Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 43351-LA

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED IDA GRANT

IN THE AMOUNT OF SDR 3.7 MILLION (US$6.0 MILLION EQUIVALENT)

TO THE

THE LAO PEOPLE’S DEMOCRATIC REPUBLIC

FOR A

CUSTOMS AND TRADE FACILITATION PROJECT

May 15,2008

Poverty Reduction and Economic Management Unit East Asia and the Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization.

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GOVERNMENT FISCAL YEAR October 1 - September 30

CURRENCY EQUIVALENTS (Exchange Rate Effective as o f May 2,2008)

Currency Unit Kip 8,721 - US$l .oo -

WEIGHTS AND MEASURES Metr ic System

Vice President: James W. Adams Country Director: Ian C. Porter Country Manager: Patchamuthu Illangovan

Sector Director: Vikram Nehru Lead Economist Mathew A. Verghis

Task Team Leader: Ekaterina Vostroknutova

The Lao PDR Customs and Trade Facilitation Project i s prepared by an IDA team lead by Ekaterina Vostroknutova (EASPR) and comprising Gerard McLinden (PRMTR), Ramesh Sivapathasundram (ISGEC), Sengxay Phousinghoa (EASPR), Sirirat Sirijaratwong (EAPCO), Souphanthachack Sisaleumsak (EAPCO), Donald Mphande (EAPCO), and Roch Levesque (LEGES). Vatthana Singharaj (EASPR) and Lynn Gross (EASPR) provided administrative assistance.

Peer reviewers are: Graeme Ludlow (Senior Economist, Fiscal Affairs Department, IMF), Enrique Fanta (Senior Public Sector Specialist, LCSPS), and Albert Zeufack (Senior Economist, EASPR), and the team are grateful for their guidance. The team i s also very grateful for guidance, support, and comments from Vikram Nehru (EASPR), Ian C. Porter (EACTF), Patchamuthu Illangovan (EACTF), Mathew A. Verghis (EASPR), Ahsan Al i (EAPCO), and Christine Wong (EASPR) as well as to two comprehensive reviews and comments provided by many departments and colleagues.

ADB AFD AFTA APEC A S E A N

A S Y C U D A

AusAID

BOL CAS C F A A

CIDA

CPAR

CPI

CPIA

CPPR DB DOS

D S A D T I S E C EFD FDI FMCBP

FMR GDP G M S GOL GPAR

I C A I C R IDA IMF ISR

FOR OFFICIAL USE ONLY

ABBREVIATIONS AND ACRONYMS

Asian Development Bank Agence Frangaise de Dkveloppement A S E A N Free Trade Area Asia Pacific Economic Cooperation Association o f Southeast Asian Nations Automated Systems for Customs Data Management Australian Agency for International Development Bank o f the Lao P D R Country Assistance Strategy Country Financial Accountability Assessment Canadian International Development Agency Country Procurement Assessment Report Committee for Planning and Investment Country Policy and Institutional Assessment Country Portfolio Performance Review Doing Business Department o f Statistics in the Ministry o f Planning and Investment Debt Sustainability Analysis Diagnostic Trade Integration Study European Commission External Finance Department Foreign Direct Investment Financial Management Capacity Building Project Financial Management Report Gross Domestic Product Greater Mekong Sub-region Government o f Lao PDR Governance and Public Administration Reform Program Investment Climate Assessment Implementation Completion Report International Development Association International Monetary Fund Implementation Status Report

IT JICA

LBF L P I L C D MDG MDTF M&E MOF M O I C MRC NGO NGPES

NPV N T 2 PACSA

P D R PETS PFMSP

P F M PFMSU

P I U PRS SECO

S IDA

SOE TA TDF TOR TRS UNCTAD

UNDP WB wco WTO

Information Technology Japan International Cooperation Agency Lao PDR Business Forum Logistics Performance Index Lao P D R Customs Department Mi l lennium Development Goal Mult i -Donor Trust Fund Monitor ing and Evaluation Ministry o f Finance Ministry o f Industry and Commerce Mekong River Commission Non-governmental organization National Growth and Poverty Eradication Strategy Ne t Present Value N a m Theun 2 hydroelectric dam Public Administration and Civil Service Authority People’s Democratic Republic Public Expenditure Tracking Survey Public Financial Management Strengthening Program Public Finance Management Public Financial Management Strengthening Unit Project Implementation Unit Poverty Reduction Strategy Swiss State Secretariat for Foreign Affairs Swedish International Development Agency State Owned Enterprise Technical Assistance Trade Development Facil ity Terms o f Reference Time Release Study United Nations Conference for Trade and Development Uni ted Nations Development Program Wor ld Bank Wor ld Customs Organization Wor ld Trade Organization

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

LAO PDR CUSTOMS AND TRADE FACILITATION PROJECT

A . 1 . 2 . 3 .

B . 1 . 2 . 3 . 4 .

C . 1 . 2 . 3 . 4 . 5 . 6 .

D . 1 . 2 . 3 . 4 . 5 . 6 . 7 .

CONTENTS

STRATEGIC CONTEXT AND RATIONALE ...................................................................................................... 1 Country and sector issues ................................................................................................................. 1 Rationale for Bank involvement ....................................................................................................... 4 Higher level objectives to which the project contributes ................................................................. 5

PROJECT DESCRIPTION ................................................................................................................................................. 5 Lending instrument and PDOs ........................................................................................................ -5

Lessons learned and reflected in the project design ......................................................................... 8 Project components .......................................................................................................................... 6

Alternatives considered and reasons for rejection ............................................................................ 9

IMPLEMENTATION ............................................................................................................................................................. 9 Partnership arrangements ................................................................................................................ -9 Institutional and implementation arrangements ............................................................................. 10 Monitoring and evaluation o f outcomeshesults ............................................................................. 10 Sustainability .................................................................................................................................. 10 Critical r isks and possible controversial aspects ............................................................................ 11 Grant conditions and covenants ..................................................................................................... 13

APPRAISAL SUMMARY .................................................................................................................................................. 14 Economic and financial analyses ................................................................................................... 14 Technical ........................................................................................................................................ 16 Fiduciary ........................................................................................................................................ 16 Social .............................................................................................................................................. 17 Environment ................................................................................................................................... 17 Safeguard policies .......................................................................................................................... 17 Policy Exceptions and Readiness ................................................................................................... 17

TABLES

Table 1: IDA Financing by Component ....................................................................................................... 6

Table 3: Project-Related k s k s ................................................................................................................... 11 Table 4: Financial Analysis: IRR ............................................................................................................... 15 Table 5: Safeguards Table .......................................................................................................................... 17

Table 2: Project Financing by Source o f Financing and Component (US$ mill ion) .................................... 8

ANNEXES

Annex 1: Project Background .................................................................................................................. 1. Annex 2: Major Related Projects by the Bank and other Agencies ..................................................... 23

Annex 4: Detailed Project Description .................................................................................................... 32 Annex 5: Project Costs .............................................................................................................................. 41

Annex 3: Results and Monitoring Framework ....................................................................................... 30

Annex 6: Institutional and Implementation Arrangements .................................................................. 43 Annex 7: Financial Management and Disbursement Arrangements ................................................... 44 Annex 8: Procurement Arrangements .................................................................................................... 53 Annex 9: Financial and Economic Analyses ........................................................................................... 58 Annex 10: Safeguard Policy Issues .......................................................................................................... 61 Annex 11 : Multi-Donor Trust Fund for Trade-Related Assistance “Trade Development Facility”

Annex 12: Project Preparation and Supervision .................................................................................... 64 Annex 13: Documents in the Project F i l e ................................................................................................ 65 Annex 14: Statement o f Loans and Credits ............................................................................................ 66

(P109702, TF091201/2/3) .......................................................................................................................... 62

Annex 15: Country at a Glance ................................................................................................................ 67

M A P IBRD 33431

FIGURES

Annex Figure 1 : GDP growth and inflation. 2000-2008 ............................................................................ 18 Annex Figure 2: Lao PDR Logistics Performance Index ........................................................................... 21 Annex Figure 3: Implementation Arrangements ........................................................................................ 43

TABLES

Annex Table 1: Project Financing by Source o f Financing and Component (US$ mill ion) ...................... 32

Annex Table 3: Allocation o f Project Proceeds ......................................................................................... 52 Annex Table 2: Financial Management Risk Assessment ......................................................................... 46

Annex Table 4: Procurement o f Goods ...................................................................................................... 56 Annex Table 5: Procurement o f Consulting Services ................................................................................ 56

Annex Table 7: Project Timeline ............................................................................................................... 64 Annex Table 6: Financial Analysis: IRR ................................................................................................... 59

Annex Table 8: Project Team ..................................................................................................................... 64

.. 11

LAO PDR

1 2

CUSTOMS AND TRADE FACILITATION PROJECT

Lao People’s Democratic Republic 0.24 0.00 0.24 WorldBank 0.72 5.28 6.00

Total 0.96 5.28 6.24

PROJECT APPRAISAL DOCUMENT

EASPR

FY FY09 FYlO F Y l l FY12 FY13 Annual 1.35 1.54 2.78 0.32 0.02 Cumulative 1.35 2.88 5.66 5.98 6.00

Program implementation period: Start: September 1,2008 End: June 30,2013 Expected effectiveness date: September 1,2008 Expected closing date: December 3 1,20 13 Does the project depart f rom the CAS in content or other significant respects? Ref. P A D A.3 Does the project require any exceptions f rom Bank policies? Ref. P A D D.3

I s approval for any pol icy exception sought f rom the Board? Does the project include any critical r isks rated “substantial” or “high”? Ref. PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref. P A D D.7 Project development objective The objective o f the project i s to facilitate trade by improving the efficiency and effectiveness o f customs

[ ]Yes [XINO

[ ]Yes [XINO

Have these been approved by Bank management? [ ]Yes [ IN0 [ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

Ref. PAD B.2, Annex 4

... 111

administration. The project will simplify customs procedures, eliminate duplication and redundancy, reduce transaction costs and time to clear goods, and increase transparency and accountability. Project description Ref. P A D B.3., Annex 4

(a) Implementation o f an automated customs system A S Y C U D A World. The Project wil l finance the acquisition o f equipment, customization and installation including user training o f UNCTAD’s A S Y C U D A system at headquarters and nationwide at international border checkpoints, in three phases: (1) Development o f prototype; (2) Validation on a pi lot site; (3) Replication to remaining regional offices and checkpoint sites. In addition, it will provide minor refurbishment o f offices to accommodate the new hardware, related office and auxiliary equipment, as wel l as training for Lao PDR Customs Department (LCD) IT Staff to prepare them to maintain and operate the system once implemented.

(b) Customs Modernization Support. The Project will finance capacity building activities to assist Lao P D R to implement modern approaches to customs administration as well as meeting requirements for WTO membership. I t will also finance a long term international Customs Reform and Modernization advisor to provide international expertise in the introduction o f new Customs systems and to provide overall change management support including assisting the national management team in quality control and verification.

Which safeguard policies are triggered, if any? None Ref. P A D D.6, Annex 10

Environmental Category: C Loan effectiveness conditions:

0

0

A Steering Committee to oversee the reforms has been established with agreed terms o f reference and i s in operation. A Customs Reform and Modernization Team chaired by Deputy Director General, charged with the day-to-day implementation o f the project i s in operation. Government has issued a notice or letter signed by the Minister o f Finance that agreed in principle to an A S Y C U D A System User Fee (WTO Compatible) to be established, with revenue escrowed for hardware and software maintenance and operation costs and future development/expansion o f the system.

The Steering Committee will be maintained during Project implementation to provide oversight, pol icy guidance, overall coordination, and conflict resolution. The A S Y C U D A System User Fee (WTO Compatible) will have been implemented n o later than 18 months after project effectiveness. As such, the Ministry o f Finance (MOF) will ensure that the funds collected through the escrowed user fee are allocated to L C D to cover the operating and maintenance costs and to ensure sustainability o f the enhancements achieved through this project. The A S Y C U D A contract will have been signed n o later than 3 months after Effectiveness. On or about December 20 11, the Lao PDR Customs Department (LCD) and the Bank shall jo in t ly carry out a midterm review o f the progress made in implementing the Project. The project will operate with an adequate financial management system with appropriate accounts and in accordance with generally accepted accounting principles. The L C D will furnish to the Bank semi-annual reports o n the results o f monitoring and evaluation activities, on December 3 1 and June 30 every year, starting on December 2008. The Financial Management Reports shall be submitted to the Bank on a timely basis and in the form and substance agreeable to the Association. Annual audited financial statements for the Project shall be submitted n o later than six months after the end o f the Project’s fiscal year, The Financial Statements shall be: Sources and Uses o f Funds (one o f the FMRs) and Balance Sheet.

Covenants applicable to project implementation:

0

0

0

0

0

0

iv

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues

1. Over the past two years, Lao PDR has maintained stable macroeconomic conditions; i t s economic growth i s robust and it i s making progress on i t s Millennium Development Goals (MDGs). Growth has increased from 6.4 percent in 2004 to above 7 percent and remained stable in 2007 and 2008. In particular, outputs expanded in mining, newly emerging processing industries, agriculture, hydropower projects, tourism and other service industries. As Lao PDR i s surrounded by some o f the fastest growing economies in the world, i t has benefited from increased demands for i t s products and massive investment inflows from neighboring countries, such as China, Vietnam and Thailand. Macroeconomic conditions remain relatively stable, reflecting improved monetary and fiscal discipline, with inflation in single digits for the last several years, public expenditures are under control and the fiscal situation steadily improving. The poverty headcount f e l l f rom 33 percent in 2002/2003 to 31 percent in 2005/2006.

2. In 2004, the Government developed a National Growth and Poverty Eradication Strategy (NGPES) that became i t s f i r s t official Poverty Reduction Strategy and the main guideline for the County Assistance Strategy in 2004. The NGPES underlines the Government’s commitment to sound macroeconomic policies to sustain growth, and prudent monetary and fiscal policies combined with structural reforms and: (1) acknowledges the importance o f governance challenges; (2) begins to articulate solid strategies for improving service delivery and infrastructure; (3) sets appropriate directions for sustaining growth; (4) seeks to address inequity and vulnerability; and (5) provides a framework for monitoring and implementation. In particular, the NGPES also recognizes the importance o f improving Lao PDR’s international competitiveness and attracting foreign direct investment (FDI).

3. The Lao PDR’s proposed Poverty Reduction Strategy, the Sixth National Socio- Economic Development Plan (NSEDP) for 2006-2010 aims at poverty reduction through a combination of broad-based economic growth and focused policy interventions. The NSEDP contains a sound set o f pol icy interventions in the fol lowing areas: (1) human development and private sector driven economic growth; (2) competitiveness, trade and regional integration; (3) social development and focused poverty reduction interventions; and (4) good governance. These priorities and the strategic pol icy directions the plan sets in each o f them are well-suited to deliver on plan objectives. The Joint Staff Advisory Note for NSEDP and i t s progress report i s currently scheduled to be considered by the Board on June 17,2008.

4. Lao PDR i s committed to sustaining a private sector led economy through export- driven growth, and to modern governance while keeping a strong focus on human and social development and equity considerations, through these priori ty intervention areas in i t s NSEDP. The World Bank Group’s Country Assistance Strategy (CAS) for Lao PDR i s based on the NGPESNSEDP. The current CAS extension ti l l 201 1 was discussed by the Board in May, 2007.

5. One o f the main elements o f the national strategy i s to increase non-resource exports growth. Total exports, after stagnating during 2000-2003, increased by around 50

percent in 2006, with most o f i t going to ASEAN countries and China. In 2007, exports are expected to grow at a more moderate rate o f about 5 percent. Apart from the mining sector exports that benefited form metal price increases, export growth was driven by agriculture and garments, with both o f these industries increasing by over 20 percent. Implementing the strategy o f increasing non-resource export growth i s critically important for sustaining high and shared growth. To achieve this goal, the Lao PDR Government is:

(ii)

(iii)

6. Lao agreements.

Improving Lao PDR’s regional integration and market access opportunities through bilateral, regional and World Trade Organization (WTO) accession negotiations;

Expanding Lao PDR’s capacity to trade by engaging in multilateral initiatives such as the Integrated Framework (IF) and trade related projects and programs which focus o n addressing key supply side constraints and the promotion o f trade and regional integration; and

Improving export competitiveness by lowering trade transaction costs, addressing specifically those generated by inefficient customs and other agency procedures at both ends o f the line.

PDR has become an active partner in the regional and international Lao PDR participates in the emerging Greater Mekong Sub-region (GMS)

Economic Cooperation Program which comprises Lao PDR and i t s neighboring countries (Thailand, Vietnam, Yunnan province o f China, Cambodia and Myanmar). On a broader level, Lao PDR became a member o f the Association o f Southeast Asian Nations (ASEAN), i s participating in negotiations with the ASEAN Free Trade Area (AFTA) and has initiated accession negotiations to the WTO. Through participation in the ASEAN and GMS initiatives the Government aims at facilitating Lao PDR regional trade through neighbors’ seaports. Lao PDR i s also participating in the Mekong River Commission (MRC), which explores opportunities for regional cooperation in the Mekong River Basin. Other initiatives include further liberalization o f private business registration and o f private investment regulations, without which the private sector cannot exploit the new opportunities for agricultural and manufactured exports resulting from increasing integration.

7. Based on other countries’ experience, Lao PDR i s expanding i t s capacity to trade. The Integrated Framework is one o f the main external assistance channels through which the Government o f Lao PDR will focus i t s trade agenda and boost export competitiveness and growth. Lao PDR decided to set up a framework for maximizing the benefit from the assistance provided by development partners including assistance to implement the measures described in the Diagnostic Trade Integration Study (DTIS), carried out with Wor ld Bank assistance. The DTIS was approved during the Lao PDR National Validation Workshop o n September 12 2006, following extensive stakeholder consultations. The DTIS identifies five priori ty areas where external assistance and reform should be concentrated:

(i) Export Competitiveness; (ii) Trade Facilitation; (iii) Business Environment;

2

(iv) (v)

Trade Policy, Trade Agreements and Global Opportunities; and Trade Opportunities for the Poor.

8. The Government of Lao PDR in moving forward in implementing a sector-wide approach in trade to support its trade reform agenda. The Government, including a number o f agencies led by the Ministry o f Industry and Commerce and including Ministry o f Planning and Investment, Ministry o f Finance, Ministry o f Agriculture and Forestry, Ministry o f Health, STEA, and representatives from the business associations, has already proposed a plan o f activities. An integral part o f this approach i s the Mult i-Donor Trust Fund for the “Trade Development Facility” (TDF), administered by the Wor ld Bank and with contributions from Australia and European Commission (Annex 1 1). Considerable bilateral and multilateral efforts are also contributing to this framework, including Japan’s support to the L C D and to trade- related infrastructure, ADB’s support to regional trade, and support provided by France to the L C D (see Annex 2 for a more detailed description o f trade-related activities).

9. Extensive diagnostic work done with Government by the World Bank and other development partners specifically identify customs procedures as a key constraint and priority to be addressed. The Investment Climate Assessment (ICA) found that exporters experience more severe regulatory burdens than non-exporters, have to go through at least two times more inspections, and spend on average 1.3 percent more o f their time with regulators. In spite o f significant improvements achieved in recent years, both by the L C D and other border- related regulatory agencies, the processing and clearance o f import, export and transit goods in Lao PDR remains relatively inefficient and time consuming, and illegal cross-border trade i s common. The processes rely too much on manual processing o f paper-based documentation, followed unevenly across the country.

