Lao PDR Public Finance Management Reform Program (EU-WB TF073110) Aide Memoire (March 23, 2020) Chart of Accounts Mission, February 24 – 28, 2020 I. Introduction 1. As part of the Public Finance Management (PFM) Reform Single Donor Trust Fund (SDTF), which is financed by the European Union (EU) and implemented by the World Bank, a World Bank team1 visited Lao PDR from February 24 – 28, 2020 to provide support to the Ministry of Finance (MoF) in the improvement of the Chart of Accounts (CoA). This mission followed on earlier World Bank missions (March 10 – 28 and June 18-28 both 2019), which started the implementation of the action plan for the extension of the CoA devised jointly by the World Bank and IMF. The overall goal of the CoA support is to help develop an improved CoA prior to the implementation of a new Financial Management Information System (FMIS). IMF also started their TA to address the economic classification and geographic classification segments on June 26 overlapping with this mission 2. This Mission continued technical assistance for expansion of the “CoA Action Plan Phase I: Administrative, Source of Funds, and Projects segments, focus on coverage, consistency and FMIS processes”. The new FMIS will be acquired, financed by the WB’s “Enhancing PFM through ICT and Skills (E-FITS) Project”. 3. The Mission had working meetings with the management and staff of the Accounting Department (AD), National Treasury (NT), State Budget Department (SBD), and the Fiscal Policy and Law Department (FPLD), External Finance and Debt Management Department (EFDMD), and Institute of Financial Information Development (IFID) of the MoF. The Mission conducted a series of meetings with the members appointed to the Steering and Technical Committees for improvement of the Chart of Accounts (CoA STC). The Mission would like to thank, Mme Daovone Thongchanh, Head of the CoA Steering Committee, Director General, Accounting Department, MoF, Mr. Nouxeuy Phomsichan, Deputy Director General, National Treasury (NT), MoF, and the CoA STC for their overall guidance and support and to all government counterparts for courtesies extended. II. Key findings: CoA improvement 4. The overall CoA improvement progresses with delay and the improved CoA structure should receive endorsement by the MoF management by July 2020, ahead of the FMIS acquisition and launch. Steering and Technical Committees for the CoA improvement (CoA STC) have been actively working to 1 The team comprised Maxwell Dapaah, Sr. Financial Management Specialist, Fanny Weiner, Sr Public Sector Management Specialist and TTL; Janis Platais, Treasury Management Specialist; Viengmala Phomsengsavanh, Public Sector Management Specialist; and Southida Salaphan, Program Assistant. 1 ensure the provision of the necessary inputs for further work in line with the agreements reached during Mach 2019 and June 2019 missions. CoA STC members provided important inputs, comments on the existing classification structures and classification approaches for the FMIS CoA. The mission team obtained important comments regarding the legal requirements of the coding structures and progressed well on formulating the classification structure options for the new FMIS. 5. The CoA options for the future CoA organization, project, and fund source segments were thoroughly discussed during the mission. The WB team outlined the proposed solutions for the CoA design and discussed these with the CoA STC. A technical note to describe the decisions made in the design of the CoA segments will prepared and circulated separately. Upon the completion of the design of the economic and geo-location segments with assistance by the IMF, these also will be integrated in the final technical note to provide consolidated solution of the CoA. 6. Progress on implementing earlier recommendations requires improvement. Hiring local consultants to upgrade GFIS functionality until the launch of the new FMIS, to support the NT and the State Budget Department (SBD) in full utilization of the GFIS data and reporting functionality has been very slow. The NT complained of significant delays in obtaining the GFIS data, while being under the management pressure to provide real-time revenue and expenditure data. In the absence of adequate support from GFIS, the NT has embarked on developing, on pilot basis, a web-based application for the district revenue recording and custody of the collected revenues. Similarly, SBD complained on insufficient access to the actual fiscal performance data. 7. Similarly, internal MoF coordination needs to improve. The deficiencies identified are with respect to the use of the current GFIS system. The mission team noted that the accounting and IT staff of the NT do not have complete and effective access to the transaction data in GFIS subject of NT approval and reporting to the management. Such restrictions prevent the NT from effective completion of their tasks in terms of control of the operations and the use of the existing GFIS for the purposes of generating fiscal, financial, and management data. In the last mission, we observed that weak coordination had led to delays in implementing improved fiscal reporting and capturing the data for the district NT operations in GFIS. Such lack of internal coordination is cause for serious concern and could negatively impact preparatory work for the acquisition and implementation of the new FMIS, unaddressed. Progress on implementing ACH 8. MoF has been cooperating with the Bank of Lao PDR (BOL) in the implementation of the facilities for electronic payment. The BoL has been planning the implementation of the key components of the hybrid Real-Time Gross Settlement (RTGS) and Automated Clearing House (ACH) system to enable automated payment settlement among banks in Lao PDR. The BoL has acquired the necessary facilities for launching the ACH functionality. 