controls and little incentive exists for traders to strive to improve compliance. Annex Figure 2: Lao PDRLogistics Performance Index LPI 3'5 T Domestic Iqlistics msts lnfrastrunure Tracking h tracing lnlernamnal shipments 1 Logistics mmpetence -+-Vietnam &Cambodia - - - Low inmme(income average) -Lao PDR i C M o n Q o l i a 14. Recent reforms under the PRS04, have introduced significant simplifications in the border procedures; however, challenges in this area remain. Up to ten agencies used to be operating at the border but the government has taken a decision to limit the number o f agencies present to three (PMO Notice 406, 13 March 2007). While this development i s positive, full implementation o f the government decision will take some time. Licenses, approvals and certificates contain similar if not identical information, and documentary and physical inspections are unnecessarily duplicative. This, coupled with excessive face to face interaction betweentraders and government officials, leads to inefficiency and loss o fprocess integrity. 15. Notwithstanding the efforts to improve customs procedures, a fully functional IT system remains a key constraint to implementation of the NSEDP's ambitious export growth goals. While the Government has made some progress inimprovingthe effectiveness o f its customs operations in recent years and has now taken the difficult decision to centralize all 21 customs operations under one central administration, its efforts continue to be hampered by the lack of a comprehensive and fully functional customs IT system. As a result, the Government has taken a decision to abandon further development o f its current system which provides extremely limited fbnctionality in favor o f the procurement and implementation o f a proven customs IT system. After undertaking an assessment o f alternative systems4 the MOF has decided to procure the Automated Systems for Customs Data (ASYCUDA) World, a system developed by UNCTAD. There are over 70 installations o f ASYCUDA worldwide5, including in several neighboring countries. The Prime Minister endorsed the decision and a formal instruction to this effect was signed in2006. 4Technical support has been provided by the French Government under a grant from the Agence Franqaise de Dkveloppement. This number refers to all versions ofASYCUDA, of which Worldis the latest. 22 Annex 2: Major RelatedProjectsby the Bank and other Agencies Relatedlendingservices by the World Bank: TradeDevelopment Facility (TDF) (US$6.45 million, 2008-2012). A multi-donor trust fund administered by the WB with contributions from EC and Australia. The TDF development objective i s to support the establishment o f a sector-wide approach in trade sector and to implement initial activities facilitating trade and cross-border movement o f goods and increasing the capacity o f the Government to undertake specific tasks related to regional and global economic integration. For detailed project description see Annex 11. GMS regional trade project (US$30 million, under preparation). This project is still under preparation and will possibly include the following components complementary to the proposed project: (1) technical assistance for implementation o f a transit regime; (2) support to a modern clearance policy, with the options o f border or inland clearance, thus supplementing the transit dimension; (3) investment and technical assistance to improve border management (including design and construction o f border stations, IT support, station management) ; (4) SPS (including surveillance and risk management, regulatory reform, laboratories). Relatednon-lendingservices by the World Bank: Diagnostic Trade and Integration Study (DTIS) has been completed in the context o f the Integrated Framework (exercise led by the GOL and WB with participation of the other core IF agencies and the IF Facilitator. The DTIS identified major impediments to increasing exports and export competitiveness and suggested the ways forward, including an action matrix that i s now beingimplementedthrough the M D T F TDF. InvestmentClimate Assessment. A joint AAA report with ADB, it is based on a survey o f firms in six provinces and Vientiane, completed in October 2005. The firms were surveyed to identify the main constraints to doing business in manufacturing and tourism. The final report was launched and disseminated in mid 2007. Exporters were found to experience higherregulatory burdenandhigher inspection rates than non-exporters. Financial Accountability (IDF grant US$0.30m). This grant aims at improving Financial Accountability in State Owned Enterprises (SOEs) and Private Enterprises. The project focuses on capacity building and introduction o f international accounting and auditing standards and related training. The project also supports strengthening o f LICPA and improvement o f legal framework for accounting and auditingparticles. Efforts are currently underway to translate international accounting standards into local language. Civil Service ReformNote (planned for FY09).The WB is supporting the GOL inmoving toward developing its Civil Service Reform Strategy for enhancing performance and service delivery. PACSA i s developing a Prime Minister's Decree to recruit and retain staff in remote areas and to manage contract staff. The formal review o f civil servants' job descriptions i s nearing completion. The GOL issued an instruction on performance management and organized a highlevelworkshop fromwhich to disseminate it inJuly, 2007. Four provinces and two ministries have been selected to pilot the new performance management system. 23 Related assistance of other agencies: 1. At the regional level, the ADB is providing support to Lao PDR in order to achieve regional integration in the GMS framework. With the forthcoming completion o f the road network, Lao PDR will become an important transit country given its central location inthe sub- region. Trade facilitation will be increasingly important to take full advantage o f the new road network. ADB i s working in this area with a special focus on completing multilateral and bilateral agreements that are compatible also with the ASEAN Single Window. So far, ADB has not providedcomprehensive TA inthis area, but has been instrumental inpromoting progress in the legal framework for sub-regional trade facilitation. ADB i s at present launching a major study to identify needs and gaps in this area. The study will cover all GMS countries and will preparethe ground for settingup a regionalproject. The mission established contacts with ADB offices in Vientiane and Bangkok in order to compare notes and exchange information. Other important regional initiatives are being implementedplanned by the EC and by Australia. 2. Inorder to ensure maximum coordination and cooperation among GOL's ministries and agencies and with the donors at present engaged inthis process, the possibility o f establishing a Trade Facilitation Task Force i s being canvassed with the GOL. TORSfor the proposed Task Force are being developed. Its mandate will be limited and focused on implementation o f the TF program established as part o f the DTIS Action Matrix. The proposed Task Force could be co- chaired by a representative o f the GOL (possibly MOIC) and a representative o f the key development partners (possibly on a rotating basis). Participation o f private sector will also be sought. ADB Regional TA on Implementing the GMS Agreement on Facilitation of Cross-Border Transport of Goods and People (Phase 11, proposed amount US$1.8m, 2006- August 2008): the RETA aims to assist in finalizing agreement on and implementingthe GMS Cross-Border Transport Agreement (CBTA) and its annexes andprotocols. The particular emphasis o f the TA will be on supporting the GMS countries to effectively implement the CBTA. Regional TA on Support to Trade Facilitation and Capacity Building in GMS (US$l.Sm, 2006-2008). The RETA will primarily provide initial support for the implementation o f the strategic framework for action on trade facilitation. This includes building capacity o f the trade facilitation focal points and the core team in performing their crucial role as "drivers" of the SFA-TFI process at the national level, by assisting them, and subsequently the SFA-TFI mechanism to undertake "gap analysis" or other required analysis in the four identified areas: customs, inspection and quarantine measures, mobility o f business people, and trade logistics. The RETA will also aim to provide continuous and practical support to the GMS Trade Facilitation Working Group inthe exercise of its functions and responsibilities. Duringimplementation of the RETA, continuous coordination with other donors in support o f SFA-TFI will be undertaken. The RETA complements the actions initiated through the GMS Cross Border Transport Agreement. 24 Australia/AusAID Support for the Role of Integrated Framework Facilitator (A$1.5 million, 2006-2008). Australia has been invited by the Lao PDR Government to serve in the role of IF Facilitator to support Lao PDR participation in the IF process. Australia funded the participation o f an expert consultant in the DTIS main mission to the Lao PDR (2005), and will continue to work with the GOL's IF Secretariat and Focal Point, as well as with the IF core agencies (led by the World Bank and UNDP), inprogressingthe IF agenda in a positive direction over the coming few years. Australian assistance includes funding for an IFF Specialist and targeted support for DTIS Action Matrix implementation. Trade Analysis and Reform Project (A$5m, 2005-2008). Target countries: Lao PDR, Cambodia, Thailand, Vietnam. Project interventions will focus on buildinganalytical and research skills in order to strengthen capacity for trade policy analysis. The project has three components: (1) to improve understanding of the role o f analysis in trade policy development and the capacity to incorporate analysis into the policy development cycle; (2) to strengthen the capacity o f researchers in government agencies and the research community to deliver hightrade policy relevant analysis; and (3) to deliver a high quality capacity buildingproject incost-effective and cooperativeway. Sanitary and Phyto-Sanitary Capacity Building Project - SPS CBP (A$3.9m, 3 years (2004-2007). The program i s for support o f eight ASEAN focal countries: Philippines, Indonesia, Malaysia, Thailand, Vietnam, Cambodia, Lao PDR and Myanmar. The goal o f the project i s to enhance the capacity o f the ASEAN focal countries to meet international SPS standards and the requirements o f importing countries consistent with the WTO SPS Agreement. The three components focus on SPS-Trade linkages, Plant Health and Animal Health. EuropeanCommission(EC) Asia Invest-Open Resource for Commerce in Horticulture aided by species Identification Systems (Orchis) (Euro 0.3m, April 2006-March 2009). The project aims to enhance the export capabilities o f Lao PDR in the valuable flora o f the country by promoting best practices in trade aided by open source based IT&C tools furthering the integration o f Lao PDR in information society. The project also aims at reinforcing institutional capabilities o f Lao PDR to better adhere to international commitments made inconventions like CITES. EC-ASEAN Intellectual Property Rights Co-operation Programme ALA/96/25 (Euro 0.5 million 2005-2007 National Component Lao PDR). The objective o f this programme i s the development o f a modem intellectual property system in Lao PDR. This includes technical assistance in the drafting o f new legislation on Patents, Copyrights, and Industrial Design. Particular attention will be paid on TRIPS compliance, the judiciary and the enforcement. Open Resource on Conservation Agriculture for Trade and Development (ORCATAD) (Euro 0.3m 2007-2009). The action aims to enhance the export capabilities o f Lao PDR in eco-friendly cash crops, promoting best practices in conservation agriculture aided by modem information and communication technologies and furthering the integration o f Lao PDR in to the global information society. The action aims also at reinforcing 25 institutional capabilities o f the intermediary business organisations such as LNCCI (Lao PDR National Chamber of Commerce and Industry) by focussing on the niche market and new business opportunities for eco-friendly agriculture related products in the international market. France 0 TrainForTrade: Training and Capacity Buildingin the field o f International Trade, FSP 2002-95 (US$2.3m for Lao PDR and Cambodia, 2003-2008). The mainproject activities include: (1) training o f trainers (TOT); (2) use of distance learning; and (3) cooperation betweenuniversities o f LDCs. Operational changes will be undertaken in the economic sectors identified by decision-makers and authorities of the countries involved. The project i s implementedby UNCTAD together with MOIC. 0 FranceAgence de DCveloppement (FAD) is providing technical assistance to the LDC and Treasury focusing on: (i) training in planning and decision making; (ii) automation training and familiarization (study tours); (iii)creation o f a training center; (iv) developing an automation strategy; and (v) provision o f general policy advice. InternationalTrade Center ITC (Fundedby Swiss SECO) - 0 Support to Trade Promotion and Export Development in the Lao PDR (US$1.704m, 2004-2007). The main objective o f this project i s to build up the trade promotion and export development capacities o f Government, trade support institutions and exporting enterprises in the Lao PDR, in close technical cooperation with Cambodia and Vietnam, so that in turn they could induce the expansion and diversification of exports. Areas o f activities include: (1) development o f export strategies at the national and sectoral levels; (2) establishment o f an operational trade support network at the national