43557 January - February 2008 Issue no 5 Towards More Effective Management of Public Finances T BOX 1. he Government's commitment to supporting the Government in imple- About PEMSP (Public Expen- more effective management of fi- mentations of these plans. The World Bank diture Management nancial resources has resulted in works together with the Ministry of Finance Strengthening Program) significant progress in 2007, marked by the and Ministry of Planning and Investment to issuance of the new Budget Law in February assist the Government to improve budget PEMSP was adopted by the followed by a New Audit Law in July. In preparation, execution, reporting and Government of Laos in Novem- September, the Prime Minister instructed auditing, all of which are essential for better ber 2005 based on technical the Ministry of Finance to go ahead with management of funds generated from Nam assistance and advice by the reforms to centralize the customs, tax and Theun 2 as well as increased revenues from World Bank, IMF, ADB, UNDP treasury departments illustrating a strong the mining sector. The goal of the project is and bilateral donors. PEMSP is a commitment to improving transparency and to help the government to establish a program aiming to strengthen effectiveness of Public Financial Manage- mechanism to manage revenues with the capacity of the Ministry of ment. These reforms are important mile- greater transparency and accountability, Finance and Provincial Finance stones for the government and provide while ensuring that funds are targeted to Departments in fiscal planning important momentum to the Government's poverty reduction and environmental and budgeting, budget execu- medium to long term Public Expenditure protection. tion, accounting and reporting Management Strengthening Program In this regard, the new Budget Law of 2007, as well as financial legislation (PEMSP) initiated in 2005 (See Box 1). which focuses on increased centralization and regulatory framework. Lao PDR has been of one of the most and revenue sharing, will significantly decentralized countries in the East Asia improve the central-local government fiscal Region where the provinces are responsible relations framework. It is intended that all for spending a large proportion of total shared revenues will be pooled and man- In this issue public expenditures. While decentralization aged centrally and distributed to provinces can result in service delivery that is more according to a simple sharing rule. This will responsive to local needs, strong centrally help the government to establish greater Towards More Effective managed institutions are needed to monitor control of public finance resources and align Management of Public Finances revenue collection and distribution. To policies to the budget more clearly. address the need for more effective central- To improve tax collection and reduce World Bank Events ized institutions, the Government decided to leakages in tax revenue, the Government centralize customs, tax and treasury Nam Theun 2 Update has introduced a new invoice form, which department. The World Bank's Financial requires traders to disclose the identities of Sustainable Natural Resource Management Capacity Building Project is purchasers. >> Management Q&A: About IDA Page 2 http: //www.worldbank.org/lao Jan-Feb 2008 Events in This new invoicing mechanism makes it (COA) and budget nomenclature, which is easier for the tax department to audit also a component of PEMSP. The main February: business expenses and creates a better feature of the new COA is the functional paper trail for tracking business revenues (sectoral) classification, which is consistent and expenditures. Furthermore, an with the International Monetary Fund's Catalyst of Change: An Open Dialogue with the electronic tax return submission system is internationally recognized Government Legendary Leaders of Asia now available for large taxpayers at the Financial Statistics (GFS) conventions. An Organized by the World Bank Vientiane Capital Tax Office. Once tax upgrade of the Government Financial East Asia Pacific region, the returns are reviewed, taxpayers will Information System (GFIS) is in progress ASEAN Secretariat and the directly deposit money into designated to more effectively identify, track and Global Development Learning Network (GDLN) Asia Pacific. accounts in commercial banks. monitor budget execution reports on time. This unique effort brings Meanwhile, the New Audit Law allows the This will help the Government to manage together yesterday's leaders of funds in a more transparent and effective Asia with the leaders of tomor- State Audit Organization (SAO) to report manner. row in a series of in-depth dis- directly to the National Assembly instead cussions through videoconfer- of to the Prime Minister. With this new The reforms in public financial manage- ence. First Series in December law, audit reports will be published and ment will increase the Government's ca- 21, 2007 - Key speakers - World subject to legislative oversight. The SAO is pacity to manage its financial resources. Bank Vice President, James Adams, and Former ASEAN Sec- mandated to audit all public sector This will allow the Government to better retary General, Ong Keng Yong. operations, foreign-aid loan and grant allocate funds to improve