Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 75668-LA

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING GRANT

IN THE AMOUNT OF SDR 4.4 MILLION(US$ 6.5 MILLION EQUIVALENT)

TO THE

LAO PEOPLE'S DEMOCRATIC REPUBLIC

FOR THE

CUSTOMS AND TRADE FACILITATION PROJECT

April 26, 2013

Poverty Reduction and Economic Management DepartmentSoutheast Asia Country DepartmentEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(Exchange Rates Effective as of March 31, 2013)

Currency Unit = LAKLAK 8,042 = US$ 1US$ 1.4992 = SDR 1

FISCAL YEAROctober 1 - September 30

ABBREVIATIONS AND ACRONYMS

AF Additional FinancingASEAN Association of Southeast Asian NationsASYCUDA Automated System for Customs DataATIGA ASEAN Trade in Goods AgreementCPS Country Partnership StrategyCTFP Customs and Trade Facilitation ProjectDA Designated AccountDTIS Diagnostic Trade Integration StudyFM Financial ManagementFMM Financial Management ManualGDP Gross Domestic ProductGATT General Agreement on Tariffs and TradeICT Information Communications TechnologyIDA International Development AssociationIFR Interim unaudited Financial ReportIOC Incremental Operating CostsLCD Lao Customs DepartmentLPI Logistics Performance IndexMDTF Multi Donor Trust FundMoF Ministry of FinanceMTR Mid Term ReviewNSEDP National Socio-Economic Development PlanNSW National Single WindowORAF Operational Risk Assessment FrameworkPDO Project Development ObjectivePIU Project Implementation UnitSDR Special Drawing RightsTRS Time Release SurveyUNCTAD United Nations Conference on Trade and DevelopmentWCO World Customs OrganizationWTO World Trade Organization

Vice President Axel van TrotsenburgCountry Director Annette Dixon

Sector Director Sudhir ShettyCountry Manager Keiko Miwa

Sector Manager Mathew VerghisTask Team Leader Richard Record

LAO PEOPLE'S DEMOCRATIC REPUBLIC

CUSTOMS AND TRADE FACILITATION PROJECT - ADDITIONAL FINANCING

CONTENTS

Page

PROJECT PAPER DATA SHEET ........................................................................................................................ i

I. IN TR O D U C TIO N ................................................................................................................................................ 1

II. BACKGROUND AND RATIONAL FOR ADDITIONAL FINANCING............................................... 1

III. PRO PO SED CH ANG ES .................................................................................................................................. 4

IV . APPRAISAL SUM M ARY ............................................................................................................................... 6

Annex 1: Results Framework and Monitoring ................................................................................................. 8

Annex 2: Operational Risk Assessment Framework (ORAF) ...................................................................... 11

Annex 3: Detailed Description of New Project Activities...............................................................................14

Annex 4: Revised Estimate of Project Costs ................................................................................................... 18

Annex 5: Revised Implementation Arrangements and Support....................................................................19

Lao People's Democratic Republic

Customs and Trade Facilitation Project - Additional Financing (P144992)

PROJECT PAPER DATA SHEET

East Asia and Pacific Region

EASPT

Basic Information - Additional Financing (AF)Country Director: Annette Dixon Sectors: Central government administration (100%)Sector Manager/Director: Mathew Verghis / Sudhir Shetty Themes: Trade facilitation and market access (50%);Team Leader: Richard Record Administrative and civil service reform (25%); OtherProject ID: P144992 accountability/anti-corruption (25%)Expected Effectiveness Date: July 15, 2013 Environmental category: C - Not requiredLending Instrument: Investment Project Financing Expected Closing Date: June 30, 2017Additional Financing Type: Scale up and cost overrun Joint IFC: No

Joint Level: N/A

Basic Information - Original ProjectProject ID: P 10 1750 Environmental category: C - Not requiredProject Name: Customs and Trade Facilitation Project Expected Closing Date: December 31, 2013Lending Instrument: Investment Project Financing Joint IFC: No

Joint Level: N/AAF Project Financing Data

Loan [ ] Credit [X] Grant [ ] Guarantee [ ] OtherProposed terms: IDA Grant

AF Financing Plan (US$m)Source Total Amount (US$ m)Total Project Cost: 12.5

Cofmancing: 0.0Borrower: 0.5Total Bank Financing: 6.5

IDA 6.5New 6.5Recommitted 0.0

Client InformationRecipient: Lao People's Democratic RepublicResponsible Agency: Customs Department, Ministry of FinanceContact Person: Athsaphangthong Siphandone, Director General, Customs DepartmentTel/Fax No.: (856-21) 254 034Email: ath_siphandone@yahoo.com.au

AF Estimated Disbursements (Bank FY/US$ m)FY 2013 2014 2015 2016 2017Annual 0.1 1.4 2.0 2.0 1.0Cumulative 0.1 1.5 3.5 5.5 6.5

i

Project Development Objective and DescriptionOriginal project development objective: The objective of the Project is to facilitate trade by improving the efficiencyand effectiveness of customs administration and simplifying customs procedures to eliminate duplication andredundancy, reduce transactions costs and time to clear goods, and increase transparency and accountability.

Revised project development objective: N/A (unchanged).

Project description: There are two main components: (A) Automation support, to include scaling up of customsautomation, additional investments in ICT strategic capacity, business continuity and disaster recovery; and (B)Organizational development, to include professional development, implementation of the modernized legal frameworkfor customs, as well as further support to change management and capacity building.

Safeguards and Exceptions to PoliciesSafeguard policies triggered:

Environmental Assessment (OP/BP 4.01) [ ]Yes [X] NoNatural Habitats (OP/BP 4.04) [ ]Yes [X] NoForests (OP/BP 4.36) [ ]Yes [X] NoPest Management (OP 4.09) [ ]Yes [X] NoPhysical Cultural Resources (OP/BP 4.11) [ ]Yes [X] NoIndigenous Peoples (OP/BP 4.10) [ ]Yes [X] NoInvoluntary Resettlement (OP/BP 4.12) [ ]Yes [X] NoSafety of Dams (OP/BP 4.37) [ ]Yes [X] NoProjects on International Waterways (OP/BP 7.50) [ ]Yes [X] NoProjects in Disputed Areas (OP/BP 7.60) [ ]Yes [X] No

Is approval of any policy waiver sought from the Board? [ ]Yes [X] NoHas this been endorsed by Bank Management? [ ]Yes [ ]NoDoes the project require any exception to Bank policy? [ ]Yes [X] NoHas this been approved by Bank Management? [ ]Yes [ ]No

Conditions and Legal CovenantsFinancing Agreement Reference Description of Covenant Date DueOriginal Financing Agreement The recipient shall maintain, throughout the period of RecurrentSchedule 2, Section 1 A 1. implementation of the project, a Project Steering Committee

with representative, mandate, terms of reference andcomposition satisfactory to the Association to, inter alia,provide oversight in the implementation of the project.

Original Financing Agreement The recipient shall maintain, throughout the period of RecurrentSchedule 2, Section 1 A 2. implementation of the project, a Customs Reform and

Modernization Team, which will be responsible for day to dayimplementation of the project, with mandate, terms of referenceand composition satisfactory to the Association.

Original Financing Agreement The recipient shall ensure that funds collected through the RecurrentSchedule 2, Section 1 A 4 (c). ASYCUDA System User Fee are allocated for the operation and

maintenance costs of the ASYCUDA system.Additional Financing Agreement The recipient shall maintain, throughout the period of RecurrentAppendix, Section II 2 implementation of the project, the CTFP Project

Implementation Unit, with sufficient resources and competentstaff in adequate numbers.

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LAO PEOPLE'S DEMOCRATIC REPUBLIC

CUSTOMS AND TRADE FACILITATION PROJECT

ADDITIONAL FINANCING PROJECT PAPER

I. INTRODUCTION

1. This Project Paper seeks the approval of the Executive Directors to provide an additional grant in anamount of SDR 4.4 million (US$ 6.5 million equivalent) to the Lao People's Democratic Republic for theCustoms and Trade Facilitation Project (P101750 and P144992, IDA Grant No. H403-LA).