10. Recent reforms under the PRS04, have introduced significant simplifications in the border procedures; however, challenges in this area remain. Up to ten agencies used to be operating at the border but the government has taken a decision to limit the number o f agencies present to three (PMO Notice 406, 13 March 2007 refers). While this development is positive, full implementation o f the government decision wil l take some time. Licenses, approvals and certificates contain similar if not identical information, and documentary and physical inspections are unnecessarily duplicative. This, coupled with excessive face to face interaction between traders and government officials, leads to inefficiency and loss o f process integrity.

11. Lao PDR customs currently applies minimum values to a large number of products, a practice that i s not compatible with the WTO Valuation Agreement. The MOF intends to implement the provisions o f the W T O Valuation Agreement, phasing out the minimum values and to gradually replace them with the transaction value provisions o f the WTO Valuation Agreement. The IMF i s assisting the Government in drafting and implementing related regulations.

12. Notwithstanding the efforts to improve customs procedures, the lack of a fully functional I T system remains a key constraint to implementation of the NSEDP’s ambitious export growth goals. W h i l e the Lao PDR government has made some progress in improving the

3

effectiveness o f i t s customs operations in recent years and has now taken the difficult decision to centralize a l l customs operations under one central administration, i t s efforts continue to be hampered by the lack o f a comprehensive and fully functional customs IT system. As a result, the Government has taken a decision to abandon further development o f i t s current system which provides extremely limited functionality in favor o f the procurement and implementation o f a proven customs IT system. After undertaking an assessment o f alternative systems’ the Ministry o f Finance has decided to procure the Automated Systems for Customs Data (ASYCUDA) World, a system developed by the United Nations Conference for Trade and Development (UNCTAD). There are over 80 installations o f ASYCUDA worldwide,2 including that o f several neighboring countries. The Prime Minister endorsed the decision and a formal instruction to this effect was signed in 2006.

2. Rationale for Bank involvement

13. The Bank’s Country Assistance Strategy (CAS) for Lao PDR updated in 2007 and a range of analytical work underline the need to sustain growth, improve competitiveness, facilitate trade and deepen regional economic integration. The CAS explicitly identifies the need to strengthen the capacity o f the L C D as a contribution to the achievement o f these objectives (CAS Pillars 1 and 2). The pressing need to improve the effectiveness o f customs’ performance in the processing o f import, export and transit cargo i s identified in more detail in a range o f diagnostic reports which include the Bank’s Investment Climate Assessment (ICA) and the 2006 Diagnostic Trade Integration Study (DTIS) led by the Bank with strong participation and ownership o f the Lao PDR Government. An approximation o f the current leve l o f operational effectiveness o f the L C D i s reflected in the 2008 Doing Business report’s “Trading Across Borders” chapter, where Lao PDR i s rated 148th out o f 178 countries included in the survey. The World Bank’s more customs-specific Logistics Performance Index rates Lao PDR as 1 17 out o f 150 countries on customs performance.

14. This project i s an integral part of the World Bank’s strategy for Lao PDR, and relates to several CAS sub-pillars, including on trade, private sector development, and public financial management. As part o f a sector-wide approach currently being implemented in the Lao PDR, the WB and a group o f development partners are establishing a multi-donor trust fund administered by the WB, designed to support implementation o f the government’s trade strategy. One component o f the Mult i-Donor Trust Fund for the “Trade Development Facility” (TDF, P109702, TF091201) i s aimed at assisting Lao PDR to improve i t s performance in trade facilitation. The Facility includes a significant trade facilitation component with specific activities designed to complement the assistance to be provided under this project (see Annex 11). The Bank i s also exploring opportunities for further assistance in regional integration activities, both through the A S E A N single window and the GMS trade facilitation initiative (see Annex 2). As such, the Bank i s in a unique position to align activities envisioned in the TDF and the proposed project, as well as to relate these to the regional level through alignment o f project inputs in Lao PDR, Cambodia, and Vietnam to regional integration initiatives and commitments associated with relevant A S E A N and GMS programs.

’ Technical support was provided by the French Government under a grant f r o m the Agence Frangaise de Dkveloppement, and also by the IMF.

This number refers to a l l versions o f A S Y C U D A , o f wh ich World is the latest.

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15. In recent years there has been a growing recognition of the importance of an efficient and effective customs administration. A well performing customs administration can play a key role in assisting developing countries to take advantage o f opportunities presented by the global trading system. Customs plays a key role in trade facilitation, revenue collection, community protection and national security and can make a major contribution to national competitiveness. Such a realization has led to trade facilitation and customs reform being included in the W T O Doha Development Agenda.

16. The Bank supports the Government’s technical decision to implement ASYCUDA World particularly as it i s already financing the system’s implementation in several countries, including Cambodia. Therefore, i t i s in an excellent position to support the Government’s request with the appropriate financing and related technical assistance support to ensure the system i s implemented in the most cost-effective and efficient manner. The Government’s decision to procure the ASYCUDA World system was also endorsed in principle by an expert mission conducted in November 2006 which included trade facilitation and customs specialists from the IMF and the World Customs Organization (WCO).

17. The Bank has extensive experience in the institutional reform of customs administrations, having managed over 120 customs-related projects over the past twenty years. The Bank i s also currently financing customs reform and modernization projects with a strong focus on trade facilitation in Vietnam and Cambodia as well as other countries in transition in both Europe and Central Asia. I t is able to draw on the lessons learned from al l these activities in the preparation and implementation o f this project as well as i t s strong partnership with the WCO and a range o f activities it i s conducting throughout the world in support o f the trade facilitation negotiations currently taking place in the WTO.

3. Higher level objectives to which the project contributes

18. The project wil l contribute to higher level development objectives o f the GOL: increasing exports, sustaining high economic growth, and reducing poverty through improving export competitiveness, by creating more transparent, less costly, and therefore more equitable trading environment for Lao PDR’s importers and exporters.

B. PROJECT DESCRIPTION

1. Lending instrument and PDOs

19. i s proposed for this operation. The Project wi l l be implemented within a five year period.

The use o f a Specific Investment Lending Instrument (SIL) in the form o f an IDA Grant

20. The objective o f the Project is to facilitate trade by improving the efficiency and effectiveness o f customs administration. The Project wi l l simplify customs procedures, eliminate duplication and redundancy, reduce transaction costs and time to clear goods, and increase transparency and accountability.

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21. Key perfonnance indicators for the Project are divided into two main groups:

Component A Component B

Customs Efficiency: Reduction in the mean import, export, and transit clearance times; Reduction in the number o f steps to clear commercial shipments.

Financing Objectives US$3.98m from IDA US$2.02m from IDA

Implementation o f ASYCUDA World Customs Reform and Modernization Support

Customs Effectiveness: Increase in the ratio o f detections/inspections by customs; Increase in the perception o f customs performance and integrity by clients.

2. Project components

22. The project wil l finance consulting services, business and information systems, goods, training and equipment over five years, through two components. The total cost for each project component from IDA i s provided in table below.

Component A: Implementation of ASYCUDA World (US$4.22 mi l l ion o f which US$3.98 mi l l ion IDA)

23. This component will finance installation costs o f the A S Y C U D A system and some related activities including translations, modifications, training, equipment, communications infrastructure and implementation o f the system in three phases (see draft TOR in Project Document Files):

Phase I - A fully functional prototype wil l be developed by the project team in the L C D headquarters in Vientiane. As a preliminary to this phase, a mapping o f the current export and import processes has been carried out, to identify al l documentation requirements (see TOR in Project Document Files).

Phase 2 - Upon validation o f the prototype, the system will be deployed in a pi lot site. The process o f installing the computerized system wil l be accompanied by adaptation and introduction o f procedures and documentation. This wil l involve substantial interaction with, and training of, the trading community to ensure maximum efficiency and promote the Government's priori ty pol icy in terms o f liberalization o f the trading process.

Phase 3 - Upon validation o f the pilot, the nationwide rollout o f the system to customs offices wil l be carried out.

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24. The implementation o f ASYCUDA wil l complement Government’s decision to centralize customs functions and the reduction o f Ministry/Agency functions at border points to no more than three. The centralization, which involves absorbing regional customs duties and personnel, was decreed in October 2007, and i s in the process o f implementation (the broad action plan can be found in the Project Document Files). At the same time, Government is committed to rationalize (and reduce) restrictions on exports/imports through, inter alia, the use o f the Single Administrative Document ( S A D ) proposed by the WCO and implemented in ASYCUDA; this document would capture the information required by al l agencies at present operating at the border, and transmit to them the appropriate information. This wil l permit a drastic decrease in the formalities today demanded at border checkpoints.

25. I t must be emphasized that this project does not intend to be anything other than an important first step in the modernization o f customs. I t i s clear that such a modernization program, although critically dependent on information technology, goes far beyond automated systems; nor is this particular automated system expected to be other than a first step permitting later enhancements and improvements.

26. In addition, the component wi l l finance the strengthening, through training and provision o f some basic computer equipment, o f the L C D I T staff, to prepare them to maintain and run the ASYCUDA system once in operation. This component will finance PC familiarization and basic computer sk i l ls development for L C D staff and other relevant agencies to facilitate the successful adoption and long te rm sustainability o f the ASYCUDA Wor ld system. A staffing plan and a sk i l ls development plan wil l need to be developed and implemented to ensure the smooth operation and sustainability o f the new system. K e y officials in other relevant agencies wil l receive similar technical training in basic I T sk i l ls and relevant application-specific skills.

Component B: Customs Modernization Support (US$2.02 mi l l ion o f which US$2.02 mi l l ion IDA)

27. WB experience suggests that while implementation o f the new customs IT system i s l ikely to streamline and rationalize processes and procedures and wil l provide a sound platform for the introduction o f a range o f internationally agreed standards, i t i s unlikely to realize i t s full potential unless a number o f complementary reforms and supporting operational changes are undertaken in parallel with system implementation. To ensure these complementary measures are introduced in a structured and cost effective manner the project wil l also finance a range o f capacity building activities and a long te rm international customs reform and modernization advisor. The Advisor wil l be responsible for assisting customs management in supervising the introduction o f the new systems, quality control and where necessary verification o f results. The Advisor wil l also assist in the overall change management process.

28. With support from the Advisor, a technical assistance (TA) sub-component wil l be implemented to support the introduction o f the W T O Valuation Agreement, post clearance audit, a compliance improvement and management strategy, client service charters, intelligence and

7

risk management development, introduction o f an advance rulings regime, the development o f an integrity and anti-corruption strategy and a cost effective administrative appeals system.

Local Foreign Total US$ US$ US$

Project Cost by Component million million million A: Implementation o f ASYCUDA World 0.35 3.64 3.98

Total Project Costs 0.72 5.28 6.00 B: Customs Modernization Support 0.37 1.64 2.02

3. Lessons learned and reflected in the project design

29. There are several lessons learnt, both from project implementation in Lao PDR (cf. CAS) and with institutional development projects in general, applied to this project. In particular, the need for:

(i) Ownership. The project has been requested by Minister o f Finance with the direct support o f the Prime Minister. The importance o f the project to the Government can be clearly inferred by the fact that the L C D Director General has assumed the responsibility for managing the project, and that the project wi l l be supported by an existing implementation unit, consistent with the Vientiane Declaration on Aid Effectiveness.

(ii) Change management. Experience with similar projects highlighted the importance o f change management where political support i s important and risks o f reversal are high. The project wil l therefore include a customs administration specialist from the start and for the duration o f the program.

(iii) Partnerships to achieve successful outcomes and leverage change. The project i s directly supported and complemented by the work being done by the following development partners: IMF, AFD, EC, WCO, and Australia, and is assisted by parallel projects and tasks financed by the Bank. I t was based on a diagnostic carried out jo int ly by the WB, IF agencies, EC, WCO, and the IMF.

(iv) Visible, top management support. Senior management i s intimately involved with the project, as seen in (a) above. In addition, a Steering Committee composed o f representatives o f senior management o f affected agencies as well as consultative private sector groups wil l provide direction and conflict management for the project.

(v) Balance the complexity and the scope of the project. A small, focused project was decided on, to carry out immediate activities, give credibility to customs reform, and provide capacity building for future change while not overwhelming the implementation capacity o f the LCD.

8

(vi) Avoid software development when an ‘off the shelf’ package exists in the market. Given the severe I T capacity constraints facing the L C D and the need to implement procedures in l ine with existing international standards i t was decided to implement an o f f the shel f system rather than finance the development o f a unique Lao PDR-specific application which involves a significantly higher level o f r isk.

(vii) Simplify the disbursement process. The main bulk o f the Bank-financed portion wil l be a single contract, with a very few other contracts. Complementary activities are financed through other instruments, such as separate bilateral assistance, multi- donor trust fund, and WB’s program in public finance management.

(viii) Sustainability. Ensuring long term sustainability o f IT systems implemented under various donor-financed customs reform and modernization projects has frequently proved to be difficult due principally to insufficient budget support for hardware and software maintenance and periodic replacement. To overcome this potential problem the project includes the establishment o f a WTO-compliant ASYCUDA System U s e r Fee and a project effectiveness condition specifying that al l income obtained from the fee be retained in a special escrow account specifically dedicated to support the ASYCUDA system. To be WTO-compliant the fee can only cover the cost o f processing the import, export and transit transactions, therefore it i s expected to be modest and unlikely to add significantly to trade transaction costs. Advice from the Lao PDR public finance management team suggests that the approach i s consistent with the broader objectives in the public finance reforms, operations o f the Government, and the ongoing centralization reform.

4. Alternatives considered and reasons for rejection

30. A more comprehensive project was considered, but rejected due to a need to obtain immediate results for trade facilitation, support the centralization o f customs, and prepare the LCD for future reform activities by increasing the department’s implementation and change absorption capacity. Limited managerial capacity and lack o f organization-wide experience in the management o f change precludes large-scale reform. Discrete, selected incremental changes wil l thus have more chance o f success and be instrumental in laying the foundations for further and more far-reaching future reforms.

3 1. The more limited project design provides the largest potential benefit for the resources invested and complements work being carried out by other donors (see below). I t avoids the fate o f larger over-ambitious projects, profits from very similar work being done in neighboring Cambodia, permits economies o f scale for the Bank in that i t consolidates some technical assistance and supervision activities, and complements the on-going TDF.

C. IMPLEMENTATION 1. Partnership arrangements

32. The assistance to trade-related activities in Lao PDR has been growing both in the number o f participating development partners and in amounts allocated to trade (see Annex 2 for a more detailed description). The most direct donor influence on the Project i s the TDF, a Multi-

9

donor Trust Fund for trade-related assistance, to begin operation in July 2008, administered by the World Bank and supported by the E C and Australia. This trust fund wil l have a trade facilitation component that wil l support the provision o f trade-related information to related agencies and assist them in rationalizing their procedures to prepare them to utilize information gathered by ASYCUDA. A more detailed description i s given in Annex 11. Alongside this activity, Australia, which i s the IF Facilitator in Lao PDR, and the WB and other donors, are assisting the Government in setting up a sector-wide approach for trade-related assistance.

2. Institutional and implementation arrangements

33. Overall responsibility for the project i s vested with the LCD, whose Director General and deputies have assumed the direct responsibility for implementation o f the project and coordination o f development partner activities. They wil l be assisted by the international customs Advisor and guided by a high level Steering Committee chaired by the Vice-Minister o f Finance and integrated by various stakeholders including the Department o f Statistics in the Ministry o f Planning and Investment (DOS), the Ministry o f Industry and Commerce (MOIC), the Bank o f the Lao PDR (BOL), and representatives o f the private sector (see TOR in the Project Document Files). The creation o f the Steering Committee i s a condition o f Effectiveness. The project wil l be implemented over a period o f five years.

3. Monitoring and evaluation of outcomes/results

34. The responsibility for monitoring and evaluation (M&E) rests with the LCD. The monitoring framework wil l be based on project indicators defined with technical assistance financed by the project preparation budget and during implementation (see Section B2). Baseline values for the indicators as well as the indicators themselves wil l be progressively refined and agreed with the Bank during the Bank’s semi-annual supervision visits. The Director General o f the L C D and his management team wil l be responsible for monitoring reform outcomes and results with the assistance o f the customs Advisor, under the overall supervision and guidance o f the Steering Committee. The management team wil l produce quarterly monitoring reports on project implementation performance.

35. The Project Team under the leadership o f the Steering Committee wil l conduct a semi- annual assessment o f progress against the targets o f agreed outputs and against the designed outcomes, identify issues to be addressed, and plans for the next steps in implementation. The Bank wil l conduct semi-annual implementation support reviews, which may coincide or fol low the Steering Committee’s assessments. A mid-term review wil l be conducted during the third year to assess progress and any need for mid-course adjustments. An implementation completion review wil l be carried out jo int ly by the Bank and the Government at the end o f the project implementation period for a full evaluation o f accomplishments.

4. Sustainability

36. The introduction o f performance management systems and the strengthening o f management tools wil l increase accountability and result in more efficient and effective management. This should create a supply-and-demand spiral for increased management

10

effectiveness as the benefits o f improved results-oriented management are felt in day-to-day operations.

Risk factors

37. Change management activities wil l keep internal and external stakeholders informed on aims and accomplishments o f the project. These wil l transmit the mission and values o f the LCD, improving transparency and enhancing expectations o f the quality o f services o f the department both externally and internally.

Rating" of

risk

Ratinga of risk Description of risk Mitigation measures residual

3 8. The introduction o f an off-the-shelf system with accompanying standardized procedures wil l provide rigor and structure to customs processes, although a minimum degree o f adaptation to local conditions i s both necessary and contemplated. The new structure wil l help align unit and individual efforts with the goals o f the customs administration and create ongoing momentum for reform.

39. Escrowing o f a part o f the A S Y C U D A user fee wil l provide for the system's sustainable maintenance and future development. The agreement in principle to establish a mechanism to escrow such fee, in a WTO-compatible way i s a condition o f effectiveness.

5. Critical risks and possible controversial aspects

40. and those related to implementation.

This Section looks into the project-specific r isks to the Project Development Objectives

Technicalidesign Possible absence o f adequate counterpart budget resources to support the project and/or to sustain the operation o f the customs IT system beyond the l i fe o f the project.

Status-quo resistance to customs centralization reforms or to regulatory reform i s possible. W h i l e the central Government and M O F as responsible agency are fully committed to these reforms, there are political risks stemming from the fiscally decentralized nature o f the Lao PDR's P F M system, and therefore some potential resistance to

S Government has provided assurances to this effect. Counterpart funding requirements are modest and critical components o f the project (e.g., ASYCUDA) are fully financed by the grant. Establishment o f a WTO- compliant fee w i l l support the management, maintenance and operation o f the IT system. Government agreement to establish an escrow account for the fee i s a condition o f effectiveness.

Centralization was officially begun in October 2007 and i s slated for completion at the end o f 2009, within the schedule for customs automation and modernization. Should additional time be necessary, project and system design allow for f lexibil i ty regarding this issue. Residual risk i s mitigated by change management activities to be carried out by an experienced international customs advisor.