access to public Here is the link to summary investment projects, budget support and services, including health care and educa- report of the first series: state-owned enterprises. SAO New tion, and to protect the environment so http://www.jointokyo.org/en/fea tured_stories/story/catalysts/ Zealand will help with capacity building that the country can meet its Millennium measures. Development Goal objectives of reducing Second Series on February 1, poverty and bring the country out of least 2008 - Key speaker - Fidel Another breakthrough in the reform Ramos, Former President of the process is the new charts of accounts developed status. Philippines "Second Series of Semi- nars on Public Expenditure What is PFM? Public Financial Management (PFM) refers to the legal and Review" to be held at University organizational framework for supervising all phases of the budget cycle, including the prepara- of Laos, Faculty of Economics tion of the budget, internal control and audit, procurement, monitoring and reporting arrange- and Business Management, ments, and external audit. The broad objectives of public financial management are to achieve during the 4th week of February overall fiscal discipline, allocation of resources to priority needs, and efficient and effective (date to be confirmed). allocation of public services. (Source:OECD) World Bank Participation in December 2007 Events 22 December: Street March against HIV/AIDS 21 December: International Day against Corruption Jan-Feb 2008 http: //www.worldbank.org/lao Page 3 Nam Theun 2 Countdown: Four months to impoundment J une 2008 is an important milestone for the completion of communities. It will provide much needed resources for the Nam Theun 2 (NT2) Hydropower project, when a large improving education, better access to medical services and to flow of water from the Nam Theun river will be diverted by the support environmental protection. The World Bank shares the closing of the Nakai dam spillway gates and fill the reservoir government's commitment to ensure the impacts from the NT2 that will fuel one of the largest power plants in southeast Asia project on affected communities and the environment are when it goes into operation in 2009. The dam, built over a five- minimized and appropriately managed. The 12-year program to year period, will be an important asset for Lao PDR as the prepare for the day when NT2 opens for business is progressing income it generates will help improve the lives of the country's well and areas in need of attention are being addressed. six million people, while also improving the lives of the affected CONSTRUCTION: The construction of impoundment is scheduled for mid-June the main dam and electromechanical work 2008. Construction of project roads ­ is 71 percent done. Excavation work has spanning over 140km - is progressing well. been completed and significant progress To address concerns about erosion and has been made in building the power excessive dust, grass and over 10,000 station and transmission lines. The trees have been planted covering 28 diversion tunnel closure is scheduled to hectares near the dam and along the main occur in April 2008, and reservoir access road. NAKAI PLATEAU: Villagers being The villagers have started their new resettled in the Nakai Plateau are in the livelihood activities such as rice produc- process of moving into their new tion, seasonal crops, planting fruit trees, houses, which have been designed ac- raising pigs and frogs, livestock, forest cording to their preferences. The reset- products and in the future subsistence tlement areas are equipped with water fishing in the reservoir. Health problems supply, schools, electricity and new among villagers have dropped signifi- roads. By May 2008, all the houses for cantly due to better water and sanita- 6,200 residents will be ready and the tion, regular health check-ups and the relocation process will be completed. provision of mosquito nets. DOWNSTREAM: Villagers living down- generate money from a variety of differ- stream of the dam have started to bene- ent sources to compensate for any fit from improved safe water supply and changes in fishing catches after the river protection from floods ahead of project diversion. This will be scaled up to all impacts. A group of pilot villages has impacted villages in the downstream also been taking part in new livelihood areas. Implementation, however, development programs focused on agri- remains a challenge and it will require culture, fish ponds and handicrafts, considerable attention going forward to among others, to help them generate ensure that villagers are adapting and income beyond that derived from river benefiting from the new livelihood fishing. The objective is to help villagers opportunities. WILDLIFE AND ENVIRONMENTAL cent of the commercially available tim- PROTECTION: Progress in dealing with ber has been harvested. illegal mining, wildlife poaching, and PROJECT LANDS: Progress has been logging threats to the Nakai-Nam Theun made in the delivery of compensation National Protected area continues. Im- payment to villagers losing land to the provement has also been noted in wild- project. However, payment of compen- life monitoring. Salvage logging has sation needs to be accelerated, espe- been completed and more than 90 per- cially