Report No. 25334-LA Lao PDR Country Procurement Assessment Report January 10, 2002 South Asia & Mongolia Country Unit East Asia and Pacific Region Document of the World Bank CUJIKNC'Y EJiIVA]LENIT Currency UniP ..p US$1 = 10,040 Kip (as of September 25, 2002) .A9L.71¶ TR NS AND$ ACRONYMS ADB Asian Development BaiLk AUSAID Australian Agency for International Development BPC Business Promotion Committee CAS Country Assistance Strategy CEO Chief Executive Officer CPAR Country ProcLuement Assessment Report CPC Committee for Planning and Cooperation CPPR Country Portfolio Performance Review EFRD External Finance Relations Department (of MOF) FDI Foreign Direct Investment FMAC Financial Management Adjustment Credit (approved by the Bank on June 25, 2002) FMCBC Financial Management Capacity Building Credit (approved by he Bank on June 25, 2002) ICB Intemational Competitive Bidding LFC International Finance Corporation IRR Inplementing Rules and Regulations JICA Japan Iernational Cooperation Agency Lao PDR Lao Peoples' Democratic Republic LIL Leaming and Innovation Loan MOF Ministry of Finanice MvDF Mekong Project Development Facility NCB National Competitive Bidding ODA Official Development Assistance PER Public Expenditure Review PrMO Procurement Monitoring Office PIP Portfolio improvement Plan PIU Project Implementation Unit SBD Standard Bidding Documents (of the World Bank) SOE State-Owned Enterprise SPD Standard Prequalification Documents (of the World Bank) TA Technical Assistance TOR Terms of Reference TTL Task Team Leader (of the World Bankc) UNCITRAL United Nations Coirimission on International Trade Regulations n d L:ut UNDP Umted Nations Development Programme Regional Vice President: Jemal-ud-din Kassurin Country Director: Ian C Porter Regional Procurement Adviser: Denis Robitaille Task Team Leader: David Howarth COUNTRY PROCUREMENT ASSESSMENT REPORT EXECUTIVE SUMMARY ,,,,,,,,,, ....................... ES-1 A. PREFACE ..................... 1 A. 1 Previous Country Procurement Assessment Report ...,,,,,,,,,,,,,.,,,,,1 A.2 Date and Bases for Report ...,,....,,1 A.3 Acknowledgements ,,,,,,, ,,.2 A.3.1 Government Participating Organizations . .,,,..2 A. 3.2 Other Co-Sponsors/Contributors ,,..,,,,,,,,,..,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.,,,,,,.2 N.3.3 World Bank Team.3 X .3.3 W orld B ank Team ,,,,,,,,,,,,,. ,,. ,,................ .............................. . ............. ........... -- .........- B. BACKGROUND 3 B. 1 Relevant Country Information,,,,,,,,....,,,,,,,,,,,,,..,,,,,,..,....,,,,,,...,,,,,,,,,,-----,---,--------,---,---------..3 B.2 Bank Portfolio 5 B.3 Government Participation in CPAR , ,,,,,,,,, ,,,,,,,, ,,,,,,,,,,..5 C. DISCUSSION AND ANALYSIS OF FINDINGS. 6 C.1 Public Sector. 6 C. 1.1 Legal and Regulatory Framework ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.6 C. 1.1.1 Procedures and Approvals ,,,,,,,,,,,,,,,,,,,,,.,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.6 C. 1.1.2 Criteria for Selection of Bidders 7 C.1.1.3 Negotiations .7 C. 1.1.4 Rejection of Bids,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,8 C .1.1.5 O ther A spects.---------------------------------------,----------------------------------------,,,,,,,,,,,,,,,,,,,,8 C. 1.2 Procedures, Practices, Organization and Resources-.,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.. . 8 C. 1.2.1 Bank-assisted Projects,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,..,,,,,,,,,,,,,,,,,,..,,,,.8 C.1.2.2 Non-Bank Assisted Projects,.,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,14 C. 1.2.3 Audit and Anti-Corruption Measures ...............................................................17 C. 1.2.4 Public Sector Management Performance,........................_ ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,17 C. 1.2.5 The Involvement of State-Owned Enterprises,., ,,,,,,,,,,,,,,,,,,18 C. 1.2.6 Fiduciary Risk Assessment,...,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.,,.,,,20 C.2 Private Sector 21 C.2.1 Private Sector Share of Lao PDR economy. . ,,,,,,,,,,,,,, .,,,,,,,,,,.,.,,,21 C.2.2 Commercial Regulations. .... ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, .,,,.,,,,,,,,, .22 C.2.3 Commercial Practices 22 C.2.4 Performance on Public Procurement Contracts 22 C.3 Summary of Key Issues and Recommendations.. .,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.,,,,,23 C.3.1 Key Issues,.,,,,,,,,,,,,,,.,,,,,,,,,,,,,,,,,,,,,,.,,,,,,,,23 C.3.2 Recommendations 25 Priority 1 ,,-- ,,,-- ,,,-- ,,,,,,,,,-- ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,25 Priority 2, ,,,,,,,,,,,,,,,,,,--,,,,,,,,,,--,--,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,--,,,,,,,,,,,,,,,,,,,,,,,,,,,-,,25 Priority 3 ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,..,,,,,,,,,,,,................................................................I.........,26 D PROPOSED ACTION PLAN 26 ANNEXES A List of Documents Reviewed B Principal Persons Met r Cnmnnri pn.in nf Prnmirpm pnt Prr.PdiiirPc D_1V Leogal Pirovisiuns fIr %IVaurIelvILt tLUe U-1cLIUUL III W. CIrUeLi E PILU Questionnaire with Summary of Responses F TTL Questionnaire G Analysis of Contract and Review Thresholds H Draft Charter for PrMO (exactly as produced in 1996 under ADB Technical Assistance) I Determination of Eligibility of State-Owned Enterprises to Participate in Prequalification and IddiUJnIgr FOREWORD The Government of Lao PDR has made significant strides over the last eight years in improving its public procurement process, principally through the introduction of a procurement law and implementing rules and regulations that were facilitated by significant technical assistance from the Asian Development Bank. However, as this Country Procurement Assessment Report (CPAR) illustrates, more remains to be done to improve the efficiency of public spending at a time when Lao PDR is still experiencing fiscal imbalances caused largely by the economic crisis of the late 1990s and the subsequent heavy burden of budget subsidies. This report, prepared by World Bank staff with close cooperation of the Asian Development Bank and support from key agencies of the Government, is a contribution to the Govenmment's ongoing economic and fiscal reform program. It analyses strengths and weaknesses in the system and outlines an action plan to bring public procurement further into line with intemationally accepted best practice. Implementation of the action plan is important not only in continuing to improve the effectiveness of public spending and attract continued support for the Government's economic reform program, but also in the light of additional pressures arising from the Government's policy of decentralizing responsibilities for project formulation and implementation. The World Bank is making continued public procurement reform a key part of its Country Assistance Strategy for Lao PDR. Despite the improvements of the last few years, World Bank- financed projects m Lao PDR continue to operate in an environment of high fiduciary risk. On its part, the World Bank is takmg steps to reduce such risk through measures that range from greater community involvement m project design in order to reduce opportunities for corruption, to strengthening mechanisms for project momtoring and supervision. These steps alone, however, will have limited impact unless the Government continues the progress made in the last few years in improving in its procurement systems. We particularly welcome the Government's recent commitment to re-establish a functional Procurement Monitoring Office (PrMO) to oversee public procurement policy and implementation countrywide, and to implement effective procurement trauiing for government staff. The World Bank is ready to support establishment and development of the PrMO as well as assist the Government in implementing all other aspects of the proposed action plan. Ian Porter Country Director, Lao PDR World Bank Office, Bangkok September, 2002 AClOWGIEDGEMEN'1F This Country Procurement Assessment Report is based on work done between November 2001 and April 2002 by a team of staff from the World Bank working with close cooperation of staff of the Asian Development Bank and several agencies of the Government of the Lao Peoples' Democratic Republic. Field work was conducted between November 2001 and January 2002, and a draft report was presented to the Ministry of Finance in early May 2002. Discussions on the draft were held with the Ministry of Finance and the Committee for Planning and Cooperation, in July 2002, following which a revised draft was presented. Further discussions on the revised draft were held during September 2002 and the Report was finalized at the end of September 2002. The main objective of the Report is to assess the overall efficiency of public procurement in the Lao Peoples' Democratic Republic and to develop an action plan to address areas that should be improved in line with internationally accepted principles of procurement. The World Bank team was led by David Howarth of the World Bank Office, Bangkok, under the guidance of Mr Ian Porter, Country Director for Lao PDR, and Mr Denis Robitaille, Regional Procurement Advisor. The World Bank team consisted of Mario Reyes Vidal, John Richardson (Consultant) and Xaynari Chanthala (Consultant), with additional input from Nipa Siribuddhamas, Chmnakorn Chantra, Sirirat Sirijaratwong and Soudalath Silaphet, and support from Linda Schneider and Enrique Crousillat from the Bank's Vientiane Office. Asian Development Bank staff who provided input were Robert Rothery and Ajay Guha of Manila Head Office, and Edvard Baardsen and Arouny Sakulku of the Resident Mission in Vientiane. Cooperation, advice and assistance was provided by Government staff including Mr Sila Viengkeo, Madame Thipphakone Chantavongsa, Mr Southot Sodachanh, Madame Khamphay Vithasay and Mr Rithikone Phoummasack of the Ministry of Finance, and H.E. Madame Khempheng Pholsena, Dr. Bountheuang Mounlasy and Ms. Chongchith Chanthalavanh of the Committee for Planning and Cooperation. The World Bank team would like to thank the Ministry of Finance, the Committee for Planning and Cooperation, other central Govemment ministries and agencies, local govemments, business associations and private sector organizations for contributing generously to the CPAR study. Pamela Bigart, Irina Luca, Roch Levesque, Ron Hood, Rosemary Bellew and Behdad Nowroozi made valuable and useful suggestions by reviewing drafts of this report. i LAO PEOPLE'S DEMOCRATIC REPUBLIC COUNTRY PROCUREMENT ASSESSMENT REPORT EXECUTIVE SUMMARY A. INTRODUCTION 1. The previous World Bank's Country Procurement Assessment Report (CPAR) for Lao PDR was prepared in 1993-94. The objectives of this CPAR are to update the assessment and provide input to the Public Expenditure Review (PER), that was under preparation in the Bank's FY02, and the Country Assistance Strategy (CAS), due to be prepared in the Bank's FY03. Specifically, this CPAR reviews the overall efficiency of public procurement processes, with emphasis on donor-funded procurement since it accounts for about 80 per cent of public capital expenditure, and develops an action plan to address areas needing to be strengthened. 2. Key procurement issues identified prior to commencement of the review were: * Some progress in procurement reform but many processes still lacking accountability and transparency and having too many steps. * Increasing decentralization of project implementation to the provinces, bringing responsibility for procurement to people with weak understandmg of procedures, exacerbated by language difficulties. * Weak project implementation capacity, reflecting inadequate skills that require structured training in overall project management and admmistration. * Perception that procedures are burdensome, indicating a need for extensive training on procedures and the importance of transparency and good governance in their application. 3. Strong Government support for this CPAR was identified in early November 2001, and fact- finding was conducted in two missions from late November 2001 to late January 2002. Two questionnaires were distributed, one to all Project Implementation Units (PIU) and one to the Bank's Task Team Leaders (TTL) of ongoing projects. A procurement workshop was held in mid-January 2002, attended by senior Government officials, PIU representatives and other donor agency representatives. Analytical work and report drafting was carned out durng February and March 2002. After intemal Bank review of a first draft report, a second draft was formally presented to the Govemment in early May 2002. Detailed discussions with the Govemment were held m mid- September 2002. The Government's comments, as well as those from other donor agencies, have been reflected in this final draft. B. SUMMARY OF KEY FINDINGS Legal and Regulatory Framework 4. The Govemment has established procurement procedures since the 1994 CPAR. The enabling instrument is a pnme ministerial decree of December 1995, with implementing rules and regulations (IRR) introduced in September 1996, updated in December 1998 and currently undergoing a second update due for promulgation in late-2002. Donor procedures are permitted to take precedence on donor- funded projects, which represent about 80% of public sector procurement. ii 5. Although the Government's procedures generally provide for procurement to be conducted in accordance with best international practice, there are some aspects that would benefit from strengthening/clarification. The first, which applies to donor-funded and Government-funded procurement alike, is the delay related to senior officials of the Government being involved in the approval of small value contracts. Two other concerns on Government-funded procurement, are (1) relatively loose provisions that permit direct negotiations in certain circumstances, and (2) use of a highly subjective scoring system to evaluate non-monetary items. While no change to the basic legislation is considered necessary, these potential areas of non-transparency could be dealt with in the amended IRR now being drafted. Procurement MoHnitoiring OMfice 6. In 1993, the Government proposed to establish a central Procurement Monitoring Office (PrMO) to monitor procurement. After ADB Technical Assistance (TA) in 1996, the PrMO was formed in 1997 and received further ADB TA in 1998 for institution building and training. From documents provided by ADB, the Bank team endorses the concept of the PrMO being the Government's focal point for procurement monitonng and training, and to provide assistance to mdividual project staff. 7. The PrMO is not presently functional but the Government has commntted to a functioning PrMO as part of the conditions for release of the second tranche of the recently approved Financial Management Adjustment Credit (3677-LA). There are however different opinions within Government as to the PrMO's most effective role. Since it is envisaged that the PrMO will be the executing agency for several of the CPAR recommendations, resolution of the PrMO's terms of reference is critical. Insufficient Knowledge of Procurement Proceduires 8. Among Government staff responsible for procurement, there is inadequate knowledge of the Government's and the Bank's procurement procedures, procurement sections of credit agreements and Standard Bid Documents (SBDs). This is due to lack of training, language difficulties, especially relating to commercial and legal terms, and frequent rotation of project staff and their replacement, often by inexperienced new staff. Many national contractors also lack full understanding of the procedures, reflected in poor quality bids and delays during evaluation while bid deficiencies are resolved. 9. The time taken to recruit consultants and contractors can be improved but the majority of project delays occur during contract administration. Skills in project management including procurement and disbursement scheduling, progress tracking and record-keeping, need enhancing. Regular and comprehensive procurement training programs need to be developed and implemented for all Government staff involved with procurement activities. In the short term, every major Government contract should include focused project administration and procurement training programs. State-Owned IEnterprises 10. Some State-Owned Enterprises (SOE) have been winning contracts on Bank-financed projects, particularly in the construction sector. It is questionable whether some of the winners meet eligibility criteria under the Bank's Guidelines, and there have been complaints from the private sector that Government subsidies in various forms distort the competitive bidding process. The Government, assisted by the Bank, is undertaking reforms of SOEs to put them onto a more commercial footing but this will take time. Meanwhile, prequalification and bidding documents should require applicants and bidders to submit proof of eligibility and bids from SOEs that are ineligible should be rejected. Government Staff Absenteeism 11. Lack of skilled and experienced public sector staff mitigates against smooth and efficient project implementation and extremely low levels of public sector remuneration is a key reason for the shortage of motivated staff. Many experienced staff take up parallel employment, often for consultants or contractors on the same project for which they are responsible as a Government officer. This leads to conflicts of interest and delays due to unavailability, or reduced input, of staff. The effect is felt on project implementation and procurement but no specific recommendations are made in this report since the practice extends across a wide range of Government activities. The matter requires addressing in the Bank's dialogue with the Government on country-wide issues. Harmonization of Procedures 12. To simplify procurement, the Government is keen to harmonize procurement guidelmes among donor agencies, particularly for NCB and small works procurement that characterize poverty alleviation and rural self-help projects, and particularly between the Bank and ADB. The Bank is currently part of a global working group among all major multi-lateral development banks tackling this issue. In Lao PDR, donors have already agreed and adopted common procedures for NCB and small-scale procurement in the transport sector and this should be extended to other sectors as soon as possible. Private Sector Procurement and Performance 13. The pnvate sector in Lao PDR is still small but evolving quickly - foreign investment applications have increased since 2000. There are no regulations relating to procurement by the private sector and it is considered that none are needed at present. By and large, pnvate companies are free to pursue procurement in the way they deem most suitable to their needs, although the Government occasionally encourages private sector companies and individuals to procure locally. Freight Forwarding 14. An effective monopoly exists through an SOE on freight forwarding of imports for large projects regardless of funding source, as well as exports. PIUs of Bank-financed projects have complained that delays occur, giving rise to problems when three-monthly import licences expire and need renewal. Private sector companies also say that the service is somewhat inefficient and more expensive than might be the case if competition were allowed. Procurement Thresholds 15. An analysis has been made of contract and review thresholds for works, goods and services in ongoing Bank-financed projects. Details are contained in an annex to the main report. It is recommended that current thresholds are not changed. Fiduciary Risk Assessment 16. Fiduciary risk in procurement has reduced since the introduction of procurement legislation 5-6 years ago. However, it is still rated high on account of the following factors: * In the absence of a functioning and well-staffed PrMO, there is no Government agency to oversee country-wide procurement and implement effective procurement training. * To avoid distortion occurring on Government-financed procurement, the transparency of Government procedures needs to be safeguarded through amending the IRR in a few areas. iv o A shortage of qualified and experienced Government staff, lack of familiarity with procurement procedures and language difficulties cause misapplication of procedures and delays. Decentralization is exacerbating these problems with a limited number of qualified staff available in the provinces. Structured procurement training is required, together with translation of key Bank documents into Lao. o Low public sector salary scales result in Government staff having to take up secondary employment, leading to absenteeism, conflict of interest and project delays. o Overly-frequent rotation of Govermment staff disrupts overall efficiency of Govemrnment offices. It is particularly disruptive on donor-financed projects when staff knowledgeable and experienced in intemational procurement procedures are replaced with staff with little or no knowledge of the procedures. o Distortion in the bidding process for works and goods is caused by participation by SOEs that are not fully autonomous. Proposed reforms of SOEs should eventually eliminate this risk and in the meantime, stricter pre- and post-qualification of SOEs is required. o Insufficient overall skills in project management and contract administration, which requires specific training programmes for Government staff involved in implementing projects on a broader scale than merely procurement training. o Increasing focus on small-scale procurement in connection with poverty reduction and self-help projects, where established procedures designed for larger projects do not apply. 