M

11

Risk factors

Cognizant o f the weak environment, this project is designed to minimize the FM-related risk: (i) it will be implemented in a few procurements wi th a large part outsourced to the system provider; (ii) an existing P I U within the M O F w i l l be used; (iii) a computerized accounting system has been installed; (iv) separate bank account for the project funds w i l l be opened; (v) financial management procedures and policies w i l l use a project finance manual acceptable to the Bank; (vi) additional training for financial management staff in the project w i l l be provided if needed at project launch and subsequently. The total number o f procurements

Implementation capacity and sustainability

M

M

11. Implementatic Financial management

Procurement

Social and mvironmental safeguards

Description of risk

centralization from the provincial authorities. If these risks were to materialize, they could delay centralization o f customs, which may affect the full utilization o f the capacities offered b y the new automated system.

Lack o f sustained political commitment to the project or possible change o f administration, and weak capacity for reform

Risks T h e init ial risk is Substantial as Project w i l l be implemented in a weak control environment where financial management capacity i s a serious constraint.

Weak procurement capacity. L C D has no prior experience in WE3 procurement.

Implementation delays caused b y slow procurement.

The safeguards risk rating i s considered to be low, as per Safeguards screening attached.

Ratinga of risk

S

S

H

S

L

Mitigation measures

Information dissemination campaign as well as staff feedback mechanisms w i l l serve to reduce resistance to change. Finally, the fact that the automation relies on the introduction o f a wel l known off-the-shelf package w i l l reduce uncertainty wi th respect to expected changes and results.

A Steering Committee chaired by the Vice-Minister o f Finance w i l l provide leadership sustainability. An experienced P I U within the M O F w i l l manage the project. Moreover, direct project leadership will be provided by the DG Customs, supported b y a project implementation team and the international customs adviser. T h e appointment o f the adviser will assist the project team and progressively bui ld internal capacity. Internal and external information dissemination campaigns w i l l contribute to continuity and reform cohesiveness.

Ratinga of residual

risk

M

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Risk factors

Corruption

Ratinga 1 of risk 1 Description of risk

In a weak control environment, potential corruption issues require mitigation.

S This is a simple project with only a few contracts, the majority allocated to one contract for the IT system. A specific component o f the project is directed at developing and implementing an anti- corruption and integrity strategy for customs. Hence the residual risk i s low.

Mitigation measures

I safeguards risk i s considered to be

Ratinga of residual

risk

L

M

'Rating o f risks on a four-point scale according to the probability o f occurrence and magnitude o f adverse impact: L o w (L), Moderate (M), Substantial (S) and High (H).

6. Grant conditions and covenants

Conditions of Effectiveness:

A Steering Committee to oversee the reforms has been established with agreed terms o f reference and is in operation.

A Customs Reform and Modernization Team chaired by Deputy Director General, charged with the day-to-day implementation o f the project i s in operation.

Government has issued a notice or letter signed by the Minister o f Finance that agreed in principle to an ASYCUDA System User Fee (WTO Compatible) to be established, with revenue escrowed for hardware and software maintenance and operation costs and future development/expansion o f the system.

Legal Covenants:

0 The Steering Committee wil l be maintained during Project implementation to provide oversight, pol icy guidance, overall coordination, and conflict resolution.

0 The A S Y C U D A System User Fee (WTO Compatible) wil l have been implemented no later than 18 months after project effectiveness. As such, the Ministry o f Finance (MOF) wil l ensure that the funds collected through the escrowed user fee are allocated to L C D to cover the operating and maintenance costs and to ensure sustainability o f the enhancements achieved through this project.

The A S Y C U D A contract wil l have been signed no later than 3 months after Effectiveness.

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On or about December 2011, the Lao PDR Customs Department (LCD) and the Bank shall jo int ly carry out a midterm review o f the progress made in implementing the Project.

The project wil l operate with an adequate financial management system with appropriate accounts and in accordance with generally accepted accounting principles.

The L C D wil l furnish to the Bank semi-annual reports on the results o f monitoring and evaluation activities, on December 31 and June 30 every year, starting on December 2008.

The Financial Management Reports (FMRs) shall be submitted to the Bank on a timely basis and in the form and substance agreeable to the Association.

Annual audited financial statements for the Project shall be submitted no later than six months after the end o f the Project’s fiscal year. The Financial Statements shall be: Sources and Uses o f Funds (one o f the FMRs) and Balance Sheet.

Counterpart funding

41. Counterpart financial participation in the project wil l take the form o f budget-financed material, travel, workshops, office goods and other expenses; personnel assigned to the project; and the user-fees for maintenance o f hardware and software.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

42. Implementation o f customs reform and modernization wil l yield significant payoffs in terms o f a more effective, efficient, transparent and accountable customs administration that wil l facilitate trade and improve the level o f voluntary compliance, while improving Lao PDR’s investment climate and competitiveness. The project will improve the performance o f customs service by strengthening technical capacity and reducing integrity risks. More focused post- clearance verification and audit, and effective implementation o f risk based approaches to customs administration wil l reduce smuggling and encourage more traders to participate in the formal economy. A modern, proven integrated IT system, integrated tar i f f and a streamlined series o f import, export and transit procedures will improve efficiency, reduce clearance times and facilitate information exchange and better coordination with other government agencies. The economic and financial justifications for the project are based on these benefits.

43. The economic benefits, resulting fkom the project are numerous; however, not al l o f these are quantifiable. Some benefits, such as reduction in cost to traders as a result o f faster cargo clearance, are measurable while other benefits, such as economic impact o f reduced corruption, improved international competitiveness, greater transparency and higher level o f national security, are difficult to quantify. The project development objectives do not target increased customs revenue specifically, however, experience in other countries suggests that

14

improved customs procedures and practices, and the more effective use o f risk management and automation, wi l l contribute to revenue increases.

Two percent gain

22

1.6

Internal rate o f Return (IRR) in percent Ne t Present Value (NPV) in US$ m i l l i on

Financial analysis

Three percent gain F ive percent gain

61 188

6.2 15.3

44. The ro l l out o f a modem customs management system wil l be accompanied by improved customs practices. For instance, risk management wi l l be improved leading to better targeted documentary and physical inspections, debt management and special import regimes wil l be more closely followed, and trader compliance wil l improve. These improved practices wil l benefit not only the customs duties levied by customs but also the domestic indirect taxes, whether the present turnover taxes or the value added taxes that may replace these turnover taxes in the future.

45. By making some assumptions about the probable revenue-enhancing effects i t i s possible to calculate the internal rate o f return (IRR) and the net present value (NPV) o f the project investment. As suggested in the table below, an increase o f 2 percent o f revenue as o f 2010 would yield an IRR o f 22 percent and a NPV o f US$1.6 mil l ion. If revenues are increased by five per cent as o f 2010 the R R increases to 188 percent and the NPV to US$15.3 million.

Economic analysis

46. Economic benefits are expected to result from lowering administrative and compliance costs and from the time saved by traders whose goods wil l be processed faster. In the absence o f hard data, this exercise has used best estimates based o n the international literature on trade facilitation and the cost o f levying taxes both from the taxpayer and from the tax authorities’ points o f view.

47. Roll ing out a customs management system should result in an overall improvement in performance o f customs operations. This is expected to lead to reduced clearance times and greater levels o f predictability. Operating costs wil l be reduced for traders, who wil l need a lower inventory and thus less operating capital. They wil l also benefit from their ability to better satisfy their customers. Simplified customs procedures wil l reduce the compliance costs o f the users o f the customs services. Also customs administration costs will drop, as a result o f greater operational efficiency due to the introduction o f the new customs management system, largely because customs operating costs wil l not need to increase commensurately with the expected increase in trade volume. Annex 9 details the assumptions used to quantify these cost savings.

48. Most o f the economic benefits are derived from the reduction in clearance times. Two assumptions were made. In the base case i t i s assumed that clearance times are reduced by hal f a day and that the value o f a day saved i s equivalent to 0.25 percent o f the value o f the cargo

15

cleared. This yields an IRR o f 170 percent and a NPV o f US$176 million. Assuming the same reduction in clearance time but taking for value o f a day saved in clearance as 0.5 percent rather than 0.25 percent o f the value o f the cargo cleared increases the IRR to 250 percent and the NPV to US$347 million. These estimated values would be even higher if it were assumed that the clearance times were to be reduced by more than hal f a day.

2. Technical

49. ASYCUDA i s a mature system with a proven track-record o f over 70 installations world-wide. U N C T A D has extensive experience in implementing the system in similar environments. N o technical constraints exist. Additional technical assistance to be financed by the project is in keeping with international standards and the WCO’s capacity building framework.

3. Fiduciary

Financial Management

50. The init ial risk i s Substantial as Project wil l be implemented in a weak control environment where financial management capacity i s a serious constraint. Cognizant o f the weak environment, this project i s designed to minimize the FM-related risk: (i) it wil l be implemented in a few procurements with a large part outsourced to the system provider; (ii) an existing P I U within the MOF will be used; (iii) a computerized accounting system has been installed; (iv) separate bank account for the project hnds wil l be opened; (v) financial management procedures and policies wil l use a project finance manual acceptable to the Bank; (vi) additional training for financial management staff in the project will be provided if needed at project launch and subsequently. These mitigation measures and the experience that the existing staff o f the PFMSU have picked up during the implementation o f the FMCBP are adequate to lower the Project’s r isk to Moderate after mitigation.

Procurement

5 1. Procurement for the proposed project shall be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits”; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, revised October 2006, and the provisions stipulated in the Legal Agreements for the proposed Project and as per the agreed procurement plan. The L C D has weak procurement capacity as i t has no prior experience managing World Bank projects. However, the project has been specifically designed with only a few procurements to mitigate this risk. Procurement activities wil l be carried out by the LCD, with the assistance o f the Public Finance Management Strengthening Unit (PFMSU) to provide guidance and facilitate the procurement/ selection process leading to the signing o f the contracts, whereas the technical inputs wil l be provided by the customs technical experts. Therefore, the overall procurement risk i s expected to be ‘Moderate’.

16

4. Social

52. The project does not include activities that may have significant social r isks or deal directly with the population at large. A side benefit o f the project would, however, be reduced transaction costs therefore creating an incentive for higher levels o f trader compliance. The reduction in compliance costs for traders, in terms o f faster clearance times and less corruption may be transferred to consumers in the form o f lower prices o f goods.

5. Environment

53. The Project wi l l finance consulting services, goods, information systems, and training. There are no c iv i l works or any activity that wil l have negative environmental implications. The project i s classified under category C.

6. Safeguard policies

54. There are no adverse social safeguards implications (involuntary resettlement, Indigenous Peoples, etc.).

Table 5: Safeguards Table Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPIBPIGP 4.01) [I [x 1 Natural Habitats (OPIBP 4.04) [I [x 1 Pest Management (OP 4.09) [I [x 1 Cultural Property (OPN 11.03, being revised as OP 4.11) [I [x 1 Involuntary Resettlement (OP/BP 4.12) [I [x 1 Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [x 1 Forests (OP/BP 4.36) [I [x 1 Safety o f Dams (OP/BP 4.37) [I [x 1 Projects in Disputed Areas (OP/BP/GP 7.60)' [I [x 1 Projects on International Waterways (OPIBPIGP 7.50) [I [x 1

7. Policy Exceptions and Readiness

55. None.

* B y supporting the proposed project, the Bank does not intend to prejudice the final determination o f the parties'

claims on the disputed areas.

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Annex 1: Project Background

Country context

1. The economic outlook for Lao PDR remains favorable, but rising inflation poses a risk. GDP growth remained stable at above 7 percent in 2007 and this i s expected to continue into 2008. The inflation rate, however, that had earlier fallen to 4.5 percent in 2007 (compared to 6.8 percent in 2006) has been climbing in recent months and reached about 6.5 percent in January 2008. The government’s fiscal position continued to improve in FY2006/07 owing to higher-than-targeted revenue collection and lower-than-planned expenditures, while implementation o f the public finance management reform agenda has been steady. And although the legal framework is in place to support international trade and private sector activity, implementation remains incomplete.

2. Notwithstanding a more challenging international economic environment, the economy i s expected to maintain a rapid growth rate. Real GDP growth i s estimated at 7.1 percent in 2007 and projected to rise to 7.6 percent in 2008. Only around 2 percentage points o f this growth i s expected to come from new hydro and mining projects (see Figure below), including construction o f four hydro-power dams and a large copper plant. The remaining 5 percentage points i s expected to come through investments in plantations for agricultural crops and industrial forestry, steadily rising tourism revenues, and newly emerging food and nonfood processing industries.

Annex Figure 1: GDP growth and inflation, 2000-2008

Source: recent staff estimates and projections.

3. Having dropped to historical lows in 2007, inflation picked up recently to around 6 percent, the target set by the BOL for all of 2008. This upward trend i s due mostly to higher o i l and food prices -the latter the result o f l ow grain harvests caused by bad weather in 2007 and by culling poultry at risk o f propagating avian flu. The r ise in the food CPI has slowed in recent months although food inflation remained high at 6 percent in January 2008.

4. High commodity prices have proved to be a mixed blessing. Fuel prices pushed up the cost o f transport, construction, land clearing, and agriculture. But strong non-oil commodity prices have proved to be a net benefit, since Lao PDR exports metals (copper, gold, tin, and other) and non-metal commodities (rubber, sugar and other ago-industrial products). In the last

18

two years, production and exports o f Lao agricultural products (maize, coffee, rice, fi-uits and vegetables) have also increased due to growing demand from neighboring countries.

5. Given recent trends, the government-set inflation target of 6 percent will be difficult to meet. This i s partly due to a high level o f circulation o f U S dollars and Thai baht in the Lao PDR economy, that limits effectiveness o f the BOL’s monetary policy. Notwithstanding this, the Government has established an inter-agency committee with each agency assigned tasks to help tackle the inflation problem. Included in this committee are the B O L to maintain tight monetary policies and stable exchange rates, MOF to sustain good fiscal Performance and revenue management, Ministry o f Agriculture and Forestry (MAF) to promote food and agricultural production, and Ministry o f Industry and Commerce (MOIC) to monitor retail prices in the country and warn o f incipient price increases.

6. The kip has appreciated against the U S dollar but remained steady against the baht, and the respective real exchange rates have moved similarly. Foreign exchange reserves increased sharply to about US$540 mi l l ion in 2007 (more than 5 months o f non-resource imports) and are expected to rise further given expected trends in the prices for mining and agricultural exports, tourism receipts, and FDI inflows. At the same time, imports associated with large mineral and hydro projects in the pipeline wil l exert pressure o n the external current account deficit.

7. The government’s fiscal position has continued to strengthen as a result of which external debt ratios have retreated slightly from their elevated levels. The government achieved i t s revenue targets for a second consecutive year; with revenues increasing from 12.7 percent o f GDP in 2005/06 to about 13.8 percent in 2006/07. If expenditures remain unchanged, the overall budget deficit i s l ikely to be close to 3 percent o f GDP in FY2006/07. Lao PDR’s external public debt burden remains elevated. At end-2006, Lao PDR’s stock o f public and publicly guaranteed external debt in present value terms was equivalent to 70 percent o f GDP, 135 percent o f exports, and 377 percent o f fiscal revenues. All three debt stock indicators exceed the indicative sustainability thresholds for countries with comparable CPIA ratings, placing Lao PDR at “high risk o f debt distress” according to IDA’S debt sustainability framework. However, debt servicing indicators remained under indicative thresholds due to the high concessionality o f debt (75 percent). The proposed project wil l offer measures that wil l impact on revenue increases and collection rates.

8. The reform agenda for public financial management i s being implemented steadily. A new Budget Law was promulgated in early 2007 allowing recentralization o f the Treasury, Customs and Tax Departments, including work on a new revenue sharing mechanism. The proposed project plays an important role in the process o f customs centralization. Progress on a revised Chart o f Accounts (COA) i s progressing well and i s expected to be deployed in the FY2008/09 budget. To strengthen audit performance and oversight o f the State Owned Enterprises, a new Audit Law was promulgated by the National Assembly in July 2007 to allow the Supreme Audit Office (SAO) to directly report to i t instead o f the Prime Minister.

9. Progress i s being achieved in reforming private sector and trade policies but implementation continues to lag. The Negative L i s t o f Business Activities under the new

19

Enterprise Law was approved in November 2007. The new Mining Law and implementing decree o f the Tourism Law are other important contributions. To facilitate cross-border trade, the government reduced the number o f agencies at border check points from sixteen in 2006 to three (immigration, customs and quarantine) in 2007. A new Commercial Banks Law was endorsed and amendments to the Presidential Decree on Foreign Exchange and Precious Metals were adopted in 2007. I t i s now important these new laws and implementing decrees are implemented.

Sector Context

10. The NSEDP estimates that necessary level o f investment to achieve targeted economic growth rate will be around 26-28 percent o f GDP, out o f which 16-17 percent i s expected to be mobilized from the private sector, including FDI. Currently, the country enjoys similar volumes o f FDI, but most o f i t comes to the natural resource sector, and investment in other sectors would be needed to achieve targeted growth. The NSEDP sets an ambitious growth target o f 7 percent per year for 2006-2010, with the objective o f graduating from the least developed country (LDC) status by 2020.

1 1. Private sector s t i l l faces significant constraints to doing business and exporters face higher regulatory burden than non-exporters. These constraints include poor infrastructure, cumbersome regulations, discretionary taxation, limited access to finance, and limited access to essential information and business support services. Two analytical studies conducted by the World Bank in close cooperation with other development partners, identify and prioritize the key constraints to a strong investment climate and export competitiveness in Lao PDR. The Joint WB/ADB I C A identified key investment climate constraints that private enterprises face. According to the studies, priorities in improving the investment climate should be to improve infrastructure, especially electricity transmission lines, streamline regulations, eliminate discretion in taxation, improve access to formal sources o f finance, and to improve regulations and processes specific to exporting and importing goods. The studies also highlighted the differences between investment climate for exporters and non-exporters and identified trade- related regulations and processes as key constraints.

12. Lao PDR ranks 117 out o f 150 economies, with respect to i t s Logistics Performance Index (LPI)3 (see figure below). Exposure to international competition is growing with the gradual opening o f the domestic market fol lowing trade liberalization commitments made under AFTA and in preparation for future membership in the WTO. Although Lao PDR i s performing better than most landlocked countries, to become competitive in the region, significant improvement wil l need to be made, especially in the weakest LPI indicators such as the ability to track and trace shipments, infrastructure quality, and efficiency and effectiveness o f customs and other border procedures. A DTIS led by the World Bank and M O I C provided analytical background for the ongoing reforms in trade-related sectors.

LPI aggregates the performance in seven areas, including efficiency and effectiveness o f customs and other border procedures, logistics costs (including freight rates), and infrastructure quality, the abi l i ty to track and trace shipments, timeliness in reaching a destination, and the competence o f the domestic logistics industry.

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13. In spite of significant improvements achieved in recent years, both by the LCD and other border related regulatory agencies, the processing and clearance o f import, export and transit goods in Lao PDR remains relatively inefficient and time consuming and presents a significant obstacle to traders engaged in legitimate cross border commercial activity. The current regulatory regime and clearance processes are administratively complex, heavily dependent on inefficient and resource intensive physical inspections, excessively reliant on manual processing o f paper-based documentation, characterized by excessive face to face interaction between traders and government officials, and are hampered by a lack o f uniformity in treatment across the country. In addition, the institutional capacity o f the LCD and other key government agencies to apply internationally accepted approaches to modem border management i s relatively weak. Traders, regardless o f their volumes, transaction history, compliance record and corporate governance arrangements are subject to essentially the same excessive controls and little incentive exists for traders to strive to improve compliance.