for villagers heavily affected. For more information about the Nam Theun 2 Project, visit: http://www.worldbank.org/laont2 and refer to: "Semi-Annual Update on the Lao PDR Nam Theun 2 Hydroelectric Project" by the World Bank and Asian Development Bank Page 4 http: //www.worldbank.org/lao Jan-Feb 2008 Sustainable Natural Resource Management: An analytical study Q&A L ao PDR is a landlocked and moun- been working with the government to tainous country with extensive address concerns regarding natural What is IDA? natural resources - especially its resource management, not only to The IDA (International Develop- mining and hydropower which could be a improve the management of revenues ment Association) is part of the major driver of growth and public revenue generated through development of natural World Bank that focuses on poor- and is expected to account for two-thirds resources but most importantly to manage est countries. IDA complements of the country's exports. the social and environmental impacts. As the World Bank's other lending these issues are complex and interrelated, Effective management of these natural arm - the International Bank for the World Bank is committed not only to resources is one of the country's greatest Reconstruction and Development help the government develop increased challenges. If managed well, these natural (IBRD) - which serves middle- policy capacity but also to help maintain resources can help lift the country out of consistency in dealing with all of these income countries with capital in- poverty. If managed poorly, the result issues. vestment and advisory services. could be environmental degradation, negative social impacts and a lost oppor- To support the government in developing What are IDA credits and tunity for the country to capitalize on its effective natural resource management grants? greatest asset. The stakes are high for the policies, the World Bank is launching the IDA lends money - known as cred- government, development partners and "Country Economic Memorandum its - on concessional terms. This private sector to do it right. (CEM) on Natural Resource means that IDA credits have no Management," a major initiative to be Lao PDR's natural resource endowment is interest charge and repayments completed in 2008. This CEM will address multi-faceted. Abundant water resources are stretched over 35 to 40 years, the objective of how best to utilize the result in hydropower having impressive including a 10-year grace period. country's rich natural resource endowment potential for both domestic power IDA also provide grants to coun- in a way that is sustainable and will generation and for electricity exports. To tries at risk of debt distress. benefit the country for generations to date Lao PDR has tapped only a small come. How large is IDA assistance to portion of its potential capacity - 643MW Lao PDR? of an estimated 20,000MW. By 2015 Lao The CEM will inform the dialogue with the rivers will fuel 14 hydropower plants government on the issues and policies From 1977 to 2006, total IDA as- scheduled to be in operation. With much related to natural resource management, sistance for Lao PDR reached of the power generated planned for export particularly for hydropower, mining, US$839 million. During this period, to Thailand, Vietnam and Cambodia, the forestry, and land usage and will: IDA was the third largest source of Lao Government aims for the country to analyze the costs and benefits of official development assistance to become the battery of the Mekong region. natural resource management-related the country, ranking behind Japan Mining has already begun to show its policies; and the Asian Development Bank. potential impact on the economy with gold Currently all financing of IDA to identify winners and losers from the and copper emerging as drivers for export Lao PDR is in the form of grants. upcoming changes due to growing natural growth. Significant mineral deposits of resource related activities; gems, potash and lignite have also been More on IDA: confirmed. The mining sector has the assess the financial and investment http://www.worldbank.org/ida potential to contribute to the economic implications of developing Lao PDR's development of the country. Forests cover natural resources; and nearly half of the country and much land measure the fiscal, environmental and could be utilized for rubber, bamboo, social sustainability of the different eucalyptus and other forestry plantations. approaches that the Government of Lao For all of these natural resource sectors, PDR might take to managing natural For more information about the their development contribution will resources. World Bank in Lao PDR, please ultimately depend on how the revenue contact: This analytical study complements the and benefit streams are managed and the Nanda M. Gasparini ongoing project activities of the World environmental risks are mitigated. E-mail: mgasparini@worldbank.org Bank in natural resource management and Viengsamay Srithirath The Government of Lao PDR recognizes will inform future natural resource E-mail: vsrithirath@worldbank.org the importance of this natural resource management initiatives in Lao PDR. http://www.worldbank.org/lao base for economic development and poverty reduction. The World Bank has Editor: Anita Dean