2. The proposed additional grant builds on the significant progress made to date and provides furthersupport in three key areas of border management designed to ensure full and effective implementation of thenew Customs Law and its translation into modem and business friendly systems and procedures. Firstly, it willsupport the preparation of a series of customs implementing regulations and procedures consistent withinternational standards and accepted good practice approaches. Secondly, it will support the development of asustainable capacity for the Lao PDR Customs Department (LCD) to develop its own human resources in a rangeof modem risk based customs techniques. Thirdly it will support the further functional expansion andgeographical rollout of the ASYCUDA World system and strengthen LCD capacity to effectively manage andmaintain its ICT systems and infrastructure.

3. The overall project development objectives remain relevant and are therefore unchanged'. ThePDO for the original CTFP and the additionally financed project is to facilitate trade by improving the efficiencyand effectiveness of customs administration and simplifying customs procedures to eliminate duplication andredundancy, reduce transactions costs and time to clear goods, and increase transparency and accountability.

II. BACKGROUND AND RATIONAL FOR ADDITIONAL FINANCING

Country context

4. Lao PDR has seen strong economic growth during the past decade, driven principally by theexploitation of natural resources. The country is surrounded by some of the fastest growing economies in theworld. Real GDP grew at an average rate of 7.1 percent a year from 2001 to 2010 and is expected to increase to7.5-8.0 percent during 2011-2015. In 2010, Lao PDR achieved a per capita Gross National Income of US$ 1,010and, as such, graduated from low income to (lower-) middle income country status. At this pace, Lao PDR is ontrack to achieve its long term vision: to graduate from Least Developed Country status by 2020.

5. Lao PDR continues to integrate more closely into the rapidly growing regional economy through theimplementation of trade commitments both multilaterally and within the Association of Southeast Asian Nations(ASEAN), the maintenance of relatively low tariffs, and through improved physical infrastructure andconnectivity with neighbors. This has resulted in strong growth in cross-border flows of goods, services andinvestment. However, much of this has been driven by the growing external appetite for Lao PDR's naturalresources. Although the resources sector has brought significant benefits to Lao PDR's economy in the form of

I There is a slight difference in the syntax of the PDO formulation in the original Financing Agreement and that in the ProjectAppraisal Document which reads: "The objective of the project is to facilitate trade by improving the efficiency and effectiveness ofcustoms administration. The project will simplify customs procedures, eliminate duplication and redundancy, reduce transaction costs andtime to clear goods, and increase transparency and accountability". This Project Paper serves to reconfirm the PDO from the originalFinancing Agreement.

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higher economic growth, an increase in fiscal revenues, and infrastructure improvements; an over reliance on thesector as a primary source of economic growth poses serious risks to the sustainability of the country's long-termdevelopment. There is a risk of increased volatility as the economy becomes more susceptible to external shocksdriven by commodity price movements. In addition, the sector may not generate the kind of broad-based job andincome creation needed to benefit a significant proportion of the Lao population.

6. Government's broad direction of development is described in the 7th National Socio-EconomicDevelopment Plan (NSEDP), which outlines clear and specific objectives for increased international and regionalintegration as a means of achieving economic and social development targets. Accession to the World TradeOrganization (WTO) and implementation of commitments at the ASEAN level remain high priorities. A keychallenge will be to follow through with fuller implementation of legal reforms enacted in recent years. This willbe especially challenging in a post-WTO accession environment when, evidence from other countries shows,reform momentum may begin to slow.

7. Trade facilitation performance is improving, but high logistics costs due in part to a landlockedsupply chain, continue to tax competitiveness and limit the scope for diversified growth. Improvements havebeen made through reform to customs processing procedures, through the introduction of an automated customsdeclaration processing system (ASYCUDA World) and via investments in better border infrastructure. TimeRelease Survey data shows that the mean customs clearance time has reduced from 17.9 hours in 2010 to 11.2hours in 2012. This result is consistent with World Bank enterprise survey data which also shows thatmanufacturing firms reporting that the average number of days to import and export has fallen. Perceptions oftrade facilitation performance in Lao PDR have also seen progressive improvements under the global LogisticsPerformance Index2 . However, gains in Lao PDR are from a low base and the country continues to compareunfavorably against neighboring Vietnam and Thailand.

8. Accession to the WTO has been a core policy objective over recent years and has acted as a driverof reform to the trade-related legislative framework. Lao PDR became a WTO member in February 2013 afterfifteen years of negotiations. Encouraging steps have been taken to improve inter-agency border coordinationthrough the establishment of a National Trade Facilitation Secretariat in 2010, and the approval by the Cabinet ofa National Trade Facilitation Strategy and Action Plan in 2011. Information on trade-related processes andprocedures is now published online as a part of related efforts to harmonize and simplify redundant borderrequirements3 . However, while much of the higher level legislation now meets WTO norms in terms oftransparency and non-discrimination, implementation of lower level regulations lags behind resulting in less-than-anticipated actual benefits to the private sector. Similarly for Lao PDR to fully benefit from an open economy,reform of domestic market institutions and strengthening of the legal framework and regulatory environment willneed to reach beyond that required for WTO accession.

9. The proposed Additional Financing to the Customs and Trade Facilitation Project aims to supportgovernment objectives to achieve high rates of economic growth that translate into meaningful povertyreduction, as outlined in the Seventh NSEDP. Increased trade, openness and integration can act as a powerfuldriver of pro-poor growth, but only if the right policies are put in place and risks are carefully managed.

10. The project forms a core part of the World Bank Group's new 2011-15 Country PartnershipStrategy (CPS) for Lao PDR, which in turn is closely aligned with the Seventh NSEDP. Additional Financing toCTFP will form a major part of efforts to achieve CPS Strategic Objective 1: "Improving competitiveness andconnectivity".

2 Lao PDR's score under the Logistics Performance Index has improved from 2.08 in 2007, to 2.17 in 2010 and to 2.38 in 2012.However, in 2012 Lao PDR still ranked 113 out of 155 countries.

The launch of the Lao Trade Portal (www.laotradeportal.com) in June 2012 brought the country into line with GATT Articlerequirements to put information on import and export process requirements into the public domain.

2

11. The Customs and Trade Facilitation Project forms part of an ambitious and integrated countrytrade program supported by the World Bank in partnership with Australia, the European Union, Germany andIreland. This includes a related IDA and Multi Donor Trust Fund financed project - the Second TradeDevelopment Facility Project4 - as well as a National Single Window Non-lending Technical Assistance activity'.The proposed additional financing will assist the LCD to play a major role in furthering the government's widertrade facilitation and national competitiveness agenda.

12. The proposed operation is informed primarily by the government's 2012 DTIS Update, as well asby related analytical work undertaken by the World Bank and development partners, including the 2010Lao Development Report (a Country Economic Memorandum), the 2011 Lao Investment Climate Assessmentand a series of trade-related analytical products prepared under the Trade Development Facility MDTF(Diversification/Product Space paper, Gender and Trade Work Program, Export Survival Study, ATIGA TariffReform Impact Study, Agribusiness Work Program, and a Trade and Transport Facilitation Assessment).

13. The Bank has extensive experience in institutional reform of customs administrations havingfinanced over 120 related projects over the past twenty years. Lessons from other Customs operations wereincorporated into the CTFP's original design and monitoring framework and have likewise been incorporated intothe design of the proposed additionally financed activities. The Bank's project team draws heavily on technicalexpertise from the International Trade Department and the Information Communications Technology Department,and project personnel have established a strong and credible professional relationship with client officials.

Project background

14. The proposed additional financing for the CTFP will provide a vehicle to support Lao PDR'songoing trade facilitation and public sector institutional strengthening program and is essentially anextension of the current CTFP that was approved in September 2008 and is scheduled to close in December 2013.It is designed to both broaden and deepen the current reform modernization agenda and build on the momentumfor change already established within the LCD. It is also designed to further support the LCD's own capacity tosustain and further expand improvements achieved to date and contribute constructively to related developmentsassociated with the establishment of a National Single Window system.

15. A Mid Term Review (MTR) of the current CTFP conducted in early 2013 rated the project assatisfactory in meeting its development objectives and acknowledged that significant progress has been madein implementing modem approaches to customs administration with marked improvements recorded in all keyperformance indicators. While implementation progress was initially rather slow in the first two years afterproject approval in 2008, the pace accelerated from 2010. Achievement of development objectives is on track anda recent time release study undertaken by an independent consultancy firm confirmed that between 2009 and 2012the time required to clear goods fell by 34 percent. Likewise, a recent client survey undertake by the same firmnoted that clients regarded customs formalities as improving considerably and that regulations were clear anduniformly enforced. The MTR also acknowledged the satisfactory performance of the client in managing theproject. The report did, however, acknowledge that in spite of achievements to date, further support would benecessary to continue and extend the process of modernization in order for Lao PDR to fully implement allrelevant international standards relating to customs administration and border management.