Annex Figure 2: Lao PDR Logistics Performance Index

LPI

3'5 T

Domestic Iqlistics msts lnfrastrunure

Tracking h tracing lnlernamnal shipments

1 Logistics mmpetence

-+-Vietnam &Cambodia - - - Low inmme(income average) -Lao PDR i C M o n Q o l i a

14. Recent reforms under the PRS04, have introduced significant simplifications in the border procedures; however, challenges in this area remain. Up to ten agencies used to be operating at the border but the government has taken a decision to limit the number o f agencies present to three (PMO Notice 406, 13 March 2007). While this development i s positive, full implementation o f the government decision wil l take some time. Licenses, approvals and certificates contain similar if not identical information, and documentary and physical inspections are unnecessarily duplicative. This, coupled with excessive face to face interaction between traders and government officials, leads to inefficiency and loss o f process integrity.

15. Notwithstanding the efforts to improve customs procedures, a fully functional I T system remains a key constraint to implementation o f the NSEDP's ambitious export growth goals. While the Government has made some progress in improving the effectiveness o f i t s customs operations in recent years and has now taken the difficult decision to centralize al l

21

customs operations under one central administration, i t s efforts continue to be hampered by the lack of a comprehensive and fully functional customs IT system. As a result, the Government has taken a decision to abandon further development o f i t s current system which provides extremely l imited fbnctionality in favor o f the procurement and implementation o f a proven customs IT system. After undertaking an assessment o f alternative systems4 the MOF has decided to procure the Automated Systems for Customs Data (ASYCUDA) World, a system developed by UNCTAD. There are over 70 installations o f ASYCUDA worldwide5, including in several neighboring countries. The Prime Minister endorsed the decision and a formal instruction to this effect was signed in 2006.

Technical support has been provided by the French Government under a grant from the Agence Franqaise de

This number refers to a l l versions o f ASYCUDA, o f which World i s the latest.

4

Dkveloppement.

22

Annex 2: Major Related Projects by the Bank and other Agencies

Related lending services by the World Bank:

Trade Development Facility (TDF) (US$6.45 million, 2008-2012). A multi-donor trust fund administered by the WB with contributions from E C and Australia. The TDF development objective i s to support the establishment o f a sector-wide approach in trade sector and to implement ini t ial activities facilitating trade and cross-border movement o f goods and increasing the capacity o f the Government to undertake specific tasks related to regional and global economic integration. For detailed project description see Annex 11. GMS regional trade project (US$30 million, under preparation). This project i s s t i l l under preparation and wil l possibly include the following components complementary to the proposed project: (1) technical assistance for implementation o f a transit regime; (2) support to a modern clearance policy, with the options o f border or inland clearance, thus supplementing the transit dimension; (3) investment and technical assistance to improve border management (including design and construction o f border stations, IT support, station management) ; (4) SPS (including surveillance and r i s k management, regulatory reform, laboratories).

Related non-lending services by the World Bank:

Diagnostic Trade and Integration Study (DTIS) has been completed in the context o f the Integrated Framework (exercise led by the GOL and WB with participation o f the other core IF agencies and the IF Facilitator. The DTIS identified major impediments to increasing exports and export competitiveness and suggested the ways forward, including an action matrix that i s now being implemented through the M D T F TDF. Investment Climate Assessment. A joint AAA report with ADB, i t i s based o n a survey o f f i r m s in six provinces and Vientiane, completed in October 2005. The f i r m s were surveyed to identify the main constraints to doing business in manufacturing and tourism. The final report was launched and disseminated in mid 2007. Exporters were found to experience higher regulatory burden and higher inspection rates than non-exporters. Financial Accountability (IDF grant US$0.30m). This grant aims at improving Financial Accountability in State Owned Enterprises (SOEs) and Private Enterprises. The project focuses on capacity building and introduction o f international accounting and auditing standards and related training. The project also supports strengthening o f L I C P A and improvement o f legal framework for accounting and auditing particles. Efforts are currently underway to translate international accounting standards into local language. Civil Service Reform Note (planned for FY09). The WB i s supporting the GOL in moving toward developing i t s C i v i l Service Reform Strategy for enhancing performance and service delivery. PACSA i s developing a Prime Minister’s Decree to recruit and retain staff in remote areas and to manage contract staff. The formal review o f c iv i l servants’ j ob descriptions i s nearing completion. The G O L issued an instruction on performance management and organized a high level workshop from which to disseminate it in July, 2007. Four provinces and two ministries have been selected to pi lot the new performance management system.

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Related assistance o f other agencies:

1. At the regional level, the ADB i s providing support to Lao PDR in order to achieve regional integration in the GMS framework. With the forthcoming completion o f the road network, Lao PDR will become an important transit country given i t s central location in the sub- region. Trade facilitation will be increasingly important to take full advantage o f the new road network. ADB i s working in this area with a special focus on completing multilateral and bilateral agreements that are compatible also with the ASEAN Single Window. So far, ADB has not provided comprehensive TA in this area, but has been instrumental in promoting progress in the legal framework for sub-regional trade facilitation. ADB i s at present launching a major study to identify needs and gaps in this area. The study wil l cover al l GMS countries and wil l prepare the ground for setting up a regional project. The mission established contacts with ADB offices in Vientiane and Bangkok in order to compare notes and exchange information. Other important regional initiatives are being implementedplanned by the E C and by Australia.

2. In order to ensure maximum coordination and cooperation among GOL’s ministries and agencies and with the donors at present engaged in this process, the possibility o f establishing a Trade Facilitation Task Force i s being canvassed with the GOL. TORS for the proposed Task Force are being developed. I t s mandate wi l l be limited and focused on implementation o f the TF program established as part o f the DTIS Action Matrix. The proposed Task Force could be co- chaired by a representative o f the G O L (possibly MOIC) and a representative o f the key development partners (possibly on a rotating basis). Participation o f private sector will also be sought.

ADB

Regional TA on Implementing the GMS Agreement on Facilitation of Cross-Border Transport of Goods and People (Phase 11, proposed amount US$1.8m, 2006- August 2008): the RETA aims to assist in finalizing agreement on and implementing the GMS Cross-Border Transport Agreement (CBTA) and i t s annexes and protocols. The particular emphasis o f the TA wil l be on supporting the GMS countries to effectively implement the CBTA. Regional TA on Support to Trade Facilitation and Capacity Building in GMS (US$l.Sm, 2006-2008). The RETA will primarily provide init ial support for the implementation o f the strategic framework for action on trade facilitation. This includes building capacity o f the trade facilitation focal points and the core team in performing their crucial role as “drivers” o f the SFA-TFI process at the national level, by assisting them, and subsequently the SFA-TFI mechanism to undertake “gap analysis” or other required analysis in the four identified areas: customs, inspection and quarantine measures, mobil i ty o f business people, and trade logistics. The RETA wil l also aim to provide continuous and practical support to the GMS Trade Facilitation Working Group in the exercise of its functions and responsibilities. During implementation o f the RETA, continuous coordination with other donors in support o f SFA-TFI wil l be undertaken. The RETA complements the actions initiated through the GMS Cross Border Transport Agreement.

24

Aus tralia/AusAID

Support for the Role of Integrated Framework Facilitator (A$1.5 mill ion, 2006-2008). Australia has been invited by the Lao PDR Government to serve in the role of IF Facilitator to support Lao PDR participation in the IF process. Australia funded the participation o f an expert consultant in the DTIS main mission to the Lao PDR (2005), and wil l continue to work with the GOL’s IF Secretariat and Focal Point, as wel l as with the IF core agencies (led by the World Bank and UNDP), in progressing the IF agenda in a positive direction over the coming few years. Australian assistance includes funding for an IFF Specialist and targeted support for DT IS Action Matr ix implementation. Trade Analysis and Reform Project (A$5m, 2005-2008). Target countries: Lao PDR, Cambodia, Thailand, Vietnam. Project interventions will focus on building analytical and research sk i l ls in order to strengthen capacity for trade pol icy analysis. The project has three components: (1) to improve understanding o f the role o f analysis in trade pol icy development and the capacity to incorporate analysis into the pol icy development cycle; (2) to strengthen the capacity o f researchers in government agencies and the research community to deliver high trade pol icy relevant analysis; and (3) to deliver a high quality capacity building project in cost-effective and cooperative way. Sanitary and Phyto-Sanitary Capacity Building Project - SPS CBP (A$3.9m, 3 years (2004-2007). The program i s for support o f eight A S E A N focal countries: Philippines, Indonesia, Malaysia, Thailand, Vietnam, Cambodia, Lao PDR and Myanmar. The goal o f the project i s to enhance the capacity o f the ASEAN focal countries to meet international SPS standards and the requirements o f importing countries consistent with the WTO SPS Agreement. The three components focus on SPS-Trade linkages, Plant Health and Animal Health.

European Commission (EC)

Asia Invest-Open Resource for Commerce in Horticulture aided by species Identification Systems (Orchis) (Euro 0.3m, April 2006-March 2009). The project aims to enhance the export capabilities o f Lao PDR in the valuable flora o f the country by promoting best practices in trade aided by open source based IT&C tools furthering the integration o f Lao PDR in information society. The project also aims at reinforcing institutional capabilities o f Lao PDR to better adhere to international commitments made in conventions l i ke CITES. EC-ASEAN Intellectual Property Rights Co-operation Programme ALA/96/25 (Euro 0.5 mi l l ion 2005-2007 National Component Lao PDR). The objective o f this programme i s the development o f a modem intellectual property system in Lao PDR. This includes technical assistance in the drafting o f new legislation on Patents, Copyrights, and Industrial Design. Particular attention wil l be paid on TRIPS compliance, the judiciary and the enforcement. Open Resource on Conservation Agriculture for Trade and Development (ORCATAD) (Euro 0.3m 2007-2009). The action aims to enhance the export capabilities o f Lao PDR in eco-friendly cash crops, promoting best practices in conservation agriculture aided by modem information and communication technologies and furthering the integration o f Lao PDR in to the global information society. The action aims also at reinforcing

25

institutional capabilities o f the intermediary business organisations such as L N C C I (Lao PDR National Chamber o f Commerce and Industry) by focussing on the niche market and new business opportunities for eco-friendly agriculture related products in the international market.

France

0 TrainForTrade: Training and Capacity Building in the field o f International Trade, FSP 2002-95 (US$2.3m for Lao PDR and Cambodia, 2003-2008). The main project activities include: (1) training o f trainers (TOT); (2) use o f distance learning; and (3) cooperation between universities o f LDCs. Operational changes wil l be undertaken in the economic sectors identified by decision-makers and authorities o f the countries involved. The project i s implemented by U N C T A D together with MOIC. France Agence de DCveloppement (FAD) i s providing technical assistance to the L D C and Treasury focusing on: (i) training in planning and decision making; (ii) automation training and familiarization (study tours); (iii) creation o f a training center; (iv) developing an automation strategy; and (v) provision o f general pol icy advice.

0

International Trade Center - ITC (Funded by Swiss SECO)

0 Support to Trade Promotion and Export Development in the Lao PDR (US$1.704m, 2004-2007). The main objective o f this project i s to build up the trade promotion and export development capacities o f Government, trade support institutions and exporting enterprises in the Lao PDR, in close technical cooperation with Cambodia and Vietnam, so that in turn they could induce the expansion and diversification o f exports. Areas o f activities include: (1) development o f export strategies at the national and sectoral levels; (2) establishment o f an operational trade support network at the national level between Government, trade support institutions, product associations and exporting enterprises, led by strengthened trade promotion organizations; (3) improvement o f knowledge, strengthening o f ski l ls and development o f capacities o f training institutions to provide training in trade promotion and export development to exporting enterprises; and (4) establishment o f a trade information capacity at the national level servicing the specific needs o f trade support institutions and exporting enterprises.

Japan

Investment Promotion Support to MPI (US$0.4m, JICA: Advisor and Training, 2007- 2009). This technical assistance mainly aims at promoting investment to Lao PDR smoothly, giving proper advice on the problems o f investment situation in Lao PDR. Second Mekong International Bridge Construction Project (US$34m, 2000-2007). The project aimed at the bridge construction and i t has already started operation in January 2007. Supplemental construction works including Common Control Area (CCA), the facility which enables single-stop inspection by Thai and Lao PDR officials, are currently on-going. The C C A has been planned in addition to the bridge construction itself, in light o f the recent progress o f trade facilitation agreement. The similar construction i s supposed to take place in Thai side as well.

26

Singapore

Trade related courses (US$1.4mY ongoing since 1992). During the period, trade/economic courses were conducted at the Lao-Singapore Training Centre in the fields o f business communication, international trade finance, consumer protection and export competitiveness strategies. Lao PDR officials also attended other trade related courses conducted in Singapore, including courses in trade and investment promotion, trade negotiation, national payment and settlement systems, and Central Bank accounting.

UNDP

Enabling more effective Integration of Lao PDR into the ASEAN Phase I1 (UNDP - US$0.57mY 2006-2009). This project wi l l build on Lao PDR’ successhl chairmanship o f the ASEAN Standing Committee and the positive achievements o f the U N D P Preparatory Assistance Project. The new project, implemented by the ASEAN Department o f the Ministry o f Foreign Affairs aims to increase national commitment to the process o f ASEAN integration, improve capacity to coordinate A S E A N affairs within the G O L and enhance national capacity to assess policy implications o f regional integration. Support for Lao PDR’s Integration into the International Trading System (US$0.64m: AusAID - US$0.59m and U N D P - US$0.32m. 1999-2007). The main objectives o f this project are to provide technical assistance to G O L in the areas o f W T O accession, improvement o f economic and trade pol icy formulation and integration. The project has two components: (1) support for Lao PDR accession to the WTO, including preparation o f Memorandum o f Accession, establishment o f a minister-level National Steering Committee and i t s secretariat, identification o f trade focal points in l ine ministries, and capacity building; and (2) integration impact studies in the areas o f laws and regulations, which should be changed to conform with W T O agreements, customs valuations, ru les o f origin, technical barriers to trade, quarantine, sanitary and phyto-sanitary measures and land transport policies. This project wil l close in December 2007 but support wil l continue to be provided through the Window I1 project mentioned below. Capacity Building and Technical support to Lao PDR in the WTO accession negotiation (IF Window I1 finds - US$0.3m, 2007-2009; supported by IF core agencies). The objective o f the IF initiative is to promote the integration o f Lao PDR into the global economy through export growth and increased competitiveness. The objective o f this project i s to: (1) Improve capacity o f the GOL (mainly from MoIC) to prepare and negotiate a pro-poor and pro-growth W T O accession agreement and to improve capacity o f the Lao PDR WTO negotiation team to coordinate the working party; (2) to improve capacity o f the G O L (mainly from MoIC, MAF, STEA, and BOL) to negotiate market access in the goods and services sectors; and (3) to ensure W T O accession negotiations are widely disseminated at central and provincial level. Institutional strengthening of the IF coordination and implementation structures (IF Window I1 funds - US$0.22millionY 2007-2008; supported by IF core agencies). The National Implementing Unit (NTU) will help remedy problems such as (i) lack o f dedicated staff responsible for overlooking project management (ii) low level o f project management capacity within government and (iii) weak inter-ministry and inter-department coordination

27

systems by providing a core o f dedicated staff responsible for coordinating in-country trade related activities and for implementing the DTIS Action Matrix. The key objectives o f the project are to (I) Enhance institutional capacity to coordinate and implement trade related policies and projects within the Government o f Lao PDR; (11) Enhance coordination management capacity with relevant l ine ministries involved in the IF process; (111) Enhance national capacity to assess the policy implication o f trade on growth, economic development, and poverty alleviation through N I U ’ s support and coordination. Capacity Building for MOIC’S Department of Import and Export (DIMEX) in Rules of Origins (ROO), Product Specific Rules (PSR) and Operational Certification Procedures (OCP) (IF Window I1 funds - US$O.15mY 2007-2009; supported by IF core agencies). The project focuses on building capacity o f DIMEX, which is a newly created department, and on strengthening technical capacity on export procedures, specifically o n ROO, PSR and OCP. The project wil l focus on capacity building to DIMEX and technical assistance to the certificate o f origin division on i t s various implementation commitments in ASEAN. In addition, the project wil l focus on developing a culture o f customer service since one o f DIMEX’s central mandates i s to provide service to the private sector. Support the shijit of the Garment Industry from contract manufacturing to direct export (Phase I) (IF Window I1 funds - US$0.32m, 2007-2008; supported by IF core agencies). The project aims to support the Lao garment industry to address the challenges that the garment sector i s facing in the market and to operate smoothly i t s shift f rom contract manufacturing to direct export. This shift would ensure a greater value addition and value retention o f the sector in the Lao PDR and support the Lao PDR garment producers in gaining full management o f their purchasing, production, promotion and distribution activities and therefore develop their own capacity and strengthen their position in the international market based on more reliable advantages than preferences under Generalized System o f Preferences or Most Favored Nation Strengthening capacity for National Human Development Reporting NHDR (UNDP- US$0.778m; June 2004-December 2007). The third NHDR International trade and human development” was successfully launched in December 2006. The report emphasizes how trade impacts human development and also how human development impacts trade. It identifies present and future opportunities and challenges for Lao PDR as well as the potential strategic measures and policies for the best possible path for the future. Dissemination activities continue with the publication o f an executive summary in both Lao and English and the release o f a radio program. The project i s to be extended to allow for the production o f the fourth NHDR which started this year. The international lead co- author was recruited, the research team has been formed and the data collection process is now underway with village and household surveys. This 4th report wi l l explore the issues around employment and livelihoods considering the multiple aspects and challenges for the Lao PDR from a human development lens.

The United States (USA)

ASEAN Market Analysis Capacity by ITC7WTOAJNCTA. (US$238k in FY 2005,2005- 2007). Under the project, WTOLJNCTAD’s International Trade Center (ITC) has created an ASEAN market analysis portal for users the A S E A N Secretariat and member countries. The portal includes three online tools for market analysis: (1) TradeMap,

28

which facilitates trade f low analysis on over 5,300 products for 180 countries, (2) Market Access Map which provides information on tariffs covering 170 importing countries and 220 exporting countries and territories, and (3) Product Map, which contains business intelligence information for 72 industry sectors. In addition to providing technical assistance and training materials, the project has plans to deliver 5 workshops to the ASEAN Secretariat and users in ASEAN member countries by i t s completion date o f April 2007.

29

Annex 3: Results and Monitoring Framework

lopment e

To facilitate trade by improving the efficiency and effectiveness o f customs administration. The project wil l simplify customs procedures, eliminate duplication and redundancy, reduce transaction costs and t ime to clear goods, and increase transparency and accountability.

Improved customs processes and procedures

Improved ICT infrastructure wh ich supports the implementation o f the new customs processes and procedures and i s sustainable and reliable

Customs Efficiency Reduction in mean import, export, and transit clearance times for commercial shipments by 10 percent per year. Reduction in the number o f steps to clear commercial shipments by 25percent.

Customs Effectiveness Increase in the ratio o f detectionslinspections by 10 percent per year. Increase in client perceptions o f customs performance and integrity, as measured by W o r l d Bank surveys by 25 percent.