level between Government, trade support institutions, product associations and exporting enterprises, led by strengthened trade promotion organizations; (3) improvement of knowledge, strengtheningo f skills and development o f capacities o f training institutions to provide training in trade promotion and export development to exporting enterprises; and (4) establishment o f a trade information capacity at the national level servicing the specific needs o f trade support institutions and exporting enterprises. Japan Investment Promotion Support to MPI (US$0.4m, JICA: Advisor and Training, 2007- 2009). This technical assistance mainly aims at promoting investment to Lao PDR smoothly, givingproper advice on the problems o f investment situation inLao PDR. Second Mekong International Bridge Construction Project (US$34m, 2000-2007). The project aimed at the bridge construction and it has already started operation in January 2007. Supplemental construction works including Common Control Area (CCA), the facility which enables single-stop inspectionby Thai and Lao PDR officials, are currently on-going. The CCA has been plannedinaddition to the bridge construction itself, inlight o f the recent progress o f trade facilitation agreement. The similar construction i s supposed to take place inThai side as well. 26 Singapore Trade related courses (US$1.4mY ongoing since 1992). During the period, trade/economic courses were conducted at the Lao-Singapore Training Centre in the fields o f business communication, international trade finance, consumer protection and export competitiveness strategies. Lao PDR officials also attended other trade related courses conducted in Singapore, including courses in trade and investment promotion, trade negotiation, national payment and settlement systems, and Central Bank accounting. UNDP Enabling more effective Integration of Lao PDR into the ASEAN Phase I1 (UNDP - US$0.57mY2006-2009). This project will build on Lao PDR' successhl chairmanship o f the ASEAN StandingCommittee and the positive achievements o f the UNDP Preparatory Assistance Project. The new project, implemented by the ASEAN Department o f the Ministry of Foreign Affairs aims to increase national commitment to the process of ASEAN integration, improve capacity to coordinate ASEAN affairs within the GOL and enhance national capacity to assesspolicy implications o fregional integration. Supportfor Lao PDR's Integration into the International Trading System (US$0.64m: AusAID - US$0.59m and UNDP - US$0.32m. 1999-2007). The main objectives o f this project are to provide technical assistance to GOL in the areas o f WTO accession, improvement o f economic and trade policy formulation and integration. The project has two components: (1) support for Lao PDR accession to the WTO, including preparation o f Memorandum o f Accession, establishment of a minister-level National Steering Committee and its secretariat, identification o f trade focal points in line ministries, and capacity building; and (2) integration impact studies inthe areas o f laws and regulations, which shouldbe changedto conform with WTO agreements, customs valuations, rules o f origin, technical barriers to trade, quarantine, sanitary and phyto-sanitary measures and land transport policies. This project will close in December 2007 but support will continue to beprovided through the Window I1project mentionedbelow. (IFWindow I1finds - US$0.3m, 2007-2009; supportedbyIFcore agencies). The objective Capacity Building and Technical support to Lao PDR in the WTOaccession negotiation o f the IF initiative is to promote the integration o f Lao PDR into the global economy through export growth and increased competitiveness. The objective o f this project is to: (1) Improve capacity o f the GOL (mainly from MoIC) to prepare and negotiate a pro-poor andpro-growth WTO accession agreement and to improve capacity o fthe Lao PDRWTO negotiation team to coordinate the working party; (2) to improve capacity o f the GOL (mainly from MoIC, MAF, STEA, and BOL) to negotiate market access in the goods and services sectors; and (3) to ensure WTO accession negotiations are widely disseminated at central andprovincial level. Institutional strengthening of the IF coordination and implementation structures (IF Window I1 funds - US$0.22millionY2007-2008; supported by IF core agencies). The National ImplementingUnit (NTU) will help remedyproblems such as (i) o f dedicated lack staff responsible for overlooking project management (ii) low level o f project management capacity within government and (iii) weak inter-ministryand inter-department coordination 27 systems byproviding a core o f dedicatedstaff responsible for coordinating in-country trade related activities and for implementing the DTIS Action Matrix. The key objectives of the project are to (I) institutional capacity to coordinate and implement trade related Enhance policies and projects within the Government o f Lao PDR; (11) Enhance coordination management capacity with relevant line ministries involved inthe IFprocess; (111) Enhance national capacity to assess the policy implication o f trade on growth, economic development, andpoverty alleviation throughNIU's support and coordination. Capacity Buildingfor MOIC'S Department of Import and Export (DIMEX) in Rules of Origins (ROO), Product Specific Rules (PSR) and Operational Certification Procedures (OCP) (IF Window I1funds - US$O.15mY2007-2009; supported by IF core agencies). The project focuses on building capacity of DIMEX, which is a newly created department, and on strengthening technical capacity on export procedures, specifically on ROO, PSR and OCP. The project will focus on capacity building to DIMEX and technical assistance to the certificate o f origin division on its various implementation commitments in ASEAN. In addition, the project will focus on developing a culture o f customer service since one o f DIMEX's central mandates i s to provide service to the private sector. Support the shijit of the Garment Industry from contract manufacturing to direct export (Phase I)(IF Window I1funds - US$0.32m, 2007-2008; supported by IF core agencies). The project aims to support the Lao garment industry to address the challenges that the garment sector i s facing in the market and to operate smoothly its shift from contract manufacturing to direct export. This shift would ensure a greater value addition and value retention of the sector in the Lao PDR and support the Lao PDR garment producers in gaining full management o f their purchasing, production, promotion and distribution activities and therefore develop their own capacity and strengthen their position in the international market based on more reliable advantages than preferences under Generalized System o fPreferences or Most FavoredNation Strengthening capacity for National Human Development Reporting NHDR (UNDP- US$0.778m; June 2004-December 2007). The third NHDR International trade and human development" was successfully launched in December 2006. The report emphasizes how trade impacts human development and also how human development impacts trade. It identifies present and future opportunities and challenges for Lao PDR as well as the potential strategic measures and policies for the best possible path for the future. Dissemination activities continue with the publication o f an executive summary in both Lao and Englishand the release o f a radio program. The project i s to be extended to allow for the production o f the fourth NHDR which started this year. The international lead co- author was recruited, the research team has been formed and the data collection process is now underway with village and household surveys. This 4threport will explore the issues around employment and livelihoods consideringthe multipleaspects and challenges for the Lao PDR from a humandevelopment lens. The UnitedStates (USA) ASEAN Market Analysis Capacity by ITC7WTOAJNCTA. (US$238k inFY 2005,2005- 2007). Under the project, WTOLJNCTAD's International Trade Center (ITC) has created an ASEAN market analysis portal for users the ASEAN Secretariat and member countries. The portal includes three online tools for market analysis: (1) TradeMap, 28 which facilitates trade flow analysis on over 5,300 products for 180 countries, (2) Market Access Map which provides information on tariffs covering 170 importing countries and 220 exporting countries and territories, and (3) Product Map, which contains business intelligence information for 72 industry sectors. In addition to providing technical assistance and training materials, the project has plans to deliver 5 workshops to the ASEAN Secretariat and users in ASEAN member countries by its completion date o f April 2007. 29 Annex 3: ResultsandMonitoringFramework lopment e To facilitate trade by improving the Customs Efficiency Outcome indicators provide an efficiency and effectiveness o f Reductioninmean import, export, overarching framework for Project customs administration. The project and transit clearance times for management, monitoring, progress will simplifycustoms procedures, commercial shipments by 10 reporting and periodic reviews. In eliminate duplicationand percent per year. addition, these indicators: redundancy, reduce transaction costs and time to clear goods, and Reduction in the number o f steps 1 Provide basis for the ease o f increase transparency and to clear commercial shipments by doing business and business accountability. 25percent. climate; Customs Effectiveness 1 Provide feedback to overall Increase inthe ratio o f national development plans detectionslinspectionsby 10 intended to enhance Lao PDR's export competitiveness. percent per year. Increase inclient perceptions o f customs performance and integrity, as measuredby World Bank surveys by 25 percent. Improved customs processes and procedures data submission for customs progress inimplementing the new declarationprocedures by the customs processes and procedures. end o f 2011. Improved ICT infrastructure which Prototype developed and The indicators will track the supports the implementation o f the accepted by government; progress o f implementing new customs processes and Accepted prototype validated at sustainable and reliable ICT procedures and is sustainable and pilot site; infrastructure. reliable Prototype replicated at remaining checkpoint sites; IntegratedIT system i s inplace by 2010, pilot completed and reviewed by 2011, and fully operational inall implementation sites by 2012; Appropriate front line staff and affected traders trained in advance o fpilot testing and pre nation wide rollout. 30 * 4 a e B h- 3ci 13 2 3 2 0 n 0 2 n 2 n Annex 4: Detailed Project Description 1. Inrecent years there has been a growing recognition of the importance of efficient and effective customs administration to the economic and social development prospects o f countries. A well-performing and ethical customs administration can facilitate trade and investment and increase confidence in the quality and integrity o f government institutions, and make a major contribution to effective revenue mobilization. 2. Customs is the key government agency capable o f responding to the need to facilitate trade while at the same time collecting revenue due and protecting society from a range o f social and national security threats. Striking an appropriate balance between these apparently competing demands i s the key challenge facing all customs and border management agencies today. The way a customs administration responds to this challenge does much to shape the external and internal perceptions o f a country's investment environment, institutional framework and quality o f governance. Customs i s also uniquely positioned to co-ordinate, consolidate and simplifyborder-relatedregulatory formalities on behalfo f all government stakeholders. 3. The Lao PDR Customs Trade FacilitationProject will therefore: (9 Implement a well tested and widely usedfully automated customs IT system; (ii) Provide technical assistance ina small number o f key areas that will assist Lao PDR to meet WTO requirements particularly in respect to the implementation o f the WTO Valuation Agreement; (iii) Provide detailed change and project management support to ensure the effective implementation and coordination o f various project and donor inputs into day to day operations; (iv) Provide accurate base line data to ensure effective monitoring o f customs trade facilitation performance over time. 4. Inview ofperceived low implementation capacity and the need for reduced uncertainty and quick implementation, the project has beendesigned with only two components: lion) Local Foreign Total US$ US$ US$ Project Costby Component million million million A: ImplementationofASYCUDA World 0.35 3.64 3.98 B:CustomsModernization Support 0.37 1.64 2.02 Total Proiect Costs 0.72 5.28 6.00 32 Component A: Implementation of ASYCUDA World (Total Financing required: US$4.22 millionofwhichUS$3.98 million IDA) Sub component 1: Implementationof ASYCUDA ASYCUDA itself i s provided free of charge by UNCTAD. 