Document of The World Bank FOR OFFICIAL USE ONLY Report No. 36553- KH INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED GRANT IN THE AMOUNT OF SDR9.8 MILLION US$15 MILLION EQUIVALENT TO CAMBODIA FOR A POVERTY REDUCTION AND GROWTH OPERATION June 18,2007 Poverty Reduction and Economic Management Unit Southeast Asia Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 36553- KH
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A PROPOSED GRANT
IN THE AMOUNT OF SDR9.8 MILLION US$15 MILLION EQUIVALENT
TO
CAMBODIA
FOR A
POVERTY REDUCTION AND GROWTH OPERATION
June 18,2007
Poverty Reduction and Economic Management Unit Southeast Asia Unit East Asia and Pacific Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
GOVERNMENT FISCAL YEAR January 1 - December 3 1
AAA ADB ASYCUDA CAP CAR CAS CDC CDHS CED CEFP CFAA CG CIB CLP CMDG CNPA COM CPI CPIA CSES c SP D&D DFID EITI ELC EU FDI FIAS FMIS FSAL GDCC GDP GNP HIPC
CURRENCY EQUIVALENTS (Exchange Rate Effective as o f M a y 11,2007)
Currency Unit = Cambodian R ie l (CR) CR 3,977 - U S $ 1.00 -
Weights and Measures Metr ic System
ABBREVIATION AND ACRONYMS
Analytical and Advisory Assistance Asian Development Bank Automated System for Customs Data Consolidated Action Plan Council for Administrative Reform Country Assistance Strategy Council for the Development o f Cambodia Cambodia Demographic Health Survey Customs and Excise Department Committee for Economic and Financial Policies Country Financial Accountability Assessment Consultative Group Cambodia Investment Board Council for Land Policy Cambodia Millennium Development Goal Cambodia National Petroleum Authority Council o f Ministers Corruption Perceptions Index Country Policy and Institutional Assessment Cambodian Socio-Economic Survey Country Strategy Paper Decentralization and Deconcentration Department for International Department Extractives Industries Transparency Initiative Economic Land Concessions European Union Foreign Direct Investment Foreign Investment Advisory Service Financial Management Information System Financial Sector Adjustment Loan Government Donor Coordination Committee Gross Domestic Product Gross National Product Heavily Indebted Poor Countries
FOR OFFICIAL USE ONLY
IBRD I D A IF IFAF'ER IFC I M C IMF I N T IP A IRITWG
JBIC JMI J S A N LASED LDP LICUS LJR LMAP LNRM M&E MAFF MBPI MDGs M D R I MEF MIME MLMUPC M M R MONASRI
MOC MOE MOEYS M O H MOJ MOP M O U MOWA MOWRAM MPTC MPWT MTEF N A A NARLD
International Bank for Reconstruction and Development International Development Association Integrated Framework Integrated Fiduciary Assessment and Public Expenditure Review International Finance Corporation International Maritime Committee International Monetary Fund Department of Institutional Integrity Independent Procurement Agent Infrastructure and Regional Integration Technical Working Group Japan Bank for International Cooperation Joint Monitoring Indicator Joint Staff Advisory Note Land Allocation for Social and Economic Development Letter of Development Policy Low Income Country Under Stress Legal and Judicial Reform Land Mapping and Administration Project Land and Natural Resources Management Monitoring and Evaluation Ministry o f Agriculture, Forestry and Fisheries Merit-Based Pay Initiative Millennium Development Goals Multilateral Debt Relief Initiative Ministry o f Economy and Finance Ministry of Industry Mines and Energy Ministry o f Land Management, Urban Planning and Construction Maternal Morality Rate Ministry o f National Assembly and Senate Relations and Inspection Ministry o f Commerce Ministry o f Environment Ministry o f Education, Youth and Sport Ministry o f Health Ministry o f Justice Ministry o f Planning Memorandum of Understanding Ministry o f Women Affairs Ministry o f Water Resources and Meteorology Ministry o f Post and Telecommunications Ministry o f Public Works and Transport Medium Term Expenditure Framework National Audit Authority National Authority for the Resolution of Land Disputes
This document has a restricted distribution and may be used by recipients only in the performance of their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.
N B C NCCS N C D M NIP NRM NSDP NT oss owos PAP PER PFM PFMRP PHRD P M G PMO PPI PRGF PRGO PSD PSIA RGC ROSC RS SAC SAD SDR SEZ SME SOE TB T D TFCP T I T IFA T W G UNDP W T O
National Bank of Cambodia National Cadastral Committee Secretariat National Committee for Disaster Management National Indicator Program Natural Resources Management National Strategic Development Plan National Treasury One Stop Service One Window Offices Priority Action Program Public Expenditure Review Public Financial Management Public Financial Management Reform Program Japan Policy and Human Resources Development Trust Fund Priority Mission Group Prime Ministerial Order Private Participation in Infrastructure Poverty Reduction and Growth Facility Poverty Reduction and Growth Operation Private Sector Development Poverty and Social Impact Analysis Royal Government o f Cambodia Report on the Observance o f Standards and Codes Rectangular Strategy Structural Adjustment Credit Single Administration Document Special Drawing Rights Special Economic Zone Small and Medium Enterprise Statement o f Expenditures Tuberculosis Tax Department Trade Facilitation and Competitiveness Project Transparency International Trade and Investment Framework Agreement Technical Working Group United Nations Development Program World Trade Organization
V ice President: James W. Adams Country Director: I an C. Porter
Act ing Sector Director: Deepak Bhattasali Country Manager: Nisha Agrawal
Sector Manager: Indermit Gill Lead Economist: K a z i Mahbub-A1 M a t i n
Task Team Leader: Robert R. Taliercio
CAMBODIA
CAMBODIA POVERTY REDUCTION AND GROWTH OPERATION
TABLE OF CONTENTS
GRANT AND PROGRAM SUMMARY .......................................................................................... 1 I . INTRODUCTION ................................................................................................................ 2 I1 . COUNTRY CONTEXT ....................................................................................................... 3
GOVERNANCE: REFORM AND CHALLENGES .......................................................... 3 RECENT ECONOMIC DEVELOPMENTS AND MACROECONOMIC OUTLOOK ................................................................................................................................ 5
I11 . THE GOVERNMENT’S PROGRAM: THE NATIONAL STRATEGIC DEVELOPMENT PLAN AND THE JOINT MONITORING INDICATORS .................................................. 13
I V . ALIGNMENT OF DEVELOPMENT PARTNER AND BANK SUPPORT ............................. 15 V . THE PROPOSED CAMBODIA POVERTY REDUCTION AND GROWTH OPERATION .... 18
OPERATION DESCRIPTION ............................................................................................... 18 V I . OPERATION IMPLEMENTATION ................................................................................... 49
FIDUCIARY ASPECTS ......................................................................................................... 49 IMPLEMENTATION, MONITORING AND EVALUATION ........................................ 50 R ISKS AND RISK MITIGATION ........................................................................................ 51
ANNEXES
ANNEX 1 : LETTER OF DEVELOPMENT POLICY ..................................................................... 54 ANNEX 2 . GOVERNMENT’S PRIORITY REFORM MEASURES .............................................. 62 ANNEX 3 : OPERATION POLICY MATRIX .................................................................................. 75 ANNEX 4: FUND RELATIONS NOTE ........................................................................................... 83 ANNEX 5: CAMBODIA AT A GLANCE ....................................................................................... 87
MAP # IBRD 33381
The operation was prepared by an IDA team consisting o f Ahsan Ali. Keith Bell. Mudita Chamroeun. Huot Chea. Tim Conway. Gloria Elmore. M i a Hyun. Peter Jipp. Sophorn Kith. Andrew Laing. Roch Levesque. Kazi Matin. Peter Murphy. Steven Schonberger. Eric Sidgwick. Robert Taliercio. Jennifer Thomson. and Albert Zeufack .
GRANT AND PROGRAM SUMMARY
CAMBODIA
CAMBODIA POVERTY REDUCTION AND GROWTH OPERATION
Borrower
Implementing Agency
Amount
Terms
Tranching
Description
Benefits
Risks
Operation ID Number
Royal Government o f Cambodia
Ministry o f Economy and Finance
US$ 15 million
Grant
Single tranche
The purpose o f the Poverty Reduction and Growth Operation (PRGO) program (2007-2009) i s to provide support for the implementation o f the “good governance” reform program laid out in the Royal Government o f Cambodia’s (RGC) National Strategic Development Plan (NSDP), 2006-20 10. The Country Assistance Strategy for Cambodia, endorsed by the Board in May 2005, follows Government’s strategy by recognizing governance issues as the primary obstacle to growth, poverty reduction, and aid effectiveness. The PRGO program (2007-2009) has three expected benefits: (1) higher rates o f growth and poverty reduction based on an improving investment climate, higher agricultural productivity, and more effective public service delivery; (2) a reform dialogue with Government more focused on results; and, (3) improved harmonization and alignment o f development partner (DP) policy positions and financial support. W h i l e there i s strong ownership o f the reform program at the MEF, there appears to be less commitment in some other agencies. Elections in 2008 raise the risk o f a reform slowdown. Implementation o f the reform program could also be delayed because o f weak capacity o f public institutions, especially at the sub-national level, which could impede the implementation o f proposed reforms. Corruption in Cambodia, also a critical constraint, has exerted a negative impact on the implementation o f the reform program. In a weak governance environment there i s also a reputational risk o f providing budnet sumort. PO7 1 103
1
INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A
PROPOSED POVERTY REDUCTION AND GROWTH OPERATION TO CAMBODIA
I. INTRODUCTION
1. The principal purpose of the proposed Poverty Reduction and Growth Operation (PRGO) program (2007-2009) i s to provide support for the implementation of the “good governance” reform program laid out in the Royal Government of Cambodia’s (RGC) National Strategic Development Plan (NSDP), 2006-2010. The NSDP i s intended to operationalize the “Rectangular Strategy for Growth, Equity and Efficiency,” which was adopted by the new Government in July 2004. The Rectangular Strategy placed “Good Governance” squarely at the heart o f the reform agenda. The CAS for Cambodia, endorsed by the Board in May 2005, follows the Strategy b y recognizing governance issues as the primary obstacle to growth, poverty reduction, and aid effectiveness in Cambodia.
2.
a.
b.
C.
The PRGO program (2007-2009) has three objectives:
T o support a program of ‘second generation’ growth and poverty reduction based on an improving investment climate, higher agricultural productivity, and more effective public service delivery. Since the early 1990s Cambodia has enjoyed over a decade o f high average economic growth-8.4 percent from 1994-2006-which drove significant poverty reduction: 35 percent o f Cambodians l ived below the poverty line in 2004, down from an estimated 47 percent a decade earlier. The primary objective o f the PRGO i s to support the next phase o f policy and institutional reform required to maintain growth and accelerate poverty reduction b y facilitating trade and diversifying exports, guaranteeing land tenure and increasing access to land for the rural poor, and making the budget a credible management tool while reducing fiduciary risk to public funds.
T o provide support for the reform agenda by focusing the policy dialogue on results and undergirding momentum where political opportunity exists. The PRGO program provides an opening to deepen and accelerate the reform agenda, especially as i t pertains to challenging issues o f governance in Cambodia, and offers some insurance against back- tracking on governance-related reform. The PRGO program i s also necessary to support successful project implementation in key areas. The RGC looks to the PRGOs to showcase i t s reform program by demonstrating i t s resolve to improve outcomes for the average Cambodian. The PRGO also ties aid more closely to Government’s performance on the reform agenda, which i s increasingly important to Cambodia’s development partners.
To harmonize and align development partner (DP) policy positions and financial support through the CG process. The prior actions in PRGO-1 are drawn from the Joint Monitoring Indicators (JMIs) agreed by Government and i t s partners at the Consultative Group (CG) Meeting in March 2006. Progress on meeting the operation’s prior actions i s discussed in sectoral Technical Working Groups (TWGs), where triggers for future operations are also jointly agreed. Moreover, the PRGO reinforces the use o f agreed
2
monitoring frameworks at the sectoral level, reducing transaction costs for Government by engaging partners around the same performance indicators.
11. COUNTRY CONTEXT
3. Cambodia i s a post-conflict country, and though the Paris Peace Accords formally established a truce in 1991, politico-military violence continued until 1997. Many important institutions o f governance and public sector management, destroyed during the Khmer Rouge period, are only just starting to be rebuilt according to democratic and meritocratic norms. The conflict has contributed to weak governance, high levels o f corruption, and a fragile political discourse. Poor governance i s thus the primary constraint on development in general and on the World Bank Group’s program in particular. This section reviews those governance challenges in the context o f Cambodia’s economic growth and poverty reduction record, and concludes with the rationale for the proposed operation.
GOVERNANCE: REFORM AND CHALLENGES
4. Cambodia’s devastating conflict-many important institutions o f governance were destroyed during the Khmer Rouge period and are only just starting to be rebuilt-has resulted in weak governance and high levels o f corruption. The Transparency International (TI) Corruption Perceptions Index (CPI) shows that the level o f corruption in Cambodia i s perceived to be high, though comparable to those o f other L o w Income Countries under Stress (LICUS) *
5. Improvements in policy, moreover, continue to be undermined by serious institutional weaknesses, resulting in difficulties translating good intentions into good outcomes for Cambodian citizens. Though public sector performance has slowly improved in some sectors, serious problems remain (World BanWAsian Development Bank, 2003). Overall, however, the RGC continues to be dogged b y l ow levels o f capacity, resources, and accountability. The bureaucracy remains largely inefficient and ineffective in meeting the needs o f i t s citizens, and particularly that third o f i t s citizens who l ive below the poverty line (World BanWAsian Development Bank, 2003). In order to implement i t s development agenda, the RGC recognizes that i t w i l l have to make much more progress.
6. Institutional weaknesses, including the lack o f effective sanctions for malfeasance, have also undermined the delivery o f project-based ODA. The World Bank Department o f Institutional Integrity’s (INT) investigations o f 63 contracts financed by seven projects resulted in declarations o f misprocurement in six projects on 42 contracts (and a declaration o f non-eligible expenditures on one contract) valued at US$ 12.1 mil l ion. Disbursement on three projects was partially suspended pending the execution o f actions plans, which were communicated to the RGC in July 2006. Progress has been made on the action plans and, as a result, a l l the suspensions were l i f ted in February 2007. In addition, the RGC and the Bank have agreed to hire an Independent Procurement Agent (IPA) to carry out the procurement activities for the entire portfolio, and i t i s expected that the IPA w i l l be operational by August 2007.
7. Recent signs, however, are encouraging, as the RGC has begun to implement reform programs-in private sector development, public financial management, and
natural resources management-focusing on improving the capacity of the public sector to deliver growth and poverty reduction:
Private sector development-Significant progress has been made in improving the regulatory framework for sustained private sector development in Cambodia despite the slow pace and some reversals in trade facilitation reform. The RGC has taken proactive steps to streamline import-export procedures, which has led to improvements noted by the Doing Business 2007 report. Whi le Cambodia ranked 143 out o f 175, the study noted good progress in the areas o f dealing with licenses (specifically on mandating a statutory time limit for issuing a license) and trading across borders. Procedures relative to issuance o f certificates o f origin and certificates of processing have been simplified. In addition, MIME, MOC, CED, and CamControl have agreed to joint inspection o f factories that results in the issuance o f certificates without further inspections required. The findings o f the Performance Measurement System (PMS), introduced as part o f the Trade Facilitation and Competitiveness Project (TFCP), suggest that these efforts have led to reductions in businesses’ processing times and costs since 2003. Looking forward, full deployment of the customs automation program (ASYCUDA), implementation o f the Single Administrative Document (SAD), the creation o f One Stop Services (OSS) in Special Economic Zones (SEZs), and the Trade Information Gateway (TIG) wi l l facilitate trade, improve transparency o f trade-related procedures, and lead to a further reduction in transaction costs for the private sector over the period o f the proposed operation.