Outcome indicators provide an overarching framework for Project management, monitoring, progress reporting and periodic reviews. In addition, these indicators:

1 Provide basis for the ease o f doing business and business climate;

1 Provide feedback to overall national development plans intended to enhance Lao PDR’s export competitiveness.

data submission for customs declaration procedures by the end o f 201 1. Prototype developed and accepted by government; Accepted prototype validated at p i l o t site; Prototype replicated at remaining checkpoint sites; Integrated IT system i s in place by 2010, p i lo t completed and reviewed by 201 1, and fully operational in a l l implementation sites by 2012; Appropriate front l ine staff and affected traders trained in advance o f p i l o t testing and pre nation wide rollout.

progress in implementing the new customs processes and procedures.

The indicators wil l track the progress o f implementing sustainable and reliable ICT infrastructure.

30

* 4 e B a

h-

ci 3

3 13 2

2 0 n

0 2 n

2 n

Annex 4: Detailed Project Description

Project Cost by Component A: Implementation o f ASYCUDA World B: Customs Modernization Support

Total Proiect Costs

1. In recent years there has been a growing recognition o f the importance o f efficient and effective customs administration to the economic and social development prospects o f countries. A well-performing and ethical customs administration can facilitate trade and investment and increase confidence in the quality and integrity o f government institutions, and make a major contribution to effective revenue mobilization.

Local Foreign Total US$ US$ US$

million million million 0.35 3.64 3.98 0.37 1.64 2.02 0.72 5.28 6.00

2. Customs is the key government agency capable o f responding to the need to facilitate trade while at the same time collecting revenue due and protecting society from a range o f social and national security threats. Striking an appropriate balance between these apparently competing demands i s the key challenge facing al l customs and border management agencies today. The way a customs administration responds to this challenge does much to shape the external and internal perceptions o f a country’s investment environment, institutional framework and quality o f governance. Customs i s also uniquely positioned to co-ordinate, consolidate and simplify border-related regulatory formalities on behalf o f al l government stakeholders.

3. The Lao PDR Customs Trade Facilitation Project wil l therefore:

(9 Implement a well tested and widely used fully automated customs IT system;

(ii) Provide technical assistance in a small number o f key areas that wil l assist Lao PDR to meet WTO requirements particularly in respect to the implementation o f the WTO Valuation Agreement;

(iii) Provide detailed change and project management support to ensure the effective implementation and coordination o f various project and donor inputs into day to day operations;

(iv) Provide accurate base l ine data to ensure effective monitoring o f customs trade facilitation performance over time.

4. and quick implementation, the project has been designed with only two components:

In view o f perceived low implementation capacity and the need for reduced uncertainty

lion)

32

Component A: Implementation of ASYCUDA World (Total Financing required: US$4.22 million o f which US$3.98 mi l l ion IDA)

Sub component 1: Implementation of ASYCUDA ASYCUDA itself i s provided free o f charge by UNCTAD.

5 . This component wil l finance installation costs o f the A S Y C U D A system and some related activities including translations, modifications, training, equipment, communications infrastructure and implementation o f the system in three phases (see draft TOR in Project Document Files):

Phase I - A fully functional prototype wil l be developed by the project team in the L C D headquarters in Vientiane. As a preliminary to this phase, a mapping o f the current export and import processes has been carried out, to identify al l documentation requirements (see TOR in Project Document Files).

Phase 2 - Upon validation o f the prototype, the system will be deployed in a pi lot site. The process o f installing the computerized system wil l be accompanied by adaptation and introduction o f procedures and documentation. This wil l involve substantial interaction with, and training of, the trading community to ensure maximum efficiency and promote the Government's priority pol icy in terms o f liberalization o f the trading process.

Phase 3 - Upon validation o f the pilot, the nationwide rollout o f the system to customs offices wi l l be carried out. This phase will include deployment o f the transit and temporary admissions modules and the cargo manifest module and remaining functionality as described below.

ASYCUDA World implementation for the L C D will include the following modules:

e

e

e

e

0

e e

e

e

e

e

e

e

Cargo and manifest processing; Declaration processing; Bonds and warehousing; Transit control; Transaction valuation and price analysis; Payment processing and revenue accounting; Release notification; Security/guarantee management; Risk management and inspection; Exemptions management; Selection intelligence and audit support; Trade statistics and management information; Data exchange;

33

0

0

0

0

0

0

0

0

0

6.

Miscellaneous items such as Laotian language support, multiple currency support, help desk, international standards, f i le transfer, download and upload capacity from other systems, data conversion and e-Commerce. Additional Standard COTS to support customs I C T Infrastructure: Operating systems for al l servers and desktops/workstations; Database Management System; Network Management System; Communications system and protocols; Web based and ED1 based software; Systems development tools; Antivirus tools.

The subcomponent wil l also finance the hardware and network infrastructure required for border stations, regional customs offices and L C D Headquarters. The hardware wil l include:

Backup and failover systems;

0

Workstations/PCs;

0 Wide Area Network (leased point-to-point dedicated connections) for national Bandwidth requirements to be determined by expected number o f

Servers for data base, application, file/print and web servers;

Environmental Controls for Data Center including f ire suppression; U P S sized to support servers and network equipment and 20 percent (for future expansion);

Local Area Networks infrastructure (cabling, routers etc);

connectivity. transactions and volume o f data transfers.

Subcomponent 2: Preparation of LCD to receive the new system

7. This subcomponent wil l finance the preparation o f customs offices, to prepare them for receiving the new system. This wil l include office goods, computer equipment, and incremental operating costs.

Subcomponent 3: LCD I T Center Strengthening

8. The component wil l also finance the strengthening, through training and computer equipment, o f the L C D IT staff, to prepare them to maintain and run the ASYCUDA system once in operation, as we l l as providing training for users. The human resources allocated to IT in the LCD are inadequate for the existing, much less the new system. In addition, computer/PC usage amongst L C D staff i s currently quite low but expected to increase significantly in future years. This component will finance PC familiarization and basic computer sk i l ls development for L C D staff and other relevant agencies to facilitate the successful adoption and long term sustainability o f the A S Y C U D A World system. A staffing plan and a sk i l ls development plan wil l need to be developed and implemented to ensure the smooth operation and sustainability of the new ASYCUDA system. Key officials in other relevant agencies wil l receive similar technical training in basic IT ski l ls and relevant ASYCUDA application-specific skil ls.

34

Component B: Customs Modernization Support (Total financing required: US$2.02 mi l l ion o f which US$2.02 mi l l ion IDA).

Sub-component 1 : Modern Customs Practices and WTO Agreement Requirements

9. This sub-component wil l fund activities to assist Lao PDR to meet the actual and future requirements o f membership o f the WTO. The principal existing requirement i s implementation o f the provisions o f the WTO Valuation Agreement, which governs the methods that must be used when valuing goods for the purposes o f import and export declarations and, therefore, the basis on which applicable duties and taxes are to be calculated.

10. Currently in the W T O there are a number o f additional technical measures7 under negotiation. They are l ikely to result in a new WTO agreement on trade facilitation during the lifetime o f the Lao PDR Customs and Trade Facilitation project. As a future member o f the WTO, Lao PDR will be formally obligated to implement these measures, which are already recommended, in a non-binding form, as “best practices” by the WCO, o f which Lao PDR i s a member, under the WCO’s Revised Kyoto Convention.

11. The activities for this sub-component are:

Activity 1: WTO Requirements

12. At present the L C D applies pre-determined minimum values to a large number o f products in an attempt to deter under-valuation and provide consistency to importers in the valuation o f their imports. Upon accession to the WTO, Lao PDR wil l be obligated to implement the provisions o f the W T O Valuation Agreement, which i s based on transaction value but also provides a number o f prescribed alternatives that may be applied in specific circumstances. The use o f minimum and arbitrary or fictitious values i s not permitted and i t wil l therefore be necessary for Lao PDR to phase out i t s minimum value scheme at the same time as it implements the provisions o f the W T O agreement.

13. The project wil l fund an international valuation expert to work with local counterparts to ensure that the number o f items subject to the minimum price l i s t are progressively reduced so that the l i s t no longer applies from the date o f Lao PDR’s implementation o f the WTO valuation agreement, ensure that the legislation meets al l the necessary requirements, develop valuation pol icy and procedure manuals and instructions, and train customs officials, customs brokers, and importers in the application o f the valuation ru les including the commercial documentation necessary to determine the correct value in cases o f doubt. In addition, drawing upon international experience in many countries, the project wil l assist the L C D to develop or procure a reference database that enables declared import values to be compared against previous importations o f the same or similar goods and, where applicable, against international commodity prices (for example, goods o f high revenue risk and/or which are commonly traded

They derived from the existing GATT Articles V (relating to freedom o f transit), VI11 (relating to import and 7

export fees and formalities), and X (relating to publication and administration o f trade regulations).

35

internationally). This database wil l interface with the ASYCUDA system, which wil l incorporate into the import clearance process a selectivity function to identify potential cases o f undervaluation.

Activity 2: Post clearance audit

14. Detection o f false values i s often extremely difficult to do from the documentation submitted at the time o f importation, notwithstanding the system tools just described. Customs administrations worldwide have therefore implemented post importation audit procedures. Such an audit may require the examination o f the full range o f the importer’s and/or customs broker’s records to check the accuracy o f declared values, as well as also other aspects o f the declaration such as tari f f classification, origin, and qualification for exemptions or concessionary rates o f duty. Audits may be:

Field Audits: usually conducted at the premises o f the importer or broker, the transactions and companies to be audited are selected by assessing the level o f risk using criteria such as past importer and broker history, and the nature and origin o f the goods.

Desk Audits: a selected percentage o f import declarations, especially those that were cleared and the goods released with minimal customs checks, are subject to detailed post clearance review for quality control purposes.

15. The project wil l assist the L C D to implement a post clearance audit function that i s consistent with international best practice. This wil l require review o f the legislation and if necessary amendment to see that the customs law contains the necessary powers and places appropriate obligations on importers and clearing agents (such as the retention o f documents, authorization o f auditors to enter premises for audit purposes, etc), development o f pol icy and procedure manuals, training in audit selection and in auditing skil ls, and education o f stakeholders.

Activity 3: Compliance improvement and management strategy

16. In many developing countries around the world, including Lao PDR, customs administrations operate in an environment o f relatively l ow trader compliance. As a result they typically employ a regime based on extremely high levels o f physical and documentary inspection. While such an approach i s understandable such a regime does not adequately differentiate between traders that are highly compliant with al l regulatory requirements and those that do not. As such, there i s l i t t le incentive for many traders to comply fully with al l regulatory requirements as they are essentially subject to the same high levels o f government intervention regardless o f their compliance history.

17. A compliance management and improvement strategy is therefore based on applying different customs controls and inspection regimes to different traders based on their compliance history and likely risk. While the project wil l finance support for the development and

36

implementation o f a comprehensive risk management regime, i t needs to be complemented by a well thought out compliance management and improvement strategy designed to identify and segment clients into different categories depending on their perceived r isk and compliance record. The project will finance the development o f a strategy to ensure an appropriate incentive and disincentive m i x i s developed to allow customs to apply an appropriate regime to different traders depending on their compliance. Through such an approach an incentive i s established for high compliance traders to maintain their level o f compliance and for l ow compliance traders to improve. In addition, through such an approach non-compliant traders wil l face a significantly higher level o f control and appropriate penalties for non-compliance.

Activity 4: Client Service Charter

18. Many customs administrations around the world have established client service standards covering the key operational activities and outputs from the organization. Typically, service standards wil l cover such issues as time for processing and release o f goods, time taken to process tar i f f classification advices, time taken to process refunds, time taken to hear appeals against customs decisions, etc. Mechanisms need to be established to ensure operational information on customs’ performance in respect to each o f the chosen standards i s captured in a reliable and consistent manner across the country. Regular reports must be produced and customs performance against the standards analyzed and reported to clients. A standard set o f client service standards wil l be published covering al l key service areas. The service standards will be monitored and results published periodically.

19. In order to successfully manage a modem customs administration it i s necessary to have a comprehensive understanding o f the complexity o f customs operations and processes. Key performance indicators should therefore be developed to provide information on the organization’s performance in areas such as imports, exports, transit, workload, workflow, compliance, valuation, duties and taxes collected, etc. These performance standards form the basis o f the Client Service Charter. The project will therefore finance the establishment o f a series o f key performance standards that wil l ultimately be issued as part o f a Client Service Charter. The performance standards wil l be reviewed periodically and improved as organizational performance increases during the course o f the project. The project wil l also finance the development o f methodologies for data collection, analysis and reporting.

Activity 5: Advance ruling

20. International best practice enables traders to apply to customs in advance o f their decision to import goods for a ruling on tari f f classification, and in some countries the method o f valuation o f and/or the basis on which the origin o f the goods wil l be determined (in particular where preferential rates o f duty may apply). This provides predictability to traders, who can proceed with their transaction knowing the duties and tax they wil l be required to pay, and confident that the customs ruling wil l apply at any port in the country at which the consignment wi l l be cleared. Under schemes o f this type the ruling i s given in accordance with established procedural rules and i s legally binding on the customs administration for a specified period o f time, provided that the goods that are imported are identical to the goods on which the ruling was given. In some countries a fee i s charged to provide the binding ruling.

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21. The project wil l assist the L C D to introduce a comprehensive advance ruling system, with the corresponding legislation, procedures, and control mechanisms, including a monitoring process to veri fy that rulings are honored by the customs offices at which the goods are cleared in circumstances where the importer has met the required conditions o f the ruling. Training in tari f f classification and the operations o f an advance rulings system wil l also be required.

Activity 6: Administrative appeals

22. As an important safeguard on the discretionary power o f decision makers and to help ensure transparency and accountability, the right to appeal against decisions made by customs administrations i s recommended by the WCO’s Revised Kyoto Convention and, with regard to valuation matters, i s mandatory under the W T O Valuation Agreement. I t is l ikely that the trade facilitation agreement currently under negotiation at the W T O also wil l include an obligation to maintain a mechanism for administrative appeals against customs decisions. The W T O valuation agreement requires the establishment o f a right o f appeal without penalty to an authority within customs or to an independent body, and also the right o f appeal to a judicial authority. In some countries the administrative appeals regime, including o n valuation matters, i s within the customs administration and typically requires a final decision at headquarters level, whi le in others there is an independent administrative (non-Judicial) review authority outside o f the customs department, either in addition to the customs’ appeals process or a substitute for it.

23. The project wil l assist the customs administration to develop and implement policies and procedures for an administrative appeals regime appropriate to Lao PDR’s administrative and legal practices which, with regard to valuation, meets the requirements for WTO accession, and which also i s consistent with international best practices based on the standards set by the Revised Kyoto Convention. This will require review o f the legislation and i f necessary amendment to see that the customs law provides for a suitable administrative appeals regime, development o f pol icy and procedures, staff training, and education o f stakeholders.

Activity 7: Intelligence and risk management development

24. The intelligence and risk assessment function involves the systematic collection, collation, and analysis o f information related to customs operations to assess the level o f actual or potential risk and thereby inform decisions about the appropriate management response to those risks. In practical terms this means determining which importers, foreign exporters, customs brokers and clearing agents, and types of goods (including, for example, their country o f origin, country o f purchase, mode and route o f shipping) pose r isks in terms o f revenue and other regulatory requirements, and entering that information into the ASYCUDA risk management module so that declarations that meet the risk criteria are routed for documentary checks, physical inspection, or other enforcement actions.

25. To use the ASYCUDA functionality effectively i t wil l be necessary to establish a group o f staff whose tasks include analysis o f the data provided by the system and available from external sources, and the setting o f risk profiles and selection criteria. The project wil l assist the L C D to establish the risk assessment unit, implement both manual and automated procedures to collect, collate and analyze the data, develop risk profiles and selectivity criteria, and input them

38

to the ASYCUDA system. This will require the establishment o f an intelligence and risk assessment unit in headquarters with the ability to receive and input information to the ASYCUDA system, and training o f staff in information processing and analytical techniques. The project wi l l also procure a small amount of hardware and internationally recognized r isk analysis software to enable collation and analysis to be perfonned efficiently by the analysts in the risk management unit.

Activity 8: Integrity and anti-corruption

26. I t i s vitally important that high levels o f integrity be established and maintained, given the vitally important role customs administrations throughout the world play in revenue collection, trade facilitation, national security and the protection o f society. Such sentiments are even more significant in economies in transition as integrity i s often considered critical to building national and international confidence in newly established national institutions. As customs i s often the f i rs t point o f contact for many potential investors, building such confidence will make an important contribution to establishing a positive perception o f the overall investment climate and level o f public governance.

27. The WCO has prepared the Revised Arusha Declaration on Integrity in Customs, to assist customs administrations to establish and maintain a culture o f integrity and to deal effectively with corruption. I t provides a relevant and useful framework for the integrity sub-component o f the project. The Revised Declaration consists o f ten distinct but interrelated elements considered essential for the development and implementation o f a comprehensive and sustainable anti- corruption and integrity enhancement program. The ten elements o f the Revised Declaration are as follows:

Leadership and Commitment; Regulatory Framework; Transparency; Automation; Reform and Modernization; Audit and Investigation; Code o f Conduct; Human Resources Management; Morale and Organizational Culture; Relationship with the Private Sector.

28. The project wil l finance the provision o f consultancy support to assist L C D officials to: (1) undertake a review to assess the LDC’s current level o f compliance with the Revised Arusha Declaration; (2) assist to design and launch a L D C national integrity and anti-corruption strategy; and (3) provide ongoing support and monitoring for i t s successful implementation.

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Activity 9: Training and Translation Support

29. The various activities in this subcomponent wil l require the organization o f workshops in the capital and various other parts o f the country, with the consequent logistic expenses. In addition, a substantial amount o f translation o f existing documentation and simultaneous translation during meetings will be required.

Subcomponent 2: Project Assistance

30. Bank experience suggests that while implementation o f the new customs IT system i s likely to streamline and rationalize processes and procedures and wil l provide a sound platform for the introduction o f a range o f internationally agreed standards, i t is unlikely to realize i t s full potential unless a number o f complementary reforms and supporting operational changes are undertaken in parallel with system implementation. To ensure these complementary measures are introduced in a structured and cost effective manner the project wil l finance a long term international Customs Reform and Modernization advisor. The Advisor wil l be responsible for assisting L D C management in supervising the introduction o f the new systems, quality control and result verification, facilitating their use through change management activities. The Advisor wil l also supervise sub-component 1, above. Detailed Terms o f Reference for the Advisor can be found in Project files. The Sub-component wil l also finance training, change management support, secretarial services, translation and interpretation support, vehicles to support project activities, a limited number o f study tours and procurement support for the P W .

31. Sub Component 2 wil l also focus on assisting the L D C to take better advantage o f its membership o f the WCO. The W C O i s the international organization responsible for customs matters, at both a strategic level-in particular the changing role o f customs in the modern world-and a technical level. The technical instruments developed by the WCO, examples o f which include the revised Kyoto Convention on simplification o f procedures, the SAFE framework o f standards o n trade facilitation and security, and numerous conventions and agreements applicable to specific circumstances, are the basis o n which customs procedures are reformed and harmonized worldwide. The WCO also provides technical assistance to i t s members, on request. In addition to i t s headquarters in Brussels, the W C O has a strong and very active regional structure, and most customs initiatives under development in the South East Asia region are derived from the WCO’s international standards. Additionally, the W C O maintains a regional intelligence network, which also supports a global enforcement network, and an Asia- Pacific regional capacity building center based in Bangkok. Lao PDR i s a new member o f the WCO, and wil l need init ial support as i t begins to make i t s contribution on topical customs issues in the region and globally, and becomes able to take advantage o f the technical support available to the WCO’s developing country members. This component o f the project wil l fund attendance at relevant W C O and headquarters and regional forums, at management level and also at the more technical levels, thereby assisting Lao PDR to learn from the experiences o f others and, as its own reforms continue, begin to make i t s contribution to regional and global customs issues.