16. Implementation of the recommendations in this report (para 129-138) will reduce fiduciary risk over time and, on the Bank's side, continuing attention to strong project design and supervision and in- depth mvestigation of cases of alleged fraud and corruption, will assist in achieving an improved fiduciary environment. C. PIRTNCIPAL RIIECOGENmDA'1RINS Priority 1 17. The PrMO should become a functional entity as soon as possible, appropriately located within MOF. The Government agreed that a staffed PrMO would be established within the MOF as one of the tranche release conditions for the Financial Management Adjustment Credit (FMAC, 3677-LA). The PrMO should assume the pivotal role in procurement reform, providing monitoring of country-wide procurement activities and take an important role in delivering training programs. It should not be another layer in the Government's procurement approval processes, nor an agency undertaking centralized procurement or exercising budget-related controls, but rather a resource center, staffed by a small number of well-trained and experienced professionals who would advise on revision of the procurement legislation and deliver procurement training programs. Plriority 2 18. The Govemment, together with the Bank and other donor agencies, should jointly design and implement a structured procurement training program, geared to the needs of all Government officials and project staff involved with procurement at both central and provincial level. Budgets for all new projects should include provision for training of PIU staff. A specific component of training should address micro-procurement on small-scale poverty reduction programs that are increasingly the focus of v donor assistance. A small element of the program should be addressed at local contractors to assist them in improving the quality of their bids. 19. To ensure that contracts under Bank-financed credits are not awarded to ineligible SOEs, requirements should include requirements in prequalification and bidding documents (details provided as annex to main report) for SOEs to submit information to enable PIUs to determine their eligibility. 20. To improve the transparency of procurement throughout Government, the ongoing revision of the Government's IRR should incorporate a few additional changes to reflect best intemational practice. 21. The Bank's current Guidelines on Procurement and the Guidelines on Selection and Employment of Consultants have been btanslated into Lao. Translations should be kept up to date and issued to every ministry, department and PIU involved with Bank-financed projects. Summary translations should also be made of instructions to applicants and bidders and evaluation criteria in the Bank's SPD and SBD. 22. The Government should review its staff rotation policy and provide a mmimum incumbency for key project staff to ensure reasonable continuity and reduce disruption. Specifically for procurement staff who need time to become familiar with intemational procedures, the aim should be to avoid rotation at less than three-year intervals. 23. To improve the whole "climate" in which procurement is carried out, a project management training component should be included in each major project, funded by specific allocation in the project budget, whether Govermment-funded or donor-funded. Selected staff should be sent for intensive project management courses. 24. The Bank should continue to work with other multi-lateral lending agencies, mcluding ADB, to develop harmonized procurement guidelines, particularly for small-scale procurement in rural areas. Priority 3 25. As the rate of growth of the private sector increases, the efficiency of Government departments handling private sector procurement-related matters such as the issue of import licences, needs to keep pace. A fully functional PrMO should provide assistance in this area. 26. The Government should review the present SOE monopoly for freight forwarding and consider allowing private sector competition to promote increased efficiency and lower costs. D. OUTLINE OF RECOMMENDED ACTION PLAN 27. A functional PrMO is critical to efficient implementation of the recommendations through an Action Plan. The target, agreed by the Government as part of negotiations of FMAC (3677-LA), is to re-establish and staff the PrMO by release of the second tranche of FMAC funds. 28. In parallel or thereafter, the remaining Action Plan targets are as follows: Recommendation Start Finish Revise Government IRR in hand December 2002 Design procurement training program a/ February 2003 May 2003 hnplement training programi / June 2003 continuing vi Tighten bidding eligibility status of SOEs. October 2002 continuing Translate frequently used Bank SPD and SBDs October 2002 December 2002 Design project management training. February 2003 May 2003 Implement project management training. June 2003 continuing Harmonize donor guidelines for small-scale procurement. in hand December 2003 Improve dialogue with private sector. February 2003 continuing a/ Trust funds will be sought for these activities. 29. Monitoring of Action Plan implementation will be undertaken by the PrMO with assistance from the Bank through the existing quarterly portfolio performance reviews. A. PREFACE A.1 Previous Country Procurement Assessment Report 1. The Bank's previous Country Procurement Assessment Report (CPAR) for Lao PDR was issued in May 1994 from data that was collected and reviewed during the preceding 12 months. At that time, there were no laws, regulatory procedures or standard bidding documents in the public or private sectors covering procurement of services, goods or works in the country. Draft legislation and implementing regulations had been prepared under UNDP-funded, Bank-supervised technical assistance that began in 1990, but had not been formalized. 2. The principal findings of the 1994 CPAR were: * In the absence of national legislation and regulatory procedures, a plethora of approaches to public sector procurement had been developed by different Government entities. Decisions were subject to a subsequent review in committee and then further subsequent approval by higher authorities. Bureaucratic delays resulted from these layers. * Locally-financed procurement was in disarray and experienced additional delays due to complex budgetary procedures. On Bank-assisted projects, the Bank's procurement procedures were generally being complied with in respect of International Competitive Bidding (ICB), although significant delays often occurred. * There was an overall shortage of trained and expenenced national staff for project implementation, including procurement activities, due in part to inadequate remuneration. * Annual budget allocations for project implementation were insufficient. * An average of only 55 per cent of donor funds available each year were being disbursed and only 60 per cent of projects included in the 1991-1995 Investment and Development Plan were being implemented. 3. This report's finding is that the Government of Lao PDR (the Government) has made good progress on addressing most of the above issues although some notable problem areas remain. A.2 Date and Bases for Report 4. For all borrowing countries, the Bank now requires a CPAR (as well as a Country Financial Accountability Assessment - CFAA) about every three years, the findings of whlch are taken into account in producing a Public Expenditure Review (PER) that is prepared by the Bank. The PER for Lao PDR was published on June 28, 2002. In turn, the PER provides input into a rolling Country Assistance Strategy (CAS), which is updated tri-annually. For Lao PDR, the next CAS update is due to be drafted and discussed with the Government during 2003. 5. The objectives of this CPAR are to review the overall efficiency of pulblic procurement processes in Lao PDR and to develop an action plan to address areas found to need strengthening. In Lao PDR, 80 per cent of public sector procurement occurs on donor-financed projects (para 28). Therefore, while addressmg public sector procurement m general, this report focuses significantly on donor-funded procurement. The Bank's procedures require that the findings, recommendations and proposed action plan contained in this Main Report and summarized in the Executive Summary be reviewed by the Government and discussed with the Bank before bemg finalized (paras. 6 to 9). - 2 - 6. Initial work for this report commenced with a brief reconnaissance mission at the beginning of November 2001, when Government support was identified for the Bank's review of procurement procedures and performance, including measures that would assist the efficiency of the Government's decentralization policy'. Fact-finding was conducted from late November to mid-December 2001, during which time the Bank team met senior Government officials, Project Implementation Unit (PIU) representatives of all Bank-assisted projects, other donor agency representatives, and several consultants and contractors. Based on the Bank's guidelines for preparation of CPARs and a search of the Bank's on- line SAP procurement database, two questionnaires were then prepared and distributed, the first to all PLUs and the second to the Bank's Task Team Leaders (TTL) of ongoing projects. 7. After analysis of returmed questionnaires from PIlJs, the Bank team conducted a procurement workshop in Vientiane in mid-January 2002 under the chairpersonship of the Committee for Planning and Cooperation (CPC) to discuss procurement issues and to identify a strategy to address the issues. Representatives of other donor agencies including the Asian Development Bank (ADB), the Japan Intemational Cooperation Agency (JICA) and the Australian Agency for Intemational Development (AUSAID) attended and contributed to the workshop. After reviewing output from the workshop, the Bank team conducted further fact-finding during the second half of January 2002 and visited some Bank Group-financed and private sector projects for more detailed observations and discussions. Senior Govemment officials were re-visited to report progress and discuss specific issues. 8. Further analytical work and report drafting was carried out during February and March 2002, based on findings from the above activities, as well as review of relevant Bank, Government and other donor agency documents relating to procurement (a list of principal documents reviewed is at Annex A). Comments on the first draft CPAR were received from Bank staff in early April 2002 and incorporated into a second draft, which was formally presented to the Government on May 3, 2002. Detailed discussions with the Government on the final draft were conducted in mid-September 2002. The Government's comments, as well as those from other donor agencies, have been reflected in this report. 9. This report was finalized in September 2002. A3 Acknowledgements 10. The Bank team gratefully acknowledges the support and cooperation received during fact-finding and preparation of this report from senior officials and staff in several Government entities, other donor agencies and the private sector. A list of key persons met by the Bank team and who provided valuable information, is presented in Annex B. A.3.1 GoveramentPs&rtic1ipa g Org&noiztdo2s 11. The Bank team (para 18) received strong support from: H.E. Madame Khempheng Pholsena, Vice-President of CPC; Dr. Bountheuang Mounlasy, Director of the Department of International Cooperation of CPC; Mr. Sila Viengkeo, Deputy Director General, MOF; Mr Southot Sodachanh, Acting Chief of Loan and Grant Division, External Finance Relation Department of MOF; and Mrs Khamphay Vithasay, Deputy Director of Budget Department of MOF. I From 1998, the Government has provided increasing autonomy to provincial authorities in respect of planning, budgeting and implementing developmental activities, mcluding donor-assisted and self-funded projects. - 3 - A.3.2 Other Co-Sponsors/Contributors 12. ADB provided information at all stages of the work, including providing details of the outcome of assistance provided to the Government on establishing a proposed Procurement Monitoring Office, referred to later in this report. ADB provided comments on the draft CPAR in early June and attended a presentation of the revised action plan in mid-September 2002. 13. The International Finance Corporation (IFC) through its Bangkok Office and Mekong Project Development Facility (MPDF) office in Vientiane, provided data on IFC-financed private sector projects and general advice on procurement by the private sector in the country. 14. JICA provided the Bank team with details of ongoing work to assist the Government in preparation of a master plan for reform of State-Owned Enterprises (SOE). 15. The United Nations Children's Fund (UNICEF) provided an outline of its ongoing program in Lao PDR and some of the successes and problems encountered. A.3.3 World Bank Team 16. This report was produced under the overall guidance and advice of Mr Ian Porter, Country Director for Lao PDR, and Mr Denis Robitaille, Regional Procurement Advisor. 17. The Bank team wishes to thank the project directors (and their procurement staff) of the 11 Bank- assisted projects in the country who provided a 100+ per cent response to the questionnaire, all Bank TTLs and numerous other Bank staff who provided valuable input, advice and support. 18. The Bank team was led by Mr David Howarth (Coordinator of Portfolio Management Cluster, EACSM), supported mainly by Mr Mario Reyes Vidal (Senior Operations Officer), Mr John Richardson (Contracts Specialist - Consultant) and Mrs Xaynari Chanthala, (Procurement Lawyer - Consultant). Further input was provided by Mrs Nipa Siribuddhamas (FM Specialist), Mr Chinnakom Chantra (Procurement Officer), Mrs Sirirat Sirijaratwong (Disbursement/Procurement Assistant) and Miss Soudalath Silaphet (Procurement Assistant). Strong support was provided throughout by the Bank's office in Vientiane, led by Ms Linda Schneider (Resident Representative) and Mr Enrique Crousillat (Lead Energy Specialist - Country Operations). Details of the Bank's parallel work to reform SOEs in Lao PDR was provided by Mr Magdi Amin (Private Sector Development Specialist). B. BACKGROUND B.1 Relevant Country Information 19. With an estimated annual per capita income of about U$400, Lao PDR is one of the poorest and least developed countries in the East Asia region. With a population of about five million growing at 2.6 per cent annually, Lao PDR's economy is overwhelmingly agricultural (53 per cent of GDP) and rural (77 percent of the population). Moreover, much of the rural population is widely scattered. Ethnic minorities inhabit remote areas and some groups move periodically as they practice slash and burn agriculture. In addition to demographic and geographic challenges, Lao PDR faces institution-building constraints as well. For over a quarter century the country has struggled to find an appropnate balance of responsibilities between central, provincial and district levels of Government. The current decentralization dnve will severely test the capacities of provincial and district governments to perform as needed. Human capital constraints are important but there are also serious weaknesses in the basic systems and procedures that are critical for effective implementation of the decentralization efforts. -4 - 20. Prior to the approval of three new projects in June 2002, the Bank's active portfolio consists of nine projects with total conmmitments of US$261.5 million. Ongoing projects are distributed among transport (US$116.5 million), rural development (US$86.8 million), power (US$34.0 million) and education and health (US$24.0 million). The ultimate objective of the Bank Group support to Lao PDR remains reducing poverty with the goal of returning the country to a path of sustained GDP growth, infrastructure development and human resource development. Consequently, the Bank's assistance strategy focuses on: stabilizing the economy, deepening structural reforms, investing in health, education, rural development and natural resource management, and focusing on portfolio management. 21. The Bank's Country Portfolio Performance Review (CPPR) of May 12, 2000 concluded that procurement problems were a major stumbling block in Bank-assisted project implementation and disbursements. Beginning in 2001, the Government and the Bank agreed to conduct quarterly CPPRs and the fourth quarterly CPPR in January 2002 discussed procurement issues and an action plan for improvement. 22. A Portfolio Inprovement Plan (PIP) mission in September 2001, while noting that good progress had been made in reducing project implementation issues and procurement delays, found that part of the gains were due to strengthened procurement capacity in the Bank's country office2. The mission concluded that a comprehensive, updated CPAR and a CFAA were urgently needed. 23. The key issues affecting procurement that were identified by the above missions, prior to commencement of work for this CPAR, were: o Slow progress in procurement reform. Government officials had confirmed Bank staff views that most projects were being facing slow and difficult procurement processes that lacked accountability and transparency and had too many steps. o Increasing delegation of procurement responsibility to the provinces. Existing procurement procedures had been prepared to cover procurement by central government agencies. The implementing rules and regulations (IRR) need to be strengthened to cover procurement issues that have surfaced since the Government's decentralisation policy began in 1998, such as how dispersed communities could carry-out procurement efficiently, a lack of trained people, and little competition among contractors and suppliers. o Weak project implementation capacity, both at national and local levels. Poor project implementation performance was largely due to weak project implementation capacity - particularly procurement management. Training in procurement is being carried out on an ad-hoc basis. Even where experienced expatriate procurement expertise has been provided to assist project implementation, only one or two projects include for structured procurement class-room learning/ training allied to hands-on training. o Mencies perceive World Bank guldelines and procedures to be unnecessarily burdensome. Strengthening of the World Bank Office in Vientiane in the area of procurement has significantly improved the image of the Bank in this area. Some of the complaints regarding complicated Bank procedures indicate that there is an obvious need to undertake an extensive amount of training of Government staff at both senior and junior level to demonstrate the need for, and put 2 In the last two years, the relocation of an experienced and procurement-accredited Bank staff member to the country office, together with hiring a local procurement assistant, has worked well in dealing with the majority of procurement issues in-country. - 5 - m place, simple and transparent procurement procedures for good governance that are acceptable to the Government and the Bank. B.2 Bank Portfolio 24. In respect of Bank-financed procurement, this CPAR is based on a review of 11 IDA Credits, nine of which are ongoing and two of which have recently closed, and three Trust Fund projects. The projects are listed in the table below, together with three new Credits approved in June 2002. Project Ref No. Value Approved Closin date $ rnillion Original Extended IDA Credits Provincial Grid Integration 2425-LA 25.30 10/06/1992 06/30/1999 Luang Namtha Provincial Development 2579-LA 10.20 03/15/1994 12/31/2001 12/31/2002 Second Highway Improvement Project 2606-LA 21.80 04/14/1994 06/30/2001 12/31/2001 Health System Reform & Malaria 2674-LA 24.00 01/05/1995 12/31/2001 06/30/2003 Control Land Titling 2832-LA 28.40 03/21/1996 09/30/2003 Third Highway Improvement 2943-LA 68.90 04/08/1997 06/30/2003 Southern Rural Electrification 3047-LA 34.70 03/17/1998 06/30/2004 Provincial Infrastructure 3131-LA 27.80 09/22/1998 11/30/2006 District Upland Development & 3186-LA 2.20 03/17/1999 09/30/2006 Conservation (LIL) Road Maintenance (APL) 3481-LA 47.80 03/27/2001 12/31/2004 Agriculture Development 3509-LA 18.21 05/29/2001 06/30/2007 Poverty Reduction 3 3675-LA 19.30 06/25/2002 03/31/2008 Financial Management Capacity 3 3676-LA 8.50 06/25/2002 04/30/2008 Building Financial Management Adjustment 3 3677-LA 17.00 06/25/2002 05/31/2003 Trust funds Effective Preparation of Second Education TF26344- 0.455 05/22/2000 04/30/2002 Development (PHRD) LA Preparation of Sustainable Forest TF26765- 0.078 04/09/2001 03/15/2003 Management (PHRD) LA Strengthening Capacity for Expenditure TF27326- 0.219 05/19/2000 05/18/2002 05/19/2003 & Debt Management LA Pipeline Credits Projected Approval Date Sustainable Forestry 12.00 04/03/2003 Second Education 10.00 04/24/2003 Health 2 25.00 Nam Theun Social 20.00 Land Titling 2 25.00 3As of September 26, 2002, these Credits are not yet effective. - 6 - 13.3 Governmeiumt rc ardeAalm lu0n am lAIR 25. Ongoing reorganization of MOF prevented identification of a counterpart department at commencement of field work for this CPAR. This draft report is largely based on the Bank team's discussions with several agencies, all of which, including CPC, were strongly supportive, rather than mteraction with a single agency. C. DISCUSSION AN$D ANALYSffS GmF IFEINUIGS C.1 m'ublc Sector G.l. ]Legd xadR'ega&ory.Framewvo,r1 26. The enabling instrument on public sector procurement is the "Prime Minister's Decree on Government Procurement of Goods, Works (Construction, Repairs) and Services" No. 95/PM dated December 5, 1995. This Decree is supplemented by Implementing Rules and Regulations (IRR) on Government Procurement of Goods, Works (Construction, Repairs) and Services issued by the Minister of Finance: o The first IRR No. 2642/MOF was issued on September 21, 1996. o The first update of IRR No. 1639/MOF was issued on December 22, 1998 and superseded IRR No. 2642/MOF by amending the thresholds expressed in kip for methods of procurement, to take account of depreciation of the kip against international convertible currencies. O A second update of the IRR is currently under preparation by MOF and is expected to be issued in late-2002. It is intended to supersede IRR No 1639/ MOF in several respects, including: o Amendments to reflect the Government's decentralization policy. Previously only central and, to a lesser extent, provincial government agencies were granted financial autonomy in respect of procurement. Under the decentralization policy, district agencies will, to a significant extent, be responsible for procurement. The amended IRR is iritended to provide for demarcation of responsibilities based upon the value of the procurement. o Revised thresholds to take account of further depreciation of the kip. 27. A comparison of provisions in the Government's existing legislation with the Bank's procedures and intemational best practice (including the UNCITRAL Model Law on Procurement), is presented in Annex C. There are differences between the Bank's procurement procedures for national competitive bidding (NCB) and those of the Govemment. At Annex D are the provisions that need to be included in the Procurement Schedule of a Credit Agreement, or in a side letter to a Credit Agreement. Key points of the Government's legislation are summarised in the following paragraphs. C.1.111 Procedures and AgpirovaBs 28. Where there are specific procurement procedures prescnbed by multilateral and foreign donors in their loan, credit or grant agreements with the Government, they take precedence over national procedures. Approximately 80 per cent of Government capital expenditure is currently assisted by multilateral credits, mainly from the Bank and ADB, or grants from donors such as JICA. Direct application of the Government's regulations therefore apply to only about 20 per cent of official procurement. - 7 - 29. However, all procurement decisions made under donor procedures are still subject to final approval by a procurement committee, which must be established for all donor- and non-donor procurement. In the case of public (open or pre-qualified) international procurement, the committee must comprise 3-5 persons, 1-3 from the procuring entity, one from MOF, one from the Central Bank and one from CPC. For donor-funded procurement, the requirement for Central Bank representation on the committee is dropped. For central Government contracts worth over 50 million kip (approximately $4,800), the committee's decision is further subjected to approval at a meeting among Ministers and Vice-Ministers who were represented on the committee. For provincial government contracts worth over 30 million kip (approximately US$2,900), the committee's decision is further subjected to approval at a meeting of officials who were represented in the joint committee. For all contracts worth over 1,000 million kip (approximately US$96,000), award shall be approved by the Government, although precisely who in Government is not stated. 