4 P130512: Lao PDR Second Trade Development Facility Project, 2013-17 (US$ 4.0 million IDA grant, co-financed by a US$ 10.0million MDTF grant).s P130772: Lao PDR National Single Window Preparation, 2012-13 (Non-lending technical assistance activity financed via a US$1.35 million grant from the global Trade Facilitation Facility MDTF).

3

16. The proposed additional financing operation will focus on providing further support in three keyareas all designed to ensure full and effective implementation of the new Customs Law and its translationinto modern and business friendly systems and procedures. It will support the preparation of a series ofimplementing regulations and procedures consistent with international standards and accepted good practiceapproaches. It will also support the development of a sustainable capacity for the LCD to train and develop itsown personnel. In addition, it will support the further functional expansion and geographical rollout of theASYCUDA World system and strengthen the LCD capacity to effectively maintain its ICT systems andinfrastructure. The latter is particularly critical in terms of long term sustainability and business continuity.

17. In terms of project management, the additional financing operation will maintain the satisfactoryarrangements currently in place for the existing project providing a seamless migration from the CTFP to theadditional financing operation thus taking full advantage of existing project management experience and physicalresources. All key local personnel and existing project monitoring mechanisms will be retained including theexperienced procurement and financial management staff.

18. The results framework established for the CTFP remains relevant, however, it has been updatedslightly to reflect progress already achieved and the enhanced scope and ambition reflected by the additionalresources. It has also been adjusted to incorporate a more reliable measure to assess the effectiveness of inspectionactivities.

III. PROPOSED CHANGES

19. For ease of administration the project will continue to consist of two components, but withexpanded scope to reflect enhanced ambition and progress achieved to date. Component A will focus onautomation support and will include additional financing for three separate but closely interrelatedsubcomponents. Component B will focus on organizational development and will include six subcomponents, fiveof which are focused on furthering the customs reform agenda and one covering project management. A detaileddescription of new project activities is included in Annex 3.

20. Component A: Automation Support (Additional Financing of US$ 2.65m).The effective deployment ofICT has become a major component of customs reform and modernization throughout the world and is criticallyimportant in supporting the adoption of international standards and meeting regional integration commitments.While the ASYCUDA World system has been successfully implemented, the LCD's capacity to effectivelymanage and maintain the system as well as its overall ICT infrastructure and network needs to be furtherstrengthened. Enhancing in-house capabilities will also contribute to supporting the design, development andintegration of complementary ICT investments, such as those associated with the proposed Lao PDR NationalSingle Window system. Component A is therefore focused on progressively shifting responsibility for the supportand maintenance of the ASYCUDA system from the current contractor (UNCTAD) to LCD's own personnel andon building a strong in-house capacity to effectively manage current and future ICT systems and relatedinfrastructure.

21. Component B: Organizational Development (Additional Financing of US$ 3.6m).This component isdesigned to consolidate and further extend the improvements achieved in customs work practices, procedures andorganization that have progressively been implemented by the LCD over the past five years. It is also designed tofinance a series of key activities that were initially planned to be conducted in the final year of the CTFP but weredeferred due to a reallocation of priorities toward additional support for ASYCUDA 6 and a funding shortfallresulting from depreciation of the value of SDRs . Subcomponents will finance the establishment of a

6 Delays in the procurement of key system licenses and changes in the locations of selected implementation sites meant theUNCTAD contract had to be extended to accommodate additional time and work.7 The net impact of the depreciation was a drop in available funds from US$ 6.0 million at the time of appraisal to US$ 5.6 millionin 2013.

4

comprehensive professional development capability, assistance to develop the necessary enabling regulations andworking practices to ensure full implementation of the new Customs Law, further support for the development ofan in-house strategic planning and change management capacity, and intensive support for the adoption of a suiteof modem approaches to customs administration in keeping with internationally agreed standards. A sub-component will also finance the ongoing operation of the high quality project management infrastructureestablished under the CTFP.

22. The PDO remains relevant and no changes are required. Project performance indicators likewiseremain relevant although specific definitions have been clarified and target values have been increased to reflectprogress achieved to date and an enhanced level of ambition. Detailed information on revised results monitoringis included in Annex 1. The revised project outcome indicators are summarized below.

Project outcome indicators Original target Changes with AF Revised target

Reduction in mean import, export and transit clearancetimes for commercial shipments by 10% per year 11.6 7.4(number of hours)Reduction in the number of steps to clear commercial No change inconsignments by 25% (number of steps to export and 5,4 indicators. Revisednumber of steps to import) numerical target toIncrease in the ratio of detections/inspections by 10% per reflect additionalyear [based on available ASYCUDA data and reports for N/A time and resources.the purposes of customs control] (percentage ratio)Increase in client perceptions of customs performanceand integrity as measured by WB survey results by 25% 2.6 2.8(Logistics Performance Index score) ______________________________

23. Project implementation arrangements will remain as per current practice with overall supervisionprovided by the Steering Committee on Customs Reform and Modernization, and day-to-day execution ofactivities undertaken by a CTFP Project Implementation Unit within the Customs Department. Further detail isincluded in Annex 5.

24. In order to complete the scope of activities under the Additional Financing, the project will beextended for three and a half years. The closing date for the AF will be June 20, 2017. The closing date for theoriginal grant will not be extended beyond the existing date of December 31, 2013 as the grant is expected to befully disbursed by this time.

25. The revised financing plan is for a total project cost estimated at US$ 12.5 million, of which IDAfinancing will constitute SDR 8.1 million, including AF of SDR 4.4 million (US$ 6.5 million equivalent). Adetailed breakdown of revised cost estimates is included in Annex 4. The revised costs by component aresummarized below.

o tOriginal cost Changes with AF Revised costCmPoet i(US$) (US$) (US$)

Component A: y m Reor a M ezi aAutomation Support 3.98 me2U65 m . mComponent B:Organizational Developmentancg th3pojct5il2bContingency 0.m 0.25m 0.25mTotal IDA costs 6.00 m 6.50 m 12.50 m

26. The following is a summary of the revised project costs financed by IDA and to be disbursed against thefollowing expenditure categories.

5

Percentage ofAmount of Original Amount of Additional eentre obExpenditure category Financing allocated Financing allocated financed (inclusive of

(SDR) (SDR) txstaxes)(1) Goods, non-consulting services,consultant services, training and 3.7 m 4.4 m 100%workshops, and incrementaloperating costs for the projectTotal 3.7 m 4.4 m 100%

27. Overall risks are considered to be low. The project is an extension of an existing project that hasachieved a satisfactory implementation performance rating and is on track to meet or exceed key resultsindicators. The AF will utilize existing project management arrangements and all key activities fall within theoperational responsibilities of the Lao Customs Department, within the Ministry of Finance. LCD management isstrongly committed to successful implementation of the project. Fuller details of the identified risks andmitigation measures are included in Annex 2 (Operational Risk Assessment Framework).

TV. APPRAISAL SUMMARY

28. The Bank has completed a detailed appraisal of the proposed additional financing operation and hasverified that the government is strongly committed to the proposed additional financing grant and has thenecessary capacity to implement the additional activities to be covered by the project. The project content closelyaccords to the LCD's own assessment of future development needs and its own reform and modernizationstrategy and no change to the initial PDO is envisaged. The initial financial and economic rationale for the CTFPcontinues to strongly justify Bank investment in this economically important component of Lao PDR's tradefacilitation and national competitiveness agenda. The satisfactory project management and implementationmechanisms established for the CTFP will remain in place and are expected to continue to perform satisfactorily.The proposed additional financing will build on the results achieved through the CTFP and will complement aseries of other activities currently being supported by the wider development community.

Economic and financial analysis

29. Implementation of customs reform and modernization will yield significant payoffs in terms of a moreeffective, efficient, transparent and accountable customs administration that will facilitate trade and improve thelevel of voluntary compliance, while improving Lao PDR's investment climate and competitiveness. Theeconomic benefits of the additional financing, as assessed under the original project, are numerous but not alwaysfully quantifiable. Some benefits, such as reductions in costs to trades as a result of faster cargo clearance aremeasurable while other benefits, such as economic impact of improved transparency and competitiveness aremore difficult to quantify. While increased revenue is not a specific objective of the project, experience suggeststhat improved customs procedures and practices, along with more effective use of risk management andautomation, will contribute to revenue increases.