9. Commercial banks, which provide the MoF with a range of services for the revenue collection and cash disbursement, have been reluctant to support broad use of the new hybrid RTGS/ACH system. The banks complain that the new arrangement would undermine their investments into electronic services for the MoF and would not bring proportional benefits to the banks specifically, if the government withdraws its bank accounts from the banks and consolidates the payment facilities through the TSA in the BoL. 2 10. An early decision on connecting the NT to the new digital payment services under implementation by the BoL will assist in determining the data structure in the future FMIS. It should be noted that the CoA project may progress irrespective of the ACH/RTGS connectivity options, while effective connections supported by the new FMIS will improve the NT and government operations substantially, depending on the effective and secure payment operations. Notwithstanding, a decision on the specific types of electronic payment needs to be made before finalizing the bidding documents for the acquisition of the new FMIS. 11. Targeted effort to develop the facilities and procedures within the NT should ensure effective consolidation of the government cash flows through a Treasury Single Account (TSA) under the NT control. The MoF has been conducting the preparation for the technical connectivity of the systems, while a comprehensive work program is still to be adopted. Specifically, the consultations still have to take place at high level among the senior management of the MoF and the BoL regarding the principal decision of connecting the MoF systems to the hybrid ACH/RTGS systems as a participant of the interbank payment and settlement system. 12. Insufficient effort is being made for consolidating the payment settlement functions in the NT for exchanging the transaction data with the BoL and commercial banks -a major step ahead for modernization of the NT operations and achieving improved staff productivity. Earlier missions recommended that the MoF establishes internal coordination to study the benefits of the connectivity to automated payment settlement system and to cooperate with the BoL and commercial banks in the process of implementing the connectivity (interface) of the MoF systems (GFIS) to the new payment system. The MoF should adopt architecture and security features for consolidating the payment transactions within the NT organization at all levels and centralized electronic services to replace routine manual large-scale effort by the employees. It has been established earlier that the connectivity to the RTGS/ACH hybrid system would enable the MoF to achieve the functionality of the Treasury Single Account (TSA). Using GFIS during the transition to IFMIS and improving fiscal reporting 13. The NT and SBD complain about insufficient coverage of critical information in GFIS as well as significant delays in obtaining the necessary transaction data as discussed above in para 7 and 8. The NT does not meet tight deadlines established by the MoF management to supply the accounting data, where GFIS information comes typically with 3-4 working day delay. These problems require the NT maintaining parallel manual report collection and consolidation based on Excel. SBD complains about limited access to the records in the GFIS database. The necessary data SBD may obtain only from the NT. 14. The efforts to improve the timeliness of the data entry into GFIS database and access to full reporting functionality for all users remain priority and would be addressed as part of support to the current GFIS to the degree feasible. Addressing the gaps in the transaction coverage and extending the GFIS, where possible, to the provinces and districts, where GFIS data is incomplete, are important steps for improving the operational outcomes of MoF departments regarding timely supply of the key data on the fiscal performance as well as enhancing the learning process for the district locations, where GFIS coverage has not been extended. 3 15. The mission learned about the efforts of the NT to address the challenges based on developing a web-based application and piloting it for nine districts of Vientiane Capital. Real-time information system (RTIS) uses web-based application for recording the revenue transactions and reconciling these transactions with bank deposits. The NT finds the outcomes of the pilot satisfactory and prepares for the rollout of the revenue collection functionality to other locations. The limitations to accessing GFIS database have not allowed the NT to integrate the data from RTIS with GFIS except using spreadsheets outside databases. Other features such as overall design, data security, and contribution to the objectives of the new IFMIS acquisition of the new application should also be evaluated. 16. The NT intends to progress further on the expenditure processing and other functionalities in the RTIS. The NT has been looking forward to ensuring that RTIS would develop the capacity to record budgets, control payment vouchers against the budgets, initiate payment transactions, and conduct accounting tasks. The mission finds these steps as a part of a useful learning and capacity development process launched in the absence of adequate support by the incumbent GFIS, while these should not undermine the effort of progressing towards IFMIS supported by the E-FITS project. The mission finds that the integration of budget controls and transactions processed in RTIS and GFIS databases would pose the key challenges with the development and support of two parallel systems. 