Report No: AUS0000591

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Public Disclosure Authorized Lao People's Democratic Republic Public Expenditure and Financial Accountability (PEFA) Assessment

Public Disclosure Authorized .

March 27, 2019 .

World Bank Governance Global Practice Public Disclosure Authorized Equity, Finance and Institutions (EFI) , Lao PDR, East Asia and Pacific Region

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Public Disclosure Authorized .

© 2019 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of January 1, 2019)

Currency Unit = (Kips)

US$1.00 = Rp 8,530

FISCAL YEAR

I October - 30 September (until 2015/2016)

January 1 – December 31 (since 2017)

This report was prepared by Sylvie Zaitra, Consultant; John Short, Consultant; Viengmala Phomsengsavanh, Consultant; Maxwell Dapaah, Senior Governance Specialist (Financial Management); Fanny Weiner, Senior Governance Specialist (Public Sector), and Saysanith Vongviengkham, Governance Specialist (Public Sector). The work was funded by the European Union.

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Table of Contents Executive Summary ...... 8 1. Introduction ...... 15 2. Country Background Information ...... 24 PILLAR ONE: Budget Reliability ...... 43

PI-1. Aggregate expenditure outturn ...... 43

PI-2. Expenditure composition outturn ...... 43 PILLAR TWO: Transparency of Public Finances ...... 48

PI-4. Budget classification ...... 48

PI-5. Budget documentation ...... 50

PI-6. Central government operations outside financial reports ...... 52

PI-7. Transfers to subnational governments ...... 57

PI-8. Performance information for service delivery ...... 58

PI-9. Public access to fiscal information ...... 62 PILLAR THREE: Management of Assets and Liabilities ...... 65

PI-10. Fiscal risk reporting ...... 65

PI-11. Public investment management...... 67

PI-12. Public asset management ...... 72

PI-13. Debt management ...... 75 PILLAR FOUR: Policy Based Fiscal Strategy and Budgeting ...... 79

PI-14. Macroeconomic and fiscal forecasting ...... 79

PI-15. Fiscal strategy ...... 82

PI-16. Medium-term perspective in expenditure budgeting ...... 84

PI-17. Budget preparation process ...... 87

PI-18. Legislative scrutiny of budgets ...... 91 PILLAR FIVE: Predictability and Control in Budget Execution ...... 95

PI-19. Revenue administration ...... 95

PI-20. Accounting for revenue ...... 103 PI-21. Predictability of in-year resource allocation ...... 106

PI-22. Expenditure arrears ...... 111

PI-23. Payroll controls ...... 113

PI-24. Procurement ...... 117

PI-25. Internal controls on non-salary expenditure ...... 122

PI-26. Internal audit ...... 125 PILLAR SIX: Accounting and reporting ...... 129

PI-27. Financial data integrity...... 129

PI-28. In-year budget reports ...... 134

PI-29. Annual financial reports ...... 136 PILLAR SEVEN: External Scrutiny and Audit ...... 140

PI-30. External audit ...... 140

PI-31. Legislative scrutiny of audit reports ...... 145 4. Conclusions of the Analysis of PFM Systems ...... 149

4.1 Integrated Assessment of PFM Performance ...... 149

4.2 Effectiveness of the Internal Control Framework ...... 152

4.3 PFM Strengths and Weaknesses ...... 154 5. The Government’s PFM Reform Process ...... 159

5.1 Approach to PFM Reforms ...... 159

5.2 Recent and Ongoing Reform Actions ...... 163

5.3. Institutional Considerations ...... 168 Annex 1: Performance indicator summary ...... 172 Annex 2: Summary of observations on the internal control framework ...... 181 Annex -3A: List of persons interviewed or consulted ...... 185 Annex 4: Calculation Sheets for PI-1, PI-2 and PI-3 ...... 198

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List of acronyms

ADB Asian Development Bank ASEAN Association of Southeast Asian Nations AT Lao PEFA Assessment Team BCEL Banque pour le Commerce Exterieur Lao BoL Bank of Lao PDR BoP Balance of Payments CN Concept Note CPI Consumer Price Index EDL Electricité du Lao EU European Union FDI Foreign Direct Investment FFRDF Forest and Forest Resources Development Fund EPF Environment Protection Fund FICT Financial Information Technology Center FMCBP Financial Management Capacity Building Program FMIS Financial Management Information System FY Fiscal Year GDP Gross Domestic Product GFIS Government Financial Information System GGP Governance Global Practice GIZ Gesellschaft für Internationale Zusammenarbeit GNI Gross National Income GoL Government of Lao PDR HDI Human Development Index ICT Information, Communications and Technology IMF International Monetary Fund IT Information Technology JICA Japan International Cooperation Agency KEXIM Korea Export-Import Bank LDB Lao Development Bank LDC Least Developed Country LPRP Lao People’s Revolutionary Party LSFC Lao State Fuel Company LSX Lao Securities Exchange LTC Lao Telecom Company MAF Ministry of Agriculture and Forestry MEM Ministry of Energy and Mines MDTF Multi-Donor Trust Fund MoES Ministry of Education and Sports MoF Ministry of Finance

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MoH Ministry of Health MoHA Ministry of Home Affairs MoIC Ministry of Industry and Commerce MoJ Ministry of Justice MoNRE Ministry of Natural Resources and Environment MPI Ministry of Planning and Investment MPWT Ministry of Public Works and Transport MTFF Medium Term Fiscal Framework NA National Assembly NGPES National Growth and Poverty Eradication Strategy NPNL Nam Papa Nakhone Luang (Vientiane Capital Water Supply State Enterprise) NSEDP National Socio-Economic Development Plan NSSF National Social Security Fund NT2 Nam Theun 2 Hydropower Project OT Oversight Team (Lao PEFA Assessment Steering Committee) PDR Lao People’s Democratic Republic PEFA Public Expenditure and Financial Accountability PFM Public Finance Management PFMMP Public Finance Management Modernization Program PFMSP Public Finance Management Strengthening Program PIM Public Investment Management PPG Public and Publicly Guaranteed PRF Poverty Reduction Fund PRSO Poverty Reduction Support Operations RMF Road Maintenance Fund SAO State Audit Organization SDC Swiss Agency for Development Cooperation SDG Sustainable Development Goals SDTF Single-Donor Trust Fund SME Small and Medium Enterprise SOCB State-Owned Commercial Bank SOE State-Owned Enterprise TSA Treasury Single Account UN United Nations VAT Value-Added Tax WB World Bank WTO World Trade Organization

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Executive Summary

Introduction

1. Since 2005, the economy of Lao PDR has grown at a rate above 7 percent, one of the fastest rates of the region, accompanied by a stead