30. These provisions effectively place the final decisions on procurement on all Government projects, whether self-funded or donor-funded, in the hands of senior-level officials regardless of whether prior procedures have been correctly followed. While no evidence has been found of procurement decisions being changed by these arrangements, there are documented delays in some cases as a result of time taken to address queries raised by the committee and higher authorities. For major contracts, the Government may wish to retain the right to review the related evaluation but there are two issues that need to be addressed related to the present system. They are: (i) the value of a contract that is subject to such a review needs to be substantially increased; and (ii) any such reviewers should not be permitted to make a recommendation for award. C.1.1.2 Criteria for Selection of Bidders 31. Government procedures provide initially for the establishment of responsiveness of bids, after which the contract award shall be based on the lowest evaluated bid. However, there is a further provision that non-price factors may be taken into account (time, overheads, efficiency of plant being offered, after-sales service, provision of warranty), through evaluation in monetary terms or by a scoring system. Although bidding documents must state the evaluation cnteria, the use of a scoring system can still be subjective and open to abuse, and is no longer used in best practice procurement. Recommended best practice is that the specifics of such provisions as time, warranty and after-sales service be mandated in the bid documents and evaluated as a pass/fail condition of responsiveness. Efficiency of plant can be evaluated in monetary terms as provided in the Bank's procedures, through calculating and capitalizing recurrent operating costs. C.1.1.3 Negotiations 32. Decree 95/PM states that in certain circumstances, direct contracting through price negotiation is allowed. The circumstances are defined in the IRR as (1) no responsive or suitable bid is needed after announcement of public bidding; (2) for technical reasons or protection of industrial property rights, only one contractor or supplier is capable of executing the contract; (3) additions to ongoing contracts are valued at not more than 20 per cent of the original contract price; (4) cases of extreme urgency are brought about by unforeseen events and minimum time limits for public biddmg would be unacceptable; and, (5) consultant contracts are valued at not more than 20 million kip (approximately US$1,900). While inclusion of these five exceptions provides flexibility for exceptional situations, they could be liable to misuse in circumventing competitive bidding. It is noteworthy that MOF reports that only about 20 per cent of Government-funded contracts are now procured by direct contracting. Revised, and more precise draffing of the IRR, should further reduce the risk associated with negotiating contracts. -8 - C.1.1.4 lReectiflo of Bids 33. The Govemment's legislation permits that, when there are less than three bidders or when all bids received are substantially higher than the budget provided, direct negotiation with the lowest bidder is permitted. The Bank's procedures are that all bids may be rejected where there is lack of competition, in which case the contract shall be re-bid, but that the number of bidders alone does not determine lack of competition. As part of updating of the IRR (para 26), this aspect needs tightening to avoid abuse. C.1.1.5 Othelr Aspects 34. Other aspects of the Government's procedures that could be improved, compared with intemational best practice (Annex C), are: o Adverdsing Opporunmities. There is presently no national bulletin or gazette that advertises upcoming procurement business opportunities. o lRecord Ikeeping. There is little in the Government's procedures requiring comprehensive records to be kept of all stages of the procurement process. O Giratuities and Anducements. There is nothing specific in the Govemment's procedures to outlaw the offering of inducements during decision-making stages. O Single source procuremenmt by priee megodtatiom. The Government's procedures do not contain a proviso that this method of procurement is permissible only when the reasons for urgency were not foreseeable and not contributed to by the procuring entity. o Examinadoa, evaluation and comparison. It is sound practice to require that a successful bidder re-establishes its qualifications before being awarded a contract but this is not covered in the Govenmment's regulations. o 1Disputes ResoRutiom. No mechanism is provided in the Government's procedures to receive and review protests by bidders regarding procedural non-compliance by the procunng entity, or to resolve disputes. o Signing contracts. The authority for signing contracts is not clearly defined in Government procedures (para 63). C.1.2 Procedures JPracdce.s, rg&adou and dResorcesr 35. To determine procurement procedures and practices being used on donor-funded projects, and the supporting organization and resources, the detailed reviews and analyses described in paragraphs 6 and 7 were carried out. To review practices on Government self-funded projects, the majority of which are small, senior Government staff and other line agency staff were interviewed. C.1.2.1 Bank-assisted iProlects 36. The two questionnaires (para 6) were issued to (i) PIUs of nine ongoing and two recently closed IDA-credit projects and three grant-funded activities, and (ii) Bank ITLs of the IDA-credit projects. - 9 - 37. The first questionnaire to PIUs was structured in sections and sought to establish their knowledge of procedures, details of how procurement was being conducted, their perceptions of the reasons for delays where these were occurring, and their suggestions for how the procurement process could be improved. All 14 PIUs responded to the first questionnaire, although in several cases not to all questions. The questionnaire is presented in Annex E with summarized answers. 38. The second questionnaire, presented in Annex F, requested Bank TTLs to supply dates of various stages of recruitment of consultants and contractors on specific contracts selected at random from the Bank's incomplete SAP database. The aim was to establish typical recruitment periods and the questionnaire also requested comments on the reasons for significant delays. A total of 28 questionnaires were sent out and 16 responses have been received to date, only three of which were fully completed. TTL's have indicated that finding the requested information has proved difficult and unfortunately the response rate is insufficient to make a meaningful analysis of approximately 200 ongoing contracts on Bank-assisted projects. 39. Responses to the PIU questionnaire were summarized and discussed at the procurement workshop held in mid-January 2001 (para 7). Analysis of, and conclusions from, the findings, together with the limited information obtained from the second questionnaire to Bank TTLs, are presented at paragraphs 40 to 66 below. Understanding the Procedures 40. The first section of the PIU questionnaire sought to establish the general level of knowledge of procurement rules, regulations and guidelines. Responses indicated a wide vanation: * One PIU claimed to understand the Bank's procedures fully. The remainder understood from zero to about 80 per cent with an average of about 50 per cent. * The principal reason for this low level of understanding appeared to be inadequate language skills, especially in comprehending legal and commercial aspects of the Bank's guidelmes. The Bank office in Lao PDR issued a translation of the Bank's procurement guidelines for works and goods in 1998, but all PrUs do not appear to have the translation. Recently the translations has been updated to include revisions in 1999 and the consultant guidelines have also been translated. * Procurement officers from six PIUs had received no training on procurement during the last five years, while seven had received only 24 days of training. One claimed an average of six days of training per year over the five years. There is a clear need for regular and structured training of Government procurement staff. Procurement as Part of Proiect Administration 41. Project administration, including procurement planning and monitoring, is computerised on four projects, carned out manually on eight projects and comprises a mixture of computerised and manual systems on the other two. Only seven projects incorporate procurement planning into overall project schedulmg. Skills vary among projects but the overall indication is one of need for specialized training in best practices of project management. - 10- Advertising Opportunities 42. The majority of PIUs advertise prequalification and bid opportunities in local Lao and English language newspapers. As required in the credit agreements, some also advertise in the UN Intemational Development Business publication and also notify foreign embassies of ICB opportunities. However, based on informnation from three PRIs, formal procedures for advertising are not always followed. This important aspect of the prequalification and bidding process needs to be followed up by the Bank to ensure compliance with Bank procedures. Transparency and fairness would be considerably enhanced by establishing routine procedures for public advertisement of all contracts above certain thresholds. The establishment of a procurement bulletin or gazette would be a positive step, as well as setting up a web site to advertise opportunities, given the rapidly increasing rate of access to the Internet in Lao PDR. Pre-gualification 43. Five PIUs have utilized prequalification for large works contracts and two have done so for the supply of highly specialized goods. Most PIUs have used the Bank's Standard Prequalification Documents (SPD) but three have not, claiming either that they were not aware of the SPD or considered that they were not applicable to their particular exercise. 44. Prequalification generally takes from one to two months, which is considered relatively quick, but a few cases have taken up to six months. The main reason given for delays was that queries were raised by either the executing agency or the Bank or both, that took time to be addressed and answered. 45. Three PIUs do not ask for, and therefore do not review, the financial status of potential bidders during the prequalification exercise, which is an important part of the process. Further training is needed on this aspect. 46. All PIUs prepare shortlists for consultant services, taking 1-2 months for individual consultants and often six months or more for firms needed for larger assignments. Almost all PIUs admitted their inexperience in evaluating consultants expressions of interest for short-listing, which reflects Lao PDR's relatively short history of using intemational consultants for large projects. Further training is needed on the procedures for recruiting consultants and Bank ITLs need to spend more time to assist their PLUs in developing criteria through which well-qualified firms and individuals would be short-listed. Bidding Documents 47. All projects utilize the Bank's Standard Bidding Documents (SBD). Six PIUs expressed concern that local bidders, particularly provincial companies, have language difficulties that lead to misunderstanding of instructions to bidders and evaluation criteria. As already completed for the transport sector, translation of bid documents for small works and goods into the Lao language is recommended. As a first urgently needed step for larger contracts, translation of these elements of the Bank's SPD and SBD is of high priority. Also, the Bank TTLs need to work closely with their PIUs on preparing more detailed and easily understood bid evaluation criteria. 48. The CPAR team found general agreement that the quality of bids from the smaller provincial contractors would improve if they were given some basic instruction on the bidding's procedures in general, particularly on the importance of complying with instructions to bidders including information to be supplied with the bid. Bidding and Bid Opening 49. Only three PIUs hold pre-bid conferences, the others appear unaware of the advantages to themselves in reducing the number of queries received during the bid period. Where bid conferences were held, subsequent queries received were very few (1-2 per bid in most cases) but PlUs not holdmg pre-bid conferences received up to 30 queries per bid. Training is needed on the advantages of holding structured pre-bid conferences. 50. Eight PIUs respond to queries in writing, circulate answers to all bidders and keep records. However, three PLUs often respond verbally and only to the enquirer, being unaware of the importance of not creating an unfair advantage and the potential problems that can arise during bid evaluation by not circulatmg answers to all potential bidders. 51. In compliance with the Government's and Bank's procedures, all PIUs open ICB and NCB bids publicly, immediately after the time for bids to close. Bid Evaluation 52. Under provisions m the Government's procurement procedures, all bids must be evaluated and the bid evaluation report prepared by committee. Permanent bid evaluation committees exist for half of the projects while ad-hoc committees for each bid are formed on the other half. Committees range from 5-11 persons with an average of about seven. Several PIUs commented that it is often difficult to constitute meetings on a date and times when all members can attend. In theory, a majority decision is sufficient but since committees comprise senior central or provincial goverment representatives, difficulties can arise if key members are not available. Committees should be smaller, or at least the majority decision rule should be more strictly applied. 53. In practice, particularly at provincial level, many committee members are unfamiliar with the Bank's procurement procedures and language deficiencies prevail. PIU staff usually undertake basic bid evaluation and prepare the report and recommendation, sometimes with the help of more expenenced staff from the central line ministry. The evaluation committee then reviews the report and recommendations, which are sometimes translated into the Lao language for their benefit. Committee members need some basic instruction on evaluation procedures, including those of donors with specific differences m procedures from those of the Government. 54. Despite the delays that can occur the majority of PIUs feel that they produce clear bid evaluation reports with fully justified recommendations, and that they generally do so within the bid validity period. However, Bank TTLs do not always share this opinion and queries from the Bank and central level of government often mean that PIUJs have to seek bid validity extensions. This is most noticeable for large consultancy assignments, where the submission and evaluation of proposals and approval of the selected firm, often takes over one year. 55. The committee procedure, together with the referral to senior officials for final approval of a larger number of relatively small contracts (paras 29-30), frequently causes delay and considerable extra work for PIUs. Representations by Bidders 56. Three PIJs (out of eight who responded to this question) have received representations from losing bidders after the award decision had been made, almost always resulting in delay in signing the contract. One notable case is currently being pursued in the courts by a losing bidder. - 12 - 57. Only one PIU confirmed that they strictly follow the Bank's procedures which do not permit representations to be entertained between bid closing and contract award. Two PIUs stated that they do receive occasional representations during the bid evaluation period. 58. Further training of PIUs is needed on the importance of rejecting representations during the bid evaluation stage and on dealing with complaints received after the award decision is made. Approvals 59. On the Government's side, final responsibility for approval of ICB and NCB bid evaluation rests with the line minister or vice-minister for central-level projects, and with the chairperson of the bid evaluation committee for provincial level projects. In the latter case, the chairperson is often the provincial vice-governor, a rank equivalent to vice-minister at central level. 60. For small-scale procurement, approvals can be made at lower levels of authority, although responsibilities do not appear to be clearly defined. The project manager of one provincial project is delegated with authority to approve shopping procurement not exceeding US$1,000 in value. The ongoing revision of the IRR is expected to further define responsibilities based upon contract value. 61. The time for the Bank to issue its no objection is between one and two weeks for straightforward cases that do not require clarification. Where clarification is needed, the period extends to between three and five weeks. In one or two isolated cases, due to documents going astray etc., straightforward cases have taken up to five weeks. 