5. This component will finance installation costs o f the ASYCUDA system and some related activities including translations, modifications, training, equipment, communications infrastructure and implementation o f the system in three phases (see draft TOR in Project Document Files): Phase I A fully functional prototype will be developed by the project team inthe LCD - headquartersinVientiane. As a preliminary to this phase, a mappingo f the current export and import processes has been carried out, to identify all documentation requirements (see TOR inProject Document Files). Phase 2 Upon validation o f the prototype, the system will be deployed in a pilot site. - The process o finstalling the computerized system will be accompanied by adaptation and introduction o f procedures and documentation. This will involve substantial interaction with, and training of, the trading community to ensure maximum efficiency and promote the Government's priority policy interms o f liberalization o f the trading process. Phase 3 Upon validation of the pilot, the nationwide rollout of the system to customs - offices will be carried out. This phase will include deployment of the transit and temporary admissions modules and the cargo manifest module and remaining functionality as described below. ASYCUDA World implementation for the L C D will include the following modules: e Cargo and manifest processing; e Declaration processing; e Bonds and warehousing; e Transit control; 0 Transaction valuation and price analysis; e Payment processing and revenue accounting; e Release notification; e Security/guarantee management; e Riskmanagement and inspection; e Exemptions management; e Selection intelligence and audit support; e Trade statistics and management information; e Data exchange; 33 0 Miscellaneous items such as Laotian language support, multiple currency support, help desk, international standards, file transfer, download and upload capacity from other systems, data conversion and e-Commerce. 0 Additional Standard COTS to support customs ICT Infrastructure: 0 Operating systems for all servers and desktops/workstations; 0 Database Management System; 0 Network Management System; 0 Communications system andprotocols; 0 Web based andED1based software; 0 Systems development tools; 0 Antivirus tools. 6. The subcomponent will also finance the hardware and network infrastructure required for border stations, regional customs offices and L C D Headquarters. The hardware will include: Servers for data base, application, file/print and web servers; Backup and failover systems; Environmental Controls for Data Center including fire suppression; 0 UPS sized to support servers and network equipment and 20 percent (for future expansion); Workstations/PCs; LocalArea Networks infrastructure (cabling, routers etc); 0 Wide Area Network (leased point-to-point dedicated connections) for national connectivity. Bandwidth requirements to be determined by expected number o f transactions and volume o f data transfers. Subcomponent 2: Preparationof LCD to receive the new system 7. This subcomponent will finance the preparation o f customs offices, to prepare them for receiving the new system. This will include office goods, computer equipment, and incremental operating costs. Subcomponent 3: LCD IT Center Strengthening 8. The component will also finance the strengthening, through training and computer equipment, o f the LCD IT staff, to prepare them to maintain and run the ASYCUDA system once inoperation, as well as providing training for users. The human resources allocated to IT in the LCD are inadequate for the existing, much less the new system. In addition, computer/PC usage amongst L C D staff i s currently quite low but expected to increase significantly in future years. This component will finance PC familiarization and basic computer skills development for L C D staff and other relevant agencies to facilitate the successful adoption and long term sustainability o f the ASYCUDA World system. A staffing plan and a skills development plan will need to be developed and implemented to ensure the smooth operation and sustainability of the new ASYCUDA system. Key officials in other relevant agencies will receive similar technical training inbasic IT skills and relevant ASYCUDA application-specific skills. 34 Component B: Customs Modernization Support (Total financing required: US$2.02 million ofwhich US$2.02 million IDA). Sub-component1:ModernCustoms PracticesandWTO Agreement Requirements 9. This sub-component will fund activities to assist Lao PDR to meet the actual and future requirements o f membership o f the WTO. The principal existing requirement i s implementation of the provisions o f the WTO Valuation Agreement, which governs the methods that must be used when valuing goods for the purposes o f import and export declarations and, therefore, the basis on which applicable duties andtaxes are to be calculated. 10. Currently in the WTO there are a number o f additional technical measures7 under negotiation. They are likely to result in a new WTO agreement on trade facilitation during the lifetime o f the Lao PDR Customs and Trade Facilitation project. As a future member o f the WTO, Lao PDR will be formally obligated to implement these measures, which are already recommended, in a non-binding form, as "best practices" by the WCO, o f which Lao PDR i s a member, underthe WCO's RevisedKyoto Convention. 11. The activities for this sub-component are: Activity 1: WTORequirements 12. At present the LCD applies pre-determined minimum values to a large number o f products in an attempt to deter under-valuation and provide consistency to importers in the valuation o f their imports. Upon accession to the WTO, Lao PDR will be obligated to implement the provisions o f the WTO Valuation Agreement, which i s based on transaction value but also provides a number o f prescribed alternatives that may be applied in specific circumstances. The use o f minimum and arbitrary or fictitious values i s not permitted and it will therefore be necessary for Lao PDR to phase out its minimumvalue scheme at the same time as it implements the provisions o fthe WTO agreement. 13. The project will fund an international valuation expert to work with local counterparts to ensure that the number o f items subject to the minimumprice list are progressively reduced so that the list no longer applies from the date o f Lao PDR's implementation o f the WTO valuation agreement, ensure that the legislation meets all the necessary requirements, develop valuation policy and procedure manuals and instructions, and train customs officials, customs brokers, and importers in the application o f the valuation rules including the commercial documentation necessary to determine the correct value in cases of doubt. In addition, drawing upon international experience inmany countries, the project will assist the L C D to develop or procure a reference database that enables declared import values to be compared against previous importations o f the same or similar goods and, where applicable, against international commodity prices (for example, goods o f high revenue risk and/or which are commonly traded 7 They derived from the existing GATT Articles V (relating to freedom o f transit), VI11 (relating to import and export fees and formalities), and X (relating to publication and administration o f trade regulations). 35 internationally). This database will interface with the ASYCUDA system, which will incorporate into the import clearance process a selectivity function to identify potential cases o f undervaluation. Activity 2: Post clearance audit 14. Detection o f false values i s often extremely difficult to do from the documentation submitted at the time o f importation, notwithstanding the system tools just described. Customs administrations worldwide have therefore implemented post importation audit procedures. Such an audit may require the examination o f the full range o f the importer's and/or customs broker's records to check the accuracy o f declared values, as well as also other aspects o f the declaration such as tariff classification, origin, and qualification for exemptions or concessionary rates o f duty. Auditsmaybe: Field Audits: usually conducted at the premises o f the importer or broker, the transactions and companies to be audited are selected by assessing the level o f risk using criteria such as past importer and broker history, and the nature and origin o fthe goods. Desk Audits: a selected percentage of import declarations, especially those that were cleared and the goods released with minimal customs checks, are subject to detailed post clearance review for quality control purposes. 15. The project will assist the LCD to implement a post clearance audit function that is consistent with international best practice. This will require review o f the legislation and if necessary amendment to see that the customs law contains the necessary powers and places appropriate obligations on importers and clearing agents (such as the retention o f documents, authorization o f auditors to enter premises for audit purposes, etc), development o f policy and procedure manuals, training in audit selection and in auditing skills, and education o f stakeholders. Activity 3: Compliance improvement and management strategy 16. In many developing countries around the world, including Lao PDR, customs administrations operate in an environment o f relatively low trader compliance. As a result they typically employ a regime based on extremely high levels o f physical and documentary inspection. While such an approach is understandable such a regime does not adequately differentiate betweentraders that are highly compliant with all regulatory requirements and those that do not. As such, there i s little incentive for many traders to comply fully with all regulatory requirements as they are essentially subject to the same high levels o f government intervention regardless o f their compliance history. 17. A compliance management and improvement strategy is therefore based on applying different customs controls and inspection regimes to different traders based on their compliance history and likely risk. While the project will finance support for the development and 36 implementation o f a comprehensive risk management regime, it needs to be complementedby a well thought out compliance management and improvement strategy designed to identify and segment clients into different categories depending on their perceived risk and compliance record. The project will finance the development o f a strategy to ensure an appropriate incentive and disincentive mix i s developed to allow customs to apply an appropriate regime to different traders depending on their compliance. Through such an approach an incentive i s established for highcompliance traders to maintaintheir level o f compliance and for low compliance traders to improve. In addition, through such an approach non-compliant traders will face a significantly higher level o f control and appropriate penalties for non-compliance. Activity 4: Client Service Charter 18. Many customs administrations around the world have established client service standards covering the key operational activities and outputs from the organization. Typically, service standards will cover such issues as time for processing and release o f goods, time taken to process tariff classification advices, time taken to process refunds, time taken to hear appeals against customs decisions, etc. Mechanisms need to be established to ensure operational information on customs' performance inrespect to each o f the chosen standards i s captured in a reliable and consistent manner across the country. Regular reports must be produced and customs performance against the standards analyzed and reported to clients. A standard set o f client service standards will be published covering all key service areas. The service standards will be monitoredand results publishedperiodically. 19. Inorder to successfully manage amodemcustoms administrationit is necessary to have a comprehensive understanding o f the complexity o f customs operations and processes. Key performance indicators should therefore be developed to provide information on the organization's performance in areas such as imports, exports, transit, workload, workflow, compliance, valuation, duties and taxes collected, etc. These performance standards form the basis o f the Client Service Charter. The project will therefore finance the establishment o f a series o f key performance standards that will ultimately be issued as part o f a Client Service Charter. The performance standards will be reviewed periodically and improved as organizational performance increases during the course o f the project. The project will also finance the development o f methodologies for data collection, analysis and reporting. Activity 5: Advance ruling 20. International best practice enables traders to apply to customs inadvance o f their decision to import goods for a ruling on tariff classification, and in some countries the method o f valuation o f and/or the basis on which the origin o f the goods will be determined (in particular where preferential rates o f duty may apply). This provides predictability to traders, who can proceed with their transaction knowing the duties and tax they will be required to pay, and confident that the customs ruling will apply at any port in the country at which the consignment will be cleared. Under schemes o f this type the ruling is given in accordance with established procedural rules and i s legally binding on the customs administration for a specified period o f time, provided that the goods that are imported are identical to the goods on which the rulingwas given. Insome countries a fee i s charged to provide the bindingruling. 