Technical

30. The additional financing will support the scale up and cost overruns associated with the deployment ofASYCUDA in Lao PDR. It is a mature system, with a proven track record of installations in other developingcountries.

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Financial management

31. A financial management capacity assessment of the FM arrangements for the Customs and TradeFacilitation Project was undertaken in February 2013 to determine whether the implementing agency (theCustoms Department of the Ministry of Finance) has adequate financial management systems and related capacityin place to meet the minimum requirements of the World Bank's Operational Policy / Bank Procedure 10.02 onFinancial Management. The assessment was based on the Concept Memorandum, the draft Project Paper anddiscussions with the finance staff of the Customs Department. The LCD will continue to be the implementingagency for CTFP and the Project Implementation Unit (PIU) already set up within the LCD will continue toassume the financial management functions of the project. Based on the FM review, the current financialmanagement arrangements are deemed acceptable. The current project accounting system is capable of producingtimely and accurate financial statements, accounting policies and procedures are in place, audit arrangements areacceptable to the Bank and an acceptable financial management manual is also available to guide the project staffin their day-to-day work. Further detail on FM arrangements is included in Annex 5.

32. The overall financial management risk is Moderate.

Procurement

33. Procurement for the proposed project will be carried out in accordance with the World Bank'sProcurement and Consultant Guidelines (January 2011), and the provisions stipulated in the Financing Agreementand in agreed Procurement Plans. The CTFP Project Implementation Unit, within the Customs Department, hasgained project implementation experience during implementation of the original project. The unit is familiar withthe Bank's Procurement and Consultants Guidelines. For each contract to be financed by the project, the differentprocurement methods or consultant selection methods, estimated costs, prior review requirements, and time framehave been agreed between the recipient and the Bank's Task Team and articulated in the Procurement Plan. TheProcurement Plan will be updated at least annually or as required to reflect the actual project implementationneeds and improvements in institutional capacity.

34. As this is additional financing to the existing Customs and Trade Facilitation Project, the LCD will keepthe same institutional arrangements as currently in place. Detailed procurement arrangements can be found inAnnex 5.

Social and environmental (including safeguard policies)

35. The project does not include activities that may have significant social risks or deal with the population atlarge. However, faster and lower cost border clearance times and lower compliance costs for traders are likely tobenefit consumers in the form of lower prices of goods.

36. Automation of customs and border procedures can also support positive gender and pro-poor outcomesthough improvements in service standards at the border, a reduction in the inappropriate use of discretionarypowers, greater consistency in the application of procedures and reduced scope for human contact; all of whichare likely to disproportionately benefit small traders, and in particular female traders.

37. The project will finance consulting services, goods, training and workshops. There are no civil works orany activity that may have negative environmental implications. The project is classified under category C.

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Annex 1: Results Framework and Monitoring

LAO PDR: CUSTOMS AND TRADE FACILITATION PROJECT - ADDITIONAL FINANCING

Revisions to the Results Framework Comments/Rationale for Change

PDO

Current (PAD) ProposedThe objective of the project is to facilitate trade by No change is proposed. The PDO, as originallyimproving the efficiency and effectiveness of customs formulated, remainsadministration and simplifying customs procedures to relevant.eliminate duplication and redundancy, reduce transactionscosts and time to clear goods, and increase transparencyand accountability.PDO indicators

Current (PAD) Proposed changeCustoms efficiency No change is proposed. Remains relevant and* Reduction in mean import, export and transit further progress

clearance times for commercial shipments by 10 anticipated.percent per year.

* Reduction in the number of steps to clear commercialshipments by 25 percent.

Customs effectiveness No change is proposed. Remains relevant and* Increase in the ratio of detections/inspections by 10 further progress

percent by year. anticipated.* Increase in client perceptions of customs performance

and integrity, as measured by World Bank surveys by25 percent

Intermediate Results Indicators

Current (PAD) Proposed changeImproved customs processes and procedures. Updated to reflect* Full acceptance of electronic data submission for Revised to 2013 to take account progress made to date and

customs declaration procedures by the end of 2011. of extended pilot process. expanded scale ofImproved ICT infrastructure which supports the activities.implementation of the customs processes andprocedures and is sustainable and reliable.* Prototype developed and accepted by government. Task completed.* Accepted prototype validated at pilot site. Task completed.* Prototype replicated at remaining checkpoint sites. Task completed.* Integrated IT system is in place by 2010, pilot Revised to end 2014 to include

completed and reviewed by 2011, and fully additional sites covered byoperational in all implementation sites by 2012. Additional Financing.

* Appropriate front line staff and affected traders Task completed.trained in advance of pilot testing and pre nationwiderollout.

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Revised Project Results Framework - Customs and Trade Facilitation Project

Project Development Objective (PDO): To facilitate trade by improving the efficiency and effectiveness of customs administration and simplifying customs procedures toeliminate duplication and redundancy, reduce transactions costs and time to clear goods, and increase transparency and accountability.

Baseline Cumulative Target Values

Q Original Progress Data Source! ResponsibilPDO Level Results Indicators o UOM Project To Date Frequency ity for Data Comments

Start (2012) 2013 2014 2015 2016 Methodology Collection(2009)

Reduction in1. Reduction in mean import, export meanctime toand transit clearance times fortime to

commercial shipments by 10 percent E Hours 17.9 11.2 10.1 9.1 8.2 7.4 Every 1-2 Time Release LCD clear imports of

perac years Survey (TRS) 34% during2009-12

Reduction in. number of steps

2. Reduction in the number of steps to Number Every 1-2 LCD to import from 9clear commercial shipments by 25 ElNme 9,7 5,4 5,4 4,3 4,3 4,3 Eey12 LDLCD t motfocaerci sof steps years regulations to 5 and to

export from 7 to4 during 2009-12

Indicator of3. Increase in the ratio of increased usedetections/inspections by 10 percent ASYCUDA and effectivenessper year [based on available E % N/A 1.2 1.5 1.9 2.3 2.9 Annual management LCD of customs riskASYCUDA data and reports for the reports management andpurposes of customs control]. ASYCUDA

selectivity

4. Increase in client perceptions of SustainedLogistics improvements in

customs performance and integrity as H Index 2.08 2.38 2.5 2.6 2.7 2.8 Every 2-3 Performance WB performance asmeasured by World Bank survey years Index (LPI) measured by theresults by 25 percent. LPI

UOM = Unit of Measurement.

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Intermediate Results and Indicators

Baseline Target ValuesQ Original Progress Data Source! Responsibility

Intermediate Results Indicators o UOM Project To Date Frequency for Data CommentsStart (2012) 2013 2014 2015 2016 Methodology Collection

Intermediate Result 1: Improved customs processes and procedures.

Revised to2013 to take

1. Full acceptance of electronic data Partially t... Not Prily Comple Progress account of

submission for customs declaration E Text i complete C e rors LCD extendedprocedures by the end of 2013 initiated d ted reports e pilot

process.

Intermediate Result 2: Improved ICT infrastructure which supports the implementation of the new customs processes and procedures and is sustainable and reliable.

2. Prototype developed and accepted E Text Not Complet Progress LCD Taskby government initiated ed reports completed

3. Accepted prototype validated at E Text Not Complet Progress LCD Taskpilot site initiated ed reports completed

4. Prototype replicated at remaining E Text Not Complet Progress LCD Taskcheckpoint sites initiated ed reports completed

Revised to5. Integrated ICT system is in place by Partially Partiall end 2014 to2011, pilot completed and reviewed by E Text Not complete y Compl Progress LCD include2012, and fully operational in all initiated d complet eted reports additionalimplementation sites by 2014. ed sites covered

by AF6. Appropriate front line staff andaffected traders trained in advance of E Text Not Complet Progress LCD Taskpilot testing and pre nationwide initiated ed reports completedrollout.