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Annex 5: Project Costs

ComDonent A: IMPLEMENTATION OF ASYCUDA WORLD iscal Year (WB) Total FYW FYI0 PYl l FYI2 FYI3 :alendar Year 2008fZ009 2009fZ010 2010/2011 2011fZ012 201u2013 A. 1 Implementation o f Asycuda

A. 1. 1 First Phase: Prototype including user requirement and adaptation of software modules a. Personnel b. Training c. Equipment d. Miscellaneous e. Support Cost Second Phase: Deployment at headquarters and pilot Site

a. Personnel h. Training c. Equipment d. Miscellaneous e. Support Cost Third Phase: replication to regional offices a. Personnel b. Training c. Equipment d. Miscellaneous e. Support Cost

A. l . 2

A. I, 3

A. 1. 4 Contingency a. Personnel b. Training c. Equipment e. Support Cost

Incremental operating costs, incl office supplies A. 2 LCD preparation for reception o f new System

A.2. I A.2. 2 Office equipment

A.3. I A.3. 2 Technical assistance A.3. 3 Special support equipment A.3. 4

A. 3 LCD Information Technology Center strengthening Personnel training - academic and on-the-job

Office eoods (under countemart assistance)

359,680 49,140 118,500 15,000 70,502

441,430 49,140 165,501 15,000 87,239

617,680 14,620

1,027,883 15,000

217,774

138,500 20,000 170,000 42,705

103,000 75,000

80,000 50,000 40,000

240,000

359,680 49,140 118,500 15,000 70.502

441,430 49,140 165,501 15,000 87.239

617,680 14,620

1,027,883 15,000

217,774

138,500 20,000 170,000 42,705

34,333 34,333 34,333 25,000 25,000 25,000

50,000 30,000 25,000 25,000 20,000 20,000 60,000 60,000 60,000 60,000 "~

Base Costs 4,223,294 827,155 952,643 2,383,495 60,000 ase Costs: Lao People's Democrane Republic 140,000 60,000 60,000 60,000 60,000 ase Costs: World Bank 3,983,194 767,155 892,643 1,313,495

Total 4,113,294 827,155 952,643 2,383,495 60,000

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Component B: CUSTOMS MODERNIZATION SUPPORT Ice1 Year (WB) Total FY09 FYI0 FYll FY12 FY13 Mender Year 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 I. I Vodern Customs Practices and \\TO Agreement Requirements

B.1. 1 WTO Requirements B . l . 2 Post Clearance Audit B . l . 3 B. 1.4 Client Service Charter B. 1. 5 Advanced Rulings B. 1. 6 Administrative Appeals B.1. 7 B . l . 8 Integrity and Anti-Conuption B. 1. 9

B.2. 1 Customs Advisor B.2. 2 Training B.2.3 Secretarial Support B.2.4 Material, travel expenses B.2. 5 Change Management expenses B.2. 6 Office equipment and refurbishing, and vehicles B.2. 7 Visit to ASYCUDA operation B.2. 8 Translation and Interpretation Services B.2. 9 Project Coordinator B.2. 10 Auditor B.2. 11 WCO Support and Coordination B.2. 12 Customs Advisor's Assistant & Intemreter

Compliance Improvement and Management Strategy

Intelligence & Risk Management Development

Training & Translation Support I, 2 Project Assistance

76,000 76,000 26,000 32,000 55,000 75,000 150,000 50,000 50,000

877,500 50,000 20,000 20,000 60,000 125,000 28,000 25,906 33,500 40,000 100,000 46.800

50,000

30,000

270,000 10,000 5,000 5,000

15,000 105,000 28,000 6,952

10,000 10,000 20,000 14.400

76,000 76,000 26,000

50,000

10,000

10,000

270,000 20,000 5,000 5,000

15,000 20,000

6,952 10,000 10,000 20,000 14.400

50,000

10,000

20,000

270,000 20,000 5,000 5,000

15,000

6,952 10,000 10,000 20,000 14.400

32,000 55,000 75,000

20,000

67,500

5,000 5,000

15,000

5,050 3,500

10,000 20,000 20,oo 3.600

Base Costs 2,016,706 579,352 644,352 456,352 316,650 20,000 Base Costs: Lao People's Democratic Republic Base Costs: World Bank 2,016,706 579,352 644552 456,352 316,650 20,oo

Total 2,016,706 519,352 644,352 456,352 316,650 20,oo

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Annex 6: Institutional and Implementation Arrangements

PFMSU Procurement

and FM Support

Project management wil l be carried out directly by the L C D Director General (Project Director) and a Deputy Director (Project Team Leader), assisted by an expert customs Advisor financed through the project. Procurement and accounting for the project have been specifically designed to be minimal, and wil l be carried out by an existing experienced project administration unit in the MOF. Additional full-time staff are not expected to be needed to this effect in the PFMSU, but a project coordinator wil l be hired to facilitate procurement; the project wil l also finance the hiring o f experts on as-needed basis.

Customs Reform & Modernlzation Team (Project Team) . *ASYCUDA Implementation

*Risk Management Implementation

Annex Figure 3: Implementation Arrangements

Steering Committee for Customs Reform & Modernization

Chair Vice Minister Finance

[MOF, MOiC, BOL, DOS, MAF, Private Sector]

r International

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Annex 7: Financial Management and Disbursement Arrangements

Summary of the Financial Management Assessment

1. This annex i s a record o f the results o f a financial management (FM) capacity assessment o f the (FM) arrangements for the Lao PDR Customs and Trade Facilitation Project undertaken in October 2007 at the Public Finance Management Strengthening Unit (PFMSU) within the Ministry of Finance. The PFMSU i s a government implementing agency o f a number o f projects within the Ministry o f Finance. The Lao Customs and Trade Facilitation Project wil l also be implemented by the same unit. This annex provides an updated summary o f the country wide FM issues that are relevant to the Project and other projects that the unit i s already coordinating and supporting. I t also provides institutional and implementation arrangements and analyzes the FM r isks in addition to outlining envisaged disbursement and accountability arrangements for the project. The assessment was undertaken to determine whether the PFMSU has adequate financial management systems and related capacity in place which satisfy the World Bank’s Operational Policy/Bank Procedure 10.02 requirements with respect to financial management. Under the policy, a project implementation entity i s supposed to have and maintain adequate financial management systems which include budgeting, accounting, internal controls, funds flow, financial reporting and auditing arrangements to ensure i t can readily provide accurate and timely information regarding project resources and expenditures. These arrangements are deemed acceptable if (a) they are capable o f correctly and completely recording al l financial transactions and balances relating to the project resources(b) if they can facilitate the preparation o f regular, timely and reliable financial statements;(c) safeguard the project’s assets; and (d) are subject to auditing arrangements acceptable to IDA. The assessment was conducted through discussions with the staff o f PFMSU. The discussion was preceded by a financial management questionnaire which the staff filled in.

2. The Financial Management assessment indicates that the project wil l be implemented in a moderate risk environment. This conclusion comes from the current weak government financial management systems which are undergoing reform. This i s why this project wil l be implemented within ring fenced financial management systems established by the PFMSU through the FMCBP which has been operational for the last four years whose financial management systems have hnctioned effectively.

3. In conclusion, the proposed financial management arrangements put in place by the PFMSU do meet the Bank’s minimum requirements for project financial management as per OP/BP10.02. A number o f suggested actions at assessment have been undertaken leaving the ones below to be undertaken subsequently. The actions are as follows:

Action Plan

4. accounts for the Project and integrate it into the FMCBP Financial Management Manual.

Lao PDR will, before implementation o f this project, develop and integrate a chart of

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Country Issues

5. Since 2003, the government o f Lao PDR has been implementing robust Public Financial Management reforms financed by a number o f donors, The IDA, through the Financial Management Capacity Building Project (FMCBP) has been financing such reforms which encompass three components. Component 1 covers (a) financial sector reform which focuses on improving data management, on and o f f site examination o f banking and other financial institutions. It also covers improvement o f credit information bureau o f Bank o f Lao PDR. The second component covers core PFM reforms such as (a) stabilization o f GFIS (b) strengthening o f debt management (c) support to procurement monitoring office (c) curriculum strengthening at government three P F M regional schools and upgrading training institutions. The third component covers SOE reform and business development which focuses on (a) development o f business strategy (b) SOE restructuring (c) monitoring and evaluation. Through the Additional Financing to the program, the following components have been included into the program which cover (a) developing a new inter- governmental fiscal framework (b) implementation o f revised chart o f accounts (c) providing support towards treasury centralization (d) strengthening external audit capacity. Such Public Financial Management reforms are anchored in the Public Financial Management Strengthening Program (PFMSP).This i s a master document which guides key PFM reforms in Lao PDR. I t was adopted by the Government o f Lao PDR in November 2005, by the approval o f the Minister for Finance and the Prime Minister’s Office.

6. The PFMSP i s a multi-year medium-to-long te rm program which aims to improve policy consistency, efficiency, transparency and accountability in public expenditure management by strengthening institutional systems and capacity and making progress towards appropriate international financial management standards. I t provides a framework for implementing Government policies and strategies laid out in the “Policy Paper on Governance”, the National Growth and Poverty Eradication Strategy, and the National Socio Economic Guidelines 2006-20 10. The document i s a response to some o f the key PFM weaknesses outlined in the Country Financial Accountability Assessment (CFAA) o f 2002 which concluded that the overall fiduciary risk in Lao PDR was considered to be high, despite the fact that there are elaborate built-in controls within the government FM system.

7. The conclusions in the C F A A were anchored in insufficient transparency in public finances. The budget process was assessed as being not transparent and public access to government financial information as being limited. These weaknesses have been compounded by insufficient awareness o f modem practices o f internal control in the public sector and by the government’s ongoing decentralization initiative, which needs to be supported with a sufficiently robust institutional framework that clearly defines the new responsibilities at lower levels. Technical capacity o f staff at these levels needs to be strengthened. The oversight functions and the State Audit Organization need enhanced capacity and improvement. Capacity at provincial and district level i s weak. A recently completed IDF grant to improve accountability in state owned enterprises and the private sector has helped develop the environment for the accounting and auditing professions and initiated amendments to accounting and auditing laws. An Integrated Fiduciary Assessment- Public Expenditure Review (IFA-PER) has been completed and disseminated whose findings go to support the weak accounting environment annotated above.

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8. While the implementation o f the actions above have started to impact specific fiduciary issues, the country FM environment for externally-funded projects s t i l l remains weak as the effects o f some o f the measures being implemented are yet to impact the respective ministries and departments.

Risk

Inherent Risk

Risk Analysis

Risk Rating Risk Mitigation measures incorporated into Risk after project design Mitigation

9. articulated in the following table:

The detailed risks to project funds and related mitigating aspects are as analyzed and

Country level Fiscal environment: There i s weak control environment with weaknesses in National Treasury operations, especially in cash management. There are limitations in P F M accounting system, and weak internal and external auditing capacity. Inabi l i ty to use finds efficiently and economically for purposes intended Potential corruption arising f r o m procurement

High

Moderate

Substantial

Overall inherent risk Control risk Budgeting-inaccurate budgets which are not

The observed PFM weaknesses are being addressed through the FMCBP. These include establishing internal audit, improv ing budget execution, implementing a G F M I S and bui lding capacity at the SAO. The capacity bui lding measures through the State Audit Organization wil l help mitigate against some o f the risks. Government wide, Treasury management, commitment control and debt management. The F M C B P has clear achievement indicators in reforming and addressing the weaknesses noted. .

There shall be enhanced accounting and reporting. Independent external auditors shall be engaged to conduct annual audits.

Substantial

Substantial Budgets wil l be prepared annually and revised Moderate bi-annually. The FMRs to be prepared wil l be

The biggest contract within the project procurement activities i s the purchase o f A S Y C U D A where a direct payment wil l be made.

realistic. Staffing-limited capacity owing to increased level o f responsibilities. External Audit- l imited capacity

Delayed reporting and monitoring Overall control risk Overall Project Risk

Substantial

used to monitor variance analysis with budget.

increased level o f training. Moderate The staff capacity wil l be enhanced through Low

Moderate Annual financial audit o f the project’s financial Low statements wil l be conducted by independent auditors.

agreed upon for each quarter. Moderate Clear timelines for submitting reports wil l be Low

Moderate Low Moderate

Low

Moderate

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10. Implementing arrangements

10. Refer to Annex 6 on implementation arrangements.

11. Financial Management staffing

11. The PFMSU has 9 staff, 3 in the Financial Unit. I t has obtained approval to hire 3 additional accounting staff. The unit has been responsible for managing implementation o f the FMCBP project since 2004 and also manages a number o f PHRD grants. An accountant within the structure of the project wil l be earmarked to work on the project financial management, with assistance from other accounting staff o f the PFMSU. The organization structure o f the unit comprises a Project Director (who is a government official), an Assistant to the Project Director, two project staff, two administrative staff al l o f whom are national consultants financed by the FMCBP. The numbers and staff capacity were assessed as sufficient.

12. The PFMSU has clearly written out job descriptions for i t s accounting staff. These are documented in the project financial management manual. The transfer rate o f such staff out o f the project i s very minimal. Currently, there i s no training policy for finance and accounting staff within the project though using whatever available courses are available around the region, the project sends some to build and enhance their capacities. It is hoped that accounting staff working on this project shall benefit from capacity building efforts which also target accounting staff in the capacity building plan currently in place.

Accounting Policies, systems and procedures

13. The Lao Customs and Trade Facilitation Project wil l use financial management systems currently in existence in PFMSU. Initiation and authorization o f a l l transactions under the project are the responsibility o f the Director General Customs (Project Director). PFMSU shall be responsible for the fol lowing functions in financial management:

0

Keeping a well functioning financial management system at al l times; Recording a l l transactions o f the project; Producing monthly, quarterly and annual financial statements; Reviewing the status o f books o f accounts o f the project and ensuring that they do balance on a monthly basis; Contracting auditors and ensuring that such an annual audit i s submitted on time.

14. The project’s key accounting policies and procedures have been written in a project financial management manual. Such a manual wil l guide financial management staff working on the project. The manual forms part o f the project’s operational manual. The manual has been updated with a chapter on the operations o f the customs project. The policies and accounting principles so far developed are assessed as adequate. The manual gets updated periodically to ensure that i t reflects experiences coming from implementation. The FMCBP accounting system i s computerized and has been running on ACCPAC version 5.3. The system operates on a stand-alone system.

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15. (CTFP) wil l be retained by the PFMSU.

All accounting and supporting documentation for this Customs and Trade Facilitation Project

Budgeting

16. The current government budgets as currently prepared do not lay down physical and financial targets. However, budgets are prepared for al l significant activities in sufficient detail to provide a meaninghl tool with which to monitor subsequent performance. Actual expenditures are normally compared to the budget every quarter and explanations obtained for significant variations from budget. Approvals for variations from budget are obtained in advance. Similar procedures wil l also be adopted for the project.

17. The L C D wil l develop a project budget for each year within the framework agreed within the Financing Agreement. The detailed budget wil l be shared with the Bank team for review and comments. Upon approval, the project team wil l formulate a procurement plan from such an approved budget and start implementing the annual activities.

Counterpart funds: Shall be provided to the project in kind.

Policies and Procedures

18. The basis o f accounting government wide i s cash. Preparation o f financial statements i s supposed to be guided by Lao accounting standards. Their applicability in government i s very limited if not non existent. The project’s key accounting policies and procedures have been articulated in a Financial Management Manual prepared for the PFMSU for the FMCBP and other projects. The manual wil l be updated to reflect the new institutional arrangements with the addition o f this project. The manual wil l document the major transaction cycles o f the project, funds f low processes, accounting records, supporting documents and chart o f accounts. It also summarizes authorization procedures, the financial reporting process, financial and accounting policies for the project, budgeting procedures, financial forecasting procedures, procurement and contract administration and management, as well as replenishment procedures for the Designated Accounts and the auditing arrangements.

Reporting and Monitoring

19. The project financial statements wil l be prepared by the PFMSU Financial Unit and will fol low the Lao Accounting standards. Such financial statements wil l be prepared every quarter. Such reports wil l be prepared forty five days after the end o f every quarter. The current system does not have the capacity to link the financial information with the project’s physical progress. However, the FMCBP has developed a mechanism o f reporting quarterly physical progress reporting to mitigate the risk that physical data may not synchronize with financial data. In view o f this suggestion, the draft financial management manual has established financial management responsibilities that specify what reports are to be produced, what they are supposed to contain and how they are to be used. The reports to be produced wil l compare actual expenditures with budgeted and programmed allocations for the quarter, bi-annually and annually.

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Internal controYInterna1 audit

20. There i s no internal audit function within the entire government o f Lao PDR. MOF i s planning to establish internal audit government wide soon. Currently, the ministry does have a Department o f Inspection which partially functions as an internal auditor. However, this department is not fully staffed and thus only able to address identified problems rather than review processes and transactions on a routine basis to identify problems and areas o f control weaknesses.

External Audit

21. All government ministries and departments are supposed to be audited by the Supreme Audit Office (SAO) by the new audit law. The SA0 can only do compliance audits at the moment because i t s capacity i s limited. As such, the project’s annual financial statements wil l be audited in accordance with International Standards on Auditing (ISA) by independent external auditors based on acceptable terms o f reference acceptable to IDA. The audited financial statements and audit reports wil l be submitted to the Bank six months after the end o f each fiscal year, and after the closing date o f the project.

22. There wil l be one audit opinion on one set o f financial statements for the project on which the auditors wil l issue a single opinion covering project accounts, the usage o f funds, and the management o f the project’s designated account. In addition, a management letter outlining any internal control weaknesses o f the implementing office and other agencies at various implementation points wil l also be issued by the external auditor together with the audit report. The PFMSU wil l be responsible for engaging and managing the audit contract to cover the funds managed by the unit. The same auditor for the FMCBP project wi l l conduct the audit for the Customs and Trade Facilitation Project. The auditor for the project wil l be appointed six months after effectiveness. The cost o f the audit wil l be financed from project proceeds. Emphasis wil l be placed on assessment o f proper use and accountability o f funds.

Supervision Plan

23. As the Financial Management inherent risk i s assessed as moderate after mitigation, supervision o f project financial management wil l be done at least twice a year. The supervision wil l review the project’s financial management systems including but not l imited to operation o f designated account, evaluating quality o f budgets, project financial management reports, assessing relevance o f financial management manual, statements o f expenditures, internal controls, reporting and follow up o f audit and mission findings. The review wil l also conduct random reviews o f financial statements concentrating on per diems, training and workshop costs, fuel, accommodation expenses and compliance with covenants. I t will also involve visits to various implementation sites and physical verification o f assets bought and ones created by the project. The financial management supervision wil l be conducted by IDA’S financial management specialist staff and at times assisted by consultants. At each time o f supervision, the project’s financial management r i sks o f the project will be assessed and influence the frequency o f supervision.