17. Faster progress towards the consolidation of the government cash resources on the Treasury Single Account (TSA) is necessary to strengthen the MoF capacity in the budget execution. The mission has identified the decentralized banking arrangements for the NT as the key obstacle for obtaining timely data and controlling the government cash flows. Consolidating the clearing of all inflows to and outflows from the NT in a centralized clearing system can be undertaken in the interim, while the decision on connecting to the BoL RTGS/ACH hybrid or to multiple commercial banks using core banking systems resolved as technical capacities improve over time. The primary objective of such an approach would be to capture all the bank transactions data by the morning of the next business day to inform the management on the cash resources at the disposal of the NT. The interim solution could manage day-to- day management information based on bank data under the control of the NT, while comprehensive accounting data could be produced monthly to reflect all other financial operations with some delay compared to the available data on the cash flows through bank accounts. The long-term solution would be achieved with the implementation of IFMIS, including comprehensive accounting procedures and access to real-time transaction and financial data. III. Next Steps 18. The World Bank expert will produce a comprehensive proposal for the CoA organization and fund source structure for the new CoA for the STC to study and prepare a proposal for the MoF management. The considerations for the coding of the project and program segments will be documented based on the existing practice in Lao PDR (for the project segment) and good international practice for the program budget segment to provide the flexibility in using these coding structures in the IFMIS. 19. IMF will continue providing the TA to finalize the structure and key concepts of the economic code and geographic-location code. After finalizing the economic and geo-location codes the World Bank TA will assist with the integration of all segments of the CoA for the further steps to acquire the new IFMIS. 4 It would be preferable that the economic code structure accommodates the data for accounting on cash basis as well as accrual basis, to provide for supplementary data as the accounting reforms progress, including to accommodate the data on the state assets and liabilities in the IFMIS. Specifically, the coding structure would accommodate the necessary accounts for accrual accounting, while specific accounts would be made active only upon the authorities making decisions regarding the implementation of specific accrual treatments in the accounting policies. 20. Meanwhile, STC should focus on the evaluation of the reporting requirements, particularly collecting and systematizing the GFIS report templates currently used for producing the reports for external users and the management. Comprehensive assessment of the current scope of the reporting and information requirements in the future is critical a step to developing the requirements for the future CoA. The core reporting requirements for external users include periodic reporting to the National Assembly, Government, and external bodies, such as IMF. Internal (management) information focuses on the monitoring of the fiscal performance and the control over the key processes under the MoF responsibility. 21. Another important aspect of the CoA requirements includes the standardization of the data exchange among different information systems of the government. The data in IFMIS should clearly align with the data received from or transmitted to other government systems. Most critical data exchange will occur with the payments systems (BoL and commercial banks) regarding the revenue collected or government expenditure. Other important systems include the systems used by the revenue authorities, primarily Tax and Customs, as well as payroll, aid and debt management, planning and investment. 22. Developing and maintaining the CoA will be an ongoing task of the STC in long term . The effort of the CoA STC will continue in several phases: i. The CoA STC, in close collaboration with the World Bank and the IMF TA, and IFMIS consultants should agree and verify that the CoA structure as meeting the budget formulation, execution and reporting requirements of MoF for the purposes of the IFMIS bidding documents. This be done prior to the CoA structure endorsement by the MoF management by July-August 2020; ii. Incorporate the new CoA selectively (to the degree necessary and technically feasible) in the upgrade of the current GFIS. The coding and the preparations for the implementation of the new CoA should be completed in a gradual and planned manner, and transitioned to the FMIS configuration and launch – by 2023 iii. The new CoA structure implemented fully, while the decisions regarding the accounting reforms to adopt the components of the accrual accounting would be subject of a separate decision of the MoF. 23. The CoA STC will require further support in reviewing and preparing the options for improving the CoA structure to finalize the decision in mid-2020 for the purposes of advancing the FMIS project. The effort will particularly focus on assessing, if the current classification delivers the necessary results and the upgrades to the CoA coding structure meet the requirements. The challenges will be addressed as identified. 5 24. The MoF should adopt a plan to accommodate the priorities of GFIS improvement during the transition to FMIS. The focus here should be on centralizing the payment clearing and settlement in the NT based on electronic payment facilities using the features of GFIS to the degree possible. RTIS - the web- based application developed for extending the revenue functionality to district-level NT offices should be evaluated before further steps are planned and accommodated in the GFIS improvement plan. NT requires support to use GFIS effectively, particularly developing the capacity to produce non-standard reports from GFIS database, and to facilitate comprehensive, timely, and reliable fiscal reporting. 