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Annex 2: Operational Risk Assessment Framework (ORAF)

LAO PDR: CUSTOMS AND TRADE FACILITATION PROJECT - ADDITIONAL FINANCING

Stage: Board

Project Stakeholder Risks Rating: LowDescription: The Lao Customs Department has benefited from Risk Management: Structures are now in place to manage inter-agency coordination, government-strong political support due in part to Lao PDR's international donor coordination, and public-private dialogue. The challenge is to build capacity and ensure theintegration agenda, particularly to issues surrounding accession to effective utilization of these coordination structures by the LCD as it moves forward with its reformthe World Trade Organization. High-level policy priorities are and modernization program.articulated in the Action Matrix to the 2006 Diagnostic TradeIntegration Study, and more recently in the 2012 DTIS Update. The Resp: Client Stage: Ongoing Due Date: 2013 Status: Not yetTrade Facilitation Strategy and Action Plan also outlines specific duepriorities relating to border management. The trade sector alsobenefits from an increasingly developed institutional architecture forinter-agency coordination, including three permanent secretariatsoperating under the supervision of the National Steering Committeeon Economic Integration: the WTO Secretariat; the IntegratedFramework/Trade for Development Secretariat; and the NationalTrade Facilitation Secretariat. This structure provides theframework, but the key challenge is inevitably associated with day-to-day engagement on key issues, identification of activities andimplementation. The LCD maintains a forum for private sectordialogue and hold regular meetings to discuss issues of mutualinterest. The LCD also participates in the Lao Business Forum.

Implementing Agency Risks (including fiduciary)Capacity Rating: LowDescription: The current project management arrangements for the Risk Management: Centralized fiduciary and core project implementation services remain withinCTFP will be retained and will be responsible for overall project the existing project management arrangements that have proved satisfactory to date.implementation, including fiduciary, monitoring and evaluation Implementation rests within the LCD and is under the direct control of LCD management.responsibilities.

Resp: Client Stage: Ongoing Due Date: 2013 Status: Not yetProject management risk: With increased experience gained over duethe course of implementing the existing CTFP the projectmanagement unit has now established a strong and robust system offiduciary controls, with experienced Financial Management andProcurement staff available to manage the proposed project.

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Activity management risk: Responsibility for technicalimplementation of project activities will fall on LCD personnelunder the direct control of LCD management. LCD management isstrongly committed to project delivery and is fully aware of thechallenges they will face during project implementation.

Governance Rating: ModerateDescription: Fiduciary performance during the CTFP has been Risk Management: Centralized fiduciary and core project implementation services remain withinsatisfactory, with capacity built and experience progressively gained the existing project management arrangements. Regular Bank implementation support missions willin procurement and financial management. be undertaken, including procurement ex-post and financial management transaction reviews.

Resp: Client / Bank Stage: 2013 Due Date: Ongoing Status: Not yetdue

Project RisksDesign Rating: LowDescription: Project design is based on an extension of the current Risk Management: Project design is based on a series of activities identified by both the client andsatisfactory CTFP. The initial design proved to be sound and the the Bank team. Design has proved to be sound and new activities are designed to support long termextension builds on existing priorities and development needs as sustainability.identified and validated by the client and Bank team. Moreover, therecent DTIS Update clearly articulates goals and objectives Resp: Client Stage: Ongoing Due Date: 2013 Status: N/Aassociated with trade and integration over the next five years, with aprioritized action matrix / roadmap. The design of the project buildson lessons learned during the implementation of the CTFP andinvolves a deeper engagement with fewer areas of focus. Links withthe multi-donor financed TDF will continue to be made.

Social & Environmental Rating: LowDescription: The operation presents limited direct social and Risk Management: None.environmental risks.

Resp: N/A Stage: N/A Due Date: N/A Status: N/A

Program & Donor Rating: ModerateDescription: The CTFP supports a well-defined trade facilitation Risk Management: Continued maintenance of an in-country trade team to provide day-to-dayagenda and benefits from high level political support. Several other implementation support to the project, and facilitate donor coordination and communication.donors are providing support to the LCD and the Bank maintains anactive and productive dialogue with other development partners. Resp: Client/Bank Stage: Ongoing Due Date: 2013 Status: Not yetActivities financed by the Bank and other donors involve very few duepractical overlaps and are generally complementary. Nevertheless,there are risks associated with different advice being provided byvarious donors.

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Delivery Monitoring & Sustainability Rating: ModerateDescription: The current satisfactory program management Risk Management: The project management team has managed the existing project satisfactorily.arrangements will be retained. The counterpart team has Project implementation support missions will be conducted regularly and will monitor projectprogressively enhanced its capacity to manage implementation. performance.

Resp: Client Stage: Ongoing Due Date: 2013 Status: Not yetdue

Overall Risk Following ReviewImplementation Risk Rating: LowDescription: The project will utilize existing project management arrangements and all key activities fall within the operational responsibilities of the Lao CustomsDepartment, within the Ministry of Finance. The project is an extension of an existing project that has achieved a satisfactory implementation performance rating and is ontrack to meet or exceed key results indicators. LCD management are strongly committed to successful implementation of the project.

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Annex 3: Detailed Description of New Project Activities

LAO PDR: CUSTOMS AND TRADE FACILITATION PROJECT - ADDITIONAL FINANCING

1. The additional financing operation will focus on providing further support in three key areas all designed toensure full and effective implementation of the new Customs Law and its translation into modem and businessfriendly systems and procedures. First, it will support the preparation of a series of implementing regulations andprocedures consistent with international standards and accepted good practice approaches. Second, it will supportthe development of a sustainable capacity for the LCD to train and develop its own personnel. Third it willsupport the further functional expansion and geographical rollout of the ASYCUDA World system and strengthenthe LCD capacity to effectively maintain its ICT systems and infrastructure.

2. For ease of administration the project will continue to consist of two components, but with expanded scope toreflect enhanced ambition and progress achieved to date. Component A will focus on automation support and willinclude additional financing for three separate but closely interrelated subcomponents. Component B will focuson organizational development and will include six subcomponents, five of which are focused on furthering thecustoms reform agenda and one covering project management.

COMPONENT A: AUTOMATION SUPPORT (including Implementation of ASYCUDA World)

3. The effective deployment of ICT has become a major component of customs reform and modernizationthroughout the world and is critically important in supporting the adoption of international standards and meetingregional integration commitments. While the ASYCUDA World system has been successfully implemented, theLCD's capacity to effectively manage and maintain the system as well as its overall ICT infrastructure andnetwork needs to be further strengthened. Enhancing in-house capabilities will also contribute to supporting thedesign, development and integration of complementary ICT investments, such as those associated with theproposed Lao PDR National Single Window system. Component A of CTFP (AF) is therefore focused onprogressively shifting responsibility for the support and maintenance of the ASYCUDA system from the currentcontractor (UNCTAD) to its own personnel and on building a strong in-house capacity to effectively managecurrent and future ICT systems and related infrastructure. This component will also finance the further rollout ofthe ASYCUDA World system to an additional 12 border crossings completing the nationwide deployment of thesystem. To ensure continuous operations and availability of the system, a Business Continuity plan and a DisasterRecovery Center will be implemented under this component. Similarly, to ensure system availability at theoperational border checkpoints, backup generators will also be financed.

Subcomponent Al. ASYCUDA implementation, support and maintenance (US$ 1,050,000 - AF to existingsubcomponent))4. The current project has financed the implementation of ASYCUDA World at most key locations (coveringapproximately 80 percent of all Lao PDR trade flows) however, several smaller locations are not within the scopeof the current project. Operating ASYCUDA at larger locations and the old C2000 system at smaller locationspresents significant risks to procedural consistency and data accuracy. The subcomponent will therefore financeadditional support to assist the LCD to roll out the system to all relevant locations and border checkpoints (anadditional 12, mostly smaller, border checkpoints beyond the 11 major checkpoints automated under the originalproject). It will also finance additional hardware required at the new locations and ongoing support andmaintenance including training for ICT personnel, help desk services, bug fixes, software version upgrades,functionality enhancements, and support to prepare customized reports. LCD's capacity to centrally monitoroperations and support improved compliance at border checkpoints will also be significantly improved with theimplementation of a closed-circuit television system at selected major checkpoints under this component.

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Subcomponent A2. LCD preparation for reception of new system5. No additional financing.

Subcomponent A3. LCD information technology strengthening6. No additional financing.