37 21. The project will assist the L C D to introduce a comprehensive advance ruling system, with the corresponding legislation, procedures, and control mechanisms, including a monitoring process to verify that rulings are honored by the customs offices at which the goods are cleared in circumstances where the importer has met the required conditions of the ruling. Training in tariff classification and the operations o f an advance rulings system will also be required. Activity 6: Administrative appeals 22. As an important safeguard on the discretionary power o f decision makers and to help ensure transparency and accountability, the right to appeal against decisions made by customs administrations i s recommended by the WCO's Revised Kyoto Convention and, with regard to valuation matters, i s mandatory under the WTO Valuation Agreement. It is likely that the trade facilitation agreement currently under negotiation at the WTO also will include an obligation to maintain a mechanism for administrative appeals against customs decisions. The WTO valuation agreement requires the establishment o f a right o f appeal without penalty to an authority within customs or to an independentbody, and also the right o f appeal to a judicial authority. Insome countries the administrative appeals regime, including on valuation matters, i s within the customs administration and typically requires a final decision at headquarters level, while in others there is an independent administrative (non-Judicial) review authority outside o f the customs department, either inaddition to the customs' appeals process or a substitute for it. 23. The project will assist the customs administration to develop and implement policies and procedures for an administrative appeals regime appropriate to Lao PDR's administrative and legal practices which, with regard to valuation, meets the requirements for WTO accession, and which also i s consistent with international best practices based on the standards set by the Revised Kyoto Convention. This will require review o f the legislation and if necessary amendment to see that the customs law provides for a suitable administrative appeals regime, development o fpolicy andprocedures, staff training, and education o f stakeholders. Activity 7: Intelligence and risk management development 24. The intelligence and risk assessment function involves the systematic collection, collation, and analysis o f information related to customs operations to assess the level o f actual or potential risk and thereby inform decisions about the appropriate management response to those risks. In practical terms this means determining which importers, foreign exporters, customs brokers and clearing agents, and types of goods (including, for example, their country o f origin, country o f purchase, mode and route o f shipping) pose risks interms o f revenue and other regulatory requirements, and entering that information into the ASYCUDA risk management module so that declarations that meet the risk criteria are routed for documentary checks, physical inspection, or other enforcement actions. 25. To use the ASYCUDA functionality effectively it will be necessary to establish a group o f staff whose tasks include analysis o f the data provided by the system and available from external sources, and the setting o f risk profiles and selection criteria. The project will assist the L C D to establish the risk assessment unit, implement both manual and automated procedures to collect, collate and analyze the data, develop risk profiles and selectivity criteria, and input them 38 to the ASYCUDA system. This will require the establishment o f an intelligence and risk assessment unit in headquarters with the ability to receive and input information to the ASYCUDA system, and training o f staff in information processing and analytical techniques. The project will also procure a small amount of hardware and internationally recognized risk analysis software to enable collation and analysis to be perfonned efficiently by the analysts in the risk management unit. Activity 8: Integrity and anti-corruption 26. It is vitally important that high levels o f integrity be established and maintained, given the vitally important role customs administrations throughout the world play in revenue collection, trade facilitation, national security and the protection o f society. Such sentiments are even more significant in economies in transition as integrity is often considered critical to building national and international confidence in newly established national institutions. As customs i s often the first point o f contact for many potential investors, buildingsuch confidence will make an important contribution to establishing a positive perception o f the overall investment climate and level o fpublic governance. 27. The WCO has prepared the Revised Arusha Declaration on IntegrityinCustoms, to assist customs administrations to establish and maintain a culture o f integrity and to deal effectively with corruption. It provides a relevant and useful framework for the integrity sub-component o f the project. The Revised Declaration consists o f ten distinct but interrelated elements considered essential for the development and implementation o f a comprehensive and sustainable anti- corruption and integrity enhancement program. The ten elements o f the Revised Declaration are as follows: Leadership and Commitment; Regulatory Framework; Transparency; Automation; Reform and Modernization; Audit and Investigation; Code o f Conduct; Human Resources Management; Morale and Organizational Culture; Relationship with the Private Sector. 28. The project will finance the provision o f consultancy support to assist L C D officials to: (1) undertake a review to assess the LDC's current level o f compliance with the RevisedArusha Declaration; (2) assist to design and launch a LDC national integrityand anti-corruption strategy; and (3) provide ongoing support and monitoring for its successful implementation. 39 Activity 9: Trainingand TranslationSupport 29. The various activities inthis subcomponent will require the organization o f workshops in the capital and various other parts o f the country, with the consequent logistic expenses. In addition, a substantial amount o f translation o f existing documentation and simultaneous translation duringmeetings will be required. Subcomponent 2: ProjectAssistance 30. Bank experience suggests that while implementation o f the new customs IT system i s likely to streamline and rationalize processes and procedures and will provide a sound platform for the introduction o f a range o f internationally agreed standards, it is unlikelyto realize its full potential unless a number o f complementary reforms and supporting operational changes are undertakenin parallel with system implementation. To ensure these complementary measures are introduced in a structured and cost effective manner the project will finance a long term international Customs Reform and Modernization advisor. The Advisor will be responsible for assisting L D C management in supervising the introduction o f the new systems, quality control and result verification, facilitating their use through change management activities. The Advisor will also supervise sub-component 1, above. Detailed Terms o f Reference for the Advisor can be found in Project files. The Sub-component will also finance training, change management support, secretarial services, translation and interpretation support, vehicles to support project activities, a limitednumber o f study tours and procurement support for the PW. 31. Sub Component 2 will also focus on assisting the L D C to take better advantage o f its membership o f the WCO. The WCO is the international organization responsible for customs matters, at both a strategic level-in particular the changing role o f customs in the modern world-and a technical level. The technical instruments developed by the WCO, examples o f which include the revised Kyoto Convention on simplification o f procedures, the SAFE framework o f standards on trade facilitation and security, and numerous conventions and agreements applicable to specific circumstances, are the basis on which customs procedures are reformed and harmonized worldwide. The WCO also provides technical assistance to its members, on request. Inaddition to its headquarters inBrussels, the WCO has a strong and very active regional structure, and most customs initiatives under development inthe South East Asia region are derived from the WCO's international standards. Additionally, the WCO maintains a regional intelligence network, which also supports a global enforcement network, and an Asia- Pacific regional capacity building center based in Bangkok. Lao PDR i s a new member o f the WCO, and will needinitial support as it beginsto make its contribution on topical customs issues inthe region and globally, andbecomes able to take advantage o fthe technical support available to the WCO's developing country members. This component o f the project will fund attendance at relevant WCO and headquarters and regional forums, at management level and also at the more technical levels, thereby assisting Lao PDR to learn from the experiences o f others and, as its own reforms continue, begin to makeits contribution to regional and global customs issues. 40 Annex 5: Project Costs ComDonent A: IMPLEMENTATIONOF ASYCUDA WORLD iscalYear (WB) Total FYW FYI0 PYll FYI2 FYI3 :alendar Year 2008fZ009 2009fZ010 2010/2011 2011fZ012 201u2013 A. 1 Implementationof Asycuda A.1. 1 FirstPhase:Prototypeincludinguser requirementand adaptationofsoftwaremodules a. Personnel 359,680 359,680 b. Training 49,140 49,140 c. Equipment 118,500 118,500 d. Miscellaneous 15,000 15,000 e. SupportCost 70,502 70.502 A.l. 2 SecondPhase:Deploymentat headquartersandpilot Site a. Personnel 441,430 441,430 h. Training 49,140 49,140 c. Equipment 165,501 165,501 d. Miscellaneous 15,000 15,000 e. SupportCost 87,239 87.239 A. I,3 ThirdPhase:replicationto regionaloffices a. Personnel 617,680 617,680 b. Training 14,620 14,620 c. Equipment 1,027,883 1,027,883 d. Miscellaneous 15,000 15,000 e. SupportCost 217,774 217,774 A.1. 4 Contingency a. Personnel 138,500 138,500 b. Training 20,000 20,000 c. Equipment 170,000 170,000 e. SupportCost 42,705 42,705 A. 2 LCD preparationfor reception of new System A.2. I Incrementaloperatingcosts, incl office supplies 103,000 34,333 34,333 34,333 A.2. 2 Office equipment 75,000 25,000 25,000 25,000 A. 3 LCD Information Technology Centerstrengthening A.3. I Personneltraining- academicand on-the-job 80,000 50,000 30,000 A.3. 2 Technicalassistance 50,000 25,000 25,000 A.3. 3 Specialsupport equipment 40,000 20,000 20,000 A.3. 4 Office "~ (under countemartassistance) eoods 240,000 60,000 60,000 60,000 60,000 BaseCosts 4,223,294 827,155 952,643 2,383,495 60,000 ase Costs:LaoPeople'sDemocrane Republic 140,000 60,000 60,000 60,000 60,000 ase Costs:World Bank 3,983,194 767,155 892,643 1,313,495 Total 4,113,294 827,155 952,643 2,383,495 60,000 41 ComponentB: CUSTOMS MODERNIZATION SUPPORT Ice1Year (WB) Total FY09 FYI0 FYll FY12 FY13 Mender Year 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 I.I Vodern CustomsPractices and\\TO Agreement Requirements B.1. 1 WTO Requirements 76,000 76,000 B.l.2 Post ClearanceAudit 76,000 76,000 B.l.3 ComplianceImprovementand ManagementStrategy 26,000 26,000 B.1.4 Client Service Charter 32,000 32,000 B.1. 5 AdvancedRulings 55,000 55,000 B.1. 6 Administrative Appeals 75,000 75,000 B.1.7 Intelligence& RiskManagementDevelopment 150,000 50,000 50,000 50,000 B.l.8 IntegrityandAnti-Conuption 50,000 30,000 10,000 10,000 B.1. 9 Training& TranslationSupport 50,000 10,000 20,000 20,000 I,2 Project Assistance B.2. 1 Customs Advisor 877,500 270,000 270,000 270,000 67,500 B.2.2 Training 50,000 10,000 20,000 20,000 B.2.3 SecretarialSupport 20,000 5,000 5,000 5,000 5,000 B.2.4 Material,travelexpenses 20,000 5,000 5,000 5,000 5,000 B.2. 5 ChangeManagementexpenses 60,000 15,000 15,000 15,000 15,000 B.2. 6 Officeequipmentandrefurbishing, andvehicles 125,000 105,000 20,000 B.2.7 Visit to ASYCUDA operation 28,000 28,000 B.2.8 Translationand InterpretationServices 25,906 6,952 6,952 6,952 5,050 B.2. 9 Project Coordinator 33,500 10,000 10,000 10,000 3,500 B.2. 10 Auditor 40,000 10,000 10,000 10,000 10,000 B.2. 11 WCO Support and Coordination 100,000 20,000 20,000 20,000 20,000 20,oo B.2. 12 Customs Advisor's Assistant& Intemreter 46.800 14.400 14.400 14.400 3.600 Base Costs 2,016,706 579,352 644,352 456,352 316,650 20,000 Base Costs: LaoPeople'sDemocraticRepublic Base Costs: World Bank 2,016,706 579,352 644552 456,352 316,650 20,oo Total 2,016,706 519,352 644,352 456,352 316,650 20,oo 42 Annex 6: InstitutionalandImplementationArrangements Project management will be carried out directly by the L C D Director General (Project Director) and a Deputy Director (Project Team Leader), assisted by an expert customs Advisor financed through the project. Procurement and accounting for the project have been specifically designed to be minimal, and will be carried out by an existing experienced project administrationunit inthe MOF. Additional full-time staff are not expected to be needed to this effect in the PFMSU, but a project coordinator will be hired to facilitate procurement; the project will also finance the hiring of experts on as-neededbasis. Annex Figure3: ImplementationArrangements SteeringCommitteefor CustomsReform& Modernization Chair [MOF,MOiC,Vice DOS, MAF,PrivateSector] Minister Finance BOL, r International PFMSU Customs Reform& ModernlzationTeam Procurement . (Project Team) and FM *ASYCUDA Implementation Support *RiskManagementImplementation 43 Annex 7: FinancialManagementandDisbursementArrangements Summaryof the FinancialManagementAssessment 1. This annex is a record o f the results o f a financial management (FM) capacity assessment o f the (FM) arrangements for the Lao PDR Customs and Trade Facilitation Project undertaken in October 2007 at the Public Finance Management Strengthening Unit (PFMSU) within the Ministry of Finance. The PFMSU i s a government implementing agency o f a number o f projects within the Ministryof Finance. The Lao Customs and Trade Facilitation Project will also be implementedby the same unit. This annex provides an updated summary o f the country wide FM issues that are relevant to the Project and other projects that the unit i s already coordinating and supporting. It also provides institutional and implementation arrangements and analyzes the FM risks in addition to outlining envisaged disbursement and accountability arrangements for the project. The assessment was undertaken to determine whether the PFMSUhas adequate financial management systems and related capacity in place which satisfy the World Bank's Operational Policy/Bank Procedure 10.02 requirements with respect to financial management. Under the policy, a project implementation entity i s supposed to have and maintain adequate financial management systems which include budgeting, accounting, internal controls, funds flow, financial reporting and auditing arrangements to ensure it can readily provide accurate and timely information regarding project resources and expenditures. These arrangements are deemed acceptable if (a) they are capable o f correctly and completely recording all financial transactions and balances relating to the project resources(b) if they can facilitate the preparation o f regular, timely and reliable financial statements;(c) safeguard the project's assets; and (d) are subject to auditing arrangements acceptable to IDA. The assessment was conducted through discussions with the staff o f PFMSU. The discussion was preceded by a financial management questionnaire which the staff filled in. 2. The Financial Management assessment indicates that the project will be implemented in a moderate risk environment. This conclusion comes from the current weak government financial management systems which are undergoing reform. This i s why this project will be implemented within ring fenced financial management systems established by the PFMSU through the FMCBP which has been operational for the last four years whose financial management systems have hnctioned effectively. 