62. It is relevant to note that, when asked for opinions on reasons for delay to the recruitment of contractors and consultants, the equal top-ranked response from PIUs was the difficulty of obtaining approvals from both the Government and the Bank. Award of Contracts 63. Contracts are normally signed 1-2 weeks after receipt of the Bank's no objection. Occasionally it has taken up to four months, apparently due to difficulties of getting contract signatories together at a mutually convenient time. Responsibility for signing contracts on behalf of the Government ranges from the project director, chairperson of the bid evaluation committee, chief of cabinet in the line ministry, to the line minister. It is not clear how this responsibility is allocated and it should be clarified in the ongoing revisions of the Government's IRR. 64. Some PLUs do not re-check the financial status of a winning bidder before the contract is signed. A recent case on one of the Bank's projects shows how important this is - a foreign contractor appointed in November 2001 failed to mobilize and, in January 2002, the PIU found that the contractor was subject to bankruptcy proceedings in its home country. Overall Recruitment Periods 65. From analysis of responses to the two questionnaires and discussions with PIUs and Bank TTLs, the Bank team found that the time taken to recruit consultants and contractors on the present portfolio of Bank-assisted projects is as follows: - 13 - Consultants (including short-listing) Individuals: 4 - 7 months, average 6 months Firms for large assignments: 9 - 18 months, average 15 months Goods International Competitive Bidding (ICB) 6 - 18 months, average 12 months National Competitive Bidding (NCB) 6 - 8 months, average 7 months International Shopping (IS) 2 - 4 months, average 3 months National Shopping (NS) I - 3 months, average 2 months Works International Competitive Bidding (ICB) 6 - 9 months, average 8 months International Competitive Bidding (ICB) 10 - 14 months, average 12 months with prequalification National Competitive Biddmg (NCB) 2.5 - 4 months, average 3.5 months 66. Except for IS and NS, there is scope for considerable improvement in these periods by addressing issues discussed in previous paragraphs and providing structured procurement training. Contract and Review Thresholds 67. An analysis of the contract and review thresholds of nine IDA projects under implementation and one recently closed, is at Annex G. Based on this analysis and discussions with each PIU, the Bank team has made recommendations in Annex G for contract value thresholds for bidding under ICB, NCB, etc., together with review thresholds. Project Administration and Disbursements 68. Disbursements on Bank-assisted projects in FY00 were 15.5 per cent. In FY01, they improved to 24.9 per cent and in FY02 were 24.0 per cent. Despite this notable improvement, the Bank team found that, for a variety of reasons, significant delays are occurring during the project implementation stage. The most frequently cited reasons are: * Local contractors' difficulties in raising their performance security of 10 per cent of the contract amounts. National banks usually insist on a cash deposit of the full amount of the security, which is difficult for the smaller contractors to raise. However, there appears to be merit in maintaming the present arrangement in that it does guarantee a degree of financial solvency of the contractors/suppliers. * Inter-ministerial overlap on projects involving procurement in several sectors. The project line ministry may not be able to approve documentation and import licences for goods that are not completely within its remit. For example, all imported project vehicles must be processed by the Ministry of Communications, Transport, Post and Construction (MCTPC), even if MCTPC is not the line ministry for the particular project on which the vehicles will be used. There is a strong case for making the project line ministry responsible for all procurement documentation on that project, provided that appropriate line ministry approvals are obtained at the design stage. * Difficulties with import licences themselves. A firm order for imported goods cannot be placed without an import licence and when approved and issued, they are normally valid for only three months. It is often impossible to order, manufacture and import foreign-made items needed for a project within that period. Reissuing import licences requires a new application, causing delay. - 14 - In some cases, an import licence cannot be approved until serial numbers are given for the goods to be imported, and suppliers will not allocate a serial number before a firm order is placed. Streamlining these procedures will result in an improvement in efficiency in both the public and private sectors. o Problems on small-scale procurement. An increasing focus of the Government's and donors assistance, including the Bank's, is for poverty alleviation and rural development, often where small items and quantities of goods and materials are procured and handed over to village communities to construct facilities themselves. Specifying these small items in sufficient detail to ensure that like quotations are received and can be properly compared for both quality and price, is proving difficult for PIUs. Although the Bank's procedures are equally applicable to small- scale procurement, the Operational Manuals for each project need to carefully address the practical issues related to this type of procurement. Recent post-reviews show that much of small scale procurement is not being covered in a satisfactorv manner. O Insufficient skills in project management and administration. Despite some on-the-job transfer of technology from experienced consultants, many PIJ staff need to enhance their management and administration skills further and specific training courses should be run in parallel with further procurement training. o Rotation of staff. Stemming largely from the overall shortage of technical skills and experience available to the Government, frequent rotation of staff is practised. As people improve their skills and gain expenence, they are moved to a more senior post, often at intervals as short as a few months. While this is natural progression, it is occurring too quickly in many cases to enable replacement of the rotated staff with sufficiently trained people. The PIU post of procurement officer on one Bank-assisted project has had three incumbents within the last 12 months and has suffered delays from each replacement having to learn the job while having less expenence than his predecessor. 69. Performance on project administration would be improved by providing short-course fellowship training of Government project managers at specialized institutions, such as the Asian Institute of Management in Manila. The provision of funds for training could be included in project budgets. Proposed Bank Supervision of Procurement 70. Para 22 refers to how strengthening the Bank's Office in Vientiane in the area of procurement has helped to improved disbursements. Nonetheless, paras 40 to 66 show that there is a need for the Bank to provide regular guidance on a number of procurement issues. To provide this assistance, it is intended that all project supervision missions from mid-2002 onwards shall include a procurement specialist. This will be achieved either through the use of either procurement staff from the EACSM office m Bangkok or regionally-based consultants. 71. Ex-post procurement reviews have not been carried out on a regular basis due to limitations on the availability of procurement staff. In the future, it is mtended that such reviews will be carried out on a regular basis during supervision missions by the procurement specialists who assist each supervision mission. 72. These measures should ensure that day-to-day procurement activities on Bank-assisted projects are carried out in accordance with the Bank's procedures. However, no procurement audit has been carned out to date and in view of the findings of this CPAR, it is proposed that a procurement audit be - 15 - undertaken within the next few months, preferably immediately after the Procurement Monitonng Office has been staffed (paras 74-79 and 129). C.1.2.2 Non-Bank Assisted Proiects ADB Projects 73. Discussions with ADB staff resident in Lao PDR reveals that ADB-assisted projects have experienced similar procurement issues as Bank-assisted projects - delays caused by a shortage of skills and experience on the part of Government staff managing projects, lack of familiarity with procedures, language difficulties, and cumbersome approval procedures. To begin tackling these problems, ADB conducted comprehensive procurement training under two technical assistance (TA) grants in 1996 and 1998 and, more recently, has translated its procurement guidelines into Lao. 74. A proposal by the Government to establish a Procurement Monitoring Office (PrMO) was first made in a Decree of 1993 on reorganization of MOF. The PrMO is referred to in the subsequent IRR but its role is not detailed. The first ADB TA in 1996 provided grant funds to (a) prepare national procurement regulations for the public sector, (b) prepare model bidding documents and establish a contractor's registration system,4 and (c) develop the role and guidelines of the PrMO and train its staff. The TA was successful in drafting IRR 1639/MOF, currently still in force, and in establishing the draft charter (terms of reference) for the PrMO, which are presented in Annex H. The Bank team endorses the concept and basic duties of the PrMO as defined in the daft charter but does not believe that the PrMO needs to be as large as envisaged by the ADB consultants, with five divisions. 75. During the first ADB TA, the Government questioned the need for the PrMO and it was not established immediately but came into being following issue of IRR No. 855/MOF in March 1997. The second ADB TA in 1998 funded institutional strengthening of the PrMO, including further training of three permanent and seven part-time staff that were initially allocated to the PrMO by the Govemment. Procurement training was conducted in Vientiane and, with the Government's decentralization policy then underway, in 11 provinces and a study tour for PrMO officers was conducted in Singapore. 76. During its work on this CPAR, the Bank team was unable to trace the PrMO within MOF or meet with its officers and, in view of the importance of this office (para 79), there is an urgent need to ensure the existence of this office. The ADB concluded in January 2002 that the PrMO seems to have reverted to name-only existence. 77. According to BRR No. 855/MOF dated 18 March 1997, the primary role of the PrMO is to monitor the implementation of Decree No.95/PM, provide training to procurement staff at central and provincial levels and disseminate information and recommendations to staff. Recently, the responsibility for procurement has been transferred to the Budget Department and the newly adopted regulations of the Budget Department include procurement as one of its responsibilities. The MOF has confirmed that, since the Budget Department itself attends biddings organized by different government agencies, it makes more sense to assign the duty of overseeing procurement procedures to the Budget Department. 78. IRR no. 1160/MOF dated August 6, 2001, address the role, duties, rights and organizational structure of the Budget Department of MOF. One of the duties (quoted) is "Research, disseminate, advise, monitor and control the implementation of regulations on public procurements, such as tenders for 4 Representanves of private contractors and suppliers report that the registration system does not work well. The Bank team's view is that the advantages of registration are far outweighed by the disadvantages, which include the difficulty, tume and cost of mnamtaming an up-to-date system, and the problerns ansing when post-qualification (para 64) requires disqualification of a registered contractor/supplier. - 16 - the procurement of new items, construction and maintenance items seen as necessary and with high costs, participation in tender committees within the scope of the budget allocations at the level of the mimstries and equal ranking agencies responsible for such tenders." The Bank team's view is that the concerned line ministry should, as stated in the IRRs, be responsible for the actual evaluation of bids with the Budget Department monitoring the process. Provided items to be procured are included in a line ministry's budget, the procurement process should not be used as a means of exercising control of disbursement of the Government's overall budget. 79. The team's initial findings suggest that the Govemment was reluctant to enlarge the PrMO to the size outlined in the Charter produced by the ADB consultants. Further discussions have been conducted with the Government, whose commitment to a functioning PrMO has been obtained as part of the conditionalities for the second tranche release of the recently approved Financial Management Adjustment Credit (3677-LA). The Bank team strongly supports the concept of a PrMO as a focal point to monitor all procurement activities in Lao PDR, act as a resource center for training Government staff undertaking procurement on projects and provide guidance and practical assistance to project staff on an as-needed basis. The PrMO's role should extend to all Government projects, both donor-assisted and self-funded. However, the PrMO should not become a central procurement agency that exercises control of procurement on projects, as this will result in it becoming a further bureaucratic layer in the approval process. 80. Several requests were made to the Bank team by Government officials and project staff to harmonize the Bank's, ADB's and other donor agencies' procedures for all methods of procurement but particularly NCB, NS and small works, for ease of administration by project executing agencies and improvement in efficiency. The team advised the Government that a working group comprising representatives from the Bank and all major regional development banks is currently addressmg harmonization of ICB and SBD and would move onto NCB and smaller procurement in due course. In the latter respect, a start has been made in the transport sector where harmonized NCB and small works bidding documents have been prepared, translated into Lao, and are m use by all donors. As soon as the PrMO is operational, a high priority task will be to develop and introduce similar harmonized documents to all other sectors. Government-funded Projects 81. The Bank team was unable to obtain comprehensive information on individual Government- funded projects. However, projects funded entirely through Government resources generally tend to be small and account for less than 20 per cent of capital expenditure in the public sector (para 28). Discussions with Government officials, the Lao National Chamber of Commerce and Industry, and other individuals involved with Government self-funded projects reveal the following: o Procurement is organized to comply with the provisions of Decree 95/PM and the current IRR 1639/MOF. The MOF has confirmed that about 80 per cent of bidding procedures presently comply with the Decree and the IRR; o Public bidding is often cancelled on one or other of the provisions in Decree 95/PM (para 32) and the concerned contracts negotiated directly; o State-Owned Enterprises (SOE - see paras 90 to 104) win a substantial proportion of Government-funded contracts for goods and works; o Time overruns are common, while claims for justifiable cost overruns, (many related to the time overruns) are rarely entertained and contractors can suffer significant losses. Local agents - 17 - quoting in foreign currency for the supply of foreign-made goods are paid in klp at the exchange rate prevailing on the date of acceptance of their offer. Depreciation of the kip over the interval between signing a contract and being paid is not taken into account; and The provision for committee approval of almost all contract award recommendations, and higher level approval where contract values exceed the current low threshold (para 29), often cause delays simnlar to those experienced on donor-assisted projects. 82. Currently, the Ministry of Defence and some provincial and district level government agencies do not carry out procurement in accordance with the Decree and the IRR. However, it is the intention of MOF to encourage all Government agencies to follow the Decree and the IRR. The Bank team's view is that the Government will also benefit from extending the ongoing review of the ERR to include aspects (paras 29-34) that, when amended, will produce greater efficiency and economy. C.1.2.3 Audit and Anti-Corruption Measures 83. Procurement committees have control over procurement decisions, except where final approval rests with higher authorities (para 29). Representation on committees by MOF, CPC and the Central Bank effectively provides a degree of internal audit. The Bank team sees the PrMO, when staffed with trained procurement officers, as the appropriate entity to assist the Auditor-General in the audit of procurement, provided it remains independent of procurement decision-making on individual projects. 84. While the Procurement Decree and IRR stress transparency in procurement activities and decision-making, specific anti-corruption measures are not included. The Bank team found no evidence of corruption during its work but there is a need to update the IRR, as aspects such as the relative ease with which competitive bidding can be substituted by direct negotiations (para 32) is not transparent. C.1.2.4 Public Sector Management Performance 85. The Bank's procurement procedures are generally being used on its ongoing portfolio and the same is true of other donor-assisted programs. Some deviations and errors occur (paras 40 to 66) but these are prncipally due to lack of familiarity with, or msufficient attention to, the procedures. The main issue is one of performance inefficiency. The time taken to recruit contractors and consultants (para 65) leaves ample room for improvement through better understanding of procedures and more streamlined approval processes, while delays during project implementation could be minimized through better planning and improved project administration skills. 86. It is noticeable that line ministries such as MCTPC, which has received the largest share of ODA for infrastructure projects over recent years, generally perform better and implement their projects quicker than other line ministnes, such as those responsible for rural development and poverty alleviation, which have a much shorter history of handling ODA-funded projects. It is also apparent that new problems have arisen in conjunction with the Government's decentralization policy over the last 3-4 years, where relatively inexperienced provincial organizations have had to take on added project implementation responsibilities for which they have a limited number of qualified staff and little experience of implementing relatively large projects. It is important that both procurement and project administration training proposed in this report address. as a high priority, the deficiencies at provincial level. 87. Management performance on Government-funded projects is harder to assess, since there are far fewer projects and mostly of small scale. On the basis of the limited information available to the team, the management of Government projects appears to be no better or worse than ODA-funded projects, - 18 - although Government procurement procedures are not being applied to all projects (para 81) and provide some scope for contract awards to be made in a non-transparent manner (para 32). 88. The public sector is beset by a shortage of adequately skilled staff, largely due to very low rates of remuneration. Because of this, it has been common practice for several years for Government staff to take other paid work in the evenings and at weekends to improve their income. The Bank team found that technical staff take time off for parallel employment during regular working hours, often with consultants or contractors engaged on Government projects and sometimes on the same project that they supervise in their Government job. Some ministries seem to ignore or even tacitly accept this practice, which creates obvious conflicts of interest and leads to delay through Government officers not having enough time to attend to their regular duties. 89. Importation of small goods for private sector consumption is relatively informal and occurs at several points along the border of Lao PDR with its neighbouring countries. For large goods, including those required by private sector industry or for use on Government projects, the system is formalized and is the monopoly of a state-owned forwarding company. Comments to the Bank team from several quarters were that delays occur, freight forwarding costs are unduly high and that, as regards the private sector, unauthorised relatively small payments are sometimes the only way to secure fast release of imports. Allowing competition in freight forwarding from the private sector should eliminate many of these inefficiencies. C.L2.5 1The lnvolvement of Statt-Gwnmed Eaerpuises 90. Interviews conducted by the Bank team reveal that national private sector consultants and contractors perceive that state-owned enterprises (SOEs) have a distinct advantage when bidding for Government contracts. It is difficult to determine the number of SOEs that are engaged on Bank-assisted projects but some have been identified. This aspect of procurement, which causes market distortions, is discussed in the following paragraphs. 91. According to Laos PDR's Business Law promulgated in August 1994, SOEs may take three forms: > State-Owned Enterprise, which is 100 per cent owned by the State; > State Mixed Enterprise, in which the State owns 51-100 per cent of the equity and the balance is owned by non-State entities; > State Joint Enterprise, in which the State owns less than 50 per cent of the equity and its joint venture partner owns a majority of equity. Legal and Regulatorg Framework 92. So far as the CPAR team could ascertain, the Government does not maintain a central registry of SOEs, although it is now assembling records of the larger ones under its SOE reform program (see para 101). All three types of enterprise are governed by the Business Law and the subsequent Decree on the Implementation of the Business Law dated February 1, 1996. These both stipulate that the enterprises are managed by a board of directors and can openly mobilize funds. - 19 - Eligibility Issues 93. The Bank's Guidelines on Procurement state that Government-owned enterprises in a borrower's country shall be eligible to participate in bidding on Bank-assisted projects only if they can establish that they (i) are legally and financially autonomous, (ii) operate under commercial law, and (iii) are not a dependent agency of the Borrower or Sub-Borrower (other than bidding for Force Account units). The purpose of these requirements is ensure fair competition for all bidders. 94. Financial Independence: According to the 1994 law, an SOE is fully responsible for its liabilities. Through decisions of its board of directors an SOE may increase its capital or its sources of funding through (i) loans from commercial banks (local or foreign), and (ii) mobilizing funds from the public through mechanisms such as the sales of debentures. The board of directors is also responsible for the allocation of an SOE's annual after-tax profit. 95. Management Independence: For an SOE, the law stipulates that the Mmister of Finance represents the Govemment in appointing or dismissing the president, vice-president, chief executive officer (CEO) and members of the board of directors. For an SJE and an SME, membership of the board of directors must be in proportion to the enterprise's capital. A vice-president representing private shareholders and a representative of employees must be approved by the Minister of Fmance. An SJE is managed and operates according to the regulations governing public companies, whereby most of the decisions are taking by the shareholders, including the appointment of the board of directors (except the president) and the CEO, who in turn is responsible for the operation of the enterprise. 