Subcomponent A4. Strategic ICT capability development (US$ 700,000 - AF to new subcomponent))7. To date the LCD's ICT capacity has been focused exclusively on supporting the customization anddeployment of the ASYCUDA system and the maintenance of hardware as well as effective operation of theexisting telecommunication network. In order to build an effective in house capability to strategically manage allICT investments and ensure a reliable and stable operational environment, significant support will be required.The sub-component will therefore finance the appointment of an international ICT advisor with extensiveexperience in managing in-house ICT operations for an initial period of one year followed by periodic visits in thefollowing two years. The focus of the Advisor's work will be to establish a strong an effective in-house ICTcapability and instill in personnel the appropriate professional disciplines necessary to support the long termoperation and strategic management of all the LCD's ICT investments. He/she will also provide training andmentoring to key personnel in order to develop the appropriate core competencies necessary to maintain theLCD's key business applications and infrastructure. The subcomponent will also finance the appointment of threelocal ICT specialists for the duration of the project as well as the establishment of a robust help desk capability inorder to adequately support internal and external system users. Training and capacity enhancement activities willalso be financed in order to improve the technical ICT skills of LCD personnel assigned to the ICT division.

Subcomponent A5. Disaster recovery and business continuity (US$ 900,000 - AF to new subcomponent)8. With the ASYCUDA World system now responsible for processing approximately 80 percent of all importand export declarations both the LCD and the trading community have become heavily dependent on the system.As such, system reliability and availability has become an important issue with any system downtime resulting indelays and additional costs for traders and data irregularities for the Ministry of Finance. To date both theproduction and back-up servers are physically housed in one location making them particularly vulnerable. Inkeeping with established good ICT practice it is prudent to establish and implement a robust Business ContinuityPlan including a fully functioning and well equipped Disaster Recovery Center at a separate location. Such acenter will ensure business continuity and adequate data back up in the event of a natural disaster or anyunforeseen event that might take the production server and related hardware out of operation. The subcomponentwill therefore finance the fit out of an appropriate remote site, the procurement of required generators (for the siteand operational locations) and uninterrupted power supply equipment as well as back up servers with sufficientcapacity to maintain business continuity. In addition, in order to adequately monitor network performance thesub-component will also finance the procurement of appropriate ICT infrastructure monitoring tools.

COMPONENT B: ORGANIZATIONAL DEVELOPMENT (including Customs Modernization Support)

9. Component B of CTFP (AF) is designed to consolidate and further extend the improvements achieved incustoms work practices, procedures and organization that have progressively been implemented by the LCD overthe past five years. It is also designed to finance a series of key activities that were initially planned to beconducted in the final year of the CTFP but were deferred due to a reallocation of priorities toward additionalsupport for ASYCUDA 9 and a funding shortfall resulting from depreciation of the value of SDRs.' 0

Subcomponents will finance the establishment of a comprehensive professional development capability,assistance to develop the necessary enabling regulations and working practices to ensure full implementation of

9 Delays in the procurement of key system licenses and changes in the locations of selected implementation sites meant theUNCTAD contract had to be extended to accommodate additional time and work.to The net impact of the depreciation was a drop in available funds from US$ 6 million at the time of appraisal to US$ 5.6 million in2013.

15

the new Customs Law, further support for the development of an in-house strategic planning and changemanagement capacity, and intensive support for the adoption of a suite of modem approaches to customsadministration in keeping with internationally agreed standards. A subcomponent will also finance the ongoingoperation of the high quality project management infrastructure established under the CTFP.

Subcomponent Bl. Modern customs practices and WTO agreement requirements (US$ 400,000 - AF toexisting subcomponent)10. Additional financing to this subcomponent will provide for resources to support the installation of a valuationsupport database in order to ensure that LCD is able to complete the phase out of reference pricing for imports (aWTO requirement). This first phase of this activity (assessment and design) has already been completed, but thesecond phase was deferred due to a shortage of funds under the original project. Secondly, this subcomponent willprovide for two additional Time Release Surveys to provide further data to measure progress against the resultsframework in efforts to reduce the time to clear imports. Thirdly, the subcomponent will also provide for thedevelopment of a risk management system, including related training and implementation support.

Subcomponent B2. Professional development (US$ 850,000 - AF to new subcomponent)11. Customs administration is a complex and highly technical area of public administration. Unlike manyprofessional disciplines there are few opportunities available to gain professional qualifications relevant tocustoms administration. As such, most customs administrations throughout the world invest heavily in internalstaff development and training. While LCD staff attend various courses offered by the Department and smallnumbers of staff can attend programs offered periodically by development partners there has not to date been acomprehensive human resource development strategy in place to address competency gaps that impact negativelyon organizational performance. The subcomponent will therefore finance the conduct of a detailed competencyassessment and the development of a comprehensive training curriculum and up to date training materials. Onceappropriate materials have been prepared and piloted, the sub-component will also support the training of trainersin core customs disciplines. Attention will also be given to supporting the set-up of the LCD Training Center andthe procurement of necessary equipment, including e-Leaming and Video Conferencing facilities. Regionaloffices will also be equipped with Video Conferencing facilities so that small training programs can be easilycarried out. In order to allow LCD staff to avail themselves of the suite of high quality e-leaming packagesavailable through the World Customs Organization (WCO), the sub-component will also finance translation of therelevant modules as well as other key reference documents into the Lao language.

Subcomponent B3. Legal framework implementation support (US$ 450,000 - AF to new subcomponent)12. The new Customs Law (drafted in part with support provided by the CTFP) entered into force in July 2012and is consistent with international standards including WTO and WCO requirements. While the law has beenpassed much work is still required to ensure its full and effective implementation. Work outstanding includes thedrafting of the required implementing decrees, regulations, administrative directions and the design of revisedprocedures in line with accepted international good practice. The subcomponent will therefore finance theappointment of a highly experienced International Advisor for a period of one year followed by a series of shortervisits in years two and three. The role of the Advisor will be to support preparation of the required enablingadministrative framework. The Advisor will be assisted by two local legal drafting specialists.

Subcomponent B4. Change management and strategic planning (US$ 250,000 - AF to new subcomponent)13. During the course of the CTFP the LCD has undertaken a significant number of major reforms that have had afar reaching impact on both staff and the business community. These include the implementation of automation,replacing many formally labor intensive manual tasks, and the introduction of modem concepts such as risk basedselective intervention. A range of new activities are currently being implemented and more are scheduled forimplementation in the coming years all of which will require careful planning and detailed monitoring. To supportthe overall reform and modernization program the subcomponent will finance the development of an in-housestrategic planning capacity and the establishment of a sound monitoring framework to guide strategic decisionmaking and to track reform progress through quantifiable targets and clear performance indicators across all key

16

functions of the LCD. Particular attention will be paid to developing a comprehensive change management andcommunications strategy directed at both staff and other stakeholders. Concrete milestones and performanceoutcomes will be developed and cascaded throughout the organization with specific responsibilities andaccountabilities established and monitored. All senior officials in Vientiane and regional offices will beaccountable for implementation and progress assessed on a quarterly basis. The subcomponent will finance anInternational Advisor with extensive experience in strategic and operational planning who will assist the LCD toestablish a sustainable capacity for strategic planning and change management and will assist in the developmentof reliable and cost efficient monitoring mechanisms. This work will be closely aligned with ongoing work toestablish robust and publically available client service standards. As part of the implementation of the changemanagement and communications strategy, LCD will establish regular channels for consultation with privatesector stakeholders (including the establishment of an "ASYCUDA user group" to provide for stakeholderfeedback on service standards and performance.

Subcomponent B5. Capacity building in core customs disciplines (US$ 850,000 - AF to new subcomponent)14. As part of the CTFP significant attention was paid to supporting the implementation of a series of modemapproaches to customs administration, including value added functions such as risk management, valuation andintelligence as well as the establishment of client service standards and a compliance improvement strategyincorporating an Authorized Economic Operator regime. These were scheduled to be undertaken during the lastyear of the project and procurement action for each was pending. Unfortunately, due to depreciation of SDRs andthe need to reallocate additional funding to extending UNCTAD's contract meant these activities were unable toproceed prior to the end date of the current project. All are considered to be essential elements of modem customsadministration and are embedded in relevant international agreements and regional commitments under ASEAN.Implementation of these measures will allow the LCD's to pursue its trade facilitation objectives while continuingto meet its revenue collection responsibilities. The subcomponent will therefore finance the provision of expertadvice and assistance in each of the above areas to ensure effective design and implementation in a form that isconsistent with the particular needs, capabilities and operating environment of Lao PDR. The subcomponent willalso address the pressing issue of unofficial facilitation payments by financing assistance to develop andimplement an integrity (anti-corruption) strategy and implementation plan based on the provisions of the WCO's(Revised) Arusha Declaration on Integrity in Customs that establishes a practical framework for addressing theissue.