3. Inconclusion, the proposed financial management arrangements put inplace bythe PFMSU do meet the Bank's minimumrequirements for project financial management as per OP/BP10.02. A number o f suggested actions at assessment have been undertaken leaving the ones below to be undertaken subsequently. The actions are as follows: Action Plan 4. Lao PDR will, before implementation o f this project, develop and integrate a chart of accounts for the Project and integrate it into the FMCBP Financial Management Manual. 44 CountryIssues 5. Since 2003, the government o f Lao PDR has been implementing robust Public Financial Management reforms financed by a number o f donors, The IDA, through the Financial Management Capacity Building Project (FMCBP) has been financing such reforms which encompass three components. Component 1 covers (a) financial sector reform which focuses on improving data management, on and off site examination o f banking and other financial institutions. It also covers improvement o f credit information bureau of Bank o f Lao PDR. The second component covers core PFM reforms such as (a) stabilization o f GFIS (b) strengthening of debt management (c) support to procurement monitoring office (c) curriculum strengthening at government three PFM regional schools and upgrading training institutions. The third component covers SOE reform and business development which focuses on (a) development o f business strategy (b) SOE restructuring (c) monitoring and evaluation. Through the Additional Financing to the program, the following components have been included into the program which cover (a) developing a new inter- governmental fiscal framework (b) implementation o f revised chart o f accounts (c) providing support towards treasury centralization (d) strengthening external audit capacity. Such Public Financial Management reforms are anchored in the Public Financial Management Strengthening Program (PFMSP).This i s a master document which guides key PFM reforms in Lao PDR. It was adopted by the Government o f Lao PDR in November 2005, by the approval o f the Minister for Finance and the Prime Minister's Office. 6. The PFMSP is a multi-year medium-to-long term program which aims to improve policy consistency, efficiency, transparency and accountability in public expenditure management by strengthening institutional systems and capacity and making progress towards appropriate international financial management standards. It provides a framework for implementing Government policies and strategies laid out in the "Policy Paper on Governance", the National Growth and Poverty Eradication Strategy, and the National Socio Economic Guidelines 2006-2010. The document i s a response to some o f the key PFM weaknesses outlined in the Country Financial Accountability Assessment (CFAA) o f 2002 which concluded that the overall fiduciary risk in Lao PDR was considered to be high, despite the fact that there are elaborate built-in controls within the government FMsystem. 7. The conclusions in the CFAA were anchored in insufficient transparency inpublic finances. The budgetprocess was assessed as being not transparent andpublic access to government financial information as being limited. These weaknesses have been compounded by insufficient awareness o f modem practices o f internal control in the public sector and by the government's ongoing decentralization initiative, which needs to be supported with a sufficiently robust institutional framework that clearly defines the new responsibilities at lower levels. Technical capacity o f staff at these levels needs to be strengthened. The oversight functions and the State Audit Organization need enhanced capacity and improvement. Capacity at provincial and district level i s weak. A recently completed IDF grant to improve accountability in state owned enterprises and the private sector has helped develop the environment for the accounting and auditing professions and initiated amendments to accounting and auditing laws. An Integrated Fiduciary Assessment- Public Expenditure Review (IFA-PER) has been completed and disseminated whose findings go to support the weak accounting environment annotated above. 45 8. While the implementation o f the actions above have started to impact specific fiduciary issues, the country FM environment for externally-funded projects still remains weak as the effects o f some o f the measures being implemented are yet to impact the respective ministries and departments. RiskAnalysis 9. The detailed risks to project funds and related mitigating aspects are as analyzed and articulated inthe following table: Risk RiskRating RiskMitigation measures incorporatedinto Riskafter project design Mitigation Inherent Risk Country level Fiscal High The observed PFM weaknesses are being Substantial environment: There i s addressed through the FMCBP. These include weak control establishing internal audit, improving budget environment with execution, implementing a GFMIS and weaknesses inNational building capacity at the SAO. The capacity Treasury operations, building measures through the State Audit especially in cash Organization will help mitigate against some o f management. There are the risks. Government wide, Treasury limitations inP F M management, commitment control and debt accounting system, and management. The FMCBP has clear weak internal and achievement indicators in reforming and external auditing addressing the weaknesses noted. . capacity. Inability to use finds Moderate There shall be enhanced accounting and Low efficiently and reporting. Independent external auditors shall economically for be engaged to conduct annual audits. purposes intended Potential corruption Substantial The biggest contract within the project Moderate arising from procurement activities is the purchase o f procurement ASYCUDA where a direct payment will be made. Overall inherent risk Substantial Control risk Budgeting-inaccurate Substantial Budgets will be prepared annually and revised Moderate budgets which are not bi-annually. The FMRs to be prepared will be realistic. used to monitor variance analysis with budget. Staffing-limited capacity Moderate The staff capacity will be enhanced through Low owing to increased level increased level o f training. o f responsibilities. External Audit-limited Moderate Annual financial audit o f the project's financial Low capacity statements will be conducted by independent auditors. Delayedreporting and Moderate Clear timelines for submittingreports will be Low monitoring agreed upon for each quarter. Overall control risk Moderate Low Overall Project Risk Moderate 46 10. Implementingarrangements 10. Refer to Annex 6 on implementationarrangements. 11.FinancialManagementstaffing 11. The PFMSUhas 9 staff, 3 inthe Financial Unit.It has obtained approval to hire 3 additional accounting staff. The unit has been responsible for managing implementation o f the FMCBP project since 2004 and also manages a number o f PHRD grants. An accountant within the structure of the project will be earmarked to work on the project financial management, with assistance from other accounting staff o f the PFMSU. The organization structure o f the unit comprises a Project Director (who is a government official), an Assistant to the Project Director, two project staff, two administrative staff all o f whom are national consultants financed by the FMCBP. The numbers and staff capacity were assessedas sufficient. 12. The PFMSU has clearly written out job descriptions for its accounting staff. These are documented in the project financial management manual. The transfer rate o f such staff out o f the project i s very minimal. Currently, there i s no training policy for finance and accounting staff within the project though using whatever available courses are available around the region, the project sends some to build and enhance their capacities. It is hoped that accounting staff working on this project shall benefit from capacity building efforts which also target accounting staff inthe capacity buildingplancurrently inplace. AccountingPolicies,systems andprocedures 13. The Lao Customs and Trade Facilitation Project will use financial management systems currently inexistence inPFMSU. Initiation and authorization o f all transactions under the project are the responsibility o f the Director General Customs (Project Director). PFMSU shall be responsible for the following functions infinancial management: Keeping a well functioning financial management system at all times; 0 Recording all transactions o fthe project; Producing monthly, quarterly and annual financial statements; Reviewingthe status o fbooks o f accounts o fthe project and ensuring that they do balance on a monthly basis; Contracting auditors and ensuringthat such an annual audit i s submittedon time. 14. The project's key accounting policies and procedures have been written in a project financial management manual. Such a manual will guide financial management staff working on the project. The manual forms part o f the project's operational manual. The manual has been updated with a chapter on the operations o f the customs project. The policies and accounting principles so far developed are assessed as adequate. The manual gets updated periodically to ensure that it reflects experiences coming from implementation. The FMCBP accounting system i s computerized and has been runningon ACCPAC version 5.3. The system operates on a stand-alone system. 47 15. All accountingand supporting documentation for this Customs and Trade FacilitationProject (CTFP) will be retained by the PFMSU. Budgeting 16. The current government budgets as currently prepared do not lay down physical and financial targets. However, budgets are prepared for all significant activities in sufficient detail to provide a meaninghl tool with which to monitor subsequent performance. Actual expenditures are normally compared to the budget every quarter and explanations obtained for significant variations from budget. Approvals for variations from budget are obtained in advance. Similar procedures will also be adopted for the project. 17. The LCD will develop a project budgetfor each year within the framework agreed within the Financing Agreement. The detailed budget will be shared with the Bank team for review and comments. Upon approval, the project team will formulate a procurement plan from such an approved budget and start implementingthe annual activities. Counterpartfunds:Shallbeprovidedto the project inkind. Policiesand Procedures 18. The basis o f accounting government wide is cash. Preparation o f financial statements is supposed to be guided by Lao accounting standards. Their applicability in government i s very limited if not non existent. The project's key accounting policies and procedures have been articulated in a Financial Management Manual prepared for the PFMSU for the FMCBP and other projects. The manual will be updated to reflect the new institutional arrangements with the addition o f this project. The manual will document the major transaction cycles o f the project, funds flow processes, accounting records, supporting documents and chart o f accounts. It also summarizes authorization procedures, the financial reporting process, financial and accounting policies for the project, budgeting procedures, financial forecasting procedures, procurement and contract administration and management, as well as replenishment procedures for the Designated Accounts and the auditing arrangements. Reportingand Monitoring 19. The project financial statements will be prepared by the PFMSU Financial Unit and will follow the Lao Accounting standards. Such financial statements will be prepared every quarter. Such reports will be prepared forty five days after the end o f every quarter. The current system does not have the capacity to link the financial information with the project's physical progress. However, the FMCBP has developed a mechanism o f reporting quarterly physical progress reporting to mitigate the risk that physical data may not synchronize with financial data. In view o f this suggestion, the draft financial management manual has established financial management responsibilities that specify what reports are to be produced, what they are supposed to contain and how they are to be used. The reports to be produced will compare actual expenditures with budgeted and programmed allocations for the quarter, bi-annually and annually. 48 InternalcontroYInterna1audit 20. There i s no internal audit function within the entire government o f Lao PDR. MOF i s planning to establish internal audit government wide soon. Currently, the ministry does have a Department o f Inspectionwhich partially functions as an internal auditor. However, this department is not fully staffed and thus only able to address identified problems rather than review processes and transactions on a routine basis to identify problems and areas o f control weaknesses. ExternalAudit 21. All government ministries and departmentsare supposed to be auditedby the Supreme Audit Office (SAO) by the new audit law. The SA0 can only do compliance audits at the moment because its capacity i s limited. As such, the project's annual financial statements will be audited in accordance with International Standards on Auditing (ISA) by independent external auditors based on acceptable terms o f reference acceptable to IDA. The audited financial statements and audit reports will be submitted to the Bank six months after the end o f each fiscal year, and after the closing date o f the project. 22. There will be one audit opinion on one set o f financial statements for the project on which the auditors will issue a single opinion covering project accounts, the usage o f funds, and the management o f the project's designated account. In addition, a management letter outlining any internal control weaknesses o f the implementingoffice and other agencies at various implementation points will also be issued by the external auditor together with the audit report. The PFMSU will be responsible for engaging and managing the audit contract to cover the funds managed by the unit. The same auditor for the FMCBP project will conduct the audit for the Customs and Trade Facilitation Project. The auditor for the project will be appointed six months after effectiveness. The cost o f the audit will be financed from project proceeds. Emphasis will be placed on assessment o fproper use and accountability o f funds. SupervisionPlan 23. As the Financial Management inherent risk is assessed as moderate after mitigation, supervision o f project financial management will be done at least twice a year. The supervision will review the project's financial management systems including but not limited to operation o f designated account, evaluating quality o f budgets, project financial management reports, assessing relevance o f financial management manual, statements o f expenditures, internal controls, reporting and follow up o f audit and mission findings. The review will also conduct random reviews o f financial statements concentrating on per diems, training and workshop costs, fuel, accommodation expenses and compliance with covenants. It will also involve visits to various implementation sites and physical verification o f assets bought and ones created by the project. The financial management supervision will be conducted by IDA'Sfinancial management specialist staff and at times assisted by consultants. At each time o f supervision, the project's financial management risks o f the project will be assessedand influence the frequency o f supervision. 49 Funds flow and DisbursementsArrangements 24. The funds from the project will be drawn from the IDA Grant and be deposited in one Designated Account (DA) to be managed by the Treasury Department o f the Ministry o f Finance. The DA will therefore be opened by the Treasury Department o f the Ministry o f Finance at the Bank o f Lao PDR inVientiane. The ceiling for the DesignatedAccount will be $100,000 since the bulk o f the payments will be direct from the grant account maintained at the World Bank. The Ministry o f Finance through its Treasury Department administers such a DA and has overall responsibility o f signatories. The signatories on the DA shall be from Ministry o f Finance-Treasury Department. The Director General o f Customs shall open an operating account into which funds for incremental operating costs shall be deposited and disbursed for eligible expenditures. Funds into this account will be periodically drawn on a monthly basis to meet projected incremental operating expenditures o f the project as they arise. Details of how the account will operate, controls and signatories will be outlined in a financial management manual. The PFMSU shall prepare a monthly summary o f the project's statements o f expenditures from its cashbook which it shall submit to the M O F which shall inturn submitwithdrawal applications to IDA. 25. Funds for Designated Account will be used for implementing activities of the project. Authorization of any expenditures from the Designated Account shall be sought from the Director General Customs. Whilst it will be managed by the Ministryo f Finance-Treasury Department, day to day management will be under the Director General Customs. Preparation and submission o f withdrawal applications to the Director General o f External Finance within the Ministry o f Finance for signature before submitting to IDA will be done by the PFMSU. The detailed operation o f the Designated Account i s as follows: (i) The Designated Account (DA) will be usedfor disbursements related to the two Components and sub components of the project. It will be managed by M O F through the Treasury Department. Withdrawal applications for the project will be submittedto the World Bank by the PFMSU through the External Finance Department o f the Ministry of Finance. Direct payments for procurement will be submitted to IDA through the Ministry of Finance. The details o f processing direct payments will be spelt out in the Disbursement Letter and the Financial managementmanual. Disbursement Arrangements 26. The basis o f disbursements shall be traditional transaction-based which shall include Statements of Expenditure (SOE) and direct payments. Whilst the PFMSU shall produce Interim Financial Reports (IFRs) every quarter for purposes o f monitoring the progress o f the project (linking fundusage against the procurement planand applicablephysical outputs), the IFRsshall not be usedas a basis o f disbursements.Withdrawal applications reporting on eligible expenditures paid from the DesignatedAccount will be submitted to the IDA based on SOEs for (a) goods, costing less than $100,000 per contract; (c) services o f individual consultants costing less than $50,000 equivalent per contract; (d) services o f consulting firms costing less than $100,000 equivalent per contract; and (e) all local workshops/training and incremental operating costs. All other disbursements will be based on full documentation. The related documents shall be retained at the 50 PFMSU within Ministry o f Finance. Such documentation will be made available for required audits, as well as to the Bank implementation support missions uponrequest. 27. Applications for direct payments for large contracts from the project will be accompanied by documentation such as purchase records evidencing eligible expenditures (copies o f contracts, purchase orders, supplier's invoices and receipts) will be submitted with Withdrawal Applications setting out clear payment instructions to Ministry o f Financebefore submittingthem to the IDA. 28. Withdrawal applications reporting on eligible expenditures for reimbursement will be submitted to the WB Loan Department with the same documentation as required for reporting o f eligible expenditures paid from the DesignatedAccount. 29. PFMSU with the approval o f the Project Director-DG-Customs shall prepare withdrawal applications o f funds from the World Bank. After that, the PFMSU shall send requests for withdrawal application to the Director General-External Finance in the Ministry o f Finance for approval and signature. The Director General External Finance or designate will sign and send the withdrawal application for replenishment to the World Bank. 30. The Bank's Loan Department will specify these arrangements for this project in a Disbursement Letter to the Government of Lao PDR. The Loan Department o f IDA may disburse proceeds from the grant account to designated account for the project using one or more of the following disbursement mechanisms: Statementof Expenditures:As described above; Reimbursement: GOL would be reimbursed for eligible expenditures pre-financed from their ownresources; Directpayment:as described above; and Advance: credit proceeds are advanced into designated account to finance eligible expenditures as they are incurred. The level o f the DesignatedAccount shall be $100,000. 31. Prior to the withdrawal of any grant proceeds from the grant account, the GOL will furnish the World Bank's Country lawyer for Lao with the names o f the officials authorized to sign applications for withdrawal applications and their authenticated specimen signatures. 32. Withdrawal applications must be: 0 Authorized by a representative o f the recipient; and Accompanied with evidence in support o f the application as the World Bank may reasonably request. 51 Allocation of Project Proceeds Annex Table 3: Allocation of Project Proceeds Category Amount of the FinancingAllocated Percentageof Expendituresto be (expressed inthousandUS$) Financed (inclusive of Taxes) Goods, consultants services, 6,000 100% training and workshops, study tours and incremental operating costs for the project TOTAL AMOUNT 6,000 52 Annex 8: ProcurementArrangements A. General 1. Procurement for the proposed project shall be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits"; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated inthe Legal Agreements for the proposedProject and as per the agreed procurement plan. For each contract to be financed by the IDA, the different procurement methods or consultant selection methods, the need for prequalification, post-qualification, estimated cost, prior review requirements and time frame are to be agreed between the Recipient and the World Bank team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. Procurementof Goods: 2. Goods expected to be procured under the project include the automated customs system, office equipment and vehicles. The IDA has agreed in principle to the Government's proposal for using Direct Contracting method for procuring the ASYCUDA World system supplied by UNCTAD. However, upon receipt o f UNCTAD's detailed technical and financial proposals and after negotiations, the draft negotiated contract would be subject to IDA's prior review. Goods estimated to cost more than US$lOO,OOO equivalent per contract shall be procured through the International Competitive Bidding (ICB) method and the procedures set forth in the World Bank's Procurement Guidelines and use the World Bank's applicable Standard BiddingDocuments. Goods estimated to cost between US$30,000 to US$lOO,OOO equivalent per contract may be procured through the National Competitive Bidding(NCB) method and the procedures, set forth inthe Decree 03/PM dated January 9, 2004, and in the Implementing Rules and Regulations (IRR) dated March 12, 2004, including national standard bidding document with IDA's prior concurrence, will be followed subject to the improvements listed in the NCB-Annex to the Legal Agreement. Goods estimated to cost less than $30,000 equivalent per contract may be procured through the Shopping method and the procedures, including standard biddingdocumentswith IDA's prior concurrence, set forth inthe aforesaid Decree andIRR. Selectionof Consultants: 3. Consultant services expected under the project include Modem Customs Practices and WTO Agreement Requirements (WTO Accession Support), Customs Advisor, Auditor, Procurement Coordinator. Services requiring hiring o f firms would generally be procured through Quality-and Cost-based Selection (QCBS) method. However, for complex or specialized assignments meeting the circumstances described in paragraph 3.2 o f the Consultant Guidelines the Quality Based Selection (QBS) method may be used, for assignments estimated to cost less than US$50,000 equivalent per contract the method Selection Based on Consultants' Qualifications (CQS) may be used, and for external audit assignments the Least Cost Selection (LCS) method may be used. Services for tasks under circumstances which meet the requirements o f paragraph 3.10 o f the Consultant Guidelines may, with the World Bank's prior agreement, be procured through the Single Source Selection (SSS) method. Services requiring hiringof individual consultants may be procured in accordance with the provisions of Section V of the Consultant Guidelines, whereas SSS of 53 individual consultants may be done only with the World Bank's prior agreement and under the circumstances described inparagraph 5.4 o f the Consultant Guidelines. Shortlists o f consultants for consulting services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants. B. SummaryAssessment of the Agency's Capacityto ImplementProcurement 4. Procurement activities will be carried out by the LCD, with the assistance o f the Public Finance Management Strengthening Unit (PFMSU) to provide guidance and facilitate the procurement/selection process leading to the signing o f the contracts, whereas the technical inputs will be provided by the customs technical experts. The Director General o f the LCD will sign all contracts with the contractors and consultants. The supervision, management and administration o f the awarded contracts will be carried out by the LCD, with the assistance o f the PFMSU. Inorder to coordinate and follow-up o f procurement activities between the LCD, PFMSU and the IDA, the L C D will employ a qualified local consultant to be a Procurement Coordinator for this Project. 5. The PFMSUwas established withinthe ExternalFinanceDepartment (EFD) o fthe MOF and a senior official in the M O F has been appointed as the Project Director. Other staff including an Assistant Project Director and Procurement Officers were recruited on contractual basis as consultants. 6. The PFMSU has been responsible for managing implementation o f the WB-financed Financial Management Capacity BuildingProject (FMCBP) since 2004 and now also the Additional Financing under the Project. It has also been designated to manage and will have overall responsibility for procurement under the proposed Public Financial Management Strengthening Program (PFMSP) Multi-Donor Trust Fund(US$ 5.2 million) when that becomes effective. 7. Currently there are nine staff inthe PFMSU. The PFMSU comprises o f the Project Director (who is a government official), an Assistant to the Project Director, two procurement officers, two administrative staff, and three financial management staff, all o f whom are national consultants, financed by FMCBP. 8. PFMSUwill also assist the LCD to manage procurement under this proposedProject andwill designate at least one procurement officer as the focal person for this project. The two existing procurement staff are adequately qualified and have the capacity for handlingprocurement under the ongoing FMCBP as well as the Lao PDR Customs and Trade Facilitation Project, as the additional small number o f procurements under the latter Project are not expected to restrict PFMSU's capacity. When the PEMSP Multi-Donor Trust Fundbecomes effective, the capacity o f PFMSUwill be reviewed again and any further strengthening measures, if required, will be put in place. In addition, the IDA'Sprocurement staff will also provide training to procurement staff in PFMSU from time-to-time to ensure compliance with the WB's Guidelines and procedures and to maintain quality o fprocurement documents. 9. With the above mentioned capacity strengthening measures, the overall procurement risk is expected to be "moderate". 54 C. Procurementplan 10. The LCD, with PFMSU's assistance has discussed and finalized a detailed Procurement Plan for the first 24 months o f project implementation with the Task Team during Appraisal. This plan will be updated at least annually or as requiredto reflect the actual project implementation needs and improvements ininstitutional capacity. D. The IDA's ProcurementReviewRequirements 11. The following contracts shall be subject to IDA's prior review in accordance with the Procurement Guidelinesor Consultant Guidelines: The first NCB and first Shopping contract for procurement o f goods regardless of value and all subsequent contracts exceeding US$lOO,OOO equivalent per contract. All contracts for goods procured through direct contracting. The first contract for employment o f consulting firm under the CQS method, and the first contract for hiring o f individual consultant regardless o f value, and all subsequent consulting services contracts exceeding US$100,000 equivalent for firms and US$50,000 equivalent for individuals per contract respectively. All contracts for hiring o f firms and individual consultants procured through single source selection. 12. All other contracts shall be subject to ex-post review by IDA, and will also include checks for transparency in the procurement process and verification o f end-use deliveries, in addition to verification o f compliance with the agreed procurement procedures. The percentage to apply to the sample for ex-post review will be 30 percent. E. Frequencyof ProcurementSupervision 13. Procurement supervision missions will be conducted by IDA at least twice a year to include ex-post review o fprocurement activities and to address any procurement implementation issues. 55 F. Detailsofthe ProcurementArrangementsInvolvingInternationalCompetition 1. Goods ent of Goc .s 3 4 5 6 7 Estimated Procurement Prequalific Domestic Review Expected Comment * (Descriptio cost Method ation Preference by Bank (US$) (yesho) (yeslno) (Prior I Post) G-01 Automated 3,660,000 Direct No No Prior Oct. 2008 Customs Contracting S stem 45,000 NCB No No 1st Contract Equipment (Component 7- A.2 -Year 1) G-03 Office 50,000 NCB No No Post Oct. 2008 Equipment I- (Component B 2) G-04 Office No Post Oct. 2009 Equipment (Component G-05 1 A2-Year 2) I I I I Vehicles 75,000 1NCB 1 No No Pnst Oct. 2008 14. All ICB contracts and the first NCB and first Shopping contract for goods and all direct contracting will be subject to prior review by the IDA. Annex Table 5: Procurementof ConsultingServices 1 2 3 4 5 6 7 Ref.No. Descriptionof Estimated Selection Review Expected Comments Assignment cost Method by Bank Proposals (US$) (Prior I Submission Post) Date cs-01 Customs 540,000 QCBS Prior Oct. 2008 Modernizationand WTO Agreement support cs-02 Customs Advisor 877,500 Individual Prior Aug. 2008 3 year (FT) + (Comparison of 4Ihyear (PT) Qualifications) assignment CS-03 Auditor 40,000 LCS Post April. 2009 For Four FYs. CS-04 Project Coordinator 33,500 Individual Post Aug. 2008 Four Year (Comparison of assignment Qualifications) (S700imonth) CS-05 Customs Advisor's 50,000 Individual Prior Aug. 2008 3 year (FT) + Assistant & Interpreter (Comparison of 4Ihyear (PT) Qualifications) assignment CS-06 Customs Advisor's 20,000 Individual Post Aug. 2008 Four Year Secretary (Comparison of assignment Qualifications) 56 (a) Consultancy services estimated to cost above US$lOO,OOO for firms and US$50,000 for individuals per contract and all single source selection o f consultants (firms and individuals) will be subject to prior review by IDA. (b) Short lists composed entirely o f national consultants: Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract, may be composed entirely of national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. NationalCompetitiveBiddingProcedures Biddingdocuments and contracts under national competitive biddingprocedures financed by the Association shall include a provision requiring suppliers contractors and their subcontractors to permit the Association to inspect their accounts and records relating to the bid submission and the performance o f the supplier and/or contractor, as the case may be, and to have them auditedby auditors appointed by the Association, if so requiredby the Association. The deliberate and material violation by the supplier, contractor or subcontractor o f such provision may amount to obstructive practice. Immediately after completion o f the bid opening proceedings, a copy o f the bid opening record shall be posted at a prominent location, accessible to the public, outside the office o f the concerned procuring entity and shall be retained at the same location until the award o f contract has been notified. A copy of the bid opening record shall be provided to all bidders who submittedbids. The Recipient shall publishthe following informationon contract award on a free or open access website when it becomes operational or on another means of publication acceptable to the Association: (a) name o f eachbidder who submitted a bid; (b)bidprices as read out at bid opening; (c) name and evaluated price o f each bid that was evaluated; (d) name o fbidders whose bidwere rejected and the reasons for rejection; (e) name o fthe winning bidder, contract price, explanation if it is different that bid price as well as the duration and summary scope o f the contract awarded; and (f) contract variation orders. This publication shall be updatedquarterly. The eligibility o f bidders shall be as defined under section Io f the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits, published by the Bank in October 2006; accordingly, a firm or individual previously declared ineligible by the Association based on determination by the Association that this firm or individual has engaged in corrupt, fraudulent, collusive, coercive or obstructive practices shall be declared ineligible to be awarded a contract financed by Association. The Association shall declare a firm or individual ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Association andthe Recipient, ifit at any time determines that the firm or individual has, directly or through an agent, engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in competing for, or inexecuting, an Association-financed contract. 57 Annex 9: FinancialandEconomicAnalyses BackgroundandExpectedOutcomes 1. The Project i s expected to have both financial and economic benefits. The financial benefits refer to the increase in fiscal revenue that the L C D i s expected to mobilize as a result o f relying on an improved customs management system. These are calculated using best estimates and take into account both the non-petroleum customs duties collected by the L C D as well as the general sales taxes levied on imports. These additional revenues are basically transfers from the private sector to the public sector. Interms o f social welfare these financial gains are beneficial to the country only if the budget makes better use o f these funds than the private sector. Quantifying these relative benefits i s not a simple matter and colored by political views; to date no conclusive statement has been made, and they are thus ignored for this exercise. 2. The economic benefits take into account the welfare enhancing results o f the project and ignore all revenue gain that i s expected to result from the project, as per the argument the previous paragraph. The project i s expected to benefit society in three ways: (1) administrative costs o f the customs services are expected to fall; (2) compliance costs o f users o f the customs services are also expected to fall, and 3) clearance times are projected to be reduced. Quantifying these economic benefits depends on the specificities o f the project and the time frame o f delivering results. These need to be quantified. As the statistical basis to undertake the estimates o f economic benefits Laos i s not well developed, the estimates are based on the most realistic assumptions that were gathered from the economic literature and from the analysis o f similar projects recently presented to the Executive Board.* Financialbenefits 3. The roll out o f a modern customs management system will be accompanied by improved customs practices. For instance, better use o f risk management will lead to better targeted documentary and physical inspections, debt management and special import regimes will be more closely followed, and trader compliance will improve. These improved practices will benefit not only the customs duties levied by customs but also the domestic indirect taxes levied by customs on imports, whether the present turnover taxes or the value added taxes that may replace these turnover taxes inthe future. This exercise took into account only customs duties on non-petroleum products. Customs revenues are bound to fall over time as a result o f future trade liberalization policies; this was taken into account inthe calculations as they were based on revenue projections that factored in the prospect o f future trade liberalization policies. The estimates o f financial gains to be achieved under the project can be illustrated by assuming revenue gains o f 2 percent, 3 percent and 5 percent respectively. The results are given in Table below and suggest that the financial internal rate o f return (IRR) is estimated at between 22 per cent under the assumption that the project results in 2 percent higher revenues; the IRR increases to 61 percent and 188 percent under the alternative assumptions that the project leads to a revenue increase o f 3 percent and 5 percent respectively compared with the "without" the project revenue projections. * Tuan MinhLe, Duc MinhPham and Luc De Wulf, estimating Economic Benefits for Revenue Administration reform project, PREMNotes ,Number 112, March 2007, The World Bank, pp.1-5. 58 IAnnex Table 6: FinancialAnalysis:IRR T w o percent gain I Three percent IFive percent gain Internal Rate of 22 61 188 Return inpercent N e t Present Value 1.6 6.2 15.3 inUS $million Economicbenefits 4. Economic benefits are expected to result from lowering administrative o f customs and compliance costs o f traders and from the time saved by traders whose goods will beprocessed faster. Administrative costs 5. The introduction o f an electronic customs management system will reduce the cost o f processing customs declarations. It i s here assumed that customs administration will over time be reduced by 0.5 percent o f the import value. The savings gradually emerge as o f 2011 andreachtheir fbll effect in2014. Compliance cost 6. Research has suggested that compliance costs, i.e. the cost incurred by declarants to present their declarations to customs including brokers fees, are a multiple o fthe administrative costs. They are assumed to fall by 2 percentage points o f the value o f imports. Again they start to emerge as o f 2011and reach their full potential in2014. Value of time saved 7. Calculating the economic benefits from lower clearance times relied on the following data: (a) The volume o f imports during the period for which benefits are calculated; these are based on a projected six percent per annual growth in GDP and a ratio o f imports to GDPo f40 percent; (b) Clearance times are expected to fall byhalfas a result o fthe project; this is modest in comparison with some other customs projects that were more comprehensive in nature; (c) The value o f the reduced clearance time was alternatively estimated as .5 per cent and .25 percent o f the value o f the imports per day saved in clearance time. The lower bound may be more realistic inthe case o f Lao PDR where imports are predominantly goods that are not time sensitive (low just intime delivery premium) or perishables; (d) No benefit was estimated for the reduction in the variance o f clearance time, which permits traders to keep lower inventory. The estimates are therefore somewhat o f an underestimate o f the true benefits. 59 8. The base case estimate that assumes that clearance times are reduced by half a day and that the value o f a day saved i s equivalent to 0.25 percent of the value o f the cargo cleared suggests an IRR of 170 percent and an NPV of US$176 million. Assuming that the value of a day saved in clearance i s valued at 0.5 percent rather than 0.25 percent of the value of the cargo cleared increases the IRRto 250 percent and the NPV to US$347 million. Conclusion 9. The financial and the economic benefits o fthe project are robust and fullyjustify undertaking the project. The estimates o f the economic IRR and NPV can be considered as the lower bound estimates as they exclude the reduction in the variance o f the clearance time and the second order effect that improved border crossing procedures will have on the competitiveness o f the Lao economy and its impact o f growth and openness. With larger trade flows the benefits o f the project would also increase. 60 Annex 10: Safeguard Policy Issues Environment Cateporv: C Safeguard Issues and Policies Triggered: The Project will only finance consulting services, business and information systems and training. There are no civil works or other activity that will have negative environmental implications, since no building will take place. There are also no social safeguard implications (involuntary resettlement, Indigenous Peoples) since there will be no requirement for land acquisition. The Project shall not prevent access to source of livelihood to any one, including indigenous people. 61 Annex 11:Multi-DonorTrust Fundfor Trade-RelatedAssistance "Trade DevelopmentFacility" (P109702, TF091201/2/3) 1. The Government o f Lao PDR inmoving forward inimplementing the Multi-Donor Trust Fundfor the "Trade Development Facility" (TDF), inthe proposed amount ofUS$ 6.45 million grant, to be implemented over four years beginning in 2008. The Government, including a number of agencies led by the Ministry of Industry and Commerce and including Ministryo f Planning and Investment, Ministry o f Finance, Ministryo f Agriculture and Forestry, Ministryof Health, STEA, and representatives from the business associations, has proposed a plan o f activities that are described below. 2. The TDF represented coordinated donor effort towards Supporting IF Action Matrix validated by GOL inSeptember 2006, andwill have the following components: Component A: Trade Facilitation; Component B: Sanitary and Phyto-sanitary Standards Framework and Technical Barriers to Trade; Component C; Export Competitiveness and Business Environment; Component D: Capacity Building, Trade Policy, Trade Agreements, and Global Opportunities; Component E: Strengthening o fthe National Implementation Unit. 3. Inparticular, the followinghasbeenproposedto becoveredbythe TDF: ComponentA: Trade Facilitation: (i) Implementation of Lao PDR Trade Portal, including: trade information; process harmonization and simplification; Review of regulations and legal framework; Functional specification for automation o f licensing andpermittingprocedures; (a) The Joint team also informed that automation of licensing and permitting procedures was also required for the participating agencies, but will be financed fkom future funding, unless the Government feels it i s a higher priority task; (ii) Trade Facilitation Master Plan, including: discussions on the National Body for Trade Facilitation, Trade Facilitation Policy Action Plan, Legislative Action Plan, Integrity Development - Strategy for trade-related agencies, and Capacity Buildingfor trade-related agencies. 62 Component B: Sanitary and Phyto-sanitary Standards (SPS) and Technical Barriersto Trade (TBT) Frameworks: (i) SPS. The project component will facilitate international trade and improve food safety, animal health and plant health through: meeting requirements o f WTO, AFTA and other international agreements; improving the investment climate, and improving governance. Inparticular, this component will have the following sub- components: (1) strengthen the SPS institutional, legal and regulatory framework; (2) determine risk-based policies and control measures for SPS; (3) strengthen the role o f the private sector inmanaging SPS; (ii) Strengthen the TBT institutional, legal and regulatoryframeworks. ComponentC: ExportCompetitivenessandBusinessEnvironment: (i) Feasibility studies. This component is designed to develop industry-specific interventions based on the fundamental principles o f business: development o f services with a market development focus. The component will start by financing feasibility studies to identify priorities and results; based on these, implementation o f actions will be determined and carried out based on detailed plans developed in the first phase; (ii) Agribusinesses compliance with SPS. A number o f activities in support o f the private sector competitiveness were identified related to strengthening SPS management, inparticular for agri-businesses; (iii) Implementation of the results of feasibility studies under subcomponent a. Component D: Capacity Building, Trade Policy, Trade Agreements, and Global Opportunities: (i) This component will focus on technical capacity development for trade and WTO compliance. Several other activities have been identified, including upgrading GOL's management skills and knowledge on trade; support to academic and research institutions; and developing a training course in international trade and competitiveness. However, the priorities in these other activities will need to be set by the Government. ComponentE: Strengtheningof the NationalImplementationUnit: (i) This component will finance accounting and administrative systems as well as training and technical assistance in procurement, project management, performance indicator determination and verification, and result verification. It will also finance office and computer equipment. 4. The Government is settingup the sectoral governance structures for trade-related reform (a sector-wide approach) and assistance implementation, and where the TDF's structures are expected to fit. 63 Annex 12: ProjectPreparationand Supervision Draft PAD submitted to relevant stakeholders for Key institutionresponsible for preparation o fthe project: Lao PDR Customs Department (LCD). Bank staff and consultants who worked on the Program are listed inthe table below. Bank Fundsexpended to date on project preparation: Bank Resources: US$222,000 Estimated Approval and Supervision Costs:1.Remaining Costs to Approval US$40,000; 2. EstimatedAnnual Supervision Cost: $65,000 64 Annex 13: Documentsinthe ProjectFile A. Bank Staff Assessments Country Assistance Strategy Aide Memoire of Identification andPreparation Missions Lao PDR Multi-Donor Trust Fundfor Trade Development Assistance "Trade Development Facility" PAD, March 14, 2008 B. Terms ofReference TOR for the LCD Business Process Reengineering Exercise TOR Process Mapping TOR Steering Committee TOR International Customs Advisor TOR Customs Automation (ASYCUDA Implementation) C. Other Priority Areasfor GovernanceReform: Public Sewice Reform, People's Participation, Rule of Law,and SoundFinancial Management, Round Table Process, March 2003. Doing Business 2008: Comparing Regulation in 178 Economies. The World Bank and IFC *Including electronic files. 65 Annex 14: Statementof Loansand Credits Difference between expected and actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P105331 2007 LA GMS Power Trade Project - 0.00 15.00 0.00 0.00 0.00 15.67 0.00 0.00 P100081 2006 LA-Avian and Human Influenza Control 0.00 4.00 0.00 0.00 0.00 3.28 0.55 0.00 PO75531 2006 LA-Rural Electrification Phase I 0.00 10.00 0.00 0.00 0.00 4.61 -2.10 -4.97 PO74027 2006 LA-Health Services Improvement Project 0.00 15.00 0.00 0.00 0.00 13.02 3.08 0.00 PO90693 2005 Lao Environmentand Social Project 0.00 4.00 0.00 0.00 0.00 3.19 0.74 0.00 PO78113 2004 LA-Second Education Development 0.00 13.00 0.00 0.00 0.00 5.19 -0.42 0.00 PO83543 2004 LA-ROAD MAINT APL2 0.00 22.65 0.00 0.00 0.00 1.56 -4.22 0.00 PO75006 2003 L A - Second Land Titling Project 0.00 14.82 0.00 0.00 0.00 4.88 1.44 0.00 PO64886 2003 LA-SUSTAINABLE FORESTRY FOR 0.00 9.90 0.00 0.00 0.00 2.02 0.66 0.00 RURALDEV. PO77620 2002 LA-Fin. Management Capacity Building 0.00 8.50 0.00 0.00 0.00 9.61 3.79 -0.68 Cr. PO77326 2002 LA-Poverty Reduction Fund Project 0.00 19.34 0.00 0.00 0.00 0.49 -3.56 0.00 PO65973 2001 LA-Agricultural Development Project 0.00 16.69 0.00 0.00 0.00 0.24 -2.63 -2.63 Total: 0.00 152.90 0.00 0.00 0.00 63.76 - 2.67 - 8.28 STATEMENTOF IFC's HeldandDisbursedPortfolio InMillions ofU S Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 Millicom Lao 4.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 1998 SEF Endeavor 0.15 0.00 0.00 0.00 0.15 0.00 0.00 0.00 1998 SEF Settha 0.47 0.00 0.00 0.00 0.47 0.00 0.00 0.00 2000 SEF Settha 0.09 0.00 0.00 0.00 0.09 0.00 0.00 0.00 2001 SEF Villa Santi 1.06 0.00 0.00 0.00 1.06 0.00 0.00 0.00 Total portfolio: 5.77 0.00 0.00 0.00 3.77 0.00 0.00 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. Total pending commitment: 0.00 0.00 0.00 0.00 66 Annex 15: Countryat a Glance Lao PDR at a glance 9128107 too Asia& Low- I PDR Pacific i n c m Dcvel-entdrad I 5 8 1,900 2,403 500 3,863 65# Lrfeexgectancy T 2.9 3,539 1,562 1.6 0.9 2.2 1.3 21 42 56 71 62 26 40 15 51 79 69 9'1 116 114 I23 115 108 113 1996 200s 2oDfi ~conon*'cratios* 1.9 2.9 3 4 326 32 5 22.7 27.1 360 Trade 18.6 262 16.9 12.4 192 C m t ac& balancelGDP 4.3 -220 -202 -133 Interest paymentsX;DP 0.1 03 3 1 Dmbtlc Capital Total deWDP 48.9 1 x 8 932 savings formation Total debtse~ceiexpo& 13.1 6 7 194 Presentvalue ofdewGDP 508 Presentcntlueofdebvexpwts 4 6 s ? Indebtedness 198&-96 199646 2005 2006 2006-40 6 1 6.2 7 1 76 3.1 . 4.3 5 4 5 7 -23.4 17.7 28'86 STRUCTUREof the ECONOMY 1986 1996 2005 2006 I %d GQf] Growth afcapita! and GDP (K] I Agncuiture 533 443 420 Industry 21 1 320 325 Manufactwing 159 336 209 Servrces 256 257 255 Householdfinal eonsump4on expenditure 88.5 727 645 G m lgov'tfinal consumptmexpendilure 815 8 5 9 3 Impis#f goods mdaerw~es 7.7 41.1 309 423 I I 1986-96 199666 2005 2006 (eve- o m & gmukh) Growthof exporn and imports{%) AgnNRWe 4 2 3.9 16 2 0 Industry 125 109 165 165 Manufacturing 14.1 9 6 8 8 9 2 m C e s 5 4 6 4 6 9 6 8 .Eo Hwseholdfinal oonsumpbonexpenditure 2 9 43 4 6 Generalgcllyfinal consumptioneJWendilure 9.7 26 3 179 -IC0 Gmss capltalformatlim 13B 95 7 3 tmporh af goods and serwces -Expwts I.lnyrCrtS -24 0 14.2 3 6 Note &W6data areprelimmaryeatimates This tablewas producedfrom tr%DevelopmentE m i w LDEdatabase. * The diamondssh#wfwrkeyindicatwsinthe country(in bold) miperredmth itsmcomc-group average If dataare misang,thedmmmdwll beinmiplete 67 Lao PDR PRICES andGOVERNMENTFINANCE 1986 $996 2005 2006 Domnstrc prices Inflation(%I I fss &angel Consumerprim 13 0 6 8 lrnplicltGDPdeflator 51 2 137 &7.2a 4 7 Govnmmentfinance f96 Of GDP, tt?u'udeSCl~ffWt gmntsl lhrent revenue 15.6 72.7 14.3 Cwrentbudgetbalance 6 0 4.5 5 3 W a l l surplu&defiert -4 3 -5 3 4.3 -3 6 TRADE 1986 1996 2005 2006 {US$ mrllrms) Expmand import lewis(US$ mtl.) Tcytal exgorts(fob) 45 321 448 996 7501 .F Electnaty 30 107 107 Ming 203 525 Manufactures 32 9 i a Total importsl c f l 133 690 1,205 t,384 Food m la2 Fuel and energy 66 183 226 Capitalgoods 325 615 728 Exportpriceindex @!330=700) Imp& pnceinrktxfzcrxt=fopl Termsof trade (2C300=109) M C Ed PAYMENTS 1986 1996 2005 2006 (US$RUMKms} Current account balance to GUP (%ib) Exportsd goodsand WYtOeS 64 425 869 1.236 importsof gaods and yenices 136 769 1,267 t.453 Resourcehalance -72 -344 -396 -217 k t rnconle -8 -6 -269 -409 Net c u m t transfers 125 a5 170 Current account iralance -76 -225 -532 456 Frnancing ltems (net) 85 294 571 358 Changesin net reserves -9 -69 11 98 .:5 L Menm: Reservesincludinggold (US$ mWonsJ 0 8 336 Canversicarate @EC,lmaWS$] 95 D 921 0 1D.82B.O 10 051 0 EXTERNALM B Tand RESOURCEFLOWS 1986 1996 2005 2006 ( U Smi!8ms) Ccmporiticnof 2005 debt(US$ mill.) Total debt mtstandinganddrsbursed 868 2,263 2,690 IBRD D 0 a 0 IO& 40 335 596 643 ToQaldebt sewice B 29 172 ieRD 0 0 0 0 IDA 0 3 14 14 Campced~mofnetreswrcefiawg 19 139 117 165 170 79 Pmatecreditors D 0 228 F w e ydirect investment (netinflows) 0 160 28 Portfolioequity (neti f l w s ) 0 0 a Wcdd Bank prcgram Commitments 4 61 47- 0 Disbursements 7 60 35 26 Pnncipalrepaynients 0 1 9 9 Net flows J 59 26 17 Interest payments 0 2 5 5 Nettransfers 7 57 21 12 TheWoridBank Group:This table WBS preparedbycwntryunitstaff;figures maydifferfromather WcddBankpublisheddata. W B Q 7 68 Map section IBRD 33431 100°E 102°E 104°E 106°E 108°E This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. C H I N A LAO P.D.R. To Lincang To Gejiu To Daluo Gnot-Ou 22°N Ou 22°N Phongsaly Boun-Nua PHONGSALY MYANMAR VIETNAM LUANG NAMTHA Muang Luang Khoa To Namtha Hanoi Meung Muang Xiangkho MekongBOKEO Xai Nambak Ou Sam-Neva Ban Beng LUANG Viangxai Huaisai Ta OUDOMSAI PHRABANG HOUAPHAN Rai Xiangkhoang Plateau 20°N Pakbeng Luang ChiangoT Phrabang SAYABOURY Plain of Jars Kham Nan Phokhoun Xiang Khoang XIANG Sayaboury Kasi KHOANG Phou Bia Gulf of Vangviang (2,817 m) Ban Nalé Nalé Xaisomboun Tonkin VIENTIANE Nam Ngum Reservoir Pone BOLIKHAMSAI Paksane Khamkeut Paklay Me kong Hong Mekong 18°N Xanakham VIENTIANE Kading 18°N PREFECTURE OF KHAMMOUANE VIENTIANE MUN. Cammon Plateau Ban Na Phan Thakhek To Vinh To Khon Kaen Noy XeBangfai To Khon Kaen Xebangfai 0 50 100 Kilometers SAVANNAKHET Xéno Xéno Xepon 0 25 50 75 100 Miles THAILAND Savannakhet Phin To Qui Nhon Se Banghiong Samouay LAO PEOPLE'S 16°N 16°N DEMOCRATIC SARAVANE Don Saravane REPUBLIC Khongxedon SEKONG Sekong SELECTED CITIES AND TOWNS Pakxong To PROVINCE CAPITALS Ubon RatchathaniCHAMPASSAK Bolovens NATIONAL CAPITAL Champassak Plateau Attapeu Sanamxai RIVERS ATTAPEU TT MAIN ROADS RAILROADS Khong PROVINCE BOUNDARIES 14°N 14°N CAMBODIA INTERNATIONAL BOUNDARIES 104°E 106°E NOVEMBER 2004