Lao PDR: MfDR in Aid and Country’s Own Resources
Khampakone Outhenthapanya
Deputy Director - Macroeconomic Division
Ministry of Planning and Investment
Governance
The Government’s Strategic Plan for Governance outlines the key initiatives to be undertaken in the sector to implement the targets of the 6th Plan. The Strategic Plan informs government agencies and the communities of the initiatives being undertaken for better delivery of services, and aims to facilitate dialogue between Government and development partners for efficient coordination, use and review of resources. It covers four key areas of (i) public service improvement, (ii) people’s participation, (iii) rule of law and (iv) financial manage ment.
Financial management
There have been significant improvements in public expenditure management in recent years. The Ministry of Finance has undertaken various steps to improve transparency and accountability in expenditure planning and management. This included revision of the budget law, new mandate of the national treasury, development of a medium term expenditure framework (MTEF) and modifying the current budget nomenclature and chart of accounts. The reporting system of the budget execution has been enhanced by ‘rolling out’ the computerized accounting system.
Presently, fiscal planning and budget preparation display four key problems:
· a lack of realism in the fiscal forecasts, leading to unpredictable spending by way of arbitrary cash rationing;
· no mechanism for ensuring that provinces reflect national priorities in their budget plans;
· a budget process that is fragmented institutionally and by type of expenditure; and
· an overly compressed budget cycle.
Other problems include the continuing off-budget funds, deficiencies in the budget nomenclature, little systematic monitoring and evaluation of budget execution, procurement planning that is not integrated effectively into the budget preparation process, and the short-term horizon of the budget process. Recent GOL actions have made budget targets for revenues more realistic and have expanded the period over which the budget is prepared. A revised chart of accounts and budget nomenclature is being developed and is expected to be completed by 2008.
As part of the financial management reform the government, in collaboration with development partners, has developed the Public Expenditure Management Strengthening Program (PEMSP) covering key government initiatives, planned so far, until June 2009. The program focuses on strengthening the management systems and capacities of MOF, MPI, SAO, line ministries and provincial/district finance departments. The program has five components:
· Fiscal Planning and Budget Preparation
· Budget Execution, Accounting and Financial Reporting
· Local Government Financial Management
· Financial Legislation and Regulatory Framework
· Capacity Building
Implementation of Investment Projects
The Public Investment Program (PIP) is the Government’s instrument to plan and allocate capital investments in the public sector for achieving the 6th Plan objectives. It is an integral part of the national budget formulation process and accounts for almost half of the total Government (public) expenditures. PIP is also an important tool for the Government to manage aid, most of which is provided in the form of project support. PIP provides a consistent framework within which aid agencies can concentrate and coordinate their efforts.
ODA, in the form of grants and concessional loans, plays an important role in both the overall public expenditure and PIP. Over the last 2.5 years, ODA projects comprised, on average, 84% of the total PIP budget. In absolute terms ODA has been more or less constant during 2005/06-2006/07 and is likely to register a small (5-7%) increase in 2007/08. However, only about 65-70% of the total ODA is recorded as aid from many bilaterals and non-DAC countries stays off-budget.
Foreign investments in Lao PDR are expected to be robust in the 6th Plan period. Although the approved foreign investments has declined by more than half in 2006-07, actual investments are expected to rise due to new investments and existing large resource and non-resource projects. Actual FDI inflows are estimated at about US $950 million in 2007 showing a 60% increase over the previous year.
Several new large projects worth over US $1 billion were approved in 2006-07 in agriculture (plantations and forestry), trade, services (shopping malls, entertainment, tourism and banking services) and industry (hydropower and mining projects).
A Combined Investment Law is being developed to improve investment attractiveness. It will not differentiate between domestic and foreign investors and promote a level playing field. The new law is scheduled to be considered by the National Assembly in end-2008. Approval of the Negative List (Conditional List) of Business Activities under the Enterprise Law is expected soon and will help simplify business entry regulations. An Enterprise Registration Office has been created to implement the new simplified business registration procedures. With support from the donor community, MoIC plans to introduce a new business registration system by 2010 and create a national business registry containing information on all registered enterprises.
Monitoring and Evaluation Mechanisms
Monitoring of the 6th Plan requires a comprehensive M&E system for the government to track progress and use the information for policy making. However, the M&E function is currently divided amongst four principal actors within the government with varied M&E responsibilities and little coordination.
MPI monitors the overall implementation of the 6th Plan and reports to the National Assembly on a bimonthly basis. It also prepares and presents an annual performance report on plan implementation. The information collected from the line ministries, agencies and provinces is largely descriptive and incomplete, posing a major challenge for Department of Statistics (DOS) operating under MPI to compile adequate monitoring data.
The Department of International Cooperation (DIC) monitors ODA projects, capturing the commitments of donors, and reporting on disbursements. However, this reporting is based on the plans at the central level, rather than the actual disbursements at the project and programme levels. There is also a difference in the understanding of what is meant by disbursement by the government and the development partners.
Monitoring of ODA-funded projects
The need for effective coordination and management of foreign aid is increasingly recognized by both donors and the government. Arising from the Vientiane Declaration and the associated Country Action Plan, most donors have agreed to align their work programmes with the national priority sectors of 6th Plan. The government has improved its mechanisms for streamlining aid coordination.
MPI is currently in the process of establishing a suitable ODA database management system to track all ODA resources and to record and provide information on progress of all development programmes in the country. The new system will also need to serve all line Ministries’ purposes to keep track of all ODA inflows and the results. The challenge here is for development partners to make aid commitments and disbursements more predictable and accurate and for the Government to improve ODA management which implies, among other things, strengthening inter-ministerial cooperation and building required capacities.
A standard Financial Management Manual is being developed by the Ministry of Finance to provide guidance on harmonized procedures for different financial management steps of ODA projects and programs (budgeting, accounting, internal control, disbursement, reporting and auditing). This manual is intended for all government staff working in ODA projects and programs.
Greater predictability of ODA will help improve the national planning, programming and budgeting processes. The round table process with the associated sector working groups is the major channel of donor coordination in Laos. The round table meeting (RTM) is the highest level of donor coordination between the Government of Lao PDR and its development partners.
GOL seeks greater donor coordination and harmonization of foreign assistance through joint Government-donor working groups in support of policy reform as well as investments in health, education, infrastructure and agriculture. As part of the RTM process, and in parallel to the donor working groups, the government established eight Sector Working Groups (SWGs) in June 2005 to facilitate aid coordination at sector and thematic area levels, and to enter into direct dialogue with the donors. Apart from the UN agencies, international financial institutions (IFIs), most donors, and international NGOs have nominated representatives to the SWGs. Chaired and led by the Government, and with broad participation from various government and other agencies.