25. Priority should be given to the centralization of the payment-clearing facilities in the NT as part of the development of electronic payment facilities. The MoF will enable the internal cooperation to prepare for the connectivity of the MoF systems with the hybrid RTGS/ACH system and with commercial banks to enable effective completion of the NT tasks. Specific matters to address will include the information requirements for automatic posting of payments received and payments from the NT to accounts in commercial banks through the new interface, the BoL requirements for the ICT facilities and security in the MoF. After enabling the connectivity of the NT headquarters to the automated payment settlement system, the NT in cooperation with IFID will explore the options to extend the connectivity of the automated system to Vientiane Capital and provincial NT offices applying the principles of the TSA. 26. Follow-up World Bank mission to advance the decisions regarding organization, fund source, program, and project segments of the CoA would be scheduled for May-June. Besides the CoA improvement, the mission would also focus on the action plan to centralize the payment clearing function in the NT. 6 Table 1. Priority tasks for the completion of the CoA structure and other enabling tasks for the E-FITS implementation Action Responsible Complete by Comments date of 2020 STC to assess the reporting requirements for STC, NT, End-April The report templates used currently IFMIS based on the current reports produced by SBD, all would be collected to enable the MoF departments and local administrations participants producing the reports directly from IFMIS. WB to assist conducting the evaluation of RTIS – WB, NT, IFID May The evaluation would assist the the new web-based application sponsored by the integration of effort to achieve the NT for improving the transaction capture at objectives of E-FITS district-level NT offices STC to determine the key information STC, IFID End-May The data definitions standardized requirements to exchange data with external across different information systems – payment systems, revenue collection, systems, primarily – with the payroll, state asset, project management payment, revenue, etc. systems. The MoF to adopt a plan for the GFIS IFID, NT, May The priorities to be supported by improvement and use, including on for the SBD GFIS upgrade should be selected payment and fiscal reporting functions, as well as carefully, taking into account expending the GFIS coverage to districts until the feasibility and cost launch of the IFMIS The MoF to adopt a plan to enable centralized IFID, NT June The plan will assist achieving the payment clearing for the NT supported by up to objectives of implementing a date electronic payment facilities through BoL’s Treasury Single Account (TSA). RTGS/ACH hybrid system and/or through commercial bank payment interfaces The STC to review the suitability and the options STC June This is completed in close of the CoA data structures – Organization collaboration with the TA providers segment and Fund Source segment and adopt and engaging IFMIS consultants recommendations for the management The STC to review the suitability and the options STC June-July This is completed in close of the CoA data structures – Program and Project collaboration with the TA providers segments and decide on the recommendations and engaging IFMIS consultants for the management The STC to review the suitability and the options STC According to This is completed in close of the CoA data structures – Economic and Geo- schedule collaboration with the TA providers location segments and decide on the agreed with and engaging IFMIS consultants recommendations for the management the IMF TA The STC to finalize the CoA proposal for the STC August Proposal agreed to be suitable for management approval the IFMIS specifications documents 7 Table 2. Progress completing priority tasks identified during March 2019 CoA mission. Responsible Complete by Progress to end-June 2019 date of 2019 Review and discuss the options regarding STC End-May Done. The WB team received the Administrative (Organization) the necessary inputs for the segment of the CoA options of the segment. Provide COFOG table for mapping Janis - SBD April Done. Provided to the STC as MS organization units to Administrative Excel file. (Organization) units Obtain full listing of Fund source DEFD End-May Done. The necessary inputs have categories, based on the funding provided been provided by external donors and discuss the information requirements Discuss, if three-level hierarchy structure SBD May Done. The CoA proposal will will be sufficient for the Program include three-level hierarchy. classification Confirm Location (Geo) structure with Lao STC May Done. The current structure has Statistics Bureau been provided. Request MPI to provide the schedule of MPI, with support End-May Done. The current structure has Projects and discuss future coding of DEFD been provided. IFID requested to requirements to provide comprehensive provide the structures used in Public Investment Project (PIP) listing GFIS. Develop Economic classification structure TSC and Accounting According to In progress. IMF mission started Department with separate to address the task. the IMF TA schedule Agree on the GFS classification structure TSC and FPLD with Separate In progress. IMF mission started the IMFTA schedule to address the task. Compile a table of Counterparty units IFID – request from May Postponed. This task could be from the GFIS database, including the unit current database concluded during the IFMIS name and bank account details implementation 8