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Funds flow and Disbursements Arrangements

24. The funds from the project wi l l be drawn from the IDA Grant and be deposited in one Designated Account (DA) to be managed by the Treasury Department o f the Ministry o f Finance. The DA will therefore be opened by the Treasury Department o f the Ministry o f Finance at the Bank o f Lao PDR in Vientiane. The ceiling for the Designated Account wil l be $100,000 since the bulk o f the payments wil l be direct from the grant account maintained at the World Bank. The Ministry o f Finance through i t s Treasury Department administers such a DA and has overall responsibility o f signatories. The signatories on the DA shall be from Ministry o f Finance-Treasury Department. The Director General o f Customs shall open an operating account into which funds for incremental operating costs shall be deposited and disbursed for eligible expenditures. Funds into this account wil l be periodically drawn on a monthly basis to meet projected incremental operating expenditures o f the project as they arise. Details o f how the account wil l operate, controls and signatories will be outlined in a financial management manual. The PFMSU shall prepare a monthly summary o f the project’s statements o f expenditures from i t s cashbook which it shall submit to the M O F which shall in turn submit withdrawal applications to IDA.

25. Funds for Designated Account wil l be used for implementing activities o f the project. Authorization o f any expenditures from the Designated Account shall be sought from the Director General Customs. Whilst i t wil l be managed by the Ministry o f Finance-Treasury Department, day to day management will be under the Director General Customs. Preparation and submission o f withdrawal applications to the Director General o f External Finance within the Ministry o f Finance for signature before submitting to IDA will be done by the PFMSU. The detailed operation o f the Designated Account i s as follows:

(i) The Designated Account (DA) wil l be used for disbursements related to the two Components and sub components o f the project. I t will be managed by M O F through the Treasury Department. Withdrawal applications for the project wil l be submitted to the World Bank by the PFMSU through the External Finance Department o f the Ministry o f Finance. Direct payments for procurement wi l l be submitted to IDA through the Ministry o f Finance. The details o f processing direct payments wi l l be spelt out in the Disbursement Letter and the Financial management manual.

Disbursement Arrangements

26. The basis o f disbursements shall be traditional transaction-based which shall include Statements o f Expenditure (SOE) and direct payments. Whilst the PFMSU shall produce Interim Financial Reports (IFRs) every quarter for purposes o f monitoring the progress o f the project (linking fund usage against the procurement plan and applicable physical outputs), the IFRs shall not be used as a basis o f disbursements. Withdrawal applications reporting on eligible expenditures paid from the Designated Account wil l be submitted to the IDA based on SOEs for (a) goods, costing less than $100,000 per contract; (c) services o f individual consultants costing less than $50,000 equivalent per contract; (d) services o f consulting f i r m s costing less than $100,000 equivalent per contract; and (e) al l local workshops/training and incremental operating costs. All other disbursements will be based on full documentation. The related documents shall be retained at the

50

PFMSU within Ministry o f Finance. Such documentation wil l be made available for required audits, as well as to the Bank implementation support missions upon request.

27. Applications for direct payments for large contracts from the project wil l be accompanied by documentation such as purchase records evidencing eligible expenditures (copies o f contracts, purchase orders, supplier’s invoices and receipts) wil l be submitted with Withdrawal Applications setting out clear payment instructions to Ministry o f Finance before submitting them to the IDA.

28. Withdrawal applications reporting on eligible expenditures for reimbursement will be submitted to the WB Loan Department with the same documentation as required for reporting o f eligible expenditures paid from the Designated Account.

29. PFMSU with the approval o f the Project Director-DG-Customs shall prepare withdrawal applications o f funds from the World Bank. After that, the PFMSU shall send requests for withdrawal application to the Director General-External Finance in the Ministry o f Finance for approval and signature. The Director General External Finance or designate wi l l s i g n and send the withdrawal application for replenishment to the World Bank.

30. The Bank’s Loan Department will specify these arrangements for this project in a Disbursement Letter to the Government o f Lao PDR. The Loan Department o f IDA may disburse proceeds from the grant account to designated account for the project using one or more o f the following disbursement mechanisms:

Statement of Expenditures: As described above; Reimbursement: G O L would be reimbursed for eligible expenditures pre-financed from their own resources; Direct payment: as described above; and Advance: credit proceeds are advanced into designated account to finance eligible expenditures as they are incurred. The level o f the Designated Account shall be $100,000.

3 1. Prior to the withdrawal o f any grant proceeds from the grant account, the GOL will furnish the World Bank’s Country lawyer for Lao with the names o f the officials authorized to s ign applications for withdrawal applications and their authenticated specimen signatures.

32. Withdrawal applications must be:

0 Authorized by a representative o f the recipient; and Accompanied with evidence in support o f the application as the Wor ld Bank may reasonably request.

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Allocation o f Project Proceeds

Category

Goods, consultants services, training and workshops, study tours and incremental operating costs for the project TOTAL AMOUNT

Annex Table 3: Allocation of Project Proceeds Amount o f the Financing Allocated

(expressed in thousand US$) Percentage o f Expenditures to be

Financed (inclusive of Taxes) 6,000 100%

6,000

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Annex 8: Procurement Arrangements

A. General

1. Procurement for the proposed project shall be carried out in accordance with the Wor ld Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits”; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreements for the proposed Project and as per the agreed procurement plan. For each contract to be financed by the IDA, the different procurement methods or consultant selection methods, the need for prequalification, post-qualification, estimated cost, prior review requirements and time frame are to be agreed between the Recipient and the Wor ld Bank team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity.

Procurement of Goods: 2. Goods expected to be procured under the project include the automated customs system, office equipment and vehicles. The IDA has agreed in principle to the Government’s proposal for using Direct Contracting method for procuring the A S Y C U D A Wor ld system supplied by UNCTAD. However, upon receipt o f UNCTAD’s detailed technical and financial proposals and after negotiations, the draft negotiated contract would be subject to IDA’s prior review. Goods estimated to cost more than US$lOO,OOO equivalent per contract shall be procured through the International Competitive Bidding (ICB) method and the procedures set forth in the World Bank’s Procurement Guidelines and use the World Bank’s applicable Standard Bidding Documents. Goods estimated to cost between US$30,000 to US$lOO,OOO equivalent per contract may be procured through the National Competitive Bidding (NCB) method and the procedures, set forth in the Decree 03/PM dated January 9, 2004, and in the Implementing Rules and Regulations (IRR) dated March 12, 2004, including national standard bidding document with IDA’s prior concurrence, wil l be followed subject to the improvements l isted in the NCB-Annex to the Legal Agreement. Goods estimated to cost less than $30,000 equivalent per contract may be procured through the Shopping method and the procedures, including standard bidding documents with IDA’s prior concurrence, set forth in the aforesaid Decree and IRR.

Selection of Consultants: 3. Consultant services expected under the project include Modem Customs Practices and WTO Agreement Requirements (WTO Accession Support), Customs Advisor, Auditor, Procurement Coordinator. Services requiring hiring o f f i r m s would generally be procured through Quality-and Cost-based Selection (QCBS) method. However, for complex or specialized assignments meeting the circumstances described in paragraph 3.2 o f the Consultant Guidelines the Quality Based Selection (QBS) method may be used, for assignments estimated to cost less than US$50,000 equivalent per contract the method Selection Based on Consultants’ Qualifications (CQS) may be used, and for external audit assignments the Least Cost Selection (LCS) method may be used. Services for tasks under circumstances which meet the requirements o f paragraph 3.10 o f the Consultant Guidelines may, with the World Bank’s prior agreement, be procured through the Single Source Selection (SSS) method. Services requiring hiring o f individual consultants may be procured in accordance with the provisions o f Section V o f the Consultant Guidelines, whereas SSS o f

53

individual consultants may be done only with the World Bank’s prior agreement and under the circumstances described in paragraph 5.4 o f the Consultant Guidelines. Shortlists o f consultants for consulting services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants.

B. Summary Assessment of the Agency’s Capacity to Implement Procurement

4. Procurement activities wil l be carried out by the LCD, with the assistance o f the Public Finance Management Strengthening Unit (PFMSU) to provide guidance and facilitate the procurement/selection process leading to the signing o f the contracts, whereas the technical inputs wil l be provided by the customs technical experts. The Director General o f the L C D will s i g n al l contracts with the contractors and consultants. The supervision, management and administration o f the awarded contracts will be carried out by the LCD, with the assistance o f the PFMSU. In order to coordinate and follow-up o f procurement activities between the LCD, PFMSU and the IDA, the L C D will employ a qualified local consultant to be a Procurement Coordinator for this Project.

5. The PFMSU was established within the External Finance Department (EFD) o f the MOF and a senior official in the M O F has been appointed as the Project Director. Other staff including an Assistant Project Director and Procurement Officers were recruited on contractual basis as consultants.

6. The PFMSU has been responsible for managing implementation o f the WB-financed Financial Management Capacity Building Project (FMCBP) since 2004 and now also the Additional Financing under the Project. It has also been designated to manage and wil l have overall responsibility for procurement under the proposed Public Financial Management Strengthening Program (PFMSP) Multi-Donor Trust Fund (US$ 5.2 million) when that becomes effective.

7. Currently there are nine staff in the PFMSU. The PFMSU comprises o f the Project Director (who is a government official), an Assistant to the Project Director, two procurement officers, two administrative staff, and three financial management staff, al l o f whom are national consultants, financed by FMCBP.

8. PFMSU will also assist the L C D to manage procurement under this proposed Project and wil l designate at least one procurement officer as the focal person for this project. The two existing procurement staff are adequately qualified and have the capacity for handling procurement under the ongoing FMCBP as wel l as the Lao PDR Customs and Trade Facilitation Project, as the additional small number o f procurements under the latter Project are not expected to restrict PFMSU’s capacity. When the PEMSP Multi-Donor Trust Fund becomes effective, the capacity o f PFMSU wil l be reviewed again and any further strengthening measures, if required, wil l be put in place. In addition, the IDA’S procurement staff wil l also provide training to procurement staff in PFMSU from time-to-time to ensure compliance with the WB’s Guidelines and procedures and to maintain quality o f procurement documents.

9. expected to be “moderate”.

With the above mentioned capacity strengthening measures, the overall procurement risk i s

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C. Procurement plan

10. The LCD, with PFMSU’s assistance has discussed and finalized a detailed Procurement Plan for the f i rst 24 months o f project implementation with the Task Team during Appraisal. This plan wil l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. The IDA’s Procurement Review Requirements

11. Procurement Guidelines or Consultant Guidelines:

The following contracts shall be subject to IDA’s prior review in accordance with the

The f i rs t NCB and f i rst Shopping contract for procurement o f goods regardless o f value and al l subsequent contracts exceeding US$lOO,OOO equivalent per contract.

All contracts for goods procured through direct contracting.

The f i rst contract for employment o f consulting firm under the CQS method, and the f i rs t contract for hiring o f individual consultant regardless o f value, and al l subsequent consulting services contracts exceeding US$ 1 00,000 equivalent for f i r m s and US$50,000 equivalent for individuals per contract respectively.

All contracts for hiring o f f i r m s and individual consultants procured through single source selection.

12. All other contracts shall be subject to ex-post review by IDA, and will also include checks for transparency in the procurement process and verification o f end-use deliveries, in addition to verification o f compliance with the agreed procurement procedures. The percentage to apply to the sample for ex-post review wil l be 30 percent.

E. Frequency of Procurement Supervision

13. ex-post review o f procurement activities and to address any procurement implementation issues.

Procurement supervision missions wil l be conducted by IDA at least twice a year to include

55

F. Details of the Procurement Arrangements Involving International Competition

3 Estimated cost (US$)

3,660,000

45,000

50,000

1. Goods

4 5 Procurement Prequalific Method ation

(yesho)

Direct No Contracting

NCB No

NCB No

(Descriptio

G-0 1 Automated Customs

G-03

G-04

S stem * Equipment (Component A.2 -Year 1) Office Equipment (Component B 2) Office Equipment (Component

1 Ref. No.

cs-01

cs-02

CS-03

CS-04

CS-05

CS-06

G-05 1 A2-Year 2) Vehicles

Annex Table 5: Procurement of Consulting Services 2 3 4 5 6 7

Description of Estimated Selection Review Expected Comments Assignment cost Method by Bank Proposals

(US$) (Prior I Submission Post) Date

Customs 540,000 QCBS Prior Oct. 2008 Modernization and WTO Agreement support Customs Advisor 877,500 Individual Prior Aug. 2008 3 year (FT) +

(Comparison of 4Ih year (PT) Qualifications) assignment

Auditor 40,000 LCS Post April. 2009 For Four FYs.

Project Coordinator 33,500 Individual Post Aug. 2008 Four Year (Comparison of assignment Qualifications) (S700imonth)

Customs Advisor’s 50,000 Individual Prior Aug. 2008 3 year (FT) + Assistant & Interpreter (Comparison o f 4Ih year (PT)

Qualifications) assignment

Customs Advisor’s 20,000 Individual Post Aug. 2008 Four Year Secretary (Comparison o f assignment

Qualifications)

I I

75,000 1 NCB 1 N o

ent o f Goc 6 Domestic Preference (yeslno)

No

No

No

No

No

.s 7 Review by Bank (Prior I Post) Prior

1 st Contract

Post

Post

Pnst

Expected Comment

Oct. 2008

Oct. 2008 7- Oct. 2009 I-

I

Oct. 2008 I

14. contracting wil l be subject to prior review by the IDA.

All ICB contracts and the f i rst NCB and f i rs t Shopping contract for goods and a l l direct

56

(a) Consultancy services estimated to cost above US$lOO,OOO for f i r m s and US$50,000 for individuals per contract and al l single source selection o f consultants (firms and individuals) wil l be subject to prior review by IDA.

(b) Short l i s ts composed entirely o f national consultants: Short l i s ts o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract, may be composed entirely of national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

National Competitive Bidding Procedures

Bidding documents and contracts under national competitive bidding procedures financed by the Association shall include a provision requiring suppliers contractors and their subcontractors to permit the Association to inspect their accounts and records relating to the bid submission and the performance o f the supplier and/or contractor, as the case may be, and to have them audited by auditors appointed by the Association, if so required by the Association. The deliberate and material violation by the supplier, contractor or subcontractor o f such provision may amount to obstructive practice.

Immediately after completion o f the bid opening proceedings, a copy o f the bid opening record shall be posted at a prominent location, accessible to the public, outside the office o f the concerned procuring entity and shall be retained at the same location until the award o f contract has been notified. A copy o f the bid opening record shall be provided to a l l bidders who submitted bids.

The Recipient shall publish the following information on contract award o n a free or open access website when i t becomes operational or on another means o f publication acceptable to the Association: (a) name o f each bidder who submitted a bid; (b) bid prices as read out at bid opening; (c) name and evaluated price o f each bid that was evaluated; (d) name o f bidders whose bid were rejected and the reasons for rejection; (e) name o f the winning bidder, contract price, explanation if it i s different that bid price as well as the duration and summary scope o f the contract awarded; and (f) contract variation orders. This publication shall be updated quarterly.

The eligibility o f bidders shall be as defined under section I o f the Bank’s Guidelines for Procurement under IBRD Loans and IDA Credits, published by the Bank in October 2006; accordingly, a firm or individual previously declared ineligible by the Association based on determination by the Association that this firm or individual has engaged in corrupt, fraudulent, collusive, coercive or obstructive practices shall be declared ineligible to be awarded a contract financed by Association.

The Association shall declare a firm or individual ineligible, either indefinitely or for a stated period, to be awarded a contract financed by the Association and the Recipient, if it at any time determines that the firm or individual has, directly or through an agent, engaged in corrupt, fraudulent, collusive, coercive or obstructive practices in competing for, or in executing, an Association-financed contract.

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Annex 9: Financial and Economic Analyses

Background and Expected Outcomes

1. The Project i s expected to have both financial and economic benefits. The financial benefits refer to the increase in fiscal revenue that the L C D i s expected to mobilize as a result o f relying o n an improved customs management system. These are calculated using best estimates and take into account both the non-petroleum customs duties collected by the L C D as we l l as the general sales taxes levied on imports. These additional revenues are basically transfers from the private sector to the public sector. In terms o f social welfare these financial gains are beneficial to the country only i f the budget makes better use o f these funds than the private sector. Quantifying these relative benefits i s not a simple matter and colored by political views; to date no conclusive statement has been made, and they are thus ignored for this exercise.

2. The economic benefits take into account the welfare enhancing results o f the project and ignore al l revenue gain that i s expected to result from the project, as per the argument the previous paragraph. The project i s expected to benefit society in three ways: (1) administrative costs o f the customs services are expected to fall; (2) compliance costs o f users o f the customs services are also expected to fall, and 3) clearance times are projected to be reduced. Quantifying these economic benefits depends on the specificities o f the project and the time frame o f delivering results. These need to be quantified. As the statistical basis to undertake the estimates o f economic benefits Laos i s not well developed, the estimates are based on the most realistic assumptions that were gathered from the economic literature and from the analysis o f similar projects recently presented to the Executive Board.*

Financial benefits

3. The ro l l out o f a modern customs management system will be accompanied by improved customs practices. For instance, better use o f r i s k management wi l l lead to better targeted documentary and physical inspections, debt management and special import regimes wil l be more closely followed, and trader compliance wil l improve. These improved practices wil l benefit not only the customs duties levied by customs but also the domestic indirect taxes levied by customs on imports, whether the present turnover taxes or the value added taxes that may replace these turnover taxes in the future. This exercise took into account only customs duties on non-petroleum products. Customs revenues are bound to fal l over time as a result o f future trade liberalization policies; this was taken into account in the calculations as they were based on revenue projections that factored in the prospect o f future trade liberalization policies. The estimates o f financial gains to be achieved under the project can be illustrated by assuming revenue gains o f 2 percent, 3 percent and 5 percent respectively. The results are given in Table below and suggest that the financial internal rate o f return (IRR) i s estimated at between 22 per cent under the assumption that the project results in 2 percent higher revenues; the IRR increases to 61 percent and 188 percent under the alternative assumptions that the project leads to a revenue increase o f 3 percent and 5 percent respectively compared with the “without” the project revenue projections.

* Tuan Minh Le, Duc Minh Pham and Luc De Wulf, estimating Economic Benefits for Revenue Administration reform project, PREM Notes , Number 112, March 2007, The World Bank, pp.1-5.

58

Annex Table 6: Financial Analysis: IRR I T w o percent gain I Three percent I F i ve percent gain

Internal Rate o f Return in percent N e t Present Va lue in U S $mi l l ion

22 61 188

1.6 6.2 15.3

Economic benefits

4. Economic benefits are expected to result from lowering administrative o f customs and compliance costs o f traders and from the time saved by traders whose goods wil l be processed faster.

Administrative costs 5. The introduction o f an electronic customs management system will reduce the cost o f processing customs declarations. I t i s here assumed that customs administration wil l over time be reduced by 0.5 percent o f the import value. The savings gradually emerge as o f 201 1 and reach their fbll effect in 2014.

Compliance cost 6. Research has suggested that compliance costs, i.e. the cost incurred by declarants to present their declarations to customs including brokers fees, are a multiple o f the administrative costs. They are assumed to fal l by 2 percentage points o f the value o f imports. Again they start to emerge as o f 201 1 and reach their full potential in 2014.

Value of time saved 7. Calculating the economic benefits from lower clearance times relied on the following data:

(a) The volume o f imports during the period for which benefits are calculated; these are based on a projected six percent per annual growth in GDP and a ratio o f imports to GDP o f 40 percent;

(b) Clearance times are expected to fal l by ha l f as a result o f the project; this is modest in comparison with some other customs projects that were more comprehensive in nature;

(c) The value o f the reduced clearance time was alternatively estimated as .5 per cent and .25 percent o f the value o f the imports per day saved in clearance time. The lower bound may be more realistic in the case o f Lao PDR where imports are predominantly goods that are not time sensitive (low just in time delivery premium) or perishables;

(d) N o benefit was estimated for the reduction in the variance o f clearance time, which permits traders to keep lower inventory. The estimates are therefore somewhat o f an underestimate o f the true benefits.

59

8. The base case estimate that assumes that clearance times are reduced by hal f a day and that the value o f a day saved i s equivalent to 0.25 percent o f the value o f the cargo cleared suggests an IRR o f 170 percent and an NPV o f US$176 million. Assuming that the value o f a day saved in clearance i s valued at 0.5 percent rather than 0.25 percent o f the value o f the cargo cleared increases the IRR to 250 percent and the NPV to US$347 mil l ion.

Conclusion

9. The financial and the economic benefits o f the project are robust and fully justify undertaking the project. The estimates o f the economic IRR and NPV can be considered as the lower bound estimates as they exclude the reduction in the variance o f the clearance time and the second order effect that improved border crossing procedures wil l have on the competitiveness o f the Lao economy and i t s impact o f growth and openness. With larger trade flows the benefits o f the project would also increase.

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Annex 10: Safeguard Policy Issues

Environment Cateporv: C

Safeguard Issues and Policies Triggered: The Project wil l only finance consulting services, business and information systems and training. There are no c iv i l works or other activity that wil l have negative environmental implications, since no building will take place. There are also no social safeguard implications (involuntary resettlement, Indigenous Peoples) since there wil l be no requirement for land acquisition. The Project shall not prevent access to source o f livelihood to any one, including indigenous people.

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Annex 11 : Multi-Donor Trust Fund for Trade-Related Assistance “Trade Development Facility” (P109702, TF091201/2/3)

1. The Government o f Lao PDR in moving forward in implementing the Multi-Donor Trust Fund for the “Trade Development Facility” (TDF), in the proposed amount o f US$ 6.45 mi l l ion grant, to be implemented over four years beginning in 2008. The Government, including a number o f agencies led by the Ministry o f Industry and Commerce and including Ministry o f Planning and Investment, Ministry o f Finance, Ministry o f Agriculture and Forestry, Ministry o f Health, STEA, and representatives from the business associations, has proposed a plan o f activities that are described below.

2. validated by GOL in September 2006, and wil l have the following components:

The TDF represented coordinated donor effort towards Supporting IF Action Matr ix

Component A: Trade Facilitation;

Component B: Sanitary and Phyto-sanitary Standards Framework and Technical Barriers to Trade;

Component C; Export Competitiveness and Business Environment;

Component D: Capacity Building, Trade Policy, Trade Agreements, and Global Opportunities;

Component E: Strengthening o f the National Implementation Unit.

3. In particular, the fol lowing has been proposed to be covered by the TDF:

Component A: Trade Facilitation: (i) Implementation of Lao PDR Trade Portal, including: trade information; process

harmonization and simplification; Review o f regulations and legal framework; Functional specification for automation o f licensing and permitting procedures;

(a) The Joint team also informed that automation o f licensing and permitting procedures was also required for the participating agencies, but wil l be financed fkom future funding, unless the Government feels i t i s a higher priority task;

(ii) Trade Facilitation Master Plan, including: discussions on the National Body for Trade Facilitation, Trade Facilitation Policy Action Plan, Legislative Action Plan, Integrity Development - Strategy for trade-related agencies, and Capacity Building for trade-related agencies.

62

Component B: Sanitary and Phyto-sanitary Standards (SPS) and Technical Barriers to Trade (TBT) Frameworks:

(i) SPS. The project component wil l facilitate international trade and improve food safety, animal health and plant health through: meeting requirements o f WTO, AFTA and other international agreements; improving the investment climate, and improving governance. In particular, this component wil l have the fol lowing sub- components: (1) strengthen the SPS institutional, legal and regulatory framework; (2) determine risk-based policies and control measures for SPS; (3) strengthen the role o f the private sector in managing SPS;

(ii) Strengthen the TBT institutional, legal and regulatory frameworks.

Component C: Export Competitiveness and Business Environment:

(i) Feasibility studies. This component i s designed to develop industry-specific interventions based o n the fundamental principles o f business: development o f services with a market development focus. The component will start by financing feasibility studies to identify priorities and results; based on these, implementation o f actions wil l be determined and carried out based on detailed plans developed in the f i rs t phase;

(ii) Agribusinesses compliance with SPS. A number o f activities in support o f the private sector competitiveness were identified related to strengthening SPS management, in particular for agri-businesses;

(iii) Implementation of the results of feasibility studies under subcomponent a.

Component D: Capacity Building, Trade Policy, Trade Agreements, and Global Opportunities : (i) This component wil l focus on technical capacity development for trade and WTO

compliance. Several other activities have been identified, including upgrading GOL’s management sk i l ls and knowledge on trade; support to academic and research institutions; and developing a training course in international trade and competitiveness. However, the priorities in these other activities wil l need to be set by the Government.

Component E: Strengthening of the National Implementation Unit: (i) This component wil l finance accounting and administrative systems as wel l as

training and technical assistance in procurement, project management, performance indicator determination and verification, and result verification. I t wil l also finance office and computer equipment.

4. The Government i s setting up the sectoral governance structures for trade-related reform (a sector-wide approach) and assistance implementation, and where the TDF’s structures are expected to fit.

63

Annex 12: Project Preparation and Supervision

Draft PAD submitted to relevant stakeholders for

Key institution responsible for preparation o f the project: Lao PDR Customs Department (LCD). Bank staff and consultants who worked on the Program are l isted in the table below.

Bank Funds expended to date on project preparation: Bank Resources: US$222,000

Estimated Approval and Supervision Costs: 1. Remaining Costs to Approval US$40,000; 2. Estimated Annual Supervision Cost: $65,000

64

Annex 13: Documents in the Project File

A. Bank Staff Assessments

Country Assistance Strategy Aide Memoire o f Identification and Preparation Missions Lao PDR Multi-Donor Trust Fund for Trade Development Assistance “Trade Development Facility” PAD, March 14, 2008

B. Terms o f Reference

TOR for the LCD Business Process Reengineering Exercise TOR Process Mapping TOR Steering Committee TOR International Customs Advisor TOR Customs Automation (ASYCUDA Implementation)

C. Other

Priority Areas for Governance Reform: Public Sewice Reform, People’s Participation, Rule of Law,and Sound Financial Management, Round Table Process, March 2003.

Doing Business 2008: Comparing Regulation in 178 Economies. The World Bank and IFC

*Including electronic fi les.

65

Annex 14: Statement of Loans and Credits

Difference between expected and actual

disbursements Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P105331 2007 LA - GMS Power Trade Project 0.00 15.00 0.00 0.00 0.00 15.67 0.00 0.00 P100081 2006 LA-Avian and Human Influenza Control 0.00 4.00 0.00 0.00 0.00 3.28 0.55 0.00 PO75531 2006 LA-Rural Electrification Phase I 0.00 10.00 0.00 0.00 0.00 4.61 -2.10 -4.97 PO74027 2006 LA-Health Services Improvement Project 0.00 15.00 0.00 0.00 0.00 13.02 3.08 0.00 PO90693 2005 Lao Environment and Social Project 0.00 4.00 0.00 0.00 0.00 3.19 0.74 0.00 PO781 13 2004 LA-Second Education Development 0.00 13.00 0.00 0.00 0.00 5.19 -0.42 0.00 PO83543 2004 LA-ROAD M A I N T APL2 0.00 22.65 0.00 0.00 0.00 1.56 -4.22 0.00 PO75006 2003 L A - Second Land Titling Project 0.00 14.82 0.00 0.00 0.00 4.88 1.44 0.00 PO64886 2003 LA-SUSTAINABLE FORESTRY FOR 0.00 9.90 0.00 0.00 0.00 2.02 0.66 0.00

PO77620 2002 LA-Fin. Management Capacity Building 0.00 8.50 0.00 0.00 0.00 9.61 3.79 -0.68

RURAL DEV.

Cr.

PO77326 2002 LA-Poverty Reduction Fund Project 0.00 19.34 0.00 0.00 0.00 0.49 -3.56 0.00

PO65973 2001 LA-Agricultural Development Project 0.00 16.69 0.00 0.00 0.00 0.24 -2.63 -2.63

Total: 0.00 152.90 0.00 0.00 0.00 63.76 - 2.67 - 8.28

STATEMENT OF IFC’s Held and Disbursed Portfolio

In Mi l l ions o f U S Dollars

Committed

IFC

Disbursed

IFC

FY Approval Company Loan Equity Quasi

2005 Mil l icom Lao 4.00 0.00 0.00

1998 SEF Endeavor 0.15 0.00 0.00

1998 SEF Settha 0.47 0.00 0.00

2000 SEF Settha 0.09 0.00 0.00 2001 SEF Vil la Santi 1.06 0.00 0.00

Partic. Loan Equity Quasi Partic.

0.00 2.00 0.00 0.00 0.00

0.00 0.15 0.00 0.00 0.00

0.00 0.47 0.00 0.00 0.00

0.00 0.09 0.00 0.00 0.00 0.00 1.06 0.00 0.00 0.00

Total portfolio: 5.77 0.00 0.00 0.00 3.77 0.00 0.00 0.00

Approvals Pending Commitment

F Y Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

66

Annex 15: Country at a Glance

too Asia& Low- PDR Pacific i n c m

Lao PDR at a glance

Dcvel-entdrad I 9128107

2oDfi

3 4 32 5 36 0 26 2 192

C m t ac& balancelGDP Interest paymentsX;DP Total d e W D P Total debt se~ceiexpo& Present value of dewGDP Present cntlue of debvexpwts

~conon*'c ratios*

Trade

4.3 0.1

48.9 13.1

1986-96 199666 2005 2006 (eve- o m & gmukh) AgnNRWe 4 2 3.9 16 2 0 Industry 125 109 165 165

Manufacturing 14.1 9 6 8 8 9 2 6 8 m C e s 5 4 6 4 6 9

Hwsehold final oonsumpbon expenditure 2 9 4 3 4 6 General gclly final consumption eJWendilure 9.7 26 3 179 Gmss capltal formatlim 13 B 9 5 7 3 tmporh af goods and serwces -24 0 14.2 3 6

198&-96 199646

6 1 6.2 3.1 4.3

. -23.4

Growth of exporn and imports {%)

.Eo

-IC0

-Expwts I.lnyrCrtS

I Lrfe exgectancy 5 8 1,900 2,403 500 3,863 65# 2.9 3,539 1,562 T 1.6 2.2

21 56 62 40 51 69

116 I23 108

1996

1 .9

22.7

16.9

0.9 1.3

42 71 26 15 79 9'1

114 115 113

200s

2.9 326 27.1 18.6 12.4

-220 -202 -133 0 3 3 1

1 x 8 9 3 2 6 7 19 4

508 4 6 s ?

2005 2006 2006-40

7 1 7 6 5 4 5 7

17.7 28'86

Dmbt lc Capital savings formation

Indebtedness

STRUCTURE of the ECONOMY

% d GQf] Agncuiture Industry

Servrces

1986 1996 2005 2006

Manufactwing

533 443 420 21 1 320 325 159 3 3 6 209 256 2 5 7 255

Household final eonsump4on expenditure 88.5 727 645 G m l gov't final consumptm expendilure 815 8 5 9 3 I m p i s #f goods md a e r w ~ e s 7.7 41.1 309 423

I Growth afcapita! and GDP (K] I

I I

Note &W6 data are prelimmaryeatimates This table was produced from tr% Development E m i w LDE database. * The diamonds sh#wfwr key indicatws in the country (in bold) miperred mth its mcomc-group average If data are misang, the dmmmd wll

be inmiplete

67

Lao PDR

PRICES and GOVERNMENT FINANCE

Domnstrc prices fss &angel Consumer prim lrnpliclt GDP deflator Govnmment finance f96 O f GDP, tt?u'udeS Cl~ffWt gmntsl lhrent revenue Cwrent budget balance W a l l surplu&defiert

TRADE

{US$ mrllrms) Tcytal exgorts (fob)

Electnaty M i n g Manufactures

Total imports l c f l Food Fuel and energy Capital goods

Export price index @!330=700) Imp& pnce inrktx fzcrxt=fopl Terms of trade (2C300= 109)

M C E d PAYMENTS

(US$ RUMKms} Exports d goods and W Y t O e S imports of gaods and yenices Resource halance k t rnconle Net c u m t transfers

Current account iralance

Frnancing ltems (net) Changes in net reserves

Menm: Reserves including gold (US$ mWonsJ Canversica rate @EC, lmaWS$]

EXTERNAL M B T and RESOURCE FLOWS

( U S mi!8ms) Total debt mtstanding and drsbursed

IBRD IO&

ToQal debt sewice ie RD IDA

Campced~m of net reswrce fiawg

Pmate creditors F w e y direct investment (net inflows) Portfolio equity (net i f l w s )

Wcdd Bank prcgram Commitments Disbursements Pnncipal repaynients Net flows Interest payments Net transfers

1986

51 2

-4 3

1986

45

133

1986

64 1 36 -72

-8

-76 85 -9

95 D

1986

868 D

40

B 0 0

19 165

D 0 0

4 7 0 J 0 7

$996

13 0 13 7

15.6 6 0

-5 3

1996

321 30

32 690 m 66

325

1996

425 769

-344 -6

1 25 -225 294 -69

921 0

1996

2,263 0

335 29

0 3

139 1 70

0 160

0

61 60

1 59 2

57

2005

7.2 & a

72.7 4.5 4.3

2005

€448 107 203

9 1,205

la2 183 615

2005

869

-396 -269

-532

57 1 11

1,267

a5

0 8 1D.82B.O

2005

2,690 a

596

172 0

14

117 79

228 28 a

47- 35 9

26 5

21

2006

6 8 4 7

14.3 5 3

-3 6

2006

996 107 525

t ,384

226

i a

728

2006

1.236 t.453 -217

-409 170

4 5 6

358 98

336 10 051 0

2006

0 643

0 14

0 26 9

17 5

12

Inflation (%I I

Expm and import lewis (US$ mtl.)

7 5 0 1 .F

Current account balance to GUP ( % i b )

.:5 L

Ccmporiticn of 2005 debt (US$ mill.)

The Worid Bank Group: This table WBS prepared by cwntry unit staff; figures may differ from ather Wcdd Bank published data. W B Q 7

68

Map section

Phou BiaPhou Bia(2,817 m) (2,817 m)

X iangkhoang PlateauXiangkhoang Plateau

Plain of JarsP lain of Jars

Cammon PlateauCammon Plateau

BolovensBolovensPlateauPlateau

SASAYYABOURABOURYY

OUDOMSAIOUDOMSAI HOUAPHANHOUAPHAN

BOKEOBOKEO

PHONGSALPHONGSALYY

SEKONGSEKONG

AATTTTAPEUAPEU

XIANGXIANG

LUANG LUANG PHRABANGPHRABANG

LUANGLUANGNAMTHANAMTHA

VIENTIANEVIENTIANE

SASAVVANNAKHETANNAKHET

CHAMPCHAMPASSAKASSAK

KHAMMOUANEKHAMMOUANE

BOLIKHAMSAIBOLIKHAMSAI

SARASARAVVANEANE

KHOANG KHOANG

MM

ee kkoo

nngg

SSee BBaanngghhiioonngg

DDoonn

NNooyy

OOuu

BBeenngg

TTaa

XXeeBBaannggffaaii

OOuu

KKaaddiinngg

Gnot-OuGnot-Ou

MuangMuangKhoaKhoa

PakbengPakbeng

Boun-NuaBoun-Nua

ViangxaiViangxai

MeungMeung

KhamKham

PhokhounPhokhoun

NambakNambak

XaisombounXaisomboun

PaklayPaklay

XanakhamXanakham

KhamkeutKhamkeut

XeponXepon

PhinPhin

KhongxedonKhongxedon

PakxongPakxong

KhongKhong

SanamxaiSanamxai

XebangfaiXebangfai

SamouaySamouay

Ban Na PhanBan Na Phan

XXéénono

XiangkhoXiangkho

Ban NalBan Naléé

KasiKasi

VangviangVangviang

NanNan

PhongsalyPhongsaly

LuangLuangNamthaNamtha

BanBanHuaisaiHuaisai

LuangLuangPhrabangPhrabang

XiangXiangKhoangKhoang

PaksanePaksane

ThakhekThakhek

SaravaneSaravane

ChampassakChampassak AttapeuAttapeu

SekongSekong

SavannakhetSavannakhet

Sam-NevaSam-Neva

MuangMuangXaiXai

SayabourySayaboury

PonePoneHongHong

VIENTIANEVIENTIANE

VIETNAM

C H I N A

THAILAND

MYANMAR

CAMBODIA

PREFECTURE OFVIENTIANE MUN.

SAYABOURY

OUDOMSAI HOUAPHAN

BOKEO

PHONGSALY

SEKONG

ATTAPEU

XIANG

LUANG PHRABANG

LUANGNAMTHA

VIENTIANE

PREFECTURE OFVIENTIANE MUN.

SAVANNAKHET

CHAMPASSAK

KHAMMOUANE

BOLIKHAMSAI

SARAVANE

KHOANG

Gnot-Ou

MuangKhoa

Pakbeng

Boun-Nua

Viangxai

Meung

Kham

Phokhoun

Nambak

Xaisomboun

Paklay

Xanakham

Khamkeut

Xepon

Phin

Khongxedon

Pakxong

Khong

Sanamxai

Xebangfai

Samouay

Ban Na Phan

Xéno

Xiangkho

Ban Nalé

Kasi

Vangviang

Nan

Phongsaly

LuangNamtha

BanHuaisai

LuangPhrabang

XiangKhoang

Paksane

Thakhek

Saravane

Champassak Attapeu

Sekong

Savannakhet

Sam-Neva

MuangXai

Sayaboury

PoneHong

VIENTIANE

VIETNAM

C H I N A

THAILAND

MYANMAR

CAMBODIA

Mekong

Mek

ong

M

e ko

ng

Se Banghiong

Don

Noy

Ou

Beng

Ta

XeBangfai

Ou

Kading

Gulf ofTonkin

Nam NgumReservoir

To Gejiu

To Daluo

To Khon Kaen

To Ubon

Ratchathani

To Qui Nhon

To Vinh

To Khon Kaen

To Hanoi

To C

hian

g Ra

i

To Lincang

Xiangkhoang Plateau

Plain of Jars

Cammon Plateau

BolovensPlateau

Phou Bia(2,817 m)

22°N

18°N

22°N

20°N

18°N

16°N

14°N

16°N

14°N

104°E 106°E

104°E102°E100°E 106°E 108°E

LAO P.D.R.

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 50

0 25 50 75 100 Miles

100 Kilometers

IBRD 33431

NOVEMBER 2004

LAO PEOPLE'SDEMOCRATIC

REPUBLICSELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES