Outline of a Revenue Sharing System and

Revenue Sharing Formula

Jean-Marc Lepain Public Finance Specialist

Intergovernmental Fiscal Advisor Ministry of Finance, Vientiane, Lao PDR

jlepain@yahoo.fr

What is a Revenue Sharing System

• A Revenue Sharing System is the process whereby governmental incomes are pooled and subsequently apportioned between the national and sub-national (provinces and municipalities) level of Government.

• The Revised Budget Law identifies four streams of revenues to be shared: Turnover or Value-added Tax, Excise Tax, Profit Tax and Minimum Tax, Dividends from SOEs.

New Structure of Provincial Budgets

• Taxes and revenues assigned to the provinces

• Grants from shared revenues

• Grants from the Central Government Budget

Objectives of Revenue Sharing

• Correcting horizontal imbalance that measures disparities in expenditure assignments and fund allocations by the central Government across provinces;

• Accelerating economic growth in the poorest provinces by providing additional resources;

• Providing incentive for good public finance management by linking revenue transfer to efficient tax collection.

Objectives of the New Formula

• The formula should represent a fair and equitable allocation of resources between all Government’s entities based on quantitative and objective criteria

• The Formula should trend to correct gradually disparities between provinces over a several year period of time.

• The formula should trend to correct development disparities between provinces.

• The Formula should not increase significantly the budget deficit and not reduce transfers made to any province under the previous budget law.

• The System should be both stable and flexible, excluding large year to year variations in revenue allocation, but flexible enough to allow from time to

time small revisions without change in the formula structure.

Revenue Sharing Formula Structure

TSR= Total Shared Revenue

TPA = Total Provincial Appropriation

PA = Provincial Appropriation

3 budget indicators (x, y, z) representing 3 streams of revenue (transfers based on population, land area and poverty level)

TPA = 0.5 x TSR

Provincial Allocation = (Population Based Transfer) + (Land Area Based Transfer) + (Poverty Based Transfer)

PA = x(TPA) + y(TPA) +z(TPA)

Budget Indicators

1. The Population indicator is based on the province population compared to national population

2. The Land Area indicator is based on the province land area compared to the national territory

3. The Poverty Transfer Ratio (p.t.r) is based on the poverty index

PA = pop.ind.(PTA) + l.a. ind. (PTA) + p.t.r.(PTA)

Indicators Weight

• Population based transfers = 45%

• Land Area based transfers= 10%

• Poverty based transfers = 45%

PA = (Pop. Ind. x 45% TPA) + (LA ind. x 10% TPA) + (p.tr. x 45% TPA)

Indicators

1) Land Area:

(TSR / Total Land area)

2) Population

(TSR / Total Population)

Yearly increase : 2.24%

3) Poverty

See poverty Index

Human Poverty Index

The HPI is based on three components which are:

1) Longevity - measured by the proportion of the population not expected to survive to the age of 40 years.

2) Knowledge - measured by the adult illiteracy rate.

3) Standard of living - a composite value measured by the proportion of the population without access to clean water, health services, and the proportion of children under the age of 5 years who are underweight.

Poverty Indicator Leverage

Poverty Poverty Total Transfer Poverty Trans./ Total Trans./

Indicator Transfer Transfer Differencial Dom. Exp. Dom. Exp.

0,2 5 447,72 23 853,43 5,56% 24,33%

0,5 13 619,29 32 025,00 34,26% 13,89% 32,67%

9,66 26 312,47 44 719,69 87,48% 26,84% 45,61%

Poverty Poverty Total Transfer Poverty Trans./ Total Trans./

Indicator Transfer Transfer Differencial Dom. Exp. Dom. Exp.

0,2 5 447,72 22 942,81 4,24% 17,85%

0,5 13 619,29 31 114,38 35,62% 10,60% 24,21%

0,08 21 790,86 39 079,17 70,33% 16,95% 30,40%

SARAVAN

XIENGKHUANG

POVERTY INDICATOR LEVERAGE

Average Structure of Provincial Budgets

Transfers from Shared Revenues

25%

Conditional and Unconditional Grants

55%

Province Own Revenue 20%

Operating Expenditures

73%

Domestic Investments

23%

Issues to Be Taken into Consideration

• Province Own Revenues vary from province to province from 3.3% (Houphan) to 63% (Savannakhet) of domestic expenditures.

• 11 provinces are below the average of 20% and will need to rely heavily on grant transfers

• International investment is an important component of provincial budgets but is unevenly spread across the country

• Horizontal imbalance can only be corrected over a long period of time.

• In the medium term, internal migrations should be taken into consideration

• Data on province economy must be collected systematically and their quality improved to allow MoF to prepare realistic projections of provincial revenues and expenditures

The Way Forward

• Implementing Shared Revenue system in budget plan 2008-2009

• Implementing grant transfer policy in budget plan 2009-2010

• Implementing macro budget norms in budget plan 2009-2010

• Implementing sector budget norms in budget plan 2010-2011

THANK YOU