Public financial management-The Ministry o f Economy and Finance (MEF), together wi th i t s development partners, has established a best practice performance management framework for the Public Financial Management Reform Program, which i s yielding major achievements in i t s first two years o f implementation. Major reforms measures commenced implementation in January 2007, including: a significant streamlining o f budget execution procedures, the introduction o f program budgeting, and adoption of a new chart o f accounts. These fol low on significant reforms in 2005: the amount o f customs revenue collected through the banking system increased (from zero in 2004 to nearly 1/3 in 2006); more than % o f all Tax Department revenue i s now collected through the banking system; about % o f Treasury payments to suppliers in Phnom Penh and Sihanoukville are now made by check instead o f cash; the stock o f o ld expenditure arrears has been reduced by over 40 percent; the procurement process has been streamlined, tightened, and made more competitive wi th the passing o f a new sub-decree in late 2006; the Government has set up internal audit departments in a dozen l ine ministries, and, for the first time in Cambodia, a pi lot program has been launched to pay civ i l servants through commercial banks instead o f by cash.
Natural resource management-Some progress i s being made in this area but substantial challenges remain. The Ministry o f Land Management, Urban Planning and Construction (MLMUPC), working closely wi th i t s development partners, has considerably improved the pace o f systematic land titling such that 25,000 title certificates per month are now being distributed, primarily in rural areas. The Prime Minister has announced the RGC’s objective to increase the rate o f systematic titling to 50,000 per month. In December 2005 the RGC adopted a Sub-decree on Economic Land Concessions (ELCs), which includes provisions for resolution o f issues o f prior
4
occupancyhe o f lands with local communities and requires formal classification and registration o f land to exclude forests and protected areas. Whi le the overall size o f individual concessions has been kept below the 10,000 ha. limit established by the new sub-decree, the number and total area o f ELCs increased significantly in 2006. Though public reporting on the status o f ELCs i s now established, approval for areas up to 1,000 ha. has been delegated to the provincial level, and areas subject to provincial approval have not yet been included. Legal requirements for prior state land registration and environmental and social assessments have yet to be completed and provisions for transparent bidding on E L C contracts are being circumvented through a loop hole in the sub-decree that allows for no-bid approvals in “exceptional” cases. O f great concern i s the fact that land grabbing continues unabated, while there has been no progress on the implementation o f Article 18 o f the Land Law 2001, which deals with recovery o f illegally grabbed state land.
8. As a result of progress in these areas and others, for the first time in many years, Cambodia’s Country Policy and Institutional Assessment (CPIA) ratings showed consistent improvement in 2005 and 2006, with the overall rating increasing from 3.0 to 3.2. In comparison to 2004, the 2006 assessment found that economic management remained strong (at 3.5); the structural policy cluster rating increased from 2.8 to 3.2; the rating for policies for social inclusion and equity increased from 3.0 to 3.3; and public sector management and institutions cluster rating increased from 2.5 to 2.7. Other improvements that did not lead to increases in the ratings were also noted across the board. Cambodia’s CPIA rating, at 3.2, i s now just under the IDA average o f 3.3, which i s a major achievement given Cambodia’s recent history.
RECENT ECONOMIC DEVELOPMENTS AND MACROECONOMIC OUTLOOK 9. Cambodia’s real GDP grew by about 10.8 percent in 2006, following an unprecedented 13.5 percent growth rate in 2005, marking the third consecutive year of double digit growth. The stellar performance was driven by solid garment exports, strong tourism receipts, significant growth in FDI, the continuing construction boom, and robust crop growth in agriculture. Agriculture continued to be a crucial sector for the economy, accounting for some 60 percent o f total employment and growing by 5.5 percent in 2006.
10. A sound macroeconomic framework has helped underpin success in recent years, with Cambodia’s GDP growth averaging 8.4 percent over the period 1994-2006. However, Cambodia’s narrow growth base remains a concern. Recent and ongoing work- including the National Export Strategy, 2007-2010, the Small and Medium Enterprise Development Framework, 2005-20 10, and the second phase o f the Integrated Framework (IF) for trade-aim to tackle this challenge.
11. External developments were also positive in 2006. Despite pressure f rom high world o i l prices, the balance o f payments improved as the current account deficit (excluding transfers) declined to 7.2 percent in 2006 (from 9.4 percent in 2005) and gross international reserves expanded by 20 percent to US$ 1.1 billion. FDI continued i t s upward trend reaching a record high o f US$ 475 million. Consumer price inflation declined to 2.8 percent (from 5.9 percent in 2005)’ due to an easing o f o i l prices and a significant drop o f price index o f food and clothing. The consumer price index i s expected to remain low (below 5 percent) for 2007
5
and the r iel i s expected to remain stable both in terms o f dollars and other partner country currencies.
12. The fiscal front saw some improvement in 2006 as the ratio of tax revenue to GDP grew modestly from 7.6 percent in 2005 to an estimated 8.0 percent in 2006. As a share o f GDP non-tax revenue remained constant at 2.3 percent. In nominal terms, however, year on year growth was very high: tax revenue i s estimated to have grown by nearly 22 percent in 2006. Non-tax revenue i s estimated to have grown b y nearly 18 percent, but i s starting from a very low base. Expenditure i s estimated to have remained steady at 13.5 percent o f GDP in 2006 but greater emphasis continued to be put on the social sectors with an increase in nominal spending. Total capital spending i s estimated to have increased modestly to 5.6 percent o f GDP. In 2007 the overall budget balance i s anticipated to be stable at around -3.2 percent o f GDP (excluding grants).
13. Similarly, the financial sector saw some improvement in 2006, though some management vulnerabilities remained. Combined deposits (deposits in r ie l and foreign currency) of banks operating in Cambodia rose by 43 percent and the lending-to-deposit ratio has continued to trend upward, reaching 68 percent in 2006 (from 64 percent in 2005), reflecting growing business activities in 2006 (business registration grew by nearly 50 percent over 2005, for example). There are now 20 banks operating in Cambodia, an increase from 18 banks at the end o f 2005. Cambodia also remains a highly dollarized economy with nearly 75 percent o f broad money and 97 percent o f the banking deposits made in U S dollars. The commercial interest rate i s s t i l l high at around 16.3 percent per annum.
14. Financial sector reform, guided by the ten-year sector blueprint adopted in 2001, has also progressed. The Government continued to pursue financial sector reform designed to increase competitiveness, including privatization o f the state-owned Foreign Trade Bank and adoption o f the Law on Negotiable Instruments and Payment Transactions, which aims to improve payment transactions, eliminates legal uncertainties, and reduce payment system risks. A Credit Information Sharing System has been introduced, providing commercial banks with credit-related information on prospective customers, thus lowering delinquency rates and loan defaults. The development o f a national payment system and a comprehensive information technology system for banking functions has become a pressing sectoral challenge.
15. International and domestic conditions bode well for continued favorable economic prospects in 2007. The four growth pillars-garments, tourism, construction, and agriculture-are expected to continue to thrive in 2007 with real GDP growth estimated at about 9.0 percent. Overall growth i s also expected to remain strong in the medium terms. Increasing FDI i s expected to be sustained and the discovery o f offshore o i l and gas reserves w i l l l ikely bring about even higher growth. However, the garments sector i s now facing stiffer competition from Vietnam’s accession to the W T O and the possibility o f greater competition from China in 2008. At the same time agricultural growth in Cambodia has been particularly volatile over the past several years, and i s therefore somewhat unpredictable. The emerging o i l sector wi l l also pose additional challenges to macroeconomic and fiscal management. Strong macroeconomic performance, underpinned by prudent fiscal and monetary policies, i s thus expected to persist, though new opportunities and r isks w i l l shape medium term prospects.
6
16. The Cambodian economy i s expected to grow at a somewhat lower rate of about 7.5 percent per annum over the next several years, but growth will likely accelerate again thereafter when oil production commences in 2010 or 2011. A non-trivial portion o f growth over the past decade was due to the post-conflict ‘catch up’ phenomenon, which w i l l l ikely level off over the next few years. As Cambodia confronts stiffer competition from globalization (e.g., Vietnam’s entry into WTO), the high cost o f doing business- characterized principally by high corruption-related informal fees and high energy and transport costs-will also become binding constraints. As a result o f these effects, growth in the driving sectors w i l l l ikely become less buoyant. The economy w i l l l ikely continue to be led by tourism, the garment industry, and construction, wi th agriculture providing periodic but volatile growth spurts. Beyond the near term, however, Cambodia w i l l need to diversify i t s sources o f growth to sustain 7.0 percent or higher annual non-oil growth rates. As private sector development reforms take root, non-garment sectors should increasingly contribute to growth. Agriculture i s also expected to improve i t s performance when reforms, including those pertaining to land management, are implemented and when investment in infrastructure increases. The external current account deficit i s projected to decline in the medium term. Inflation i s targeted to fall to about 3 percent in the medium term program.
17. Cambodia’s current account deficit for 2007 i s estimated at US$592 million, a large share of which would be financed by official transfers. However, the financing gap after official transfers i s estimated to be around US$ 29 mi l l ion and i s anticipated to be closed by the PRGO, including DP co-financing (see Table 1). The financing gap over 2008-2010 i s estimated at about US$30 to 40 mi l l ion per annum.
Table 1. Cambodia: External Financing and Sources 2001-2009 (US$. millions) v
Total financing requirements -45 -59 -7 -49 -65 -193 -246 -165 -137 -152 Change in gross official reserves -64 -115 -45 -60 -77 -138 -295 -216 -177 -195 Use of Fund Credit 9 9 -2 -10 -9 -82 0 0 0 0 Debt restructuring -1 6 0 0 0 0 6 0 0 0 0 Accumulation of arrears 26 47 40 21 22 21 20 21 0 0
-29 -30 -40 -43 Financing Gap . . Sources: NIS, IMF June 2007 Article IV Consultation--Cambodia, and Bank Staff Estimates.
18. External debt -o f which 35 percent i s owed to the United States and the Russian Federation-constitutes nearly 95 percent of Cambodia’s total public debt. At end-2006, Cambodia’s total external public debt was $2% bi l l ion (31 percent o f GDP; 22 percent o f
7
GDP in NPV terms), while domestic debt amounted to 2.0 percent o f GDP, one third o f which was denominated in foreign currency.’ I t should be noted that Cambodia’s relatively high debt stock i s largely due to the historical legacy o f borrowing from the U S and USSR. The recent debt policy o f the Royal Government has been prudent, though an increasing volume o f concessional borrowing from China, and possibly other non-traditional DPs, i s being monitored. The RGC i s currently negotiating debt rescheduling agreements with the United States and the Russian Federation. However, discussions have stalled and may not resume in earnest for some time. In December 2005 Cambodia met the Fund’s criteria for the Multilateral Debt Relief Initiative, which resulted in debt relief o f US$ 82 million, based on Cambodia’s satisfactory performance on macroeconomic performance, implementation o f a poverty reduction policy, and progress on public expenditure management reforms.
19. The joint IMF/WB debt sustainability analysis (DSA) comes to the conclusion that Cambodia’s debt i s on a sustainable path and that the risk of debt distress is moderate. In the baseline scenario none o f the five debt sustainability indicators’ thresholds are breached over the medium term. The NPV o f public debt-to-GDP, which declines steadily from 22 percent in the baseline scenario over the projection period (as compared to the 30 percent threshold) and the NPV of public debt-to-revenue, which stands at 185 percent in 2007 in the baseline and declines steadily over the projection period (as compared to the 200 percent threshold) are only breached for a few years in the most extreme stress tests. The macroeconomic framework is, however, vulnerable to the weak revenue base in the short to medium term. Significant o i l revenue, however, would considerably strengthen the revenue base and further diminish the risk o f debt distress. At the same time the inf lux o f official assistance from China, which recently committed about US$ 600 mi l l ion over a multi-year period, could alter the debt dynamics if i t continues at the same pace. Chinese aid i s provided on concessional terms and i s reflected in the current DSA. In order to ensure that Cambodia i s maximizing value for money from Chinese assistance (as well as other DP assistance), however, i t should be subject to rigorous investment appraisal analysis, to ensure that the increasing debt burden i s justified in economic and financial terms.
20. The major opportunity and threat to Cambodia’s medium to long term growth i s the discovery of significant amounts of offshore oil. The RGC has demarcated six offshore blocks for licensing. T o date, contracts are known to have been awarded for two blocks (A and B). According to the Cambodia National Petroleum Agency (CNPA), the precise amounts o f o i l and natural gas in block A are not known. Exploration b y Chevron i s ongoing and new estimates may be available shortly. CNPA estimates that o i l production could start in 2009 and gas production in 201 1. The most recent estimates show that o i l revenue could exceed all current revenue sources: 500 mi l l ion barrels of recoverable o i l at current world o i l prices would yield, for example, an annual peak revenue stream to the government o f more than $700 mi l l ion (the revenue stream peaks four years after the start o f production), equal to over 11 percent of GDP in 2005. This estimate does not include government revenue from natural gas production and sale. Whether o i l and gas revenues translate into greater economic diversification and poverty reduction-or macroeconomic and fiscal imbalances-is the most salient issue in Cambodia’s medium term outlook.
~~~
This analysis, drawn from the June 2007 DSA, assumes that the Russian debt stock i s treated according to the I
standard Convertible Ruble exchange rate and the seventy percent up front discount.
8
21. Both the staffs of the Bank and the Fund have concluded that Cambodia’s macroeconomic policy framework i s appropriate and sustainable. The Fund’s 2007 Article IV mission strongly supported the RGC’s macroeconomic and structural reform agenda. Moreover, Cambodia has earned consistently high macroeconomic management ratings on the CPIA (4.0 f rom 2005-2006). Despite the soundness o f the macroeconomic framework and good progress on the structural reform agenda, the proposed PRGF has been delayed due to a lack o f resolution o f the U S and Russian debt negotiations. However, in the short to medium term, the delay o f the PRGF w i l l not l ikely jeopardize macroeconomic stability or the attainment o f the economic development objectives o f the proposed program (see the Fund Relations Note in Annex 4). Moreover, Fund staff intends to agree a monitoring framework similar to that which would be used for monitoring PRGF quantitative and structural conditionality.
POVERTY TRENDS AND HUMAN DEVELOPMENT
22. Economic growth over the last decade has raised living standards and reduced poverty headcounts. Analysis o f trends in consumption and poverty in Cambodia i s made complex by the limitations o f the data. However, when comparing l iv ing standards within the same geographical frame in 2004 and 1993/4, average per capita household consumption i s found to have risen 32% in real terms (to 2,932 riels per day in 2004). In Phnom Penh and other urban centers the rise has been considerably more dramatic.
23. The decline in poverty has been significant and widespread. As average per capita consumption has risen, many more households now have per capita consumption values above the poverty line, resulting in falling poverty headcounts (Figure 1). I t i s difficult to measure the fal l in poverty in the country as a whole with precision given the lack o f an all- Cambodia baseline in 1993/4 (when the survey was only able to cover around two-thirds o f the rural population). Within the geographical sampling frame o f the first survey, the headcount fe l l f rom 39 to 28 percent. Backward projection on the basis o f this observed trend suggests that the national poverty rate fe l l by 10-15 percentage points over the last decade (from a projected 45-50 percent in 1993/4 to a measured 35 percent in 2004). Moreover, though actual data are unavailable, poverty i s very l ikely to have fallen further in 2005 and 2006 due to the exceptionally high growth rates o f those years, especially in agriculture. Projections put the poverty rate at about 32.5 percent in 2006.
9
Figure 1 Poverty has fallen in rural as well as urban areas - albeit much faster in urban areas
- & 5 0 - 4 0
3 0 c r" 2 0
H 1 0
0 C a m b o d i a A C a m b o d i a B R u r a l U r b a n ( e x c l u d i n g P h n o m P e n
e n t i r e c o u n t r y 1 9 9 3 1 4 P h n o m P e n h ) ( N B 1 9 9 3 1 4 s a m p l i n g
e s t i m a t e b a s e d t r a m e o n b a c k w a r d
p r o j e c t i o n )
Source: CSES 199314 and 2004; WB 2006.
24. Although the rate of improvement has varied considerably between groups and locations, poverty reduction has clearly been widespread. The poverty headcount fel l in rural areas (by a fifth) as well as in urban areas (falling b y a half in the capital Phnom Penh); and in all but one o f the five broad agro-ecological regions o f the country. Broadly speaking, women as well as men have benefited from economic expansion and rising average consumption, as significant numbers o f young rural women have found employment in the new garment industry and improvements in primary education have started to close the gender gap in literacy within younger age groups.
25. Rising levels of consumption have not only lifted many households out of poverty, they have also lifted households that remain in poverty closer to the poverty line. The poverty gap-the average distance by which the consumption o f poor households falls below the consumption poverty line-has declined throughout the country, signifying that those who remain below the line experienced less severe poverty in 2004 than was the case in 1993/4.
26. The picture of improving living standards suggested by rising per capita consumption is corroborated by other indicators. The food share o f total household expenditure has fallen significantly across al l consumption quintiles; conversely, the quality o f housing and ownership o f key assets have risen.
27. Rising incomes and gradual improvements in service delivery have started to result in improved human development indicators. In many areas Cambodia's human development indicators are lagging other countries in the region. However, the health and education ministries have progressed further than most in developing sector-wide strategies; aligning policy, planning, budgeting and M&E processes toward these strategies; and gradually reorienting priorities in a pro-poor direction. These fundamental improvements in core systems are starting to result in improved outcomes.
28. Starting from a low base, the Cambodian education system has made some impressive gains. Estimated net enrolment rates at the primary level are up significantly from 65% in 2000 to 76% in 2004 (CSES). Lower Secondary (grades 7-9) net enrollment has more than doubled since 1997, increasing from 7.6% to 16.4%. Advances in important indicators
10
such as literacy, repetition rates and years of schooling for younger age cohorts are further positive signs that the rebuilding of the national education system i s taking root. Progress has also tended to be pro-poor. While socioeconomic, rural and gender gaps in educational attainment exist, these gaps have generally been reduced significantly in recent years, particularly at the primary level.
29. Recently released data suggests progress on a number of health indicators, reflecting rising average levels of consumption and falling poverty rates recorded last year from the household living standards survey. Preliminary findings from the 2005 Cambodia Demographic and Health Survey (CDHS) suggest significant progress on a number o f output and outcome measures relative to the previous (2000) CDHS. Health service delivery has improved in a number o f critical respects (notably rates o f childhood immunization and the percentage o f births attended b y a trained professional). Health practices are also changing, wi th a dramatic rise in exclusive breastfeeding o f children aged under six months. These improvements in service delivery and utilization are feeding through into a number o f health outcomes, with falling fertility rates, better (though s t i l l extremely poor) childhood nutrition, and significant improvements in childhood survival (with infant mortality rates falling from 95 to 65 per 100,000 l ive births, and under-five mortality falling f rom 124 to 83). Maternal mortality (per 100,000 l ive births) has also decreased, f rom over 437 in 2000 to 343 in 2005. While births at home are slowly giving ways to births at a facility (up from 32% to 44%), progress i s starting from an extremely low base, and there i s a long way to go. Although Cambodia has s t i l l the highest prevalence o f HIV/AIDS in the region, i t has been successful in arresting and reversing the growth o f epidemic (the estimated prevalence rate for the percentage o f adults aged 15-49 years fel l f rom 3.0 in 1997 to 1.9 in 2003). Similarly, the TB epidemic has shown a declining trend.
30. At the same time, the Government will need to monitor inequality, which increased over the last decade, due mainly to widening inequality within rural areas. (Inequality in urban areas, while higher than in rural areas, has remained largely stable.) On the basis o f the data available, the report Cambodia: Shaving Growth (World Bank, 2007) concluded that consumption inequality rose primarily in the early stages o f Cambodia’s transition to the market (between 1993/4 and 1997), but remained stable between 1997 and 2004. I f consumption inequality remains at 2004 levels, i t need not create any structural impediments to continued growth and poverty reduction. Alongside this broadly optimistic conclusion, the report notes some caveats regarding the adequacy o f consumption as a measure, and household surveys as a tool, when analyzing inequality. Data f rom the 2007 survey w i l l provide an opportunity for updated analysis o f poverty and inequality trends in early- to mid- 2008.
THE REFORM AGENDA GOING FORWARD
31. As the previous sections show, Cambodia has established a commendable record of strong economic growth and moderate poverty reduction by relying on ‘first generation’ reforms and taking advantage of favorable external conditions. Cambodia has moved from an isolated, low-growth, state-managed, and subsistence-oriented economy to a market- based economy that i s open to international flows o f capital, goods, and labor. Since the early 1990s Cambodia has implemented ‘first generation’ economic reforms: deregulation o f prices and markets, privatization o f state-owned enterprises, and liberalization o f trade and
11
investment flows. Macroeconomic management, including a managed float o f the exchange rate, fiscal policy, and debt policy are all prudent and in these areas Cambodia does as well or better than i t s low income country peers.
32. These factors, plus the reorientation of expenditure policy, have resulted in moderate poverty reduction. The RGC has since 1998 significantly improved the alignment o f resources with i t s developmental objectives by increasing allocations for priority sectors, notably education and health. As a share o f total budgetary spending, the percentage dedicated to health, education, and social protection increased from 19.5 percent in 1996 to 31.7 percent in 2004, while the share for defensehecurity fel l f rom 45 percent to 20 percent over the same period. In the past couple o f years the RGC has turned i t s attention to increasing spending on the economic sectors, especially rural infrastructure.
33. Cambodia’s high growth and moderate poverty reduction over the past decade could belie the thesis that governance matters for development. However, growth has been narrowly based. The garment sector has benefited from the Multi Fiber Arrangement and the protection imposed by the U S and EU against Chinese imports. Tourism i s based largely on Cambodia’s Angkor Wat heritage and also benefits f rom strong demand throughout Asia. Though agriculture has contributed to high growth rates in selected years, i t has also contributed negatively to growth in of f years, and i s a highly volatile sector. Construction i s largely a post-conflict phenomenon. At the same time, Cambodia i s not on track to meet the CMDGs, and though there has been good progress on human development indicators, some are among the worst in the region. Inequality i s also high. Thus, though recent progress has been noteworthy, i t i s possible that growth would have been higher and more diversified, and poverty reduction greater, had there been better governance, including less corruption.
34. This i s to say that the set of first generation reforms that served Cambodia well- by removing the binding constraints to growth and poverty reduction at that time-is now in need of a successor reform program. New binding constraints have clearly emerged. On the one hand economic growth i s l ikely to slow over the medium term unless the investment climate, particularly in terms o f trade facilitation, i s improved and the agricultural sector i s revitalized. On the other hand delivery o f public services in the priority sectors i s seriously hampered by weak public financial management and an impaired c iv i l service.
35. A second generation of reforms has begun to coalesce into an overall program that promises to revitalize growth and accelerate poverty reduction. A raft o f private sector development reforms i s needed to facilitate trade, improve the business regulatory environment, and attract new investment, all in the context o f fulfilling the commitment to W T O membership. The potential o f the agricultural sector needs to be unlocked by measures that raise i t s productivity b y addressing land tenure insecurity and landlessness. Further PFM reform i s needed to remove the constraints to improving service delivery at the frontlines of poverty reduction in order to move further on key human development indicators as well as to reduce the fiduciary risk to public funds. The purpose o f the proposed operation i s to bring together these reforms into a coherent medium term package that w i l l provide the cornerstone for the second generation o f policy and institutional reforms needed to diversify and amplify growth while broadening the bases o f poverty reduction.
12
111. THE GOVERNMENT’S PROGRAM: THE NATIONAL STRATEGIC DEVELOPMENT PLAN AND THE JOINT MONITORING INDICATORS
36. The National Strategic Development Plan (NSDP) 2006-2010, approved by the National Assembly in May 2006, constitutes Cambodia’s medium-term development strategy. The NSDP provides an over-arching set o f development goals and priorities with a results focus derived from the targets established as the Cambodian Mil lennium Development Goals (CMDGs: see Box 1). For the Bank and the Fund, the NSDP serves as the Government’s second PRSP, following on the National Poverty Reduction Strategy (NPRS) for 2003-2005 (see Joint Staff Assessment Note, WB/IMF, July 2006).
I Box 1. The Cambodian Millennium Development Goals (CMDGs)
The CMDGs were derived from the global MDGs in a process led by the Ministry of Planning with support from the UNDP. The CMDGs consist of 9 Goals, 25 overall targets, and 106 specific targets covering: (1) extreme poverty and hunger; (2) universal nine-year basic education, (3) gender equality and women’s empowerment, (4) child mortality; (5) maternal health; (6) HIV/AIDS, malaria and other diseases; (7) environmental sustainability, (8) partnerships for development, and (9 ) de-mining. In 2005 a review of progress made towards the 2015 targets suggested a mixed record, with achievements (including a significant fall in poverty; expansion of primary education; reduction in child and under-five mortality; and improved immunization and breastfeeding rates) alongside areas of concern (e.g. continuing high rates of rural poverty and low enrolments in post-primary education; persistent high levels of domestic violence and maternal mortality; and degradation of forest and water resources).
I
I Source: Ministry of Planning, 2005.
37. The PRGO will support progress towards the MDG-based goals of the NSDP in a number of ways. The livelihoods o f the rural poor-and progress toward the poverty reduction targets-will be enhanced directly, through the policies and programs for the redistribution o f non-functioning concessions to poor farmers and the protection o f smallholder property rights; and indirectly, through the creation o f a more supportive private sector environment for small and medium enterprises and for trade-driven growth and diversification. Positive trends toward the human development CMDGs w i l l be reinforced by reform o f the PFM system: the inability o f the current system to align resources to priority goals, or to adjust spending targets and modalities on the basis o f results, now constitutes the primary bottleneck to improved delivery o f basic services.
38. Cambodia’s NSDP adheres to an internationally recognized set of core poverty reduction strategy principles (see Box 2) and provides the strategic framework under which sectoral and sub-national plans are elaborated. The NSDP and corresponding sector strategies should serve as the basis for future three-year rol l ing investment plans and annual budgets, and for aligning ODA to Government priorities. The NSDP includes a projection for budget allocation by sector, with a breakdown for rural and urban areas intended to help target poverty in rural areas.
39. The Government i s in the process of implementing key reforms from the NSDP, and these are jointly agreed and monitored by the collective DP community. The Joint Monitoring Indicators (JMIs) represent the highest priorities for the RGC and their
13
implementation i s closely monitored (see Annex 3 for the 2006 JMIs as well as the draft 2007 JMIs). The JMIs encompass key reforms ranging across all sectors and issues, including anti- corruption, legal and judicial reform, public administration, decentralization, public financial management, private sector development, agriculture, infrastructure, gender equality, and natural resource management. Overall, Cambodia’s development partners have recognized good progress in a number o f areas, including decentralization, public financial management, infrastructure, gender equality, private sector development, and some aspects o f natural resources management.
40. Cambodia’s progress was recognized by all development partners at the 2006 CG Meeting, at which DPs were encouraged by the recent progress that Cambodia had made, and recognized i t by pledging $601 mi l l ion in aid, a 20 percent increase as compared with pledges made in December 2004. This was in sharp contrast to the 2004 C G Meeting where the overall aid pledged had fallen as the World Bank and the ADB both cut back due to Cambodia’s poor performance on governance indicators. The reduction in aid by both multilateral development banks had a significant impact on the RGC and brought home the message that in the future, aid would be closely linked to Cambodia’s performance, especially on governance issues.
41. At the same time, however, development partners agree that reforms needed to be accelerated in a number of areas, most notably anti-corruption, legal and judicial reform, and natural resources management, especially forestry. The anti-corruption law has been drafted, though concerns remain about whether the draft meets international best practice and though pending since 2004, i t i s not clear when the law w i l l be sent to the National Assembly. With support f rom the Bank, the Government adopted a Legal and Judicial Reform (LJR) Strategy in June 2003. Priority actions with regard to LJR were agreed at the consultative group (CG) meeting in December 2004. These focused on the passing o f eight key laws (Criminal Code, Criminal Procedure, C iv i l Code, C iv i l Procedure, Law on Anti-Corruption, Law on the Supreme Council o f the Magistracy, Law on the Organization and Functioning o f the Courts, and Law on the Status o f Judges and Prosecutors). The past year has seen some progress on the drafting of these laws, and the c iv i l procedure code was passed by the National Assembly in June 2006. Issues related to the forestry sector also remain problematic-the recent Inspection Panel report highlights the problems that the Bank has faced in this sector and given the apparent inability o f the Government to successfully fight forest crime, a consensus has yet to emerge on a clear way forward. Progress in public administration has also been minimal, as reflected in the low CPIA rating for public sector management and institutions.
14
Box 2. National Plans as Poverty Reduction Strategies: Core Principles in East Asia
A regional Forum on National Plans as Poverty Reduction Strategies in East Asia was held in Vientiane on April 4-6, 2006. This was the third in a series o f conferences on poverty reduction strategies and, l ike the first two, was organized jointly by the World Bank, IMF, ADB, and UNDP. The main objectives o f the Forum were: (1) to exchange experiences with formulating and implementing national plans and poverty reduction strategies among the six countries o f the region that have participated in the PRSP initiative-Cambodia, Indonesia, Lao PDR, Mongolia, Timor- Leste, and Vietnam-as well as the experiences in formulating national plans in China and Thailand; and, (2) to agree on core principles for continuing these efforts and discuss next steps by governments and development agencies.
I t was agreed that the five-year experience with PRSPs has helped in identifying the core principles o f a successful poverty reduction strategy: Broad participation: consultation and transparency in formulating development strategies; Poverty focus: a greater poverty focus in the policies and programs that comprise these development strategies; Results orientation: better monitoring o f the results expected from implementing these policies, better evaluation systems, and a tighter feedback to policymaking; and DP harmonization: alignment o f assistance with country priorities and synchronization o f aid cycles and reporting mechanisms with country processes.
IV. AL IGNMENT OF DEVELOPMENT PARTNER A N D B A N K SUPPORT
COUNTRY ASSISTANCE STRATEGY
42. The CAS, which covers the period FY05-08, complements the NSDP’s focus on strengthening governance and reducing poverty. The PRGO i s designed to support the implementation of the CAS objectives, which are directed at tackling the governance constraints to inclusive, sustainable growth and pro-poor service delivery through support to PSD, PFM, NRM and decentralization and deconcentration (D&D), which includes mechanisms for establishing social accountability. For both PSD and PFM the government has well-developed sector strategies and programs in place and has begun implementation, thus the CAS and the PRGO objectives with respect to PSD and PFM are mainly to support implementation of the Government’s programs. For the remaining two objectives: NRM, which includes land, and D&D, the Government’s strategies and programs are at much earlier stages of development.
COLLABORATION WITH IMF AND OTHER DEVELOPMENT PARTNERS
43. Bank-Fund collaboration involves two levels of dialogue, through the policy based lending program and AAA. Bank-Fund collaboration, as well as collaboration with other DPs, occurs overall at the level o f the National Strategic Development Plan. In addition, close coordination occurs at the level of the Technical Working Groups in PFM, PSD, Land Management, and Forestry and Environment.
44. The Bank and Fund staffs have coordinated closely on the proposed PRGF and PRGO programs and have worked under streamlined conditionality arrangements. The
15
Bank and Fund have ensured that proposed conditionalities (and structural policy aims in the Article I V consultations) are complementary and mutually reinforcing. The Fund’s PRGF, which was originally scheduled to be presented to i t s Executive Board in October 2005, has been delayed due to ongoing discussions between Cambodia’s bilateral discussions with both the United States and Russia regarding concessional debt rescheduling scenarios. I t i s uncertain when the PRGF may be presented to the Fund’s Board, though presentation in 2007 i s highly unlikely.
45. Discussions with other DPs on co-financing the operation are at an advanced stage. DFID has indicated that i t would l i ke to provide up to S1.5 mi l l ion o f budget support to the RGC in 2007, rising to E2 mi l l ion in 2008 depending on satisfactory performance. DFID w i l l seek approval from Ministers after the PRGO has been approved by the Wor ld Bank’s board. JBIC supports the PRGO framework and actions agreed between the RGC and DPs as a potential financial partner o f the RGC subject to the approval o f the Japanese Government. JBIC also welcomes the progress o f policy reforms agreed upon b y the RGC and DPs. The European Commission (EC), in line with i t s international commitments on harmonization and alignment and in response to the RGC’s request to increase program-based budgetary aid, has confirmed i t s intention to support the implementation o f the NSDP via the provision o f a multi-annual Direct Budget Support operation anchored to the WB-led PRGO. The Commission i s planning to provide 35% o f i t s Multi Annual Indicative Programme (approved in March 2007 and equal to a total o f Euro 77 mi l l ion for the period 2007-2010) as budgetary support pending the approval o f the EU Member States and the European Parliament, wi th a view to obtaining a Commission Financing Decision in October 2007. The first annual disbursement w i l l relate to the successful achievement o f all the PRGO-1 triggers and should be disbursed by the end o f the year. C I D A i s developing a Country Strategy for Cambodia that i s aligned with the NSDP and harmonized with the programs o f other DPs. C I D A supports in principle the PRGO approach linking multi-donor budget support to the key reforms agreed b y the RGC in the policy matrix. The C I D A team i s presently seeking approval for a contribution to the PRGO covering all three operations. C I D A would l ikely request i t s funding be provided through a Wor ld Bank trust fund. If the proposal to support the PRGO i s approved, C I D A would l ikely be able to make a first contribution in the calendar year 2007.
46. The CAS also recognized a need to improve DP coordination and partnerships. Poor governance has encouraged DPs to adopt short-term approaches to development effectiveness (e.g., stand-alone projects often managed b y foreign consultants) and allowed for uncoordinated aid. Conversely, poor DP coordination and inadequate outreach to c iv i l society have accentuated the problems o f weak governance (by imposing high transaction costs for al l stakeholders; providing conflicting messages to the Government and undermining the evolution o f a government-owned vision o f development; and closing o f f opportunities for learning, scaling up or building effective constituencies to tackle the most challenging reforms). Much progress has been made over the past three years.
ANALYTICAL UNDERPINNINGS AND RELATIONSHIP TO OTHER BANK OPERATIONS
47. A catalytic program of AAA work has been carried out in each of the three PRGO areas. In PSD the Investment Climate Assessment (2004) served as a key input to Cambodia’s private sector development strategy and the Bank’s subsequent investment project. The
16
report’s recommendations focused on improving trade facilitation practices, integrating markets through institutions such as private value chains, and injecting competition and transparency in private participation in infrastructure. In PFM the Zntegrated Fiduciary Assessment and Public Expenditure Review (2003), which was followed by the Country Procurement Assessment Report (2004) and a Public Expenditure Tracking Survey in Education (2005), served as the key input to the RGC’s PFM Reform Program. The IFAPER yielded four principal findings: (1) resource mobilization must be improved to ensure fiscal sustainability; (2) weaknesses in the public financial management system create unacceptably high levels o f fiduciary risk to public funds; (3) in order to meet poverty reduction targets the Government w i l l need to improve the effectiveness o f public spending by more tightly linking i t with priority outcomes and by reallocating resources away from lower priority sectors and functions; and (4) given the serious problems afflicting the c iv i l service-low pay, low sk i l l s , and thus low capacity-strategic c iv i l service reform w i l l have to be initiated in the short term. In NRM a Poverty and Social Impact Analysis (2004) was carried out in support o f plans to implement a program o f social land concessions, and a Rural Sector Strategy Note (2005) establishes a broad framework to explore options for Cambodia’s future directions for rural development. The objective o f the PSIA was to assess the l ikely poverty and social impacts o f implementation o f RGC’s Sub-decree on Social Land Concessions, including the implementation challenges and determinants o f successful performance.
48. In order to make progress it i s necessary that the Bank and other DPs assist the RGC with all available instruments-including investment projects, and PRGOs- especially given weak implementation capacity. In each o f the three PRGO areas the Bank has on-going and future projects planned. The PRGO i s an important complement to the investment projects, which are focusing on capacity development and implementation o f reform measures. The PRGO addresses high level policy change and cross-sectoral issues. Both development policy and investment operations are needed in the Cambodian context, given the institutional and political challenges in place:
Trade Facilitation and Competitiveness Project (2005, US$ 10 million): The project’s objective i s to support the Government’s strategy to promote economic growth by reducing transaction costs associated with trade and investment, introducing transparency in investment processes, and facilitating access o f enterprises to export markets. The project focuses on trade facilitation, export promotion, fostering private participation in infrastructure, and legal transparency.
Public Financial Management and Accountability Proiect (2006, U S $ 14 million): In order to set the stage for improved service delivery and reduced corruption, the objective o f the project i s to improve public financial management by strengthening: (1) the mobilization o f public resources, (2) the management o f public resources, (3) the management o f human resources, and (4) external audit capacity. The project focuses on revenue management, budget formulation and execution, capacity development, and external audit. The project i s co-financed by a U S $ 17 mil l ion Multi-Donor PFM Trust Fund (2005), managed by the Bank, and supported by AusAID, DFID, EC, and Sida.
Land Management and Administration Proiect (2002, US$ 24 million): The goals o f the project are to reduce poverty, promote social stability, and stimulate economic development. The specific objectives o f the project are to improve land tenure security
17
and promote the development o f efficient land markets. These objectives wi l l be achieved through: (1) development o f national policies, the regulatory framework, and institutions for land administration; (2) issuance and registration of titles in urban and rural areas; and (3) establishment o f an efficient and transparent land administration system. A proposed Land for Social and Economic Development Project (FY08) i s under preparation.
V. THE PROPOSED CAMBODIA POVERTY REDUCTION AND GROWTH OPERATION
OPERATION DESCRIPTION 49. PRGO-1, the first in a series of three proposed annual operations, would selectively focus on the key reform areas of private sector development (PSD), public financial management (PFM), and natural resource management (including land). Of these areas public f inancial management and private sector development are the most advanced in terms of agreement on reform measures. These areas would provide the pr ior actions for PRGO-1 and the triggers for PRGO-2 and PRGO-3. To help reduce the burden of mul t ip le conditionalities, a l l o f these pr ior actions are derived f r o m either actions agreed at the 2006 CG meeting, o r f rom sectoral strategy commitments agreed by the relevant technical working groups (see Box 3).
Box 3. Good Practice Principles on Conditionality Principle 1: Reinforce Ownership The operation i s anchored in the overall framework o f the National Strategic Development Plan adopted in 2006 by the National Assembly. The prior actions for PRGO-1 are drawn from the Joint Monitoring Indicators (JMIs) o f the Cambodia Development Cooperation Forum. The JMIs are regularly discussed, including by civi l society organizations and in the press. The Government has developed a track record o f policy and institutional reform over the past fifteen years. Going forward, the Bank’s support strategically focuses on policy areas where there are Government counterparts who want to progress the reform agenda. The Bank’s analytical work program has been instrumental in assisting the government to design reform programs. Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The Bank’s support i s summarized in a brief, focused joint policy matrix. The matrix has been developed in full coordination with the relevant government agencies and has relied to a very large extent on the actions already agreed in the joint Government-Development Partner Technical Working Groups (TWG). The matrix i s routinely discussed in the relevant TWGs both in terms o f progress on the prior actions and on thinking about future triggers. Other development partners planning budget support are using the same joint matrix for their operations. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The timing o f the first operation i s not ideally aligned with the budget cycle, due to the need to pace reforms in a “step by step” manner. At present the Bank i s prioritizing a feasible, sustainable pace o f reform over the timing o f the operation. However, the cycle o f operations w i l l be better aligned with the budget cycle in subsequent operations. There i s evidence that that the actions and triggers genuinely reflect the Government’s policy priorities; most o f the actions are drawn directly from :xisting sectoral reform programs, such as the Public Financial Management Reform Program, the
18
Private Sector Development Strategy, and the Land Policy Statement. The framework includes some
Issuance o f Prime Ministerial Order requiring a l l relevant agencies to define their critical data needs for the adoption of a single administrative document ( S A D )
Issue a sub-decree and implementing regulations on trade facilitation through a risk management approach to inspections and clearance of imports and exports o f goods
Economic Zones (SEZs) and an SEZ Board in CDC
3. Adopt sub-decrees establishing Special
sensitive policy reform issues, but only those which are supported by high level officials.
Principle 4: Choose only actions critical for achieving results as conditions of disbursement The Bank’s policy matrix uses only a limited set o f conditions (10 in total per year) and highlights only a maximum of 20 benchmarks per year. Conditionality i s focused on critical issues, including the adoption o f laws by parliament. Principle 5: Conduct transparent progress reviews conducive to predictable and performance- based financial support There i s a regular cycle o f performance reviews embedded in the operation through the regular monitoring o f the TWGs and the Government-Donor Coordination Committee, which meets quarterly at the ministerial/head o f agency level to review progress and challenges. Individual TWGs also produce regular progress reports. The operation only undertakes additional assessment when existing reports and mechanisms are lacking. The process i s increasingly promoting a focus on results. The policy matrix also contains jointly agreed performance indicators drawn from sectoral reform plans and TWGs.
Achieved: The PMO has been issued, and the S A D was prepared and i t s technical configuration and layout have been completed. The effective use o f the S A D i s expected to happen in the third quarter o f 2007. On track: The sub-decree was issued. The risk management strategy i s expected to be jointly implemented with ASYCUDA by end-2007.
Achieved: The sub-decrees were issued and an SEZ Board established.
50. The operation’s development objective i s to support ‘second generation’ growth and poverty reduction based on an improving business climate, higher agricultural productivity, and more effective public service delivery. The PRGO w i l l support the next phase o f policy and institutional reform required to maintain growth and accelerate poverty reduction b y facilitating trade and diversifying exports, guaranteeing land tenure and increasing access to land for the rural poor, and making the budget a credible management tool and reducing fiduciary risk to public funds. The PRGO program would support outcomes that are driven by policy measures and expenditure policy, both o f which are supported by the DP community as necessary for underpinning medium term growth and accelerating poverty reduction. PRGO- 1 features 10 prior actions across private sector development, public financial management, and land and natural resource management (Table 2):
4. Fortify decentralized procurement by strengthening the 1995 procurement sub-decree and the 1998 implementing regulations to promote economy, efficiency, and transparency
Table 2. Summary of Progress on PRGO-1 Prior Actions
Achieved: The Prakas on the Implementation of Deconcentrated Public Procurement was issued on January 3,2005 and an amended 1995 Sub-decree on Public Procurement was issued on October 28, 2006 (the corresponding
I PRGO-1 Prior Actions I Status I
19
5. Develop and implement first phase o f new transaction processes from budget release to commitment in order to streamline budget execution
6. Increase reliance on the banking system for tax and customs payments, and for RGC payments to creditors and civi l servants via transfer andor check
7 . Introduce an official merit-based pay and employment reform pilot in MEF in support o f the PFMRP
revised 1998 implementing rules and regulations were issued on January 23,2007)
Achieved: The first phase o f streamlined execution procedures was adopted by MEF via a circular and a prakas, and became effective January 2007.
Achieved: The prakas mandating that all customs and excise duties be paid by check at the NBC in Phnom Penh and Sihanoukville was adopted in December 2004 (and complemented by a clarifying instruction in March 2007).
Achieved: The order for Treasury to pay all suppliers by check or transfer in Phnom Penh and Sihanoukville took effect September 1, 2006 (for all payments).
Achieved: The pilot program to pay civi l servants by transfer to private commercial bank accounts began in August 2006 for nearly 300 staff in MEF and MOH. Achieved: The MEF MBPI was introduced in August 2005.
Land and Natural Resources Management 8. C O M adopts Sub-decree on State Land
Management including participation o f local communities in mapping and land use planning, as well as open public access at provincial level to register o f state land use information and issues implementing regulations
9. C O M adopts Sub-decree on Economic Land Concessions that includes provisions for resolution with local communities o f issues o f prior occupancyluse o f lands and classification o f land to exclude forests and protected areas
10. Establish a mechanism and periodically disseminate information on Economic Land Concessions
Achieved: Sub-decree adopted in 2005 and prakas in 2006.
Achieved: Sub-decree adopted and the ELC Technical Secretariat was established in June 2006 (there are concerns about the quality o f implementing regulations with respect to transparency issues, but a time-bound concession review process associated with public information provision has been triggered). Achieved: Mechanism to disseminate information on ELCs has been established and updated httr,://maff.eov.kh/elc/.
51. The proposed triggers for PRGO-2 (Table 3) deepen the reforms undertaken in the context of PRGO-1, and also extend the scope of the reform program. There i s agreement on all o f these proposed triggers for PRGO-2, reflecting, in particular the depth o f the dialogue in PFM. All o f the PFM triggers are drawn from the Government’s PFM Reform Program, with the exception of endorsing the Extractive Industries Transparency Initiative (EITI), reflecting the recent confirmed discovery o f o i l reserves.
20
Table 3. PRGO-2 Triggers Private Sector Development
Use o f S A D mandatory and applied throughout Cambodia based on prakas Review implementation o f risk management and act accordingly to reduce inspection rate to 50 percent (total o f inspections by any agency as a share o f declarations) Publication o f regulations, procedures, fee schedules, penalties, and necessary forms on websites o f all trade-related ministries and agencies and 10 o f the Ministry of Commerce’s provincial
I Public Financial Management Develop an overarching resource mobilization policy including tax, non tax, and debt sources Inter-ministerial E I T I working group under PFMRP makes a recommendation to RGC on the endorsement of EITI, and the RGC and World Bank sign an M O U on EITI design and implementation Implement FMIS pilot of core purchase, payables, and general ledger modules in MEF and in two line ministries and two provinces
Civil Service Reform Design and implement MBPIs in the Ministries o f Health and Commerce
Land and Natural Resources Management Implement interim protective measures to safeguard indigenous community lands Establish and make public log book o f ELCs, including those issued at provincial level, and review a minimum o f 5 economic land concessions over 10,000 hectares, taking appropriate action consistent with Chapter 6 o f the Sub-Decree on ELCs Clearly define operational procedures for forest boundary demarcation that are fully consistent with state land management and demarcation sub-decrees
POLICY AREA: PRIVATE SECTOR DEVELOPMENT
52. The proposed operation seeks to support the implementation of key elements of the RGC’s private sector development strategy, and reduce well-identified vulnerabilities to sustaining growth and reducing poverty. Against the backdrop of the phasing out o f the MFA quota system for garments, the need to raise competitiveness in light o f WTO accession, and increasing rates o f unemployment among the new entrants to the labor market (especially in Phnom Penh), the proposed operation would directly support the implementation o f the RGC’s policy by: (a) facilitating trade and investment, including through streamlining and automation o f procedures in trade-related agencies, and implementation of a merit-based pay system; (b) improving the investment climate for domestic and foreign f i r m s and fostering greater private participation in infrastructure (PPI); and (c) more f i rmly entrenching the rule of law, especially as i t relates to encouraging and protecting commercial business activities.
21
Table 4. Private Sector Development: Focus on Improved Outcomes
Government Strategy Objectives
Achieve higher productivity levels among private firms, allowing more growth and employment
Encourage more diversified, broad- based and inclusive private sector, integrating smaller, rural and informal firms
Improve private sector delivery of public services through more transparent and accountable private participation in infrastructure (PPI)
CAS Outcomes
Governance-related constraints to productivity and growth are substantially reduced
Both the level o f unofficial payments and the time required to import and export products are substantially reduced, as measured by follow-up Investment Climate Assessments Cambodia succeeds in establishing i t s reputation as a country that protects Core Labor Standards
Institutions that integrate new firms into international value chains established
* Procedures for foreign direct investment are streamlined Modern standards and technologies introduced in a range of sectors through IFC-funded investment Provincial investment climate streamlined Voice o f private sector amplified through PS Forum and stronger business associations
Private investment in infrastructure increased under a fair, competitive, regulated regime
Regulatory environments for private provision o f water, education, telecom, and electricity established Transparent, competitive processes for public concessions enshrined in law and implemented
PRGO Outcomes
Facilitate trade, and improve transparency and accountability of all trade-related procedures
P S D Outcome 1 Facilitate trade, and improve transparency and accountability o f all trade-related procedures
Increase volume of exports and diversify export base
End of PRGO Program Performance Indicators 80% o f declarations are processed online through ASYCUDA Reduce the number o f documentary requirements to clear imports to 3 Reduce the time required to clear imports to 2 days Reduce the number o f documentary requirements to clear exports to 3 Reduce the time required to clear exports to 1 day Automatic issuance o f statistics and revenue reports in all Customs offices automated Inspection rate reduced to below 25% (total o f inspections by any agency as a share o f declarations)
> > > P
> > P
Increase domestic and foreign private investment, including in infrastructure
53. The proposed operation would support core policy and institutional reforms in each o f the three sub-areas targeted by the RGC as key policy reform priorities; namely, trade facilitation, investment promotion, and strengthening the rule o f law to better support business activities. The following section presents prior actions and milestones for PRGO- 1, triggers and milestones for PRGO-2 and PRGO-3, and performance indicators and baseline measurements for each o f the three outcomes.
54. Prior Action: Issuance o f a Prime Ministerial Order (PMO) requiring: (a) al l government agencies involved in trade facilitation to define their critical informational and data needs in the development and adoption o f an ASYCUDA-based Single Administrative Document (SAD), including in the Special Economic Zones (SEZs); and (b) the preparation o f a detailed
22
action plan by March 2006 to implement an electronic Single Window, including; a pi lot in the Port Authority o f Sihanoukville (PAS) by December 2006.
55. A Prime Ministerial Order (PM0/90) was issued on December 6, 2005 mandating: (a) development o f a single administrative document (SAD) by March 2006; (b) preparation o f a detailed action plan for implementing the Single Window, including a pi lot in the Port Authority of Sihanoukville (PAS), by March 2006; (c) development of a risk management strategy to manage and control the clearance of imported and exported goods b y December 2005, and submission to the Council of Ministers (COM) for approval b y January 2006; and (d) implementation o f inter-agency administrative agreements spelling out the relative roles and responsibilities of al l trade facilitation agencies, including CamControl, by March 2006.
56. The Single Administrative Document (SAD) was prepared and adopted in March 2006. The technical configuration and layout o f the S A D and explanatory notes for i t s 54 boxes have been completed and approved by the steering committee on December 18, 2006. The translation of the SAD and i t s attached explanatory notes i s ongoing and extensive training for the Customs and Excise Department (CED) and traders in using the S A D w i l l soon be conducted by the UNCTAD-led ASYCUDA team. Implementation o f S A D nationwide w i l l take place first on a paper form by the third quarter of 2007. The electronic usage o f the SAD together with implementation o f the harmonized system w i l l be done in conjunction with the ASYCUDA pilot in Sihanoukville b y end-2007. The mandatory use o f the SAD, applied throughout Cambodia in the third quarter o f 2007, w i l l constitute a trigger for PRGO-2.
57. The dialogue, however, on the electronic Single Window reached an impasse due to the lack of agreement on i ts operational modalities. The design and implementation o f an electronic Single Window would have allowed traders to submit their required importlexport documentation through one electronic gateway and do so only once instead o f several times to different agencies. The RGC’s position, expressed by the Prime Minister, i s that the Single Window w i l l be based on ASYCUDA and managed exclusively by CED by 2012. In January 2007, the World Bank and the Government agreed to restructure the TFCP and to redirect the funds allocated to the Single Window to alternatives with potential to improving transparency in trade-related processes.
58. The RGC has agreed to establish a Trade Information Gateway. The Trade Information Gateway (TIG), which w i l l be implemented as part o f the restructured TFCP, envisages the publication o f trade related information on individual ministry and agency websites and the establishment o f a virtual link o f this content. In i t s second stage o f development the TIG w i l l allow electronic submission o f trade-related requests. The Ministry o f Commerce has decided to move expeditiously toward full electronic submission of permits and licenses by the trading community. This w i l l ensure Cambodia’s ability to comply with changes to GATT Article X as currently being discussed as part o f the WTO Trade Facilitation negotiations. Implementation of the TIG wi l l lead to the strengthening of capacity of MOC’s provincial offices to deliver services to the local business community including electronic company registration. The TIG w i l l increase transparency o f trade-related processes and accountability of c iv i l servants in trade-related functions and therefore help in achieving the TFCP’s development objectives. Publication o f regulations, procedures, fee schedules, penalties, and necessary forms on the websites o f all trade-related ministries and agencies and
23
10 o f MOC’s provincial offices, and electronic submission o f 75% o f permits and licenses required by MOC, w i l l be triggers for PRGO-2 and PRGO-3, respectively.
59. Prior Action: Issue a sub-decree on trade facilitation through a risk management approach to inspections and clearance o f imports and exports o f goods, specifying the Customs and Excise Department (CED) as the sole lead agency for al l types o f inspections [documentary. physical, and electronic); and adopt and publish the inter-agency administrative agreements among al l the relevant agencies on procedures and widelines for the inspection and clearance of imported and exported goods.
60. The Sub-decree on Risk Management was issued on March 1,2006, along with the accompanying guidelines and explanatory notes. The sub-decree identifies the respective roles and responsibilities o f al l trade facilitation-related agencies (CED, CamControl, MAFF, MOC, MOH, MIME), and ensures that there i s no overlap o f responsibilities or duplication of activities. In particular, while CED i s to exercise overall responsibility for administering general controls over international trade, the other above mentioned agencies are responsible for particular commodities or products, and for providing CED with detailed guidelines for i t to act on their behalf at specified control points. The adoption of a risk management approach has codified a policy o f selective trade-related inspections based on risk. The risk element i s based on a statistical evaluation o f the risk o f false declaration o f the content o f the consignment, and supported by a post-clearance audit process.
6 1. Progress in implementing the risk management strategy has been uneven, however. While the Minister o f Economy and Finance signed Prakas No. 607 on August 7, 2006, establishing a Risk Management and Post Clearance Office in the CED, the office i s s t i l l to be staffed, contributing to delays in ASYCUDA implementation. MEF has issued Prakas No. 1015 on October 24, 2006, establishing the Inter-agency Coordination Group on Trade Facilitation through Risk Management. The Group includes members from trade-related agencies. In addition, a 15-member Steering Group on Risk Management led by CED has been set up and i s meeting once a month, and has received assistance including training from JICA and AUSAID. However, progress, including in creating the master l i s t o f prohibited and restricted goods and the development o f Standard Operating Procedures (SOP) between agencies, has been slow due to poor inter-agency collaboration. While Inter-Agency Agreements have been drafted and attached to Sub-decree No. 21 in March 2006, they are s t i l l pending signature by respective institutions. Development partners including AUSAID, EC, JICA, and the World Bank are al l wi l l ing to provide support to the RGC in this area. The Risk Management strategy i s expected to be joint ly implemented with ASYCUDA by end-2007. Implementation performance of the strategy w i l l provide the triggers for PRGO-2 and -3. The RGC w i l l review implementation o f risk management and act accordingly to reduce the inspection rate to 50 percent (total o f inspections b y any agency as a share o f declarations) for PRGO-2 and to 25 percent for PRGO-3. Signing and implementing service-level agreements between trade-related agencies w i l l be a critical milestone.
62. A very important milestone in the private sector development reform agenda is the full implementation of ASYCUDA and its use in the Port of Sihanoukville by end-2007. Implementation of the World Bank-funded ASYCUDA-Wor ld package started in April 2006. ASYCUDA-World (Automated System for Custom DAta) i s the most up to date version o f the UNCTAD-designed information technology package for customs automation and
24
modernization. In April 2006 the ASYCUDA Project Management Unit and a national Project Team were established in CED. The national team has been trained and i s ful ly operational, and about two-thirds o f codification/automation o f the current legislative framework has been completed and endorsed by the Steering Committee.
PSD Outcome 2 Increase volume of exports and diversify export base
63. ASYCUDA implementation is on-track. A prototype o f ASYCUDA-World i s expected to be deployed in CED headquarters by end-April 2007 and the pi lot project functional in the port o f Sihanoukville by the end o f 2007. Next steps include preparation, endorsement, and implementation o f reformed procedures by CED, endorsement o f proposed reports to be generated by ASYCUDA, validation o f the prototype, and preparation for a parallel run at the pi lot site (Sihanoukville), inclusive o f training, equipment purchase, and validation o f the pi lot site. The deployment and usage o f ASYCUDA in the five CED offices i s expected to take place by mid-2008 and i s a trigger for PRGO-3.
End of PRGO Program Performance Indicators Growth o f 5% per annum in exports excluding garments and o i l 80% of transactions of the One Stop Service (OSS) in SEZs are processed electronically All company registrations at MOC provincial offices completed electronically within 4 days
k > k
64. Discussions are ongoing with the Government to support the full rollout of the ASYCUDA system throughout Cambodia. Under the current arrangement, ASYCUDA w i l l cover most land and sea checkpoints, including the port o f Sihanoukville, CED headquarters, the Phnom Penh airport, and the Phnom Penh river port. Also, under the restructured TFCP, the Wor ld Bank w i l l fund the establishment o f service bureaus to support direct trader input for S M E s and other traders to input their import and export declarations electronically.
65. Other important milestones supporting trade facilitation have also seen recent progress. The draft Law on Customs was submitted to the National Assembly, and all associated implementing rules and regulations have been prepared. The law i s currently under consideration by the Second Commission o f the National Assembly, which has committed to adopting the law before July 2007. The Wor ld Bank has provided technical assistance to the National Assembly’s Second Commission to review the draft Customs Law. T o further facilitate trade, the RGC has also committed, as part o f i t s 12-point action plan, to introduce a WTO-compatible Flat Fee for Services. This action w i l l constitute one o f the milestones o f the proposed program.
66. Diversifying the industrial export base in the context of the anticipated natural resource (oil) boom will be a daunting challenge. In order to avoid the natural resource curse, often characterized by a contraction o f activities in non-oil industrial sectors, the RGC needs to further improve the investment climate and infrastructure to attract investment in non-garment related manufacturing activities. Promotion o f Special Economic Zones (SEZs) to attract FDI, and strengthening the capacity o f M O C provincial offices to deliver electronic services, including company registration, to the local business community-a trigger for PRGO-3-would help achieving this objective. In addition, implementation o f the Duty Suspension Scheme would further facilitate export procedures for existing investors and allow them to diversify in other activities. With the assistance o f FIAS, the authorities have been working on the adoption of an export duty suspension scheme. The scheme w i l l be
25
administered by the CIB, with selected audits to be undertaken by CED, and the software w i l l be ful ly integrated with ASYCUDA. A final report prepared b y FIAS detailing the operational steps required for implementation was submitted in late April 2006. Discussions are ongoing between FIAS, GMAC, and the RGC to finalize preparations for implementation.
PSD Outcome 3 Increase domestic and foreign
67. Prior Action: Adoption o f enabling legislation regulating Special Economic Zones (SEZs). A sub-decree on the establishment and management of SEZs was issued on December 29, 2005. The sub-decree incorporates many o f the valuable lessons learned from the global experience with such zones over many years. In particular, i t calls for public-private partnerships in SEZ development, establishes rules for the provision o f infrastructure, utilities, and municipal services, and incorporates the concept o f a one-stop service to streamline business regulations and procedures. Incentives are in line wi th the Law on Investment and i t s associated sub-decree, and important social considerations are addressed, including labor regulations and vocational training. The RGC recognizes that the enabling legislation could be further improved by incorporating more "best practice" provisions, including in the area o f local administration o f the zones, land use provisions, and extending backward linkages to surrounding rural areas, and i t has recently requested technical assistance from the World Bank group in that regard. An accompanying sub-decree was also issued on December 29, 2005, detailing the new organization and functioning o f the Council for the Development o f Cambodia (CDC), including the creation o f a Cambodian SEZ Board under the direct supervision o f a Secretary-General.
End of PRGO Program Performance Indicators 9 Response time of CIB to investor enquiries i s reduced by 25 percent
68. A milestone in the implementation of SEZs regulations i s the adoption and operationalization of the "one-stop service'' (OSS) in all established SEZs. The One Stop Service (OSS) i s now operational in the Bavet SEZ with five agencies represented in a single room (CDC, CED, Camcontrol, MOC, and Ministry o f Labor). This constitutes a step in the right direction, although efforts are s t i l l needed to reduce the number o f institutions at the table. The RGC has confirmed that an OSS w i l l be established whenever a new SEZ becomes operational. Automating OSSs in SEZs, in line with ASYCUDA and risk management principles, and reviewing the implementation experience of the sub-decree on SEZs by end- 2008 with a view to submit a law on SEZs to the NA, or issue revisions to the sub-decree by April 2009, wi l l constitute other important steps.
private investment, including in infrastructure.
P Issuance of at least two judgments by a recognized arbitration center
69. Increasing domestic and foreign private investment in Cambodia will require further reform of the regulatory framework. Such measures should aim at reducing uncertainty over investment procedures and approval processes, enhancing confidence in Cambodia as a destination for FDI, and encouraging greater private participation in infrastructure (PPI) through fair, transparent, and competitive procedures. Adopting a PPI governance framework to effectively manage, deliver, and implement PPI transactions conducted fairly, transparently, competitively, and in the public interest, would be highly useful.
26
70. As part of its strategy to increase private investment, the Government has issued a Sub-decree on the Law on Investment. The Law on Investment, which was amended in 2003, creates a transparent 28-day process for investment approvals. The associated sub- decree giving the law effect and containing the implementing rules and regulations, was approved on September 5, 2005. Importantly, the sub-decree: (a) defines so-called “special nature” projects, which would not be subject to the standard automatic approval process, as “large infrastructure and natural resource activities;” (b) provides an explanation of the RGC’s underlying policies in relation to the l isted activities ineligible for investment incentives, including those below a specified threshold; and (c) redefines the role o f the Cambodian Investment Board (CIB) as an investment facilitation and promotion. The implementing regulations for the Law on Investment are being effected to the full satisfaction o f clients. Examples o f improved procedures are noted: approval by CDC o f ‘routine’ investment project proposals (e.g. those relating to shoes or garments factories in regular locations) within seven working days instead o f the earlier 45 days, while approvals o f ‘more complex’ projects (involving e.g. a potential threat to national security, environment, culture, etc.) now take about 28 working days, whereas earlier these could have taken up to three months. Progress in CIB reform toward an investment facilitation and promotion agency w i l l be a milestone in the proposed operation.
71. An important measure, which i s a trigger for PRGO-3, i s that all concessions are issued in accordance with the Law on Concessions. The Law on Concessions was endorsed by the Council o f Ministers on July 15, 2005, and forwarded to the National Assembly on September 18, 2005. The draft law defines a clear process for planning, approving, negotiating, awarding, and managing private participation in infrastructure (PPI) investment in a fair, transparent, and competitive manner. However, despite the RGC’s affirmation o f the great importance i t attaches to the Law, i t s enactment i s s t i l l pending. The RGC i s committed to working with the National Assembly to place the draft law on the agenda o f i t s plenary session in the near future.
72. Adoption of the Law on Concession by the National Assembly will enact the much needed revised process for private participation in infrastructure (PPI), a milestone for the proposed operation. The National Assembly’s Second Commission has committed to adopting the law within the timeframe o f PRGO-2. In the meantime, preparations are underway on the associated implementing rules and regulations, and these are expected to be issued in the form o f a sub-decree. As evidence that the revised process i s ful ly functioning, two concessions have been completed using the new framework since the draft was endorsed by the COM. I t w i l l be crucial that the legal provisions in the draft Law are applied to the process and implementation o f all concessions as soon as i t i s made law.
73. The assurance of the impartiality of commercial arbitration in Cambodia i s an important indicator of an improved business climate. An important milestone in this arena i s the submission o f a draft Law on Commercial Arbitration to the National Assembly. The Law on Commercial Arbitration, which w i l l facilitate prompt and fair resolution o f commercial disputes, was passed by the National Assembly and subsequently promulgated on M a y 5, 2006. However, the implementation o f the law has not seen much progress thus far. As per the law, M O C i s planning to establish a National Arbitration Center during 2007.
27
74. Under the WTO accession agreement, the authorities have also committed to establishing a Commercial Court, which would permit plaintiffs to pursue their grievances in the event o f dissatisfaction with commercial arbitration. A draft Commercial Court Law i s now under review and i s expected to be delivered to the National Assembly in 2007. Judges to be trained in commercial law have been selected and a course i s being developed at the Royal Academy for Judicial Professions. DPs are providing assistance to the RGC in this area. The issuance o f at least two judgments by a recognized arbitration center i s therefore a robust performance indicator.
75. Improved coordination among donors active in PSD in Cambodia as well as improved DP-RGC coordination will be crucial to the success of the operation. Donors active in PSD have recently agreed to step up their efforts to ensure increased aid effectiveness, and are considering the possibility o f increasing financial support to the Enhanced Integrated Framework. The restructuring o f MOC, as well as the adoption o f service-level agreements and the interagency agreement on risk management, are expected to provide greater clarity for the private sector about the division o f responsibilities among government agencies. Provision b y all relevant agencies o f complete information on trade procedures through the internet and increasing automation o f trade procedures w i l l increase transparency and efficiency, and limit possibilities for rent-seeking. The M O C i s in the process of implementing a Sector-Wide Approach (SWAP). The SWAP w i l l be based on existing analytical work, including the updated Diagnostic Trade Integration Study (DTIS) that i s being supported by a number o f DPs including the EC, UNCTAD, UNDP, and the Wor ld Bank. Thematic areas that w i l l form the basis for the RGC’s reform program in PSD include trade facilitation and the legal and regulatory framework for commercial transactions. The legal framework for commercial transactions i s based in part on the schedule o f commitments that Cambodia has adopted upon i t s accession to the Wor ld Trade Organization.
76. Although important progress has been made in establishing the required legal framework for commercial transactions, important impediments to traders and investors remain in the absence of an effective framework for combating corruption and upholding the rule of law. I t w i l l be vital to continue to focus on implementing integrity programs, transparency provisions, automation o f procedures, and merit-based pay reform.
Impact on Growth and Poverty Reduction
77. Trade facilitation and investment climate improvements are likely to spur growth primarily in Cambodia’s urban areas. The actions supported under the PRGO program w i l l l ikely lead to increased private investment and higher and more diversified exports. As investment and exports expand, formal sector jobs w i l l increase, especially in the traded sectors (e.g., through trade facilitation the reduction in informal fees would be passed on to labor in greater employment and higher wages). These reforms are needed to push Cambodia’s medium term growth above the projected 7 percent level.
78. There i s robust evidence from newly available data to suggest that poverty has fallen in the decade since Cambodia opened up to international trade and investment. Employment in the high growth sectors has created some poverty-reducing spillovers. As most of the approximately 300,000 jobs in garment manufacturing have been for young women, growth in this sector has had a positive effect on the gender equality o f earnings, and
28
arguably has helped to empower women to some degree. However, the economy remains undiversified and heavily dependent upon a small number o f sectors; and backward and forward linkages from these sectors into others have not been as strong as they might (for example, most o f the food supplied to the tourist industry i s imported, and garment manufacturing has not resulted in the development o f a domestic textile production sector)
79. Private sector development i s thus crucial both for maintaining existing sources of growth as well as generating new ones, to ensure more rapid and sustainable poverty reduction. The challenge i s now to sustain the high growth rates seen in the last decade, improve productivity, and diversify the economy into other sectors. The PRGO policy measures would result in an expansion o f trade in existing sub-sectors and facilitate the growth o f new sectors. Each change would also help to increase the poverty elasticity o f growth, by removing some o f the barriers that hold back business start-up and growth in a broader range o f goods and services.
80. The PSD policy reforms anticipated in the PRGO would benefit poorer groups in Cambodian society both directly and indirectly. Reducing the regulatory burden on business would l ikely have a direct impact by encouraging small-scale, household-based enterprises to expand (a decision that many small informal producers and traders currently defer because the regulatory burden and the unofficial levies that come with growth and formalization combine to offset any gains). The greater impact, however, i s l ikely to be indirect, but can be expected to be significant. Increased and more diversified investment and growth would create opportunities for waged, salaried, and self-employment, raise incomes, and so allow for the accumulation o f household assets and investments in household human capital. This i s not to suggest that weak governance i s the primary constraint on diversification, but that i t i s l ikely an important one. Critically, economic diversification would promote more balanced economic development, helping to ensure that national growth does not merely proceed at a good rate but also without the periodic setbacks that are more l ikely in an undiversified economy.
POLICY AREA: PUBLIC FINANCIAL MANAGEMENT
81. The RGC has placed public financial management reform squarely on its development and poverty reduction agendas. I t i s wel l known that weaknesses in the public expenditure and financial management system not only have high costs in terms o f allocative and operational efficiency but also create unacceptably high levels o f fiduciary risk to public funds. The critical test o f a public expenditure management system i s i t s ability to deliver a predictable and timely f low o f funds to the spending agencies, allowing flexibility in the application o f resources while ensuring adequate control at a sectoral and aggregate level. Cambodia’s system does not currently meet this test. The cash-based payments system has emerged as a major constraint. Budget execution has suffered from delays and an unpredictable release o f funds, due to cash constraints, undermining operational planning, and leading to the build-up o f arrears. The system i s plagued by gate-keeping and deficient accounting and reporting systems, thus leading to a weak control environment and increasing opportunities for corruption. Indeed, in comparative perspective, Cambodia’s PFM system ranks below average with respect to other low income countries.
29
82. When funds release is unpredictable, the budget ceases to be a useful planning tool, seriously undermining agency performance and expenditure control. Delays in the approval o f commitments and the release o f funds prevent timely implementation o f agency work plans, undermining the effectiveness o f spending in education, where school materials should be available at the beginning o f the school year, or road maintenance, where funds should be available after the rainy season. Recourse to unauthorized commitments to by-pass these problems creates another series o f perverse incentives, not least o f which i s the tying o f agencies to suppliers with whom they have credit arrangements, thereby hindering attempts to introduce a transparent procurement process. Agencies have incentives to withhold and underreport revenues, since this generates cash that can easily be used to finance expenditures.
83. Beyond public financial management, one of the other major reasons for low quality public services i s the absence of an effective system of incentives and accountability mechanisms in the Cambodian civil service. Weak merit-based c iv i l service management, low pay and pervasive corruption are the leading causes o f Cambodia’s relatively poor standing on public sector performance. The Country Policy and Institutional Assessment (CPIA) ranks Cambodia in the fourth lowest quintile among fellow low income countries on issues pertaining to public sector management and institutions, indicating the need for significant improvement. Given these serious problems, a strategically sequenced c iv i l service reform w i l l need to be initiated in the short term and carried out over the medium term if the Government’s vision o f poverty reduction i s to become reality. The reform program w i l l need to take a broad approach to strengthening c iv i l service management, by introducing a merit-based system that guarantees that human resource expenditures are subject to controls (viz., on hiring and promotion) and ful ly integrated with the budget formulation process; improving c iv i l service pay, to attract and retain slulled staff, especially for high level management and priority sector staff; and rationalizing c iv i l service employment, to ensure that human resources are wisely deployed in high priority sectors. Indeed, one o f the principal r isks to the government’s poverty reduction strategy i s the capacity o f the c iv i l service to deliver.
84. In response to these challenge, the Government has formulated a ten-year Public Financial Management Reform Program (PFMRP), launched by the Prime Minister in December 2004, which focuses on four development objectives: (1) Ensuring the budget i s realistic and implemented as intended in a predictable manner; (2) Implementing the policy agenda through a comprehensive, orderly and transparent budget process; (3) Improving accountability and internal control systems to strengthen compliance and transparency in the mobilization and use o f public resources; and (4) Motivating c iv i l servants by an effective incentive system managed according to meritocratic principles and procedures.2
85. The first cycle of PRGOs will focus on achieving four outcomes: (1) the annual budget i s realistic and implemented as intended in a predictable manner; (2) the policy agenda i s implemented through a comprehensive, orderly and transparent budget process, including better control o f the c iv i l service establishment; (3) improved accountability and systems result in strengthened compliance and transparency in mobilization and use o f public resources; and (4) an increase in the number o f priority ministries with c iv i l servants who are
Note that the CG JMI for PFM was: “Implement RGC’s PFM reform agenda: first 12 months of platform 1.” As such, no specific actions are highlighted here as JMIs.
30
motivated by adequate pay and credible sanctions for malfeasance (Table 5 relates these to the NPRS and CAS).
PFM Outcome 1 The annual budget i s realistic and implemented as intended in a predictable manner
Tab1 Government
Strategy Objectives Accelerate improvements in service delivery through increasingly efficient and effective public financial management
End of PRGO Program Performance Indicators P
> > >
Quarterly cumulative expenditure commitment profile: Q1 15%, 4 2 45%, 43 67%, 4 4 96% Execution rate to budget: salaries 98%, goods/services 95%, capital 80% Payments to creditors made by check: 85% by 2008 Payments to civi l servants made through the banking system: 20% by 2009
5. Public Financial Management R
CAS Outcomes Strengthened mobilization and management of public finance (setting the stage for improved service delivery and reduced corruption):
increases in tax and non-tax revenues and accountable stewardship o f o i l revenue more credible budget implementation reduced fiduciary risk through greater control and internal audit strengthened external audit
sults Focus
PRGO Outcomes 1. Annual budget i s realistic and implemented as intended in a predictable manner
2. Policy agenda implemented through a comprehensive, orderly and transparent budget process, including better control of the civil service establishment
3. Improved accountability and systems result in strengthened compliance and transparency in mobilization and use of public resources
86. The following sections start with each outcome and performance indicators, then describe the relevant prior actions and milestones for PRGO-1, and triggers for PRGO-2 and PRGO-3.
87. Prior action: Increase reliance on the banking system for tax and customs payments, and for RGC payments to creditors and c iv i l servants via transfer andor check (PFMRP C A P 7.5, 7.7, 7.15, and 7.16).3 This action encompasses several sub-actions: (i) salary payment via commercial banks to c iv i l servants; (ii) payment o f customs and excise duties at the N B C by checwtransfer; and (iii) government payments to creditors via checwtransfer.
88. The pilot for paying civil servants via bank transfers commenced in MEF and MOH at the director level (and above), and including MBPI participants, in Phnom Penh initially, in August 2006. ANZ has been selected through a competitive process to provide the service, and the MOU was signed with Government. NT has committed to rol l ing out the pi lot further during the second quarter of 2007 to al l ministry staff in Phnom Penh earning more than CR 400,00O/month and to all ministry staff in Siem Reap and Sihanoukville earning more than CR 200,00O/month.
Numbers in parenthesis refer to the PFMRP Consolidated Action Program Activities and “FR” to recommendations from the joint Bank-RGC Fiduciary Review.
31
89. On the payment of CED obligations at the National Bank of Cambodia (NBC), progress has also been made. MEF issued a prakas (#636, December 31, 2004) mandating that payment o f taxes and duties collected by CED be paid at NBC b y check (or cash for payments less than US$ 1,000). Init ial implementation o f the prakas had been uneven. However, some progress has been made as a result o f the measure. In 2005, 33 percent o f obligations were liquidated b y check. In 2006, 29 percent o f CED obligations were liquidated by check, but only 25 percent by cash (fully 46 percent were liquidated as offsetting transactions). As a result, MEF issued a new instruction in March 2007 to rectify the situation. As o f April 2007, all payments made in Phnom Penh and Sihanoukville above U S $ 1,000 are required to be made by check at N B C (with the exception of payments made on public holidays and by exemption from MEF). The new instruction should reduce the total amount o f cash payments to less than 20 percent in 2007. This measure w i l l be further rolled out to other provinces as triggers for PRGO-2 and PRGO-3, as banking conditions permit. A further measure w i l l be the publication o f the prakas in the press and a more active engagement with private sector working groups, to inform them o f their obligations.
90. The National Treasury (NT) has also issued an order to require payment of creditors by check as of September 2006 for all payments made in Phnom Penh (central NT and the municipal treasury) and Sihanoukville. As a result o f this measure, for the period October through December 2006, the percentages o f payments made by check at the central NT, Phnom Penh Treasury, and Sihanoukville Treasury were 63, 78, and 30 percent, respectively. Before the measure, only about 20 percent o f payments to suppliers were made by check in these locales. N o cash payments in these locales, however, were made to suppliers after September 2006 (the remaining share o f payments in these three treasuries were made by offsetting transactions to the accounts o f suppliers held at the NT). As a result o f this measure, 41 percent o f total NT payments to suppliers were made by check (from September to December 2006). Further ro l l out i s planned to other provinces as triggers in PRGO-2 and PRGO-3, so that the use o f cash would nearly be eliminated for supplier payments by 2008.
91. Prior action: Develop and implement new transaction processes from budget release to commitment to payment in order to streamline ability o f budget holders to spend in line with the budget (PFMRP CAP 6.1 to 6.14). MEF prepared detailed mappings o f the budget execution process in all major departments, and followed with technical assistance to help MEF design new streamlined processes. A new budget execution manual, based on a new circular and prakas, was prepared to streamline execution procedures and to introduce program budgeting starting in January 2007. The key features o f the first phase reform include: (a) simplification of salary approval in the seven priority l ine ministries (in which financial controllers were given approval authority); (b) streamlining o f execution for non- procurement items (utilities, rental fees, mission fees, workshops, etc.), including enhanced use o f petty cash for program budget spending (with special arrangements for schools and health operating districts), and revamped commitment and payment processes in MEF’s Financial Affairs Department, which reduced processing time from an average o f 16 days to an estimated 8 days; and (c) redesigned commitment processes for procurement items for program budget expenditures, such that commitment i s only required twice per year (50% for each commitment request) for each line item and such that 50% commitment authority i s available in November o f the previous year for the priority line ministries.
32
92. Additional budget streamlining measures will be rolled out in a second phase for the 2008 budget, in light of the need to further reduce processing times, especially for procurement items, and to reengineer processes before the installation of the Financial Management Information System. Estimates o f average processing times for procurement items put the commitment process at 23 working days (13 for FAD approval and 10 for MEF senior management approval) and the payment order process at 23 days (12 for FAD approval and 11 for MEF senior management approval), totaling 46 working days for completion o f the process (not including processing time in line ministries). The number o f steps and the time required for key authorizations for procurement items should be significantly reduced as part o f the second phase o f the reform.
93. The RGC i s focusing on procurement reform as a policy action to make the budget credible. MEF’s output for PRGO-1 would be to issue new procurement regulations, provide oversight, and expedite payment. Several prior actions, milestones, and triggers are programmed.
94. Prior action: Fortify decentralized procurement by strengthening the 1995 procurement sub-decree and the 1998 implementing regulations to promote economy, efficiency, and transparency (PFMRP CAP 13 and FR). To fill the gaps in the 1995 procurement sub-decree and the 1998 Implementing Rules and Regulations (IRR), and to update them in line wi th good public procurement practices, DPP undertook preparation o f an amended sub-decree and IRRs. DPP accelerated the amendment o f the 1995 procurement sub-decree and on October 18, 2006, the Prime Minister signed a new sub-decree, representing a very important accomplishment for MEF. The new sub-decree sets out the broad principles and parameters for the public procurement system, providing an improved framework for implementation of public procurement in Cambodia. In January 2007, MEF also issued a prakas adopting the new IRRs, including standard bidding documents, to support implementation o f the new sub- decree. The new IRRs provide detailed procurement procedures and greater clarity o f roles and responsibilities in the management o f the procurement function for further increasing economy, efficiency, and transparency in the procurement process. Both the issuance o f the new sub-decree and the new IRRs were originally expected to be prior actions for PRGO-2. The early completion o f these actions under PRGO-1 i s an indication o f the government’s commitment to procurement reform.
95. Milestone: Issue prakas to initiate deconcentration o f procurement in ministries, provinces, and SOEs. This action was completed in early 2005 with the issuance o f the prakas deconcentrating procurement authority to the line ministries. New thresholds, below with MEF has only a post-review function, were enacted in the December 3 1, 2005 prakas. The o ld threshold o f CR 50 mi l l ion has been increased to: CR 200 million for provincial spending, CR 300 million for provincial own-resources (Salakhet), and CR 500 mi l l ion for most line ministries, wi th the exception o f CR 1,000 million for M O H and MOEYS. I t i s estimated that ?4 of spending falls below the new thresholds, implying an urgent need to reorient the work of the Department o f Public Procurement (DPP) from prior review to post review. In addition, MEF issued a circular in June 2006 limiting the use o f non-competitive procurement methods to safeguard against fraud and abuse by deconcentrated procurement entities. For PRGO-3 the Government w i l l submit the draft procurement law to the National Assembly, completing the strengthening o f the legal framework for public procurement.
33
96. Additional milestones include: (1) strengthening MEF capacity to monitor public procurement outcomes, including through use o f performance measurement tools; and (2) establishing an e-procurement website for advertising bidding opportunities and publication o f contract award information, procurement policies, and standard documents. Concerted capacity development efforts are now needed to strengthen the capacity o f the DPP, line ministries, and provinces/municipalities in implementing the new procurement system. This w i l l include training programs on the new procurement sub-decree, IRRs, standard procurement documents, and good public procurement practices. An assessment o f the overall public procurement system, using the OECD-DAC Baseline Indicator System (BIS) framework, should be conducted and a procurement performance measurement tool should be developed to benchmark and monitor procurement performance and outcomes, forming the basis for establishment o f a national procurement monitoring system.
97. The program also supports some actions on the revenue side, in coordination with the Fund. The RGC i s committing to increases revenue, both f rom new policy measures as well as from increases in the revenue yield o f the tax base and in the regulation and oversight o f non-tax resources. The trigger for PRGO-2 on revenue i s the development of an overarching resource mobilization policy including tax, non tax, and debt sources. There i s currently little capacity to support the development o f a tax and non-tax revenue policy function, and an organizational home for this function was only recently established in the EPFPD. The overarching policy w i l l specify target collection goals for each category o f revenue and w i l l indicate the needed policy measures to achieve those goals.
98. An important milestone i s improved tax administration through a functional reorganization o f the Tax Department (3.21).4 The prakas (#248, M a y 26, 2005) establishing the legal basis to implement the Tax Department’s (TD) new functional organizational structure has been promulgated. TD needs, however, technical assistance in implementing the new model. The Bank and Fund w i l l joint ly provide TA in this area.
99. The discovery of oil, with revenue expected to flow in 2009-2010, necessitates planning for the flow of funds, and safeguarding of transparency and accountability in this important sector. Cambodia’s development partners (DPs) see Extractive Industries Transparency Initiative (EITI) endorsement as critically important for improving the likelihood o f sound o i l revenue management in Cambodia and for sending the right signal to the global community about Cambodia’s commitment to a favorable investment climate. The RGC formally initiated consideration o f EITI endorsement in August 2006 through technical workshops for MEF, the Cambodia National Petroleum Authority (CNPA), and the Ministry o f Mines, Industry, and Energy, as well as for the National Assembly and Senate through the offices o f the Assembly’s Second Commission. In addition, the Senior Minister, HE Keat Chhon, attended the EITI conference in Oslo in October 2006. The Chairman, HE Cheam Yeap, and the former Vice-Chairman o f the Second Commission, both o f the National Assembly, have called for EITI endorsement. The Prime Minister has indicated the need for further in-depth study in order to consider EITI endorsement and to manage EITI under the PFMRP. The RGC and DPs have thus agreed the following triggers for PRGO-2 and PRGO- 3, respectively: “Inter-ministerial EITI working group under PFMRP makes a recommendation to RGC on the endorsement of EITI, and the RGC and Wor ld Bank sign an
This measure was a prior action in the proposed PRGF program.
34
M O U on EITI design and implementation in the context o f PFMRP" and "RGC begins implementation o f EITI as per the M O U between the RGC and the Wor ld Bank." I t i s hoped that the RGC wi l l develop a clear consensus position over the coming year on the importance o f endorsing EITI.
PFM Outcome 2 Policy agenda implemented through a comprehensive, orderly and transparent budget process, including better control of the civil service establishment
End of PRGO Program Performance Indicators 9 Number of ministries using program budgets: 7 in 2007
and 12 in 2009
101. On strengthening the link between policy and the budget, MEF intends to provide the following key output actions: provide line ministries wi th a framework for program budgeting that strengthens links between spending and results, and improving c iv i l service establishment control in coordination with the Council for Administrative Reform (CAR). Only triggers for PRGO-2 and PRGO-3 are supported in this area.
102. Milestone: Develop and implement pi lot establishment control arrangements in MEF to improve budget comprehensiveness. An important measure in this area i s developing and implementing pilot establishment control arrangements in MEF to improve budget comprehensiveness (PFMRP CAP 2.5 and 2.6; MBPI MOU).
103. Milestone: Develop and implement program budget (PB) pilots in priority line ministries, including MOEYS, MOH, MOJ, and M O W A (PFMRP C A P 26.1-26.3). Together with the introduction o f a new chart o f accounts, the new budget classification structure, and the new streamlined execution procedures, MEF has also piloted program budgets in the seven priority ministries as of January. The Budget Department regards the introduction o f program budgeting as essential for introducing a stronger focus on results in public service provision, and has stressed the importance o f monitoring performance indicators in the context of program budgets. Refinement and expansion o f the pi lot w i l l take place in 2008 and 2009.
PFM Outcome 3 Improved accountability and systems result in strengthened compliance and transparency in mobilization and use o f public resources
End of PRGO Program Performance Indicators 9
9
9
Account classification and reporting allows comparison to budget of expenditure at both commitment and payment stages FMIS-generated budget execution reports prepared quarterly and issued within 1 week of the end of quarter by 2009 Internal audit reports issued regularly by at least 10 I A D s to the management o f the ministry, with copies to the MEF and the NAA by 2009
104. To support the outcome of improved accountability and control systems, MEF will introduce measures to automate and improve data management, as well as accounting data formats and sources. In 2006 the RGC took the first steps toward procurement of an
35
FMIS (PFMRP CAP 2 1). Following stakeholder consultations an FMIS specification and Request for Proposals (RFP) for the software have been developed (milestone for PRGO-1). The procurement process i s currently underway. Arrangements for acquisition o f the I C T infrastructure component, which w i l l be procured separately, are also being progressed. Based on the agreed init ial FMIS design and the user requirement specification, MEF has issued the request for proposals, which were due in March (first stage) and are being evaluated. The formal process has now commenced and i t w i l l be important to keep it on track.
105. For PRGO-2 the trigger i s piloting F M I S implementation beginning with core modules in 2008 (based on testing in mid to late 2007). Based on the current progress and the estimated time to complete the procurement, MEF w i l l implement on a pi lot basis initially the core General Ledger Module and then ro l l out other source modules (Purchase Order, Accounts Payable, Accounts Receivable, Cash Management, Budget, Assets Management, Inventory, etc.) thereafter in a phased manner. The init ial pi lot i s proposed to cover MEF, three line ministries, and four provinces. The milestone for PRGO-3 i s to continue rollout o f core FMIS modules to ministries and provinces and commence implementation o f budget module.
106. The operation also supports three key milestones on the development o f the internal audit function. PRGO-1 supports the establishment o f Internal Audit Departments (IADs) in l ine ministries and agencies. In 2006 the RGC created nineteen Internal Audit Departments (IAD) in line ministries, including a coordinating IAD in MEF. Of these nineteen IADs, seven are now operational; however their individual capacity and staffing vary significantly, depending on the scale o f R C G operations and DP support. IAD-MEF, as part o f i t s intended coordination/oversight role, has been working on developing and implementing the overall legal and institutional framework including necessary capacity building for effective IAD operation across government. With DP support, some IADs have undertaken some internal audit activity. However all IADs have identified the need for further substantive support, specifically to enable internal audit s k i l l s development, guidance on internal audit methodologies, and acquisition o f sufficient resources to facilitate effective operation.
107. The challenge now i s to strengthen MEF’s capacity to manage and oversee these internal audit departments. During 2007 the R C G proposes to focus on: (a) further evolving the overall framework for internal audit across government; (b) capacity building; and (c) activities targeted at specific risk areas. These activities w i l l aim to recognize the lessons learned from ongoing internal audit developments at the line ministry level and, where appropriate, seek opportunities for shared capacity building. The RGC proposes therefore to develop and secure approval o f an overall strategic plan for internal audit. The plan wil l , based on legislative, regulatory, and best practice requirements, articulate the roles and responsibilities o f MEF and ministry IADs, relationships wi th General Inspections Department and the National Audit Authority. MEF w i l l also develop training and resource inputs necessary to implement an effective government wide internal audit function, and prepare a training needs analysis (management, professional, and ICT). MEF w i l l also plan and implement an integrated program o f capacity building designed to strengthen internal audit coordination, risk analysis, planning, and reporting. The milestones for PRGO-2 and PRGO-3, respectively, are: (a) MEF develops a strategic plan for internal audit encompassing roles and responsibilities, coordination with GIDNAA, development o f IA methodologies,
36
and a code o f conduct; and (b) Ministry IADs produce annual risk assessments, internal audit plans, and quarterly audit reports for review and discussion by MEF.
Government Strategy Objectives Improve public sector
108. The operation also encompasses the objective of civil service reform (CSR) (Table 6). The end program outcome sought i s that c iv i l servants are motivated by an effective incentive system and are managed according to meritocratic principles and procedures. In order to attain this objective C A R and MEF w i l l provide adequate policy options to strengthen positive and negative incentives for c iv i l servants.
C A S Outcomes Meritocratic civil service management
Table 6. Civi l Service Reform Results Focus
governance by uprooting causes of and opportunities for corruption
and incentives tied to performance (setting the stage for reduced corruption and better service delivery):
merit-based pay and organizational reform piloted salaries increased and decompressed in key ministries strengthened performance management system implemented DP salary supplement practices rationalized
C S R Outcome
Civi l servants are motivated by an effective incentive system and are managed according to meritocratic principles and procedures:
1. Civ i l service remuneration i s increasingly adequate to attract and retain the requisite skills
2. Civ i l servants are increasingly managed according to merit- and performance-based criteria
PRGO Outcomes
4. Increase in the number of priority ministries with civil servants who are motivated by adequate pay and credible sanctions for malfeasance
End of PRGO Program Performance Indicators
P 1,500 civi l servants in 4 ministries incorporated into the MBPI by 2009
109. Prior Action: Introduce an official merit-based pay and employment reform pi lot in MEF in support o f the PFMRP (31.1-31.5). After nearly one year o f design work and tripartite negotiations between CAR, MEF, and DPs, a memorandum o f understanding (MOU), including the operations manual, on the PFM MBPI was signed in M a y 2005. On August 5, 2005, the Prime Minister issued Sub-decree 98 on the “Implementation o f the Merit-based Pay Supplement Incentive,” which established the official legal foundation for the MBPI. MEF has completed the selection process (262 staff were selected o f a possible 300 maximum). MBPI payments commenced in late 2005.
110. Progress on rolling out of the MBPI to other ministries-a trigger for future operations-had been less successful. Discussions with M O C are on-going, and the Minister o f Commerce requested that the Bank work with him to develop an MBPI for M O C in 2007.
37
Discussions with MOH are more advanced, and a deal in principle has now been reached between MOH, CAR, and the health DPs.
11 1. The trigger on CSR for PRGO-3 i s that the COM approves a phased medium-term civil service remuneration plan to improve civil service pay selectively to appropriate levels (PAR J M I 2 and NPAR priorities section 2.1.1, 2.1.3 and 5.1). The trigger for the RGC to develop and approve a new pay policy i s an agreed J M I from the Public Administration Reform (PAR) TWG. Development partners regard c iv i l service pay reform as a key priority for the effective implementation o f the NSDP, and recognize that progress to date has been limited, though the issue requires urgent attention. The trigger was originally agreed for completion by end-2006. As this has been delayed, and given the upcoming elections, this measure has been converted to a trigger for PRGO-3.
112. Though not currently in the PFM pillar of the matrix, which i s based on the PFMRP, the operation has been closely coordinated with the National Audit Authority (NAA). I t i s important that future PRGO operations include milestones, and potential actions and triggers, on external audit. The NAA has made progress in improving the timeliness o f audits. However, institutional bottlenecks seem to have prevented the finalization and publication o f the annual audit reports, none o f which have yet been published. The preparation and publication o f timely and comprehensive audit reports i s a critical element o f a sound public financial system and also are important for the PRGO DPs. Based on agreement reached during the last mission, the NAA reaffirmed i t s commitment to publish the audit report for the 2003 financial year, which was submitted to the National Assembly in 2006. The Bank i s providing assistance to NAA to prepare the 2003 report for publication as soon as possible and to prepare guidelines for publication o f al l future audit reports.
113. The NAA has developed a draft strategy for 2007-11 and an activity plan for its IDF grant on capacity development. In addition, the PFMAP features a component dedicated to the external audit function. Based on these plans and subject to confirmation by the NAA, possible actions include:
PRGO-2: Issue implementing guidelines and decree on the procedures and reporting framework between the National Audit Authority and the parliamentary commissions together with guidelines on the practical aspects o f how and when audit reports are made public; and issue publicly the annual financial audit reports that have been submitted to the National Assembly.
PRGO-3: Summary o f semi-annual and annual activity and financial reports, including the recommendations and responses from audited entities and the NAA’s forthcoming activities, sent to the National Assembly.
Impact on Growth and Poverty Reduction
114. The PFM reform program i s intended to mobilize higher resource levels and improve the management of public resources, both of which should result in a higher quantity and quality of pro-growth, pro-poor service delivery. Greater revenue w i l l allow higher levels o f expenditure in both the neglected economic sectors-transportation, agriculture, irrigation, and energy-as well as in the social sectors, which have benefited f rom
38
significant increases in funding over the past years (Table 7). Improvements in PFM systems w i l l also allow for more efficient and effective spending, generating higher rates o f return on investment projects and greater impact in terms o f the efficiency o f service delivery.
Table 7. Government and Externally Financed Expenditure by Summary Function, 1996-2003 (% GDP)
Rural Development 2.5 2.2 2.1 1.9 2.1 2.0 1.7 1.7 Social Services 5.2 5.4 6.8 6.9 7.2 8.9 8.6 7.2
Health 1.9 1.6 2.5 3.1 2.8 2.9 2.8 2.3 Education 2.1 2.5 2.8 2.4 2.5 3.0 3.5 2.6 Community & Social Services 1.3 1.2 1.6 1.3 2.0 3.0 2.4 1.9
Humanitarian Aid & Relief 0.4 0.5 0.3 1.4 2.0 1.2 0.4 0.5 Other 0.7 0.1 0.2 0.4 0.3 0.3 1.0 1.8 Total 24.8 22.2 23.4 21.9 24.6 25.3 25.1 22.0 Of which Treasury Executed 10.8 10.2 9.3 10.6 11.8 12.8 13.5 13.4
115. The RGC has indicated i ts intention to direct the PRGO proceeds toward expenditure in the following priority areas: roads, irrigation, agriculture productivity, education, and health. Although the grant proceeds w i l l not be tied to any specific purchases, the proceeds w i l l be made available in the middle o f the 2007 fiscal year, thus creating additional fiscal space and resulting in the need for programming o f additional (i.e., unbudgeted) spending. The RGC w i l l indicate to the Bank the allocation o f the funds and the additional spending resulting from the use o f the grant funds in the high priority sectors at the end o f the fiscal year.
116. Revenue i s projected to increase gradually f rom 10.5 percent of GDP in 2005, opening up fiscal space for higher expenditures in agriculture, irrigation, roads, and energy, as well as growth in social sector spending. The Government has indicated i t s intention to significantly increase spending on rural infrastructure, and i s beginning by allocating a large share o f MDRI funds (US$33 mil l ion) to fund small rural irrigation projects in eastern provinces from 2006-2008. In addition the RGC i s considering scaling up maintenance expenditures on i t s road network. Maintenance spending has been quite l ow compared to needs, resulting in a deterioration o f the capital stock beyond normal depreciation. The RGC has also stressed the need to continue to expand funding for health and education, and would allocate PRGO funds toward those sectors.
117. Increases in social spending in recent years seem to have resulted in positive trends in education and health outcomes. Development o f sector strategies and matching systems for planning, budgeting and M&E have provided a framework within which investments in physical infrastructure (schools and clinics) and increasing numbers and to some degree quality o f front-line service delivery staff (teachers, doctors and nurses) have started to shift a
39
number o f human development indicators upward. Primary enrollment has increased significantly. Net primary enrollment rates improved and net lower secondary enrollment rates also increased. Similarly in health, there has been remarkable success in controlling and then reducing the spread o f HIV and apparent significant decline in infant and under-five mortality rates.
1 18. The fundamental underlying impediments to further improvement in service delivery and outcomes are inadequate systems for managing public finances and public sector human resources. In PFM, budget allocations fa i l to reflect priority goals and actual disbursements often fai l to reflect the budget (generally to the further disadvantage o f spending in key poverty-reducing sectors, both social and productive). Though the recent public expenditure tracking survey in education (World Bank, 2005) found that allocated funds were reaching primary schools through the Priority Action Program, the results in health were less positive. Sub-provincial budgets were ill-defined and a very large share o f spending went to indirect costs, including administrative overhead, in the health sector. Mechanisms to feed results back into policy review and reformulation are weak and accountability for the efficient and effective management o f resources i s limited.
119. The second fundamental and related cross-cutting weakness that holds back improvements in service delivery i s public sector human resource management, and particularly the inadequate level of remuneration for civil servants. The salary o f public sector employees at all levels-including those (such as teachers and health center staff) who are directly responsible for the delivery o f basic services to the population-is not enough to l ive on, resulting in absenteeism, the levying o f additional, informal fees which bias against the poor, and low job motivation. Pilot merit-based pay initiatives w i l l help to identify approaches to systematically raise salaries in such a way as to reward ability and job performance.
POLICY AREA: L A N D A N D N A T U R A L RESOURCES M A N A G E M E N T
120. The RGC has clearly indicated that stewardship of natural resources and secure access to land are of vital importance to Cambodia's rural majority, yet major governance constraints-rooted in non-transparent state processes and a lack of public accountability-undermine the use of natural resources for pro-poor growth and poverty reduction. Government has recognized the importance o f improved management o f land resources, vital for unlocking Cambodia's productive potential and invigorating the agricultural sector, in i t s Statement on Land Policy approved by the Council o f Ministers in May 2001. The Statement identifies three objectives for a pro-poor, pro-growth land policy: (1) to strengthen land tenure security and land markets, and prevent or resolve land disputes; (2) to manage natural resources in an equitable, sustainable, and efficient manner; (3) to promote land distribution with equity. The RGC has acknowledged past and current abuses o f natural resources management, but has also recognized that reforms w i l l take time, given the challenges o f competing interests within and outside government. Given this context, RGC has focused on completing the legal framework, establishing delivery systems for key services required to establish a more transparent and participatory approach to land and natural resources management and, where necessary, piloting implementation o f the delivery systems to build implementation capacity and to improve the regulatory framework.
40
121. The Land Policy objectives respond to the need to increase agricultural productivity by addressing landlessness and tenure insecurity. The proportion o f rural households laclung land for cultivation has trended upward, f rom 13 percent in 1997 to 20 percent in 2004. Whi le the major causes o f landlessness are population growth and low agricultural productivity, widespread legal and illegal transfer o f state lands (including those occupied by the poor) to powerful interests i s worsening the situation. At the same time the lack o f secure tenure-about 80 percent o f rural households that owned land were without title in 2004 (World Bank, 2006)-is undermining the agriculture sector’s ability to underpin broad-based growth and poverty reduction. In fact, the 2004 Cambodian Socio-Economic Survey (CSES) indicates that the most important factor affecting agricultural productivity i s land tenure. I t i s also the case in Cambodia that smaller farms are more efficient than larger farms (World Bank, 2006), a finding that supports the RGC’s smallholder titling objectives. Thus, the Government’s land resources management initiatives are vital for increasing agricultural productivity, which lags in Cambodia in regional comparison, and reducing social conflict.
122. In order to implement the policy statement, the RGC has enacted a new Land Law, established the Council for Land Policy, and mobilized development partner financing. The new Land Law was passed in October 2001 fol lowing an extensive consultation process. The Council for Land Policy (CLP) was established to coordinate Government agencies involved in land resources management. The Bank has a strong track record o f partnership with the RGC in the design and implementation o f the land resource management reform agenda, however recently identified weaknesses in Bank-financed operations in Cambodia (including the ongoing Land Management and Administration Project) have raised concerns and prompted a detailed discussion about strengthening governance and ensuring adequate financial controls.
123. Despite numerous obstacles the Government has taken proactive steps in recent months and has: (1) passed a sub-decree on privatization o f state land requiring that all property be registered in the state property inventory at MEF prior to sale or lease; (2) prepared a draft law on expropriation o f private property setting out clear procedures for public appropriation o f privately owned land (including limitations on the instances in which land can be expropriated and frameworks for deciding on compensation); and (3) supported an independent review o f the functioning o f the Cadastral Commission (completed in 2006) providing a sound basis for setting up continuous monitoring o f i t s performance. Importantly, the Government has completed i t s first mapping and registration o f state lands-a key element o f improving overall state land management-in the context o f allocation o f land to the poor through social land concessions.
124. The proposed operation would build on these recent steps and support the implementation of key elements of the RGC’s land policy strategic framework which are required to improve the utilization of land resources in support of sustainable growth and poverty reduction. The actions proposed are also supportive o f the Strategic Framework for Natural Resources Management (NRM) being developed with RGC, and other development partners. The draft NRM framework emphasizes increased transparency, decentralization and local empowerment, and partnership as the basis for moving from a situation o f high conflict and minimal public benefits to one which increases both local and national public benefits and increases collaboration amongst state actors and state and private
41
entities in the protection and use o f natural resources. The areas o f focus-titling and dispute resolution, decentralized state land management, increased transparency o f state land utilization and land distribution, expanding use o f participatory approaches to natural resources management, and demarcation o f production and protection forests-represent the basis for implementing a substantial shift in the governance o f land and natural resources in favor o f local communities and the poor as well as increasing public accountability (Table 8).
Table 8. Improved Land and Natural Resources Management for Sustainable Growth and Poverty Reduction
Government Strategy
Objective Create a favorable environment in land resource management conducive to private sector enterprise
RGC will review idle and vacant state lands, as well as state lands illegally occupied by private entities
RGC will develop and implement a National Forest Program focusing on strengthening Forestry managemenl and conservation and increasing Yorestry zontributions to socio-economic jevelopment and poverty reduction
CAS Results
[ncreased number of poor Cambodians able to benefit k o m formal mechanisms for access to and secure Jwnership of private lands:
Increased number o f plots under 5 ha. registered with title Increased proportion o f land disputes involving powerful state/private interests evaluated as decided fairly by civi l society through cadastral commissions. Proportion o f state land allocated to social concessions relative to economic land concessions increases each year by 10%
[ncreased public access to information regarding status and use of state lands and local participation in state land use decisions:
Publicly accessible state land database Provincial land use classification and allocation maps completed by Provincial State Land Management Committees
Strengthened systems for management of forest *esources based on working with local communities
Development o f sustainable and equitable forest policies and improved frameworks for resolution of conflicts/disputes over implementation and regulation o f forest management systems 100% increase each year in forest area under local benefit sharing management Five protected areas have completed management plans reflecting principles o f the New PA Law such as boundary demarcation based on participatory processes, and co-management areas
PRGO Outcomes
Accelerate the distribution o f land and the issuance o f secure land titles by:
Extension o f tenure securitj by plot registration and land titling
Resolution o f land disputes quickly and transparently
Implementation o f social land concessions Legal framework defining procedures for mapping, allocating and managing state lands in place
Greater public access to information on location and use o f state lands Improved forest management through increased transparency, participatory demarcation o f forest boundaries, strengthened protected areas management, and improved/expanded community forestry
125. To improve land tenure security, the Government i s focusing on a program of accelerated registration of private land plots, including distribution o f titles; extension o f tenure security to those not covered by individual titles; more efficient and equitable mechanisms for resolving land disputes; and implementation o f a program o f social land concessions.
42
and the issuance of secure land titles
LNRM Outcome 1 Accelerate the distribution of land
End of PRGO Program Performance Indicators > Cumulative total of 1 million titles surveyed and adjudicated; of
126. The RGC will expand implementation of a transparent and participatory process of systematic registration and title issuance consistent with the procedures agreed in the context of LMAP. In order to increase the likelihood of registration o f subsequent transactions, revisions w i l l be made to reduce the cost and increase the transparency o f official fees. The following prior actions, milestones, and triggers are necessary for attaining the objective in this area:
127. The number of titles issued each year was a prior action for PRGO-1 and will also serve as a milestone for subsequent operations. Issuance o f land title certificates during PRGO-2 and PRGO-3 i s expected to continue at the rate o f approximately 20,000 titles per month leading to an end o f series total of approximately 1 million titles issued and adjudicated with 800,000 titles issued and 95% o f issued titles delivered to beneficiaries. The RGC expects to increase productivity o f the registration teams through improved personnel management based on experience in the first years o f registration.
128. Another important milestone w i l l be the expanded delegation o f signature authority for cadastral maps to governors in 3 additional provinces in PRGO-3. In order to reduce central level delays, prakas have been issued b y the MLMUPC authorizing provincial governors to sign off on cadastral maps as the basis for tit le issuance.
129. In order to extend the basis for tenure security to those not covered by individual titles, the RGC will develop the legal and technical basis for communal titling, particularly for indigenous communities. As a milestone RGC began implementing three communal titling pilots and initiated public consultation on communal land registration and titling with indigenous communities in Ratanakiri and Mondulkir i Provinces. A draft Policy on Registration and Right to Use of Indigenous Communal Land in Cambodia has been prepared and released for public comment, but finalization of the pol icy and regulations to enable full implementation o f the communal titling provisions o f the Land Law in indigenous communities i s likely to require another one to two years. In the interim, senior RGC officials have publicly supported the idea o f implementing interim protective measures (pilot identification, mapping, classification, and provisional endorsement o f indigenous land within the framework o f provincial level state land management committees and district working groups as per Sub-Decree #118) to avoid further land losses by indigenous communities. Consistent with the Law on Communities and Articles 23 to 28 o f Land Law, the legal status o f indigenous communities needs to be established b y the Ministