1. Public Finance Management Strengthening Programme
Strengthening Provincial
Planning and Budgeting Capacity
Jean-Marc Lepain
Intergovernmental Fiscal Advisor
Manilay Tipsilanty
Research Assistant

2. Part I
Objective and Issues Related to the
Implementation of the New Budget
Law

3. Objectives of This Visit
• Share with provinces progress made with budget law
implementation and further plans;
• Map existing planning and budgeting process to
identity improvement areas;
• Identify requirements for budget norms, including
needs assessment, and identification of cost drivers,
especially for the education and health sectors;
• Evaluate capacity building needs and prepare a
capacity building plan.

4. Issues Identified (1)
• Different budget formulation and budget execution processes in different
provinces
• Lack of predictability and large year-to-year variations in allocations
• No multi-year budgeting and no medium term commitment from MoF
• Budget driven by resources and not by needs
• Important disparity in fun allocation between provinces (horizontal
imbalance)
• Lack of integration between planning and budgeting,
• Unrealistic planning and unrealistic budget submissions in a context of
bargaining
• Imbalance between recurrent and investment budget leading to a lack of
capacity to maintain existing infrastructures
• Insufficient funding of non-wage recurrent expenditures

5. Issues Identified (2)
• Confusion between recurrent budget and investment budget and lack of
integration
• Lack of alignment of expenditures on national strategies
• Lack of pro-poor orientation
• Lack of clarity of decision-making procedures
• Insufficient discussion with MoF and line-ministries
• Lack of financing at the national level of already adopted policy initiatives
• No break-down of budget by programmes and by projects
• Sector Ministry not involved at the central level in budget discussions and
not informed of budget execution
• No performance indicators
• Budget execution essentially cash based
• Large arrears in many provinces

6. Horizontal Imbalance
Definition:
“Horizontal imbalance measures the disparity in
revenue assignment and resource allocation
between provinces based on their respective
expenditure needs.”

7. GENERAL IMBALANCE IN 2008/09 BUDGET
(in millions kips)
Poverty Population Total Total Exp. Recurrent Capital B.
Provinces Index % Expenditures per capita per capita per capita
Vientiane Capital 1.17 11.42% 11.96% 0.532 0.273 0.258
Savannakhet 1.43 13.50% 8.93% 0.336 0.279 0.057
Champasak 1.18 9.93% 8.12% 0.415 0.333 0.082
Khammouane 1.34 5.52% 6.46% 0.594 0.425 0.169
Luangphrabang 1.23 6.66% 6.64% 0.507 0.433 0.074
Bolikhamxay 1.29 3.68% 4.52% 0.623 0.470 0.153
Houaphan 1.52 4.59% 5.39% 0.595 0.410 0.185
Oudomxai 1.45 4.34% 4.77% 0.558 0.390 0.168
Xayabury 1.25 5.54% 7.04% 0.645 0.383 0.262
Xiengkhuang 1.42 4.07% 4.96% 0.618 0.520 0.099
Vientiane Pro. 1.19 6.68% 7.62% 0.579 0.380 0.199
Bokeo 1.21 2.38% 3.48% 0.744 0.494 0.250
Phongsaly 1.51 2.71% 3.12% 0.583 0.438 0.146
Luangnamtha 1.23 2.38% 4.09% 0.874 0.645 0.228
Saravanh 1.54 5.30% 3.96% 0.379 0.305 0.075
Attapeur 1.44 6.43% 4.18% 0.330 0.191 0.138
Xekong 1.42 4.88% 4.75% 0.494 0.212 0.281
TOTAL 100% 100% 0.508 0.353 0.155

8. Provincial Spending per Capita (2007/08)
Education Health Agriculture
Rec. Budget Cap. Exp. Total Exp Rec. Budget Cap. Exp. Total Exp Rec. Budget Cap. Exp. Total Exp
per capita per capita per capita per capita per capita per capita per capita per capita per capita
Lower Province 41,000 300 41,300 11,000 1,000 12,000 4,000 4,000 8,000
National average 79,000 16,000 95,000 18,000 9,000 27,000 9,000 25,000 34,000
Highest Province 129,000 58,000 187,000 36,000 57,000 93,000 23,000 57,000 80,000

9. Objectives of the new Budget Law
• Improve revenue assignment and revenue management through a new
revenue sharing model;
• Modernize treasury functions through computerization, single treasury
account, and centralization of treasury operations ;
• Improve accounting procedures(new chart of account, new budget
nomenclature and new computerized system);
• Improve linkage between planning and budgeting
• Improve budget arrangements through (a) expenditure need assessment,
(b) multi-year budgeting, (c) budget norms, (d) new budget preparation
forms and new procedures;
• Develop a revenue transfer system based on revenue sharing and budget
norms;
• Improve accountability.

10. Part II
Budget Financing
and
Intergovernmental Transfers

11. Three Types of Funding
• Local Revenues or “Province Own Revenue”
– Result from a new revenue assignment
– “Province Own Revenues vary from province to province from 3.3%
(Houaphan) to 63% (Savannakhet) of domestic expenditures.
– Average Local revenue is 20% of local budget
– 11 provinces are below the average of 20% and will need to rely
heavily on government transfers
• Shared Revenue
(can provide only 25% of funds needed for local budget financing)
Status: Decree drafted, awaiting Prime Minister’s signature
• Central Revenue Transfers

12. Average Structure of Provincial
Budgets
Province Own Revenue
20%
Transfers from Shared Operating
Revenues Expenditures
25% 73%
Conditional and
Unconditional Grants
55% Domestic
Investments
23%

13. Central Revenue Transfers
• Unconditional Grants
-based on budget norms, need assessment and cost
drivers such as population, life expectancy, number of
students, literacy rate, number of civil servants, kilometres of
roads, accessibility, poverty indicators, land area, etc.
-predictable and transparent
• Conditional Grants
-depend on negotiation
-based on specific situations such as temporary revenue
short fall, natural disasters, special projects, large investments

14. Intergovernmental Transfers
+ Shared revenue
+ Unconditional Grant
+ Conditional Grants
______________________
= Intergovernmental Transfers

15. Objective of Intergovernmental
Transfers
• Introduce transparency and predictability in budget
preparation based on quantitative and objective criteria
• Transfers should be based on needs with a pro-poor
orientation
• Horizontal imbalance should be reduced gradually
• The system should provide incentives for improving delivery
of Government’s services
• The system should provide incentive for improving collection
of local revenues
• The system should be compatible with fiscal sustainability

16. Intergovernmental Transfer System
Provincial Fiscal Envelope
Provincial
Education Health Agriculture CTPC G.A.
Administration
Expenditure Assignment based on Budget Norms
Revenue Assignment
Local Shared Ad hoc
Equalization Transfer
Rev. Revenue Grants
Unconditional Grants Conditional
Grants

17. Equalization Model
(Based on FY 2007/08)
Education Sector
• Recurrent Budget: 85,000 kips per capita
• Investment Budget: 7% of recurrent budget as
minimum investment envelope
• Maintenance cost: 5% of investments
Health Sector
• Recurrent Budget: 21,000 kips per capita
• Investment Budget: 12% of recurrent budget as
minimum investment envelope
• Maintenance cost: 10% of investment

18. Part III
Budget Financing
and
Budget Norms

19. Definition
“A budget norm system is methodology for allocating
budgetary funds based on expenditure needs in a fair
and transparent manner with the objective of
avoiding political bargaining and correcting
horizontal imbalance. Budget norms are usually
integrated in the design of grant transfer formulae.”

20. Objectives
• correcting vertical and horizontal budgetary
imbalance;
• Ensuring that all provincial basic need are covered;
• Reducing user fees and out-of-pocket expenditures;
• Balancing operational cost and investment;
• Ensuring maintenance of all infrastructures;
• Ensuring a linkage between national and provincial
budgeting and the national development strategy;
• Ensuring budget predictability
• Multi-year budget programming

21. Constrains
• Two budgets: recurrent and capital
• Three sources of funding: local, central and
shared
• Fiscal capacity of the Lao Government
• Unclear regulatory framework for
responsibility assignment between central and
local administration

22. Two Types of Norms
• Grant transfer norms
• Budget formulation norms
MoF is considering the possibility to have
intermediary aggregated budget norms by
economic categories (wage, non-wage,
investment)

23. General Principles
• Sector budget norms integrated in the system of unconditional transfers;
• Introduction of budget norm will be progressive to avoid any drastic
changes in the local budget structure;
• Transition period might last several years and might include the
introduction of non-wage aggregated norm for recurrent expenditures
• Salaries will not be directly affected by budget norms but will be included
in the total amount of the unconditional transfer;
• Investment norms will be prepared by the Ministry of Planning and
Investment but will integrate macro-fiscal constrains established by MoF.

24. Example of Budget Norms Factors for
the Education Budget
Objective: Raising education budget from 2.15% to 4.5% of GDP and
meeting Millennium Development Goals
Size of the local Education Budget could be determined by the
following factors:
• Total population
• Number of Enrolled Students
• Number of teachers
• Number of classrooms
• Literacy rate
Cost drivers to be taken into consideration:
• Salary incentive policy
• Poverty
• Proportion of urban/rural population
• Accessibility of schools
• Ethnic minorities

25. Education Non-wage Recurrent
Expenditure Norm
• Objective: non-wage expenditures equal to
27%-32% of recurrent education budget
• Introduction of a block grant system
• Manuals free of charge for primary schools
within three years
More detailed analysis is required

26. Example of Budget Norm Factors
for the Health Budget
Factors to be taken into consideration:
• Population
• Life expectancy and maternal mortality
• Number of health facilities and beds
• Number of patients
• Number of doctors and other medical staff
• Scope of the minimum health package
Cost drivers
• Prevalence rate of infectious diseases
• Poverty and vulnerability
• Accessibility of rural areas

27. Part IV
Improving Planning and Budgeting

28. Issues
• Allocated budgets are the result of political
bargaining without consideration for needs
and priorities;
• Planning and budgeting are not integrated
together
• No allignement of provincial budget with
national strategies and poverty reduction
policies
• Achievement reporting remains weeks

29. The New Approach
• During the transition period budget norms will only define an expenditure
ceiling.
• Budget Norms might increase significantly the size of budget in some
provinces and the volume of funds available for non-wage expenditures.
However, the money should not be made available to the provinces unless
there is a plan to spend it.
• Spending plan must but be backed by demonstrated implementation
capacity (ex: text books, schools meals, specific health programmes);
• Spending programmes must be in line with national priorities;
• User fees and out of pocket expenditures will be included as resources in
budget preparation
• Strict budget execution rules and accounting rules should be enforced.
• Communication and reporting between provincial offices and ministries at
the central level should be improved.

30. What Is Required
• Better consultation and reporting between
provinces and ministries
• Better guidelines for integrating planning and
budgeting sector by sector
• Multi-year expenditure plans
• Better prioritization of expenditures
• More detailed budgeting
• New budget execution procedures
• New reporting procedures

31. Thanks