Subcomponent B6. Project management (US$ 800,000 - AF to existing subcomponent)15. The additional financing operation will finance the maintenance of the satisfactory project managementarrangements currently in place for the CTFP and will provide a seamless migration from the CTFP to theadditional financing operation thus taking full advantage of existing project management experience and physicalresources. All key local personnel and existing project monitoring mechanisms will be retained including theexperienced procurement and financial management staff. The subcomponent will finance secretarial support,materials and travel expenses, translation and interpretation services, national procurement and FM advisors, aproject auditor, incremental operating costs and transport requirements.

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Annex 4: Revised Estimate of Project Costs

LAO PDR: CUSTOMS AND TRADE FACILITATION PROJECT - ADDITIONAL FINANCING

Costs (US$)Project component Additional Revised

Financing Total

COMPONENT A: AUTOMATION SUPPORT(including Implementation of ASYCUDA World) 3,983,294 2,650,000 6,633,294

Al ASYCUDA implementation, support and maintenance 3,635,294 1,050,000 4,635,294A2 LCD preparation for reception of new system 178,000 178,000A3 LCD information technology strengthening 170,000 170,000A4 Strategic ICT capability development 700,000 700,000A5 Disaster recovery and business continuity 900,000 900,000

COMPONENT B: ORGANIZATIONAL DEVELOPMENT(including Customs Modernization Support) 2,016,706 3,600,000 5,616,706

B1 Modern customs practices and WTO agreement requirements 590,000 400,000 990,000B2 Professional development 850,000 850,000B3 Modernized legal framework implementation support 450,000 450,000B4 Change management and strategic planning 250,000 250,000B5 Capacity building in core customs disciplines 850,000 850,000B6 Project management 1,426,706 800,000 2,226,706

Contingency 0 250,000 250,000

Total estimated costs 6,000,000 6,500,000 12,500,000

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Annex 5: Revised Implementation Arrangements and Support

LAO PDR: CUSTOMS AND TRADE FACILITATION PROJECT - ADDITIONAL FINANCING

Project institutional and implementation arrangements

1. The Steering Committee on Customs Reform and Modernization will continue to superviseimplementation of the project, chaired by the Vice-Minister of MoF. Membership consists of representatives fromrelevant departments of the Ministry of Finance, as well as from other lines ministries with a role at the border,and representatives of the private sector. The World Bank participates as an observer. The Steering Committeewill meet twice per year during which six-monthly project implementation reports and detailed work plans will bepresented for review and endorsement.

2. The CTFP Project Implementation Unit (PIU) within the Customs Department will continue to beresponsible for day-to-day implementation of the project, including work planning, progress and results reporting,procurement and financial management.

Financial management

3. A financial management capacity assessment of the FM arrangements for the Customs and Trade FacilitationProject was undertaken in February 2013 to determine whether the implementing agency (the CustomsDepartment of the Ministry of Finance) has adequate financial management systems and related capacity in placeto meet the minimum requirements of the World Bank's Operational Policy / Bank Procedure 10.02 on FinancialManagement. The assessment was based on the Concept Memorandum, the Project Paper and discussions withthe finance staff of the Customs Department. The LCD will continue to be the implementing agency for CTFPand the Project Implementation Unit that has already been set up within the LCD will continue to assume thefinancial management functions of the project. Based on the FM review, the current financial managementarrangements are deemed acceptable. The current project accounting system is capable of producing timely andaccurate financial statements, accounting policies and procedures are in place, audit arrangements are acceptableto the Bank and an acceptable financial management manual is also available to guide the project staff in theirday-to-day work.

4. The overall financial management risk is Moderate.

5. Organization and staffing. The current Finance Unit at LCD comprises of two experienced staff members, anational financial management consultant and a finance assistant. Both will continue to work during the extendedimplementation period of the project. The LCD is responsible for all project implementation, with all taskspreviously undertaken by the Public Financial Management Strengthening Unit, now undertaken within the LCD.The PIU comprises of nine staff members, consisting of a Project Director, an Assistant to the Project Director, aFinancial Management Specialist, a Procurement Specialist, a Project Analyst and administrative staff. The rolesand responsibilities for the LCD accounting staff are clearly documented in the project Financial ManagementManual (FMM).

6. Budgeting and planning. The LCD is required to prepare an annual work plan and budget each year within theframework agreed under the Financing Agreement. The annual work plan and budget are approved by the ProjectDirector and Project Steering Committee. Then the annual work plan and budget is submitted to the Bank forapproval/endorsement. The annual work plan and budget will be reviewed and revised bi-annually and wheneverthere are major changes or variations in the annual work plans or overall project plans. The World Bank's noobjection is required for variations or revisions to the annual work plan or budget. The annual budget will alsoneed to be broken down into quarterly budgets and variance analysis performed and reported in the IFR. The

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budgeting and planning procedure in the Financial Management Manual will need to be revised according to theabove.

7. The project will continue to apply the Ministry of Finance Ministerial Decision on Public AdministrativeBudget Expenditure Norms in budgeting for in-country and out-of-country training/workshops and study visits.Other related notifications by the World Bank or by Ministry of Finance on the use of official developmentassistance are also to be followed.

8. Fund flows. Project funds will be drawn from the IDA Grant and deposited in a Designated Account (DA)managed by the National Treasury. To facilitate implementation, LCD has opened an operating account in USdollars in a commercial bank (BCEL) with a ceiling amount of US$ 20,000. The project will continue to use theoperating account under the Additional Financing. The project bank account will be replenished monthly from theDA. Payment in cash will be limited to petty cash transactions only. Direct payment to suppliers and consultantswill be encouraged. Detailed funds flow arrangements and withdrawals procedures for CTFP are documented inthe FMM. Bank reconciliation for the DA at the Bank of Lao PDR and the Operating Account at a localcommercial Bank are performed on a monthly basis. A diagram of the flow of funds is shown below.

Grant Account(World Bank)II

Pooled Designated AccountSuppliers of goods and (National Treasury, MoF)

services IDA H4030 - US$ 100,000IDA AF -US$ 150,000

Operating AccountUS$ 20,000

Petty cashUS$ 500

9. Accounting policies and procedures. The procedures described in the FMM are used as guidelines for projectstaff working on the project. The FMM describes the flow of funds, accounting policy and procedures, budgeting,recording, financial reporting, auditing and disbursement arrangements. The project is accounted for on amodified cash basis. All accounting and supporting documentation are retained by the PIU in a system that allowsauthorized users easy access.

10. The current accounting software (ACCPAC version 5.5A) was determined by the PIU as adequate for use.Hence, the project will continue using ACCPAC to record and report on receipts and expenditure.

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11. Financial Management Manual. A few areas of the FMM need to be revised. The mission team discussed theproposed revisions with LCD during the appraisal. The areas requiring revision include: 1) Audit arrangements toinclude the mechanism for disclosure of audit reports in accordance with the new World Bank policy on Access toInformation effective from July 1, 2010; 2) the new IFR format requirements; 3) funds flow to include the pooledDA account; 4) accounting policy changes from a cash basis to a modified cash basis; 5) fixed asset managementneeds to include the procedures for year-end verification of assets to strengthen the control over fixed assets, and;6) budgeting section needs to include the breakdown by quarter of the annual work plan and budgets. The projectFinancial Management Manual was subsequently revised accordingly by the project and is considered to beacceptable.

12. Internal controls (segregation of duties, payments and safeguarding of assets). PIU staff has clearly definedjob descriptions and responsibilities. No single person can initiate, verify, and authorize individual paymenttransactions. Payments in cash will be minimized. A petty cash float of US$ 500 has been set up to facilitate thepayment of small transactions

13. A Fixed Asset Register is used to record the project fixed assets and is regularly updated by the PIU of theLao Customs Department. The fixed asset register is then reconciled with the accounting record periodically. Aphysical count of all fixed assets is also performed once a year by the project to verify the existence and check thestatus of the fixed assets. Internal controls on payments authorization, cheque signing, safeguarding and use ofassets, reconciliations and segregation of duties have been outlined in the current FMM and will continue to berelevant for under CTFP (AF).

14. Financial reporting. The project's financial report/statements will be prepared by the PIU within LCD.Quarterly Unaudited Interim Financial Reports (IFRs) shall be prepared on a modified cash basis and submitted tothe World Bank no later than 45 days after each quarter end. The current format of the IFR will need minoramendments to show the variances between actual and budgeted figures by quarter, year to date and cumulative todate. Variance analysis should be included in the IFR each quarter. The new subcomponents under the AdditionalFinancing need to be included in the IFR, both sources of funds (original and additional financing) need to beincluded in the Sources and Uses of Funds Statement, and a separate Uses of Funds Statements that presentexpenditure by sources of funds and either expenditure category or components needs to be prepared. The formatand content of the IFR have been agreed with the project to incorporate the new requirements. The period for thepurposes of financial reporting shall follow the government's fiscal year (i.e. from Oct 1 to Sept 30). Any otherfinancial reporting requirements by project management and/or the Ministry of Finance shall also be included inthe Financial Management Manual.

15. Audit arrangements. The project will be subject to annual audit by an independent qualified auditor withterms of references acceptable to the World Bank. The LCD currently has an audit contract withPricewaterhouseCoopers as part of the audit bundle arrangement by the Ministry of Finance. The contract is forthe period of three years to FY13. The LCD will need to appoint an auditor with Terms of Reference acceptable tothe World Bank for FY14 and beyond. An amendment to the current audit may also be required to cover theexpenditure paid from additional financing in FY13. The audit report and management letter shall be submitted tothe World Bank within 6 months of the end of each fiscal year. The audited financial statements and the auditreport shall be made available to the public in accordance with the World Bank's Policy on Access toInformation. The mechanism used by the project to disclose the audited financial statements is through theCustoms Department website (http://www,customs.gov.1a). There are no outstanding audit reports for the project.

16. Implementation support and supervision Plan. FM implementation support and supervision will be carried outonce a year as the FM risk is assessed as moderate after mitigation. The supervision is intended to be extensiveand integrated with the task team and procurement team where possible. The supervision will review thecontinued adequacy of the financial management arrangements, assess compliance with the financial covenants,and follow up on audit and mission findings. The supervision will also include reviews of a random sample of

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transactions. It will also include an integrated fiduciary review with procurement on goods and services contractsand field visits where necessary.

Disbursements

17. Disbursement arrangements. CTFP is currently financed by an original IDA grant of SDR 3.7 million.The proposed additional financing is for SDR 4.4 million (US$ 6.5 million equivalent). In order to complete thescope of activities under the Additional Financing, the project closing date will be extended for three and a halfyears. The closing date for the AF will be June 30, 2017. The closing date for the original grant will not beextended beyond the existing date of December 31, 2013 as the grant is expected to be fully disbursed by thistime. The LCD will utilize the current DA to receive funds from the World Bank (i.e. pooled DA). The ceilingapproximates a quarter's expenditure less expected direct payments. The ceiling for additional financing will beUS$ 150,000. The ceiling may be adjusted from time to time with reasonable justification. The main disbursementmethods are advance and direct payment. Reimbursements and special commitments will also be made available.A disbursement grace period will be needed and shall be equivalent to four months after the project closing date.Supporting documentation required for documenting expenditures paid from the DA are Statements ofExpenditure and Summary Sheet with Records. The minimum application size for Direct Payment,Reimbursement and Special Commitment is US$ 30,000. Reporting of eligible expenditure paid out of the DAshall be made monthly.

18. Disbursement shall be made 100 percent (inclusive of taxes) against the following expenditure category":

(1) Goods, non-consulting services, consultants' services, training and workshops and incrementaloperating costs for the project.

19. Government counter-part funds will finance refurbishment of existing office space for the disaster recoverycenter (and where required at border checkpoints) and civil service salaries.

20. All documentation for expenditure submitted for disbursements will be retained at the PIU within LCD and bemade available to the external auditors for their annual audits, and to the World Bank and its representatives ifrequested.

21. Incremental operating costs. The definition of IOC means reasonable expenditures directly related to theproject, incurred by the recipient (which expenditures would not have been incurred absent the project), includingconsumable materials and supplies (including office supplies), communications, translation services, mass mediaand printing services, vehicle rental, operation and maintenance, charges for the opening and operation of bankaccounts required for the project, postage and handling, cost of support staff (drivers and cleaners) and travel,lodging and per diems, but excluding salaries of the recipient's civil service.

Procurement

22. Procurement for the proposed project will be carried out in accordance with the World Bank's Procurementand Consultant Guidelines (January 2011), and the provisions stipulated in the Financing Agreement and inagreed Procurement Plans. The CTFP Project Implementation Unit, within the Customs Department, has gainedproject implementation experience during the implementation of the original project. The unit is familiar with theBank's Procurement and Consultants Guidelines. For each contract to be financed by the project, the differentprocurement methods or consultant selection methods, estimated costs, prior review requirements, and time framehave been agreed between the recipient and the Bank's task team and articulated in the Procurement Plan. The

it A provision of up to US$ 150,000 has been made for retroactive financing towards the cost of eligible expenditures from May 1,2013 to the date of signing of the Financing Agreement.

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Procurement Plan will be updated at least annually or as required to reflect the actual project implementationneeds and improvements in institutional capacity. As this is additional financing to the existing Customs andTrade Facilitation Project, the LCD will keep the same institutional arrangements as currently in place.

23. From the experience of the current phase of CTFP, it is expected that the following key issues and risksconcerning procurement could arise when the project is implemented, and measures necessary for mitigation havebeen agreed with LCD, as follows.

(a) Delays in implementation progress and concerns on sustainability and capacity building in LCD.Experience under CTFP shows that delays may happen because the procurement activities have beenhandled by one National Procurement Consultant only. Although procurement capacity building is one ofthe main tasks of the National Procurement Consultant, no government procurement staff have beenassigned to be trained and gain the knowledge from the National Procurement Consultant. In the proposedCTFP-AF, the Customs Department will assign at least one government official to work closely with theNational Procurement Consultant.

(b) Heavy workload of procurement committee and technical team. Experience under CTFP shows thatdelays may happen due to a delayed decision from the procurement committee or delayed inputs from thetechnical team. LCD should designate adequate staff with sufficient expertise and plan the procurementactivities in a way to balance the workload of the committee and technical team. Also before the firstCTFP (AF) bidding process is launched, training should be provided by LCD's national procurementconsultant, supported by the Bank, to the committee members to strengthen the capacity of the committee.

24. Based on the above analysis, the initial risk assessment for project procurement is Moderate, and with theagreed mitigations, the procurement risk is also rated as Moderate.

25. Applicable guidelines and thresholds. Procurement for the proposed project will be carried out in accordancewith the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011, withthe "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011, andwith the provisions stipulated in the Financing Agreement and in agreed Procurement Plans.

26. For each contract to be financed by the project, the different procurement methods or consultant selectionmethods, estimated costs, prior review requirements, and time frame will be agreed between the recipient and theBank's Task Team in the Procurement Plan. The National Competitive Bidding method will be conducted inaccordance with paragraph 3.3 and 3.4 of the Bank's Procurement Guidelines and the procedures - includingstandard bidding documents acceptable to the Bank, set forth in Decree 03/PM dated January 9, 2004, and in theImplementing Rules and Regulations on Decree of Government Procurement of Goods, Works, Maintenance andServices No. 063/MOF, dated March 12, 2004 and No. 0861/MoF dated May 5, 2009 (Amended Version) andincluding the national standard bidding documents with the Bank's prior concurrence - will be followed subject tothe improvements listed in the National Competitive Bidding Annex to the Financing Agreement.

27. Procurement Plan. A revised Procurement Plan for CTFP (AF) was discussed and agreed with the LCDduring appraisal and is available in the project's files. Once the project is approved, it will be made available tothe public on the CTFP and World Bank external websites. The Procurement Plan will be updated in agreementwith the World Bank at least annually or as required to reflect the actual project implementation needs andimprovements in institutional capacity.

28. Implementation support and supervision plan. In addition to the above-mentioned prior review supervision tobe carried out from World Bank Offices, based on the capacity of the project implementing agencies it isrecommended that integrated technical and fiduciary implementation support missions, including post review,continue to take place on a twice yearly basis.

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