96. The board of directors of an SOE is responsible for: (i) adoption of the business strategy, (ii) assessment of results of business activities, and (iii) proposing the appointment or dismissal of the CEO. The CEO is responsible for: (i) daily management of the SOE according to the strategic plan and goals adopted by the board of directors; and (ii) deciding on matters relating to the SOE within the scope determined by the board of directors. Performance 97. Visits to a sample of SOEs and brief examination of their financial statements confirm that they do not appear to receive any direct financial support from the Government budget and are in charge of raising their own operational funding. However, there is evidence of indirect financial support though delays in payment of taxes and other bills, access to credit on preferential termns, and some measure of debt forgiveness. One SOE contractor engaged on a Bank-assisted project was found (through another Bank review related to SOE reform) to have a significant non-performing loan from a state bank. 98. It appears that management of the SOEs is generally autonomous. However, signs of mefficient management were evident among those visited and most SOEs appear to be financially distressed. Top management incumbents often appear to be political appointees, rather than commercially-experienced people. 99. Many SOEs report that they compete in bidding on donor-aided projects, particularly in the infrastructure sector. They also bid for work in neighboring countries with some degree of success. One SOE indicated its frustration at winning a fairly recent bid on a donor-assisted project, only for the procurement committee's decision to be reversed after review by higher authonties and the donor (the reasons for the reversal are unknown). Other SOEs indicated their satisfaction with bid evaluation procedures but indicated that high contract values gave them problems in providing the bid security. This difficulty occasionally leads an SOE into a joint venture with a foreign partner for bidding. One SOE engaged on a Bank-assisted road construction project formed a joint venture with a foreign contractor and -20 - won the bid, but has since carried out the works without any active involvement of its foreign partner. Progress has been less than satisfactory. 100. Based on its discussions with both the public and private sectors, and including Bank staff involved in advising the Government on SOE reform (para 101), the Bank team concludes that there are SOEs biddmg for Bank projects that may presently be ineligible under the Bank's guidelines. As described in the next section, efforts are currently being made by the Government, with the Bank's active participation, to make the SOEs fully autonomous. Reform of SOEs 101. The New Economic Mechanism adopted by the Government in 1996 included a commitment to reform SOEs and base their operation on sound commercial principles. The task of determining reform policy is now bemg undertaken by the Business Promotion Committee (BPC), a Government entity in the Prime Minister's Office and responsible directly to the Prime Minister. The Bank is providing strategic inputs for SOE reform with funds being provided under the recently approved Financial Management Adjustment Credit (FMAC). BPC's initial goals include: o Identification of key SOEs by line ministries and provinces for restructuring, and preparing a pnority reform list of profitable and non-profitable SOEs. As of December 2001, BPC had identified the number of key SOEs as 33 owned by central Government and 60 owned by provincial govermnents. The total number is probably higher as there are reports that the Government's decentralization policy has spawned mnany new SOEs in the provinces keen to win Government contracts. o Identification of shortcomings in implementing a legal framework for SOE development, with particular reference to tax law. o Preparation of guidelines for performance benchmarking and milestone monitoring m the reform process. o Identifying corporate governance issues, including the role of management and board. 102. BPC will then prepare a master plan for reform. The topics proposed to be addressed in the master plan are: o Definition of goals and objectives o Roles and responsibilities of participants in the restructuring process o The future role of the state o Legal reforms o Forms and methods of restructuring o Use of proceeds from restructuring o Corporate governance and performance monitoring o Social, labor and environmental concerns o Public information plan 103. Followmg approval of the master plan, SOE reform is expected to be tackled on a sector basis with separate plans being prepared for communications, water supply, transport, energy, industry commerce and services, agriculture, the social sector, and technology. -21 - 104. Reform will clearly take some time. In the meantime, to preserve transparency of procurement on Bank-assisted projects and a "level playing field" in the bidding process, SOEs should be awarded contracts only when strict post-qualification evaluation criteria shows that they exhibit full financial and commercial autonomy. On a case-by-case basis, post-qualification may involve a review of an SOE's detailed accounts, ownership, articles of incorporation or their equivalent, Board composition and level of borrowings (see Annex I). C.1.2.6 Fiduciary Risk Assessment 105. Fiduciary risk in procurement in Lao PDR has lessened over the last 5-6 years since the introduction of procurement legislation and accompanying rules and regulations. However, it is still rated high on account of the following factors (more fully descnbed elsewhere in this report): * In the absence of a functioning and well-staffed PrMO, there is no Government agency to oversee country-wide procurement and implement effective procurement training. The Government needs to take action on this as a matter of high priority. * To avoid distortion occurring on Government-financed procurement, the transparency of Government procedures needs to be safeguarded through amending the [RR in a few areas. * A shortage of qualified and expernenced Government staff, lack of familiarity with procurement procedures, and language difficulties (especially with legal and commercial terminology), cause misapplication of procedures and delays. Decentralization is exacerbating these problems with a limited number of qualified staff available in the provinces. * Low public sector salary scales result in Government staff having to take up secondary employment, leading to absenteeism, conflict of interest and project delays. * Overly-frequent rotation of Government staff disrupts overall efficiency of Government offices. It is particularly disruptive on donor-financed projects when staff knowledgeable and experienced in international procurement procedures are replaced with staff with little or no knowledge of the procedures. Rotation policy should be reviewed and line ministries should aim for a minimum incumbency period of, say, three years for key project procurement staff.. * Distortion in the bidding process for works and goods is sometimes caused by participation of SOEs that may not be eligible under the Bank's guidelines. Since central records are incomplete, stricter post-qualification of SOEs is required until proposed SOE reforms is completed (see Annex 1). * Insufficient overall skills in project management and contract administration, which requires specific training programmes for Government staff involved in implementing projects on a broader scale than merely procurement training. * Increasing focus on small-scale procurement in connection with poverty reduction and self-help projects, where well established procedures designed for larger projects are not appropriate and new (often innovative) procedures have to be adopted. 106. Implementation of the recommnendations in this report (para 129-138) will reduce fiduciary nsk over time and, on the Bank's side, continuing attention to strong project design and supervision and in- depth investigation of cases of alleged fraud and corruption, will assist in achieving an improved fiduciary environment. - 22 - C.2 Frivate Sector (.2.1 Private Sector Share ofLao P R ecooom?y 107. The private sector is relatively "young" in Lao PDR but growing quickly as the country continues its transition to a market economy. Its contribution to GDP is hard to quantify but is considered by Government and donor agencies to be still small. The main foreign currency eamers for Lao PDR, and where the largest private sector interests are concentrated, include tourism and exports of timber, textiles and electricity. 108. Under CPC, the Department for Promotion and Management of Domestic and Foreign Investment has made significant steps in the last 2-3 years in reducing restrictions and streamlining registration processes for foreign investment. Registered applications for foreign investment are reported to have increased substantially in the last couple of years but the limited data available shows that, at best, the increase is relatively limited. Investment by sector is not yet available, nor are the actual final sums invested. (.2.2 CommercialRegleadons 109. The Business Law of August 1994 contains provisions pertaining to the establishment and operation of private sector businesses. However, there are no regulations pertainng specifically to the procurement of goods, works and services by the private sector, neither at this point in time does the Bank team see any need for regulations to be introduced. 110. There are no regulations that limit the country source from which goods, works and services may be procured or that give preference to specific countries for procurement purposes. However, some ministerial decisions encourage procurement of domestic goods where available, in preference to imported goods. (7.2.3 CommerclPracdces 111. To gauge the private sector procurement "climate", the Bank team visited two tourism (hotel development) projects and a furniture manufacturing company, all co-financed by EFC, and a foreign- owned garment manufacturing company. Discussions were also held with several local and foreign nationals, all of whom run their own private businesses. The team's conclusion is that the private sector is allowed to freely trade and procure works, goods and services, subject to obtaining the relevant licences which can sometimes take time but are rarely refused. Some organizations reported that they have experienced difficulties in such matters as obtaining import licences, but that these usually occur due to the inexperience of Government staff in dealing with the private sector. 112. Private sector enterprises do not generally follow consistent procurement procedures or practices. Those interviewed reported that while they take price into account in selecting suppliers of goods or services, they focus more on other factors associated with long-standing business relationships. The team was told that quality, compliance with specification, and time of delivery of goods or completion of works are all considered when making a purchase and awarding a contract. Technical specifications and scheduling of procurement are said to be relatively informal. 113. Procurement of construction works through turnkey contracts is favored by the private sector. Local or regional contractors appear to secure most construction work for the private sector, with contractors from Thailand and China being the most serious competitors for local companies. Contactors - 23 - do not appear to have difficulties in ensunng the supply of plant, equipment and materials required to complete the projects, whether sourced locally or from abroad. 114. There is scope for the private sector, particularly nationally-owned companies, to improve the efficiency of its procurement. There is also a need for Government officials handling prnvate sector procurement-related matters such as the issue of import licences, to upgrade their understanding of private sector needs through increased dialogue. A strengthened PrMO could provide assistance in this area. C.2.4 Performance on Public Procurement Contracts 115. At present, there are only a handful of reasonably sized, private national consultants and contractors. Numerous small consulting companies hire staff on a project-by-project basis, and small contractors undertake work on a provincial or sub-regional basis. Many told the team said that that they could not compete with SOEs on major contracts, either on account of low prices offered by SOEs or what they perceive as favoritism by evaluation committees. 116. Some contractors state that lack of access to banking services on an equal footing with SOEs put them at a disadvantage. Obtaining bid and performance securities and opening letters of credit usually require private contractors to lodge the full value of the concerned amounts. On account of small contractors' lack of adequate capitalization, larger contracts are often beyond their reach. 117. Despite these disadvantages, private sector consultants and contractors compete on public sector bids and generally perform reasonably well on those they win, especially when they syndicate with a foreign partner. 118. Local contractors indicated that they could enhance the competitiveness and quality of their bids on Bank-assisted projects if they could receive basic instruction on the Bank's procurement procedures and translated versions of instructions to bidders and evaluation criteria. The Bank team considers that building such instruction into the proposed procurement training program (para 130) would be at considerable benefit, relative to the small additional cost, as it would provide mcreased competition and better quality bids. C.3 Summary of Key Issues and Recommendations C.3.1 KeyIssues 119. Technical assistance was provided by ADB in 1996-99 to develop the Govemment's institutional arrangements at the center, leading to the creation of the PrMO. The PrMO appears to have been dormant for about the last two years but the Govemment has now committed to a functioning PrMO as part of the recently approved FMAC (3677-LA). Within Government, there are different opinions as to the most efficient role for the PrMO. These vary between monitoring project procurement and providing assistance on an as-needed basis for all procurement (the original concept developed by ADB and supported by the Bank team), to controlling and approving all procurement that has budget implications. 120. Existing Lao PDR Govemment procurement legislation embodies basic intemationally-accepted principles such as awarding contracts to lowest responsive evaluated bids. It also provides for donor procedures to take precedence on donor-funded projects. However, compared with intemational best practice, there are a few significant differences and some areas are not fully covered (para 29-34). The recent global focus on improving the transparency and the efficiency on procurement has identified a number of critical areas which can have a significant impact in improving procurement efficiency in a country. A comparison between what is considered "best intemational practice" and the present -24 - procurement legislation is at Annex C. Again, in connection with recent approval of the FMAC, the Government has confirmed that it is in the process of updating its procurement ][RRs. 121. The Bank's CPAR team found that there is a general lack of knowledge, even amongst staff responsible for procurement, of the Government's own procurement legislation and also of the Bank's procurement and consultant guidelines, procurement section of credit agreements and the Bank's Standard Bid Documents (SBDs). The reasons are: a. an inadequate level of understanding of commercial and legal terms used in the Government's procurement legislation and the Bank's documents; b. lack of training - more than half of the staff responsible for procurement on Bank-financed projects have received no procurement training in the last five years; c. frequent rotation by the Government of project staff responsible for procurement and their replacement often by inexperienced new staff; and d. for the Bank's documents, lack of fluency in the English language. 122. Many national contractors and some consultants also lack proper understanding of the Government's and the Bank's procurement procedures. This is often reflected in poor quality bids and the delays that can arise from extended evaluation periods needed to resolve deficiencies in the lowest bids. 123. While there is room for improvement in the time taken to recruit consultants and contractors on all Government projects, the majority of delays are caused by problems arising during contract administration. A broad range of administrative skills need enhancing that relate to project management including procurement and disbursement scheduling, progress tracking and record-keeping. For procurement to be carried out efficiently, it is essential that, in the long term, comprehensive procurement trainig programs are carried out on a regular basis for all Government staff involved with procurement activities. In the short term, focused procurement traimng programs need to form part of the institutional arrangements that are put in place for the supervision of every major Government contract. This training should include, but not be limited to, on-the-job training by trained Government staff or qualified consultants, with one or two key staff attending project management and procurement training programs overseas, which have been identified as specific to their project needs in Lao PDR. 124. SOEs vary in their degree of autonomy. Some have been winning contracts on Bank-financed projects, particularly in the construction sector. Given the manner in which SOEs have been established and are controlled, the degree to which they are eligible under the Bank's guidelines to bid for Bank- financed contracts is questionable in a number of cases. There have been complaints from the private sector of unfair advantage in the competitive bidding process. The Government itself is reviewing appropriate reforms to put SOEs onto a more commercial footing and has agreed to such a program under the Bank's FMAC (3677-LA) and Capacity Building Credit (3676-LA), both approved on June 25, 2002. In the mterim, sections of prequalification and bid documents that relate to an applicant or bidder being required to demonstrate its eligibility need to be carefully drafted. Additional clauses recommended for incorporation into the Bank's SPD and SBD are presented in Annex I. Documents submitted must be thoroughly vetted, to exclude any SOE that is ineligible under the Bank's guidelines. 125. Lack of skilled and experienced public sector staff continues to be a major problem mitigating against smooth and efficient implementation of all projects regardless of funding source. Extremely low levels of remuneration in the public sector is a key reason for the shortage of motivated staff. The Bank - 25 - team identified that the problem is exacerbated by many Government entities ignoring the fact that their experienced staff do not work full-time, and take up parallel employment. Often this work is for consultants or contractors on the same project for which they are responsible as a Government officer. Apart from obvious conflicts of interest, this practice causes bureaucratic delay through Government officers not attending to their regular duties. The effect is felt on project implementation and procurement but, since the practice extends across a wide range of Government activities, solutions require addressmg in the Bank's dialogue with the Government on country-wide issues. No specific recommendations are made in thls report. 126. The Bank team received several requests from Government officials and executing agency staff to work with other major donors, particularly ADB, to harmonize procurement guidelines, particularly for NCB and small works. The Bank team supports harmonization to the maximum extent possible, particularly on small-scale procurement that is increasingly prevalent on poverty alleviation and rural self-help projects, and notes that a working group comprising representatives from the Bank and all major regional development banks is currently addressing harmonization, and NCB and small works bidding documents have already been harmonized and are being used in the transport sector. 127. The private sector in Lao PDR is still small but evolving quickly. There are no regulations relating to procurement methods of goods, works and services by the private sector and the Bank team found that, by and large, the private sector is free to pursue procurement in whatever way is deemed most suitable to a particular project or mvestment. However, influence is occasionally applied by Government on private sector companies and mdividuals to procure locally. For internationally-procured items, it appears that experienced companies, who have been importing such items over a number of years, are able to import relatively easily. However the Government maintains, through an SOE, an effective monopoly on freight forwarding of imports and exports. Pnvate sector companies are of the view that the service is somewhat inefficient and more expensive than might be the case if competition were allowed. C.3.2 Recommendations 128. Recommendations are grouped by the team's assessment of their prionty for adoption. The single priority 1 recommendation is critical to the successful implementation of almost all other others, while within each of priorities 2 and 3 there is no specific order of sub-priority. Priority 1 129. The proposed PrMO should become a functional entity as soon as possible, appropnately located within MOF. The Government has now agreed to this as part of the conditionalities for the release of the second tranche for the FMAC (3677-LA). Location, structure, staffing and defined responsibilities of the PrMO are all-important. Procurement monitoring and training are critical activities and, in order to ensure that actions to maintain procurement efficiency are taken expeditiously, when required, the PrMO should have access to the highest levels of central Government. It should not become merely another layer in the Government's approval process on procurement, nor an agency undertaking centralized procurement or exercising budget-related controls, but rather a resource center. It should be staffed by a small number of professionals (a focused amount of procurement training will be required for the selected staff as there are few Government staff with procurement experience), who would assist m the revision of the procurement legislation and deliver the proposed procurement training program (para 130). Priority 2 130. The Government (through the PrMO) and the Bank, together with other donors, should jointly design and implement a structured procurement training program, geared to developing a full - 26 - understanding, by all Government officials and staff involved with procurement, of how to implement, in an efficient manner, Government and donor procurement procedures. A wide range of training courses will be required. For example, with increasing decentralization of responsibility for project implementation and procurement, the training program needs to include introductory courses for provincial decision-makers up to and including Vice-Governor level, to explain the basic principles and provisions of Government procurement procedures and donor guidelines. Another specific component of the program should be training on micro-procurement on small-scale poverty reduction programs that are increasing in number. 131. To ensure that Bank-financed contracts are not awarded to SOEs that are ineligible under the Bank's guidelines, PIUJs should include requirements in prequalification and bidding documents (see Annex I for details) for SOEs to submit adequate information to enable PIUs to determine their eligibility. 132. The Government is currently reviewing its procurement IRR with the intention of making changes to thresholds and introducing additional regulations pertinent to its decentralization policy. The opportunity should be taken make further changes in areas where there are weaknesses (paras 29-34), which would streamline public procurement procedures and comply with best intemational practice. As a part of the actions to be taken under FMAC, the Government has agreed to revise the IRRs in line with the recommendations of this CPAR. 133. The Bank's Guidelines on Procurement of Goods and Works and Selection and Employment of Consultants have been translated in their entirety into the Lao language. These need to be updated every time that revisions are issued by the Bank. Summary translations should also be made of key elements of the Bank's standard prequalification documents and bidding documents, particularly instructions to applicants and bidders and evaluation criteria. Copies of translated documents should be issued to every ministry, department and office concerned with implementing Bank-financed projects. 134. On both Government- and donor-funded projects, the Government should ensure continuity of key PIU staff, including those responsible for procurement. The Government needs to address the complex issue of staff rotation and provide some parameters such as, for example, a minimum three-year incumbency for key staff before being rotated. When ultimately rotated to another position, key staff should be replaced by persons who have already received training in procurement. 135. The Government and the Bank should include a project management training component in each major project, supported by allocation of credit funds. Training needs for PIU staff on each new project should be reviewed and selected staff should be sent for intensive project management courses. This recommendation applies also to projects not funded by the Bank. 136. The Bank should continue its current work with other lending agencies and specifically ADB, to develop harmonized guidelines to the maximuim extent possible. Harmonization of guidelines for small scale procurement should be a first priority, given the Bank's increasing focus in Lao PDR on poverty alleviation projects in rural areas. Priority 3 137. As the rate of growth of the private sector increases, the efficiency of Govermnent departments handling private sector procurement-related matters such as the issue of import licences, needs to keep pace. A fully functional PrMO should provide assistance in this area. - 27 - 138. The Government should review the present SOE monopoly for freight forwarding in and out of the country with the objective of potential privatization, in order to promote increased efficiency and lower costs. D. PROPOSED ACTION PLAN 139. Establishing the PrMO as a functional, well-staffed office, is considered critical to effective implementation of many of the recommendations of this report and should be given the highest priority. Without the PrMO, there would no central point to coordinate procurement activities country-wide and work with donor agencies on the design and implementation of urgently-needed training. 140. The remaining recommendations, in some cases commencing in parallel with establishment of the PrMO, are presented below as an Action Plan in a tabular form, showing timing, responsibilities and possible funding sources. -28 - FProposed Actitomn Rlan llssue Recommended Ti ing Responsible lFuMdinE Action Start compRlee Source 1. Uncertainty Re-establish over status of functional and well- PrMO staffed PrMO. - review and agree Oct 2002 Dec 2002 Government (MOF) not needed TOR (Charter) with ADB and Bank - appoint PrMO Oct 2002 Dec 2002 MOF Govermnent Director - appoint staff Jan 2003 Feb 2003 PrMO Director with Govermnent MOF - assistance in set-up Oct 2002 Jul 2004 Bank FMCBC 2. Inadequate Design & implement understanding of comprehensive procurement training program procedures by Government staff - design Feb 2003 May 2003 Bank & Government Trust funds (MOF) - implement Jun 2003 continuing Bank with PrMO Trust funds and Government 3. Biddmg by non- - SOE reform in progress Jun 2005 Government with Government autonomous SOEs Bank assistance & Bank - tighten bid Oct 2002 continuing Government & Bank not needed evaluation criteria and exclude non- compliant SOEs 4. Deficiencies in Review and update in hand Dec 2002 Government with not needed Government's IRR Bank input procurement procedures 5. Language Translate to Lao difficulties language: - Bank's guidelines Completed Continuing Bank Bank on Procurement of when Goods and Works & revisions Selection and Recruitment of Consultants Jan 2003 Bank Trust funds - Bank's SPD & SBD instructions to Feb 2003 applicants and evaluation criteria - 29 - Issue Recommended Timning Responsible Funding Action Start Complete | Source 6. Overly frequent Amend rotation Not Not Government not needed rotation of policy to ensure Known* Known* Government PRU minimum two years staff continuity . 7. Weak project Review training management & needs & implement administration fellowship training capabilities program - review needs & Feb 2003 May 2003 Bank & Government not needed select course (project line mmistry) - implement Jun 2003 Continuing Government with Project for each Bank monitoring budget new project 8. Bidding by non- - SOE reform m progress Jun 2005 Government with Government autonomous SOEs Bank assistance & Bank - tighten bid Nov 2003 continuing Government & Bank not needed evaluation criteria and exclude non- compliant SOEs 9. Difficulty of Ex-post procurement Oct 2002 continuing Bank operations obtaining project reviews and budget procurement data supervision missions 10. Variance m Harmonize in progress Dec 2003 Bank & ADB Bank & procedures of procedures especially ADB different donors small-scale procurement 11. Inadequate Improve Feb 2003 ongoing Government not needed responsiveness to understanding of private sector private sector needs procurement through dialogue requirements 12. Government Review & permit Not Not Government not needed monopoly on private sector Known* Known* freight forwarding competition * Timing of these actions outside scope of this CPAR 141. Monitoring of Action Plan implementation will be undertaken by the PrMO with assistance from the Bank through the quarterly portfolio performance reviews. -30 - Annex A LAO iDR - COJNTRY PROCUREMIENT ASSESSMENT REPORT ANNEX A - RINCIIAL c DOCUMENTS REVIEWED WORLD BANK DOCUMENTS GENERAL Development Credit Agreement - Financial Management Capacity Building Project (3676-LA), August 19, 2002 and Project Appraisal Document of June 6, 2002 Development Credit Agreement - Financial Management Adjustment Credit (3677-LA), August 19, 2002 and Report and Recommendation of the President of May 28, 2002. Guidelines - Country Procurement Assessment Reports, (undated) Guidelines (Revised) - Country Procurement Assessment Reports, Jan 15, 2002 Guidelines - Procurement under IBRD Loans and IDA Credits, revised Jan 1999 Guidelines - Selection and Employment of Consultants by World Bank Borrowers, revised 1999 Procurement Training Workshop, Vientiane January 17-18, 2002, overhead presentations by DAH/JR and JR notes Quality of Fiduciary ESW- A QAG Assessment, Draft, Nov 16, 2001 Standard Requestfor Proposals - Selection of Consultants, revised Jul 1999 Standard Bidding Documents - Procurement of Goods, revised Jan 2001 Standard Bidding Documents - Procurement of Works, Jan 1995 Treatment of Procurement and Financial Management in Country Assistance Strategies - Interim Guidelines to Staff, Mar 15, 2001 Workshop on Improving Country Procurement Assessment Reviews - Agenda and Issues Paper, Nov 28, 2001 REGfONAL Special Focus: Public Financial Accountability in East Asia, Draft, Aug 8, 2001 Mekong Project Development Facility (MPDF), managed by EFC, brochure, Dec 2001 EAP - Project Financial Management Regional Guidelines, Draft, undated, probably Sep 2001 -31 - Annex A LAO PDR Aide Memoire of Review Mission on Financial Management Adjustment Credit, Oct 2001 Aide Memoire of Third Quarterly Meeting of Country Portfolio Performance, Oct 2001 Back to Office Report - State-Owned Enterprise Mission, Jul 2001 Back to Office Report - State-Owned Enterprise Reform Component of SAC, Oct 2001 Corporate Restructuring Seminar, slide presentation by Magdi Amin, Dec 6, 2001 Country Financial Accountability Assessment - Concept Paper, Oct 2001 Country Financial Accountability Assessment - Concept Review Meeting Minutes, Oct 2001 Country Financial Accountability Assessment, 2nd Draft Report, Feb 14, 2002 Country Portfolio Performance Review - Plan ofAction, Apr 30, 1998 Country Portfolio Performance Review 2000, May 12, 2000 Country Procurement Assessment Report, May 15, 1994 Country Procurement Assessment Report - Concept Paper, Nov 2001 Development Credit Agreement, 3186-LA, District Upland Development and Conservation Project, Jul 15, 2001 Development Credit Agreement, 3481-LA, Road Maintenance Project, Apr 13, 2001 Discussion Ideas for the Promotion and Improvement of State Enterprises that are Subject to the Ministry of Commerce, draft by Min of Comnerce, undated (probably late 2001) Non-performing Loans among SOEs, note by Magdi Arnin, effective Dec 1999 Portfolio Improvement Plan, Sep 14, 2001 Project Agreement, 3186-LA, District Upland Development and Conservation Project, Jul 15, 2001 Public Expenditure Review, Draft, Dec 17, 2001 (Series of notes and extracts from bidding documents for Third Highway Improvement Project and Road Maintenance Project), Nov 2000 to Feb 2001 World Bank Portfolio, Prior Review Thresholds, undated, probably Sep 2001 -32 - Annex A OTHER COUNTRY-SPECIC CElna: Country Procurement Assessment Report - Concept Paper, Draft, Jul 12,2001 llundonesia: Country Procurement Assessment Report, Mar 27, 2001 Kenya: Public Procurement Reforms and Enhanced Capacity, Implementation Completion Memorandum, Nov 12, 2001 Philippines: Country Procurement Assessment Report - Concept Paper, (undated, probably mid-2001) T1rinidad ad Tobago: Country Procurement Assessment Report, Draft, Nov 30, 2001 Viet Nam: Detailed Terms of Reference for Country Procurement Assessment Report, (undated, probably Sep 2001) Viet Nam: Country Financial Accountability Assessment, Oct 15, 2001 Viet Nam: Country Procurement Assessment Report, Oct 15 2001 Viet Nam: Evaluation of Dependency Status of SOEs in Viet Nam, Answers to Questions in World Bank Terms of Reference, Oct 2001 GOVERNMENT OF LAO P]DR DOCUMENTS (where original is in Lao language, these are unofficial translations) 95/PM- Decree on Government Procurement of Goods, Works [Construction, Repairs] and Services, Prime Minister's Office, Dec 5, 1995 127/PM - Decree on the Organization and Operation of the Ministry of Finance, Prime Minister's Office, Oct 3, 2000 2642/MOF - Implementing Rules and Regulations on Government Procurement of Goods, Works [Construction, Repairs] and Services, Ministry of Finance, Sep 21, 1996 855/MOF - Rules on the Status, Duties, Scope of Power and Organizational Structure of the Procurement Monitoring Office, Ministry of Finance, Mar 18, 1997 855/MOF - Ministerial Decision/Approval on the Establishment of a Committee for Implementation of Decree No. 95/PM dated December 5, 1995, Ministry of Finance, Mar 19, 1997 11 60/MOF - Decision On The Role, Duties, Rights and Organizational Structures of the Public Budget Department, Ministry of Finance, August 6, 2001 1639/MOF - Implementing Rules and Regulations on Government Procurement of Goods, Works [Construction, Repairs] and Services, Ministry of Finance, Dec 22, 1998 -33 - Annex A Business Law (including 42/CPR - Decree of the President on Promulgation of the Business Law), August 13, 1994 Representations and Assurances Relating to National Competitive Bidding Procedures, draft side letter for Road Maintenance Project (with intemal Bank e-mails), Jan 2001 ADB DOCUMENTS Key Governance Issues in Cambodia, Lao PDR, Thailand and Viet Nam, Apr 2001 Lao PDR Country Portfolio Review, Memorandum of Understanding, Nov 27, 2001 Lao PDR Institutional Strengthening of Procurement Monitoring Office, Final Report of consultants on TA No. 2857-LAO, November 1998, with Addendum of February 1999. Lao PDR Preparation of Procurement Regulations for the Public Sector, Final Report of consultants on TA No. 2334-LAO, September 1996 Proposed Charter of the National Procurement Monitoring Office, Draft May 7, 1996 (produced under ADB TA No. 2334-LAO) Technical Assistance Completion Report - Preparation of National Procurement Regulation for the Public Sector - TA No. 2334-LAO, Mar 5, 1998 Technical Assistance Completion Report - Institutional Strengthening of the Procurement Monitoring Office - TA No. 285 7-LAO, Dec 27, 1999 (Extracts from assessments of compliance with loan covenants on two road projects - loans 1369 and 1533 - concerning privatisation of SOEs) MISCELLANEOUS DOCUMENTS Booklet on Procurement Procedures - A Brief Overview of Ten Donors in Lao PDR, DANIDA, Draft, undated but probably late 2001 Burapha Group of Lao PDR, brochure, current in 2001 -34 - Annex B LAO PDR - COUNTRY PRO1[JREMENT ASSESSBMENT lREPDRT ANNEX B - 1P1R0TClffAL PElR$SONS vMET NAM5E POSITE¢ON / 0RGANIZATRDN Governmenit Officers H E Madame Khempheng Pholsena Vice-President, CPC Mr Sila Viengkeo Deputy Director General, MOF Mr Thone Phonephachanh Chief of Macro-Economic Policy Division, MOF Dr Bountheuang Mounlasy Director, Dept. of Intemational Cooperation (DIC), CPC Ms Chongchith Chanthalanonh Division Chief, DIC, CPC Mr Soulichanh Phonekeo Officer, DIC, CPC Dr Khamnlien Pholsena Director General, Dept. for Promotion & Management of Domestic & Foreign Investment, CPC Mr Thaiyaphone Singthong Vice Governor of Khammounane Province Mrs Khampay Vithasay Deputy Director, Budget Department, MOF Dr Sayphet Aphayvanh Deputy Director, Extemal Fmance Relations Department (EFRD), MOF Mr Southot Sodachanh Chief of Loan and Grant Division, EFRD, MOF Mr Sengsomphone Viravouth Deputy Director, Dept. of Planming and Cooperation, Ministry of Education (MOE) Mr Vilayhak Somsoulivong Director, Forestry Dept., Ministry of Agriculture and Forestry Dr Bounbone Sidavong Director, Malaria Dept., Mmistry of Health (MOH) Mr Anousak Phongsavath Deputy Division Chief, Dept. of Energy, Ministry of Industry and Handicraft Mr Phisith Xaysomphou PITJ Accountant, Luang Namtha Provincial Development Project, MCTPC Mr Aloun Khounnavong Project Director, Second & Third Highways Improvement Projects, MCTPC Dr Sisanone Keola Project Director, Health System Reform & Malaria Control Project, MOH Dr Bounpheng Philavong Deputy Project Director, Health System Reform & Malaria Control Project, MOH Dr Viravanh Sourinphoumy Procurement Officer, Health System Reform & Malaria Control Project, MOH Mr Siphandone Sihavong Deputy Project Manager, Land Titling Project, Department of Land and Housing Management, MOF Mr Xaysomphone Souvongkhamchanh Head of Procurement, Land Titling Project, Department of -35 - Annex B Land and Housing Management, MOF Mr Somphone Simmalavong Project Director, Southern Provinces Rural Electnfication Project, Electricitd du Laos Mr Anousak Director, Rural Electrification Division, Development Department, Electricit6 du Laos Mr Phetoula Deputy Project Director, Provincial Infrastructure Project (CPC) Mr Khamphoy Vannasame Deputy Project Director, Provincial Infrastructure Project (Phongsaly Province) Mr Vaiyoulet PIU Accountant, Provincial Infrastructure Project (Oudomxay Province) Mr Bounta Phetdara PIU Planning Officer, Provincial Infrastructure Project (Oudomxay Province) Mr Sonxay Mekvixien PIU Officer, Provincial Infrastructure Project (Oudomxay Province) Mr Kongthanou Philavong PIU Technician, Provincial Infrastructure Project (Oudomxay Province) Mr Phiengkham Manager, Project Support Group, Nam Papa Lao (water supply components of Provincial Infrastructure Project) Mr Maniveng Phetoudom Project Director, District Upland Development & Conservation Project (DUDCP) Mr Alan Xaysavanh Assistant Project Director, District Upland Development & Conservation Project (DUDCP) Mr Niyom Chantalasi Procurement Officer, DUDCP Ms Malayphone Assistant Procurement Officer and Accountant, DUDCP Mr Somnuk Mektakul Chief Maintenance Engineer, Road Administration Division, MCTPC (Road Maintenance Project) Mr Khame Phalakhone Project Director, Agriculture Development Project (Mmistry of Agriculture and Forestry) Mrs Phonesavanh Sipaseuth Project Director, ADB Forest Management and Conservation Project, (Ministry of Agriculture and Forestry) Quasi Government Organizations Mrs Chanthao Pathammavong Vice President, Lao National Chamber of Commerce and Thiphasane Industry Mr Mayon Thammavong Deputy Director (Finance), State Printing Company (SOE) Mr Khamsene Singsounya Finance Specialist, Bridge No. 1 Construction Company (SOE) Mr. Sompadith Sitphaxay Director of Enterprise, Road Construction No. 8 (SOE) -36- Annex B Other Donoor Agencies Mr Edvard M. Baardsen Deputy Head, ADB Resident Mission Ms Arouny Anne Sakulku Project Implementation Officer, ADB Resident Mission Ms Penny Bond First Secretary, AusAID Resident Representative Mr Hisatsuga Fukukawa JICA Representative (Expert attached to CPC) Mr Peter Michener Senior Investment Officer, IFC Regional Mission, Bangkok Mr Adam Sack Regional Manager for Lao PDR and Cambodia, Mekong Project Development Facility (MPDF) Mr Litsamy Latsavong Investment Officer, MPDF Ms Viengxay Praphasiri Investment Officer, MPDF Private Sector Mr Alain Van Den Brande Belgian Technical Cooperation Consultant to PIU, Health System Reform & Malaria Control Project Mr Marko Katila Forestry Economist, Consultant on Preparation of Second Agragrian Reform Project Mr Ken Morfitt Consultant Procurement Adviser to PIU, Road Maintenance Project (MCTPC) Mr Guy Petit Consultant and Chief Technical Adviser to PIU, DUDCP Mr Chanpaseuth Thamvongs Consultant and Assistant Chief Technical Adviser to PIU, DUDCP Mr Chamlong Janetanakit Managing Director, Trio (Laos) Export Co. Ltd. Mr Santi President, Villa Santi Hotel & Resort, Luang Prabang Ms Pany Saignavongs Sales & Marketing Director, Villa Santi Hotel & Resort, Luang Prabang Mr Sisouk Thongpadsa Sales Executive, Settha Palace Hotel, Vientiane Mr Khuanchai Siphakanlaya Managing Director, Lao Consulting Group Mr Sumphom Manodham Director, Burapha Group (Consulting Division) Mir Peter Fogde Director, Burapha Group (Forestry Products Division) Mr Mark Jerome Director, KPMG Mr Gninh Phimpha Director, Accounting Services Co. Ltd Mr Khamphay Phomsavat Director, Accounting & Audit Services Ltd -37 - Annex C LAO PDR - COUNTRY PROCUREMENT ASSESSMENT REPORT ANNEX C - COMPARISON OF PROCUREMENT PROCEDURES Bank Requirement and Best Practice Satisfactorily Comments provided in GOL Decree and IRR Award shall be to the lowest evaluated responsive bid yes However, the IRR procedures permit "non-price" factors (time, overheads, efficiency of plant being offered, after-sales service, provision of warranty) to be evaluated using a points scornng system, long abandoned under best mternational practices. These factors should be either be made a condition of bid responsiveness or be converted to monetary value equivalent during evaluation. Financial negotiations with bidders are not permitted in principle However, the IRR allow financial negotiations to be conducted when: - no responsive or suitable bid is received; - for technical reasons or protection of industrial property rights, only one contractor or supplier is capable of executing the contract; - additions are made to ongoing contracts, valued at not more than 20 per cent of the original contract price; - minimum time limits for public bidding would be unacceptable in cases of extreme urgency brought about by unforeseen events; and - consultant contracts are valued at not more than 20 million kip (approximately $2,000). Most of these exclusions appear reasonable but, in practice, MOF reports that about 20% of Government-financed contracts are not bid under competitive bidding procedures. Preventing abuse of the flexibility of the procurement IRR can be achieved by tightening the wording of clauses covering this area. No bidding eligibility restrictions shall be applied based on not fully There are potential areas of discnrmination in the Decree and IRR in nationality of bidder and/or origin of goods (other than favour of Lao bidders on NCB, by way of provisions for preference and primary boycotts). limiting the advertisement of low value bids outside Lao PDR. -38 - Annex C Bainmk Requairemenat anid Best ?Practce Satisfactorily Comments pirovided in GOL Decree arnd l[IR Bidding opportunities shall be widely advertised. yes Although provided for, wide advertisement is not always practised. There is no publication such as a government gazette in Lao PDR. Contractors and suppliers shall be pre-qualified for large partly Under the Decree and IRR, pre-qualification is directed more towards and/or specialized contracts. admitting contractors and suppliers to approved rosters for all bid opportunities. Best international practices and the Bank's procedures are directed to pre-qualification for large, complex bids or post- qualification for each bidding opportunity, rather than the roster concept. Minimum 30-day bidding period shall apply for NCB. partly A normal 45-day period is specified under the IRR but accelerated procedure "in cases of justifiable emergency" permits reduction to 15 days, which is considered a little short. Bidders shall submit details of minimum experience, Yes However, there is no mention in the Decree and IRR of good practice technical capability and financial status for pre- or post- in re-checking a winning bidder's financial status prior to award of qualification. contract. Foreign companies shall not be compelled to associate with Yes a local company. Joint venture partners shall be jointly and severally liable. not mentioned Should be included in updated IRR. No limit shall apply to the number of companies allowed to Yes bid. Companies shall not be required to register with a local or No The IRR require pre-qualification on approved rosters, although they federal authority as a prior condition for NCB. do not explicitly exclude companies not on rosters. As best practice is not to have rosters, particularly in a country the size of Lao PDR, it is recommended that the roster provision is removed from the IRR. State-owned enterprises shall be allowed to bid only if they No Current participation by SOEs is not meeting the Bank's and best are financially, commercially and corporately autonomous. practice requirements, as the degree of autonomy of many SOEs is uncertain and results in some advantage to the SOEs. -39 - Annex C Bank Requirement and Best Practice Provided in Comments GOL Decree and IRR Extensions to bid validity periods are acceptable only if not mentioned Should be included in updated IRR. justified by exceptional circumstances Means of submitting bids shall not be restricted. yes Sources of labor and material shall not be restricted. yes Bids shall be opened publicly immediately after or closely yes following bid closing time. All bids may be rejected if there is lack of effective partly The Decree and IRR define lack of effective competition as less than competition, which shall not be judged solely on the number three bidders. of bidders. Provision for price adjustments is recommended in contracts partly The IRR state only one year. Consideration to be given to extending of more than 18 months duration, when domestic inflation is to 18 months. high The procuring entity shall maintain good records of queries not specifically This important provision should be included in an updated IRR. raised by bidders and responses given, and analysis of pre- mentioned and pos-qualification of bids received. Two-stage bidding is permissible when, for example, outline not specifically As GOL moves more into using the efficiency of the private sector, design are bemg provided for a contractor to develop into mentioned the use of two-stage bidding for complex projects will become more detail. The first stage bid shall comprise un-priced and important. outline technical proposals. The second stage shall comprise full technical proposals with price. Representations including offers of gratuities and not mentioned With global emphasis on transparency and good governance, this inducements are expressly forbidden at all stages of the provision should be included in an updated IRR. bidding process. There shall be provision for investigation of complaints by not provided (As previous comment) bidders that the procuring entity has not been procedurally compliant. -40 - Annex D LAO ?DR - COUNTRY PIROCUEMElYlENT ASSESSMENT REEPORT ANNEX D - LEGAL PROGVfSffONS ]FOR PROCUREMENT TO BE HNCLUDED IN JDA CREDE1S Note: The following provisions should be included in the Development Credit Agreement for all IDA Credits in Lao PDR. 1. National Comnpefdve Biiddimng (a) Except as provided in paragraphs 4 and 6 of this Part, works shall be procured under contracts awarded mn accordance with the provisions of paragraphs 3.3 and 3.4 of the Guidelines and the provisions of paragraph 1 (b) of this Part B. (b) The procedures to be followed for National Competitive Bidding under sub-paragraph (a) of this paragraph shall be those set forth in the Decree No. 95/PM dated December 5, 1995 on Government Procurement of Goods, Works [Construction, Repairs] and Services (hereinafter Decree 95/PM) and Implementing Rules and Regulations [Labieb] No. 1639/MOF dated December 22, 1998 on Government Procurement of Goods, Works [Construction, Repairs] and Services (hereinafter IRR 1639/MOF) of the Lao People's Democratic Republic, with the following clarifications required for compliance with the Guidelines. (i) no preference whatsoever shall be given to a domestic bidder over foreign bidders or to an SOE over a non-SOE; (ii) awards of goods and works contracts shall be made on the basis of the lowest evaluated bid, and any bid award based on a point system, or any other criteria other than the lowest evaluated bid, shall be deemed invalid; (iii) bids shall not be automatically rejected for lack of effective competition solely on the basis of the number of bidders or because all bid prices substantially exceed the budget allocated and the provisions of paragraph () of Article 4 of the IRRs 1639/MOF shall apply only as modified by the provisions on rejections of bids set forth in paragraphs 2.59-2.62 of the Guidelines; (iv) SOEs in the Borrower's country may participate only if they can establish that they: (i) are legally and financially autonomous, and (ii) operate under commercial law. No dependent agency of the Borrower shall be permitted to bid or submit a proposal for the procurement of goods, works or services under the Project; and (v) the Borrower shall not require bidders or potential bidders to register as such with the relevant authority of the Borrower as a condition of bidding. -41- Annex E LAO PDR - COUNTRY PROCUREMENT ASSESSMENT REPORT ANNEX E - PIU QUESTIONNAIRE WITH SUMMARY OF RESPONSES Project: Responses were received PIUs responsible for 11 IDA credits, one IDF grant, and two project preparations IDA Credit No: Name of person completing questionnaire: Position on project: GENERAL Ql. Are you aware of laws, rules, regulations and guidelines applying to procurement on your project? Yes / No If yes, please identify the laws, rules, regulations and guidelines that apply. Aware of the World Bank guidelines - 10 Not aware of World Bank guidelines - 2 No response - 2 Mentioned GOL rules and regulations - 2 Did not mention - 12 Q2. Do you fully understand the above laws, rules, regulations and guidelines? Claiming full understanding - 1 The rest varied from zero to 80%, with an average of about 50% Q3. In the last five years, how many days of formal training have you received on procurement? No training at all in last five years - 6 In the range of 2-4 days - 7 Claiming 30 days - 1 Q4. Is procurement monitoring and administration on your project computerized or carried out manually? Fully computerized - 4 Manuatly - 8 Mixture of both - 2 -42 - Annex E Q5. Are procurement activities on your project incorporated into overall detailed planning of project implementation, such as the critical path method? Incorporated - 7 Not incorporated - 4 Did not answer - 3 One PITJ asked what eiritdeia path method meamns Q6. Does your project utilize the World Bank's standard bidding and contract documents for goods, works and other types of contract? AU 1ll projects onm whch procuremeEnt is beipng uindertaem auswerred 'yes' If not, are your documents based on other intemational formats? Please define. One co-flmganced project used NDI ruvles for procurrement of coHnsuling services Q7. Excluding pre-qualification if utilized, what are typical procurement times from advertising bids to signing contracts on your project for: Thds quesdon was misundeerstood by many respondenats. CRarificadoto was sought at the Procurement Wojrkshop on January 17-10, 2002, resultng in periods quoted below: (A) Consultant services? IEndivduaD ll consultants: I - 4 monmths, verage 3 mnths Consulting companies: 4 - ¶2 months, average a molmths (Note: both periods exclude short-listig) (B) Supply of goods? NS - I - 3 months, average 2 months 11s - 2 - 4 months, average 3 momths NCO - 6 - 8 months, average 7 moEnths l¢B - 6 - 1 months, average 12 moniths (C) Construction contracts? NCD - 2.5 -4 months, average 3.0 moInthas l[D3 - 6 - 9 monathns, average 8 months -43 - AnnexE PRE-QUALIFICATION Q8. Has your project utilized the pre-qualification process for bidders? For what types of contract: (A) Consultant services? All projects short-list consultants (B) Supply of goods? 2 projects have used prequalification for supply of specialized equipment. Most projects use informal prequalification (enquiries) to identify suitable companies for IS and NS (C) Construction works? 5 projects have utilized prequalification for large contracts Q9. Do you utilize standard pre-qualification documents? Yes- 8 No- 3 Not applicable - 3 Q10. Where do you advertise for pre-qualification? National newspapers (Lao and English language) - 8 Also, UN International Development Business - 5 (of the 8 using newspapers) Also, notify foreign embassies - 3 (of the 8 using newspapers) By direct solicitation only - 3 (applies to NS) Not applicable - 3 Ql 1. What is the normal period allowed for the submission of applications? Normal - 1 month In urgent cases - 2 weeks For large contracts - 3 months Q12. Do the pre-qualification documents require applicants to submit detailed financial data on the status of their company? Of the 11 projects utilizing pre-qualification: Yes- 6 No- 3 No response - 2 -44- Annex E Ql 3. Is financial data reviewed in detail during evaluation to determine whether the company has the financial capacity to undertake the work? Of the 9 projects amswerimg the pirevious questfion: Yes- 6 No- 3 Q14. How long does the prequalification process normally take, including evaluation of applications and approval by project authorities and the World Bank? 7 responses ranging from 2 - § months, average 3.5 months BIDDItG Q15. Where pre-qualification has not been carried out, where do you advertise for bids? National newspapers (Lao and Enliash Ranguage) - 4 Also, UN International Development Business - 1 (of the 4 using newspapers) Also, naotfy foreigm embassies - 2 (of the 4 using newspapers) By direct solicitatiom only - 3 (applies to NS) Not applicable - 7 Q16. Do you hold a pre-bid conference and circulate detailed minutes to all bidders? Only 3 PIUs hold pre-bid comferences Q17. Do the companies bidding for contracts clearly understand the Instructions to Bidders including the evaluation criteria that will be applied? Yes- 4 No, not fully - 6 No response - 4 Q18. Following the pre-bid conference, how many queries on average do you receive from all bidders during the remaining bid period? mwmum- 1-2 (where pre-bisi conference is heRd) MaxiSmum- 30 Q19. Do you answer all queries promptly in writing and copy the answers to all bidders? Yes- 0 No - 3 Not applicable - 4 -45 - Annex E Q20. Do you keep an accurate record of all queries and answers for use by those carrying out bid evaluation? Yes- 8 No- 3 Not applicable - 4 Q21. If the bid documents require to be modified during the bid period, do you grant an extension to the bidding period? Never? Sometimes? Always? Never- 3 Sometimes - 9 Not applicable - 2 RECEIPT OF BIDS AND OPENING Q22. Do you open bids publicly and record bid prices for the public to see? Yes (for ICB, LCB) - 9 No response - 2 Not applicable - 3 Q23. How long after bid closing date are the bids generally opened? Immediately - 9 No response - 2 Not applicable - 3 Q24. Do you have different bid opening procedures for consultant services, supply of goods and construction works? If so, please explain briefly how they differ. No difference in procedures - 1 Do not open consultants proposals in presence of consultants - 5 Small scale works are negotiated with village communities - 1 No response - 3 Not applicable - 4 Q25. Among the bidders, can you identify government-owned companies from privately owned companies? Yes- 5 No- 2 No response - 3 Not applicable - 4 -46- Annex E Q26. How often do privately owned companies bid for contracts on your project? Frequently? Occasionally? Never? IFrequsently - 6 'ccZasWiomallly - 2 Never- - No responmse - 2 Not zpplicabie - 4 How often do private companies win a bid? Frequently? Occasionally? Never? IFrequentily - 6 D¢casDionaiy - 2 Never - 0 No response - 2 Not appflcable - 4 BI[D EVALUATE'iN Q27. Is a permanent committee established for evaluation of all bids on your project, or is a different evaluation committee appointed for each bid? 1Permanent committee - § Dlierent committee eacih bAdi - § Not applicabie - 4 Please list the organizations that committee members represent: No. of cosmim*itee mevmbers 5 6 7 |9 10 11 No. of projects wAth ths snze 3 2 2 of committee Q28. Are evaluation committee members familiar with the requirements of the bid documents? Yes- 7 IProbabRly - 1 Not aiH committee members - a No- 1 Not applicablie - 4 Are they competent in the English language? Yes- 3 Some committee members only - 3 No, but adequnate - 3 No- 1 Not appficable - 4 -47- Anne-x E Q29. Do evaluation committees at provincial level utilize assistance from central government ministries on bid evaluation? Yes- 3 Yes, when required - 3 No- 3 No response - 1 Not applicable - 4 Q30. Are bid evaluations normally completed within the original bid validity period? Yes- 7 Occasionally no - 2 No response - 1 Not applicable - 4 Q31. Other than answers to formal requests for clarification of a bid, does your project receive representations from bidders during the evaluation process? Frequently? Occasionally? Never? Frequently - 0 Occasionally - 2 Never- 6 No response - 2 Not applicable - 4 Q32. Is a comprehensive bid evaluation report prepared, fully describing the evaluation process, reasons for rejecting any bid as non-responsive, how the evaluation criteria were applied, and how the recommended bidder's qualifications were verified? 8 PIUs responded and unanimously said "yes" Q33. Who has the final authority to approve bid evaluation? If the authority depends on contract value, please state the threshold values for authority to approve. Please state whether authority to approve is at central or provincial level. 8 PIUs responded and were unanimous: At central level, the line minister has final authority. At provincial level, the Chairperson of the Bid Evaluation Committee (normally a senior provincial government officer and often the provincial vice-governor) has final authority. One PIU said that for small-scale procurement valued at less than $1,000, the Project Manager had been delegated with final authority. -48 - Annex E Q34. After sending the evaluation report to the World Bank, how long does it take on average before receipt of the Bank's No Objection? 10 PIUs responded giving answers in the following rages: 1-2 weeks - 4 34 weeks - 3 (some case required clarification of bid evaluation) 4-5 weeks - 3 (most cases required clarification of bid evaluation) CONTRACT AWARD AND EFFECTIVENESS Q35. Are negotiations conducted with bidders, before or after selection? Before selection - 2 After selection - 6 (3 responses referred to contract negotiations) Never - 1 No response - 1 Not applicable - 4 Q36. Does your project receive representations from losing bidders that delay award of contracts? Frequently? Occasionally? Never? Frequently - 0 Occasionally - 3 Never- 5 No response - 2 Not applicable - 4 Q37. If pre-qualification has been utilized, is a check carried out on the winning bidder before award of contract to ensure that the information given in the pre-qualification application is still valid? Yes- 5 No- 2 No response - 2 Not applicable - 5 Q38. Who signs the contract on behalf of the project authorities? 9 PIUs responded. Answers varied from Project Director, Chairperson of Bid Evaluation Committee, ministry Chief of Cabinet, to the line Minister. Q39. On average, how long after receiving the Bank's No Objection is a contract signed? 1-2 weeks - 5 34 weeks - 1 2-4 months - 1 No response - 3 Not applicable - 4 -49 - Annex E Q40. Are additional Government approvals required before contracts can be made effective? No- 9 Yes- 2 No response - 2 Not applicable - 1 If so, how long do they take on average? The two PIUs who responded "yes" to the above question answered 1-2 weeks CONCLUSIONS Q41. From your experience, what are the major causes of delays in the procurement process? Please describe briefly: Several reasons were given by each PIU. Summary with number of PIJs giving the same reason: Lack of trained and experienced national staff- 5 Length of time taken for approvals (both GOL and Bank sides) - 5 Poor English language skills, particularly legal and commercial aspects - 4 Time taken to clarify and revise Bid Evaluation Reports - 4 Poor communications - 3 Complexity of procedures - 3 Non-availability of Bid Evaluation Committee members to meet and approve - 2 Insufficient or non-availability of budget allocation by GOL - 2 Inadequate pre-planning of procurement - 1 Poor understanding of Bank procedures by Bid Evaluation Committee - 1 Weaknesses in inter-ministerial coordination - 1 Obstacles in opening LC and obtaining import licences - 1 Sourcing difficulties for small-scale procurement - 1 -50 - Annex E Q42. Are there any obvious discrepancies between Government rules and regulations and World Bank guidelines that create problems? Please describe briefly. Halfaf of the ]PFUs did not identify specific fserepmncAes. The other half rased the followimg comments: Large differemees in the threshoRds for NS GOL apples a lower Imit Tfor ICB, wheireas the BBak's procedures do nrot. Bank requires re-biddinig if l bds are rejected, whereas GOL permits direct negotiation with lowest bidder. Bank requires higher bid security (around 2%) thane G3L (0.5-1%) Bank permits foreign compamies to bid unider NCB, GOL effectdvely excludes them. Two other perfinent comments were made: GOL staff feel uncomfortable applying Banmk's proceduires where they contradict GOL decree anmd IRR. GOL project staff are upset that they receive muec lower per diems than aidonaR amnd foreign staff working on Bank-Tinanceed contraets. Q43. Describe briefly how, in your opinion, present procurement procedures could be improved to speed up the overall process while keeping it transparent and fair to all parties concerned. Suggesdions from PiUs, with the nmumber of PIUs making the same suggesdom: More training for project procuremenat stff- 4 Specific procuirememt training for bid evalueadoti ommittees - 2 Simplfy and speed up approval procedures, inRuding delegaidom - 2 Improved planning, monitoring amd supervision of procerement - 2 Transllate Bank's procedures into Lao language - 2 Speed up communications by more use of electro2nc communications - 2 Harmonize procedres - 1 Blire more experienced and better-traiined naifonal staff- Bank and GOL should clarify which procedures should be followed - I Bank should help on preparing more detailed bid evaluation criteria - I Incireased all-2round help from Banlk staff in WBOV and WBOB - 1 Reveal all bid iresults to the publi - I -51 - Annex F LAO PDR - COUNTRY PROCUREMENT ASSESSMENT REPORT ANNEX F - TTL QUESTIONNAIRE Please amend any incorrect entries below and fill in as many blanks as possible from your project files: Project: IDA Credit no: Contract name: Approx value: US$ Contract type2: Planned duration (months): Contractor: Lead company Associated company Name: Country of domicile: Type3: Prequalification: If yes, dates of' Yes / No Advertsement Closing of applications Evaluaton completed Bank's no obiection Bidding method4: Dates of: Invitaton Bid ooenina5 Evaluation Bank's no Signing of completed obiecwion contract Please describe briefly the reasons for any significant delays: 1. On the Executing Agency's side: 2. On the Bank's side: 3. Other (describe): 2 Goods, works or consultant services 3 Private .sector company or state-owned enterprise 4 ICB, LIB, NCB, IS or NS S Including any extension granted to the bidding period -52 - Annex G LAO P11DR- COUNThY PROCURJEMENT ASSESSMENT REPO¢RT ANNEX G - ANALYSIS OIF CONTRACT AND ]REVIEW THBlRESHOLIDS (Page 1 of 3 - Works) 'Z 1 -: 2a Amount of $18 21M $47.8M $2.20M $27.8M $34 7M $68.9M $28.4M $24 OM $21.8M $10 2M EDA Credit Note Est'd Note Est'd (US$ equiv) Total Cost of Total Cost of (USS equiv) ~~~~~~~~Works is only Works is only $60,000 $150,000 WO1KS Mostly Mostly ICB >500, 000 No ICB No ICB No ICB No ICB ICB No ICB - ICB No ICB >700,000 NCB - All works --00,000 437,000 400,000 - °00,000 :00,000 (limit 9 24m) (limit 410,000) (limt 700,000) (mech .works) 900,000 (labor works) (lirmt 5 Om) NS - 20,000 No Limit S5O,000 .- S50,000 (500,000hmit) Direct :5,000 <50,000 ----- Part A (l) 950,O000 Contracting (250,0COhimit) _250,000 (mech works) (lirrit 2 Om) .40,000 Part A (2) (labor works <7,500,000 (limit 1.7m) (hmit 5.0m) Force - -5,0o0 - 0,000 -g0,000 Account Community - - !5,000 _ - Participation Bank Prior >150,000 >600,000 First Two >500,000 >250,000 >200,000 >100,000 First three Review Contracts contracts - Indicates No Provision in Credit Agreement t Threshold Amount Dependent on Analysis of Each Specific Case cnot greater than > greater than -53 - Annex G ANNEX G - ANALYSIS OF CONTRACT AND REVIEW THRESHOLDS (Page 2 of 3 - Goods) w w_t '1 00~~~~~~ 00 -4 Cr "0 C ~4 CZ, Amount $18.21 M $47.8M $2 20M S27. 8M $34.7M $68.9M $28.4M $24.0M $21 .8M $ 10.2M of EDA Credit (US$ equiv) Goods ICB No ICB No ICB Mostly 0 ICB NCB - 7290,000 :§0,000 - (limit 570,000) IS :!60,000 All goods g4 00,000 :!60,000 - .00,000 . 00,000 (ihrut 300,000) (limit 360,000) (hmit I Om) NS .00,000 c50,000 !60,000 --i0,000 !60,000 - 00,000 !§0,000 (hmit 900,000) (hm1tl100,000) 0imtlt 30,000) (lhmit 700,000) Prior >50,000 >50,000 First Two >50,000 >20000 >50,000' >0,0 l ,00 >2,0' Review Contracts Contracts2 - Indicates No Provision in Credit Agreement Threshold Amount Dependent on Analysis of Each Specific Case :!not greater than > greater than 1 Para 2 of Appendix I of the Guidelines apply 2Para 2 and 4 of Appendix I of the Guidehnes apply -54 - Annex G ANNEX G - ANALYSIS OF CONTRACT AND RE VIEW TERESHOLIDS (Page 3 of 3 - Consultant Services) OUnt o E1DA 18UV $4 8M $220 'ICM8 co.7 $6.9 $2.4 $40M $2.8 S02 (US$ ~ ~ ~ ~ ~ ~ ~ o equiv Prior~~~~~~~~~~~~~~~~~~~~~~g ReviewS -P ~ ~ ~ ~ ~ ~ ~~~~~~~otat Contracts Amount of XIDA $18.21M $47 8M $2.20M $27.8M $34.7M $68.9M $28.4M $24.OM $21.8M $10.2M Credit (US$ equiv)__ _ _ _ __ _ _ __ _ _ _ _ CONSULT¶ANTS Prior Review Firm' >100,000 >100,000 >200,000 >200,000 >200,000 >100,000 >100,000 >100,000 All All >100,000 Consultant Consultant Contracts Contracts Firm2 - - >100,000 >1I00,000 >100,000 - - --- - - -000,000 -000,000 !500,000 -- - - - Individuals >50,000 >50,000 >50,000 >50,000 >50,000 >50,000 >50,000 >50,000 All All >50,000 Consultant Consultant _________ _________ ~~~~~~~~~ ~~~Contracts Contracts Quality Based - 00,000 :g00,000 4 00,000 Selection Consultants d 00,000 l -00,000 Qualification Recruited under cl- 00,000 K 00,000 Para 3.1 to 3.7 of Guidelines - Indicates No Provision in Credit Agreement " Threshold Amount Dependent on Analysis of Each Specific Case not greater than > greater than NOTE: In accordance with paragraph 2.7 of the Bank's Consultant Guidelines, from June 17, 2002, the dollar threshold shall not, in any case, exceed $100,000. ' The procedures set forth in para 1, 2 (other than the third subparagraph of para 2(a)) and 5 of Appendix 1 of the Guidelines apply 2 The procedures set forth in para 1, 2 (other than the second subparagraph of para 2(a)) and 5 of Appendix lof the Guidelines apply -55 - Annex H LAO PDR - COUNTRY PROCUREMENT ASSESSMENT REPORT ANNEX H - DRAFT CHRTER FOR PrMO (Exactly as produced in 1996 under ADB Technical Assistance) PROPOSED CHARTER OF THE PROCUREMENT MONITORING OFFICE Lao People's Democratic Republic Peace Independence Democracy Unity Prosperity Ministry of Finance No. /MoF Vientiane, ... Rules on the Status, Duties Scope of Power and Organizational Structure of the Procurement Monitoring Office Based on the Decree on the establishment of the Ministry of Finance No. 104/PM, dated 6 July 1993; Based on the Decree of the Prime Minister on the Procurement of Goods, Works and Services No.95/PM dated 5/12/95; Based on the Decree on the Addendum to the Decree of the Prime Minister on the Procurement of Goods, Works and Services No .... /PM dated ......; The Minister issues the following rules: CHAPTER I: STATUS AND ROLE OF THE PROCUREMENT MONITORING OFFICE Article 1: The Procurement Monitoring Office is an independent and permanent office within the Ministry of Finance established according to the Decree on the Addendum to the Decree of the Prime Minister on the Procurement of Goods, Works and Services No...../PM dated. Article 2: The Procurement Monitoring Office acts as the central organ of state administration in all matters of public procurement. The Procurement Monitoring Office acts in accordance with the laws and regulations of the Party and Govermment and under direct supervision of the Minister. CHIAPTER II: DUTIES AND SCOPE OF POWER Article 3: Duties of the Procurement Monitoring Office 1. Officers of the Procurement Monitoring Office shall coordinate with the Office of the Auditor-General and administrative authorities at all levels. Especially with the permanent procurement committees established in the various line Ministries and state enterprises subject to Decree No.95/CM of 5/12/95 and the Implementing Rules and Regulations dated . ("public procurement regulations" ); -56- Annex H 2. To provide advice and guidance to line Ministries in their application of the public procurement regulations: 3. To disseminate, in coordination with appropriate Ministries, information and guidance relating to the conduct of public procurement to officers of the central and provincial government responsible for applying the IRRs; 4. To prepare training programmes and conduct and encourage training concerning public procurement; such training will be provided to: (a) all officers applying the IRRs; and (b) in particular, officers and staff of the project implementation units ("PIU") in each of the line Ministries; 5. To collect, record and disseminate information and statistics about procurement planning, concluded procurement contracts and the performance of public procurement obligations: 6. To monitor compliance with the contractual payment terms established by the Ministry of Finance and-prepare regular reports of such compliance to the relevant personnel of the Ministry of Finance; 7. To prepare an annual report to the Council of Ministers concerning the functioning of the public procurement system; 8. To ensure the correct application of and compliance with the public procurement regulations; 9. To cooperate with foreign entities on matters associated with public procurement. 10. To be responsible, in cooperation with the relevant line Ministries, for the development and maintenance of the Rosters established and to be established in accordance with the provisions of the IRRs. Article 4: Scope of Powers of the Procurement Monitoring Office 1. In order to monitor the application of the public procurement regulations, all government entities at all levels and state enterprises in all sectors which are subject to public procurement regulations shall submit all procurement contracts signed by them within 10 days of signature; 2. The Procurement Monitoring Office has the right of access to all documents relating to any procurement subject to the public procurement regulations and may require disclosure of such documents by the procurement committees or their delegated authorities; 3. The nght to accept and seek outside information when necessary; 4. The right to use special funds means and tools, the right to receive bonuses in the event of preventing corruption and saving wasted government money; -57 - Annex H 5. To administer the staff and work with, the personnel division in order to give recommendations to the higher authority concerning: promotion, honors and measures against offenders of the laws and regulations. CHAPTER III: THE STRUCTURE OF THE PROCUREMENT MONITORING OFFICE Article 5: Structure and Division of Work The Procurement Monitoring Office consists of 5 divisions as follows: 1. The Compliance Division has the following duties: - to receive copies of all procurement contracts approved by the line Mimstries; - to monitor the compliance of those contracts with the public procurement regulations; - to refer any breaches of the public procurement regulations to the Director who will inform the Minister and who will, in appropriate cases. Recommend referral of the matter by the Minister to the Office of the Auditor-General or Public Prosecutor; - to monitor compliance with the contractual payment terms established by the Ministry of Finance and prepare regular reports of such compliance to the relevant personnel of the Ministry of Finance; - to receive information and complaints from third parties concerning the application of the public procurement regulations. 2. The Advisory Division has the following duties: - to respond to enquiries from procuring entitles subject to the public procurement regulations on tile interpretation and correct application of such regulations; - to provide advice and guidance to the procurement committees responsible for procurement in the central and provincial governments and state enterprises; - to prepare and disseminate general information and guidance relating to the conduct of public procurement. 3. The Information Division has the following duties: - to collect and record statistics and information about procurement; planning, concluded procurement contracts and the performance of public procurement obligations; - to prepare reports and analyses based on such statistics; - to prepare an annual report to the Council of Ministers concerning the functioning of the public procurement system. 4. The Training Division has the following duties: - to prepare training documents and manuals; -58 - Annex H - to develop training programmes and conduct training sessions to officers applying the public procurement regulations and to the officers and staff of project implementation units ("PIU") in the relevant line Ministries and state enterprises. 5. The Procurement Roster Division has the following duties: - to coordinate with line Ministries desirous of creating procurement Rosters in accordance with Article ...of the IRRs; - to develop and maintain appropriate Rosters in cooperation with the line Ministries: - to prepare reports on the creation of Rosters with a view to creating guidelines for the establishment of Rosters. C]BP1 IRT IW: STANDAFS AND CON F)ION$ OF THE STAFF OF TEE PROCUIEMIWNT MO=0OING OF1CI Article 6: The staff of the Procurement Monitoring Office at all levels shall represent a broad spectrum of procurement experience and shall have previous work experience in different Ministries. The Director and Deputy Directors shall be appointed from different Ministries. Article 7: Standards and conditions for the employment of the staff of the Procurement Monitoring Office are as follows: 1. Possession of a recognised diploma, preferably in the fields of engineering, management, public administration, law or finance; 2. Previous experience of working with procurement regulations required by national law or by donor countries and international organisations; 3. To be faithful and to comply with the policies, laws and regulations of the party and government; 4. To be able to define friends and opposition, to be confident, decisive, flexible, decent, impartial, to always consider the government interest higher than private interest; 5. To be in solidarity with colleagues, friends, to be concerned about others' and their own living conditions; 6. Good health certified by medical doctors without any chronic disease; 7. To be active, enjoy learning, to be modest, to quickly react to new policies of the party and government, to carry out the assigned tasks with high responsibility. CHEAPTR V: 1ETIEO1DS OGF WORK OF TEBl FPROCUREMENT MONITONG OFFfCE Article 8: Methods of Work 1. Methods of Work -59 - Annex H - To work according to the principle of democratic centralism, collective method of work with divided responsibilities for each; organisation by divisions, units and groups which should coordinate among themselves as well as with outside organisations involved with procurement; - To set up an up-to-date programme and detailed schedule for the efficient implementation of the work and to draw experience as the work goes on; - To submit regular reports on the ongoing work to the Director and through the Director and Deputy Directors to the Minister of Finance: 2. The division of work and responsibilities are as follows: - The Director of the Procurement Monitoring Office is the central organ of state administration in all matters of public procurement and is under the direct supervision of the Minister of Finance. The Director is responsible for cooperation with foreign entities on matters associated with public procurement and is directly responsible for the Compliance Division. - The Deputy Directors shall assist the Director, act an behalf of the Director when the Director is absent and be responsible for the following: - The First Deputy Director is responsible for the Advisory and Training Divisions; - The Second Deputy Director is responsible for the Information and Procurement Roster Divisions. CEAPTER VI: FINAL PROVISIONS Article 9: The Procurement Monitoring Office uses its own seal in its official activities. Article 10: All government entities and state enterprises subject-to the public procurement regulations shall be notified of these rules and must strictly implement these rules. Article 11: These rules shall become effective from the date of signature. All previous rules and regulations which contradict these rules shall be void. The Minister -60 - Annex I LAO ?DR - COTNIY PROCUREMENT ASSESSMENT REPORT ANNEX H - DTZR1EE3MATRON OIF ELGHLHY OIF STATE-OWNED ENT EHSIZES TO PARTRCIPATE IN PEQUALIKCA'EON ANDBIE NG A. W4HIAT TEE WEANIK'S GUHD ELNES SAY The Bank's Guidelines for the Procurement of Goods and Works state in paragraph 1.8(c) that: Government-owned enterprises in the Borrower's country may participate [in bidding for Bank- financed contracts] only if they can establish that they (i) are legally and financially autonomous, (ii) operate under commercial law, and (iii) are not a dependent agency of the Borrower or Sub-Borrower under a Bank-financed project (except in the case of bidding for Force Account units). Definitions of terms used above been provided by the Bank's legal department as follows: o legdly a eo,aomois means that the SOE is a legal entity separate from the State; o fi'anaciclly oautoomous means that the SOE does not receive subsidies from the State and that it is not obliged to pass on its entire surplus to the State; o operafe under commercia law means that the SOE is operating under the commercial law of the State, i.e., that it is operating like any commercial enterprise, that it can acquire rights and liabilities like a commercial enterprise, that it can borrow money and is liable for the repayment of its debts, including, inter alia, that it can be declared bankrupt. The term does not mean, however, that the SOE must have been incorporated under the rules of the company law, or the civil or commercial law of the State; and O No depenadent agency of g e BSorrower or Sub-Borrower ...shSaU be peraisted go bid means that the SOE may not bid for contracts to be awarded by the Department or Agency of the State which, under the applicable law of the State, is the reporting or supervisory authority of the SOE. lB. DEEElTR lNG ELHIG]DBIHLHITY The Bank's standard prequalification and bidding documents draw attention to these eligibility factors in the sections on instructions to applicants and bidders, e.g. clause 3.3 of the SBD for Procurement of Works (Smaller Contracts). It is the responsibility of PIUs advertising for prequalification applications or bids to ensure that documents requested for submission by applicants or bidders are adequate to determine their eligibility or non-eligibility. With these definitions in mind and in cases where SOEs are expected to apply for prequalification or to participate in bidding, it is recommended that PIUs amend the Bank's SPD and SBDs to require applicants and/or bidders to submit further specific information as follows: 1. A list of shareholders of the company - individuals, corporate bodies or government agencies - with percentage of equity held. -61 - Annex I 2. Names and positions of all members of the main Board and, in the case of ex-officio members, the name of their employer and their job title. 3. Copies of company incorporation or registration documents, current business licence and articles of association. 4. Names and addresses of all bankers. 5. A list of outstanding loans and names of lenders. C. SEEKING THE NECESSARY INFORMATION C.G Prequaiifcation for Procurement of Works Where Lao PDR SOEs are expected to apply for prequalification, the Bank's SPD should be amended as follows: 1. Shareholders SPD, page 31, "Information Forms". Amend the introductory sentence after the heading to read: "Supplementary information to be provided by Applicants. Where indicated, provision of this information is mandatory. In all other cases, the information may be provided by Applicants as deemed necessary." INFORMATION FORM (1) - General Information. Add "Mandatory" after the title. In the second table "Nationality of Owners", add an additional column "Percentage of Equity Held". Add a paragraph after this table as follows: "For any owner who holds a position in an agency of the Borrowing Government, declare the agency and the position held:" Name Agency and Position 2._ 3. 2. Board Members SPD, page 38, INFORMATION FORM (1) - General Information. At the end of this Form, add the following table: -62 - Annex I Main Board Members For Ex-Officio Members Name Position Employer Job Title 2. 3 ._ _ _ _ _ _ _ _ _ _ _ 4. _ 5.: 3. Company Documents SPD, page 27, "Letter of Application". Add a new paragraph after existing paragraph 7 and renumber subsequent paragraphs. The new paragraph to read: "We append to this application our company's certificate of incorporation/registration, current business licence and Articles of Association." 4. All Bankers Details SPD, page 38, INFORMATION 1FORM (5) lFinancial Capabilities. Add "Mandatory" after the title. In the first paragraph, amend the third sentence to read: "If necessary, separate sheets shall be used to provide details of all bankers of each applicant or partner." 5. Outstanding Loans SPD, page 38, INFORMATION FORM (5). Aer the second table "Financial infognation in US$ equivalent", add the following paragraph and table: "Whae not detailed in the audited accounts attached herewith, provide inforpation below on all outstanding loans taken by each applicant or parter, whether provided by a bank other financing institution or private source." Loan Arnount Narneof Date Loan was Original Outstanding Remaining (US$ Lender Granted Repayment Balance (US$ Repaysent equivalent) Period faequivalent) Period Appllucan Pfnarnc -63 - Annex I C.2 Procurement of Goods Where Lao PDR SOEs are expected to bid for the procurement of goods without prior prequalification, the Bank's SBD for Procurement of Goods should be amended as follows: SBD, page 14, Clause 13.1, add a second paragraph: "In particular, the Bidder shall furnish the following information in respect of the Bidder and all partners in the Bid" 1. A list of shareholders of the company - individuals, corporate bodies or government agencies - with percentage of equity held. 2. Names and positions of all members of the main Board and, in the case of ex-officio members, the name of their employer and their job title. 3. Copies of company incorporation or registration documents, current business licence and articles of association. 4. Copies of audited balance sheets and income statements for the last five financial years and projected balance sheet and income statement for the current and next financial year. 5. Names and addresses of all bankers. 6. A detailed list of outstanding borrowings, their amount, the names of lenders, the original repayment period and the outstanding repayment period. C.3 Procurement of Large Works The Bank's SBD for Procurement of Works (January 1995) have been prepared assuming that prequalification has taken place. Exceptionally, where post-qualification is approved by the Bank, action taken under the Statement of Qualification on page 199 should be amended as follows: Introductory Box. Forms issued to bidders to complete as per the Bank's SPD Procurement of Works, should be amended as described in Section C. 1 above. C.4 Procurement of Small Works (indudiugNCB) In the Bank's SBD Procurement of Works (Smaller Contracts), page 37, Standard Form: Qualification Information, insert the following new clauses and renumber subsequent clauses as appropriate: After clause 1. 1, insert new clause: "Nationality and shareholding of owners (complete the following table): -64 - Annex I Nationality of Owners 1 Name Nationality Percentage of Equity Held 2. 54 I To be cornpleted by all owners of partnerships or individually owned firms "For any owner who holds a position in an agency of the Borrowing Government, declare the agency and the position held:" Name Agency and Position 2._ 3. After the above new clause, insert a new clause: "Bankers (complete the following table in respect of the Bidder and all joint venture partners, listing all bankers and using separate sheets if necessary): 1. Name of banker: Address of banker: Telephone: Contact name and tite: Fax: Telex: 2. Name of banker: Address of banker: Telephone: |Contact name and title: Fax: Telex: -65 - Annex I After clause 1.7, insert a new clause: "Borrowings (Where not detailed in the financial reports submitted herewith, complete the table below for all outstanding loans taken by the Bidder and each partner, whether provided by a bank, otherfinancing institution or private source" Loan Amount Name of Date Loan was Original Outstanding Reanaming (US$ Lender Granted Repayment Balance (US$ Repayment equivalent) Period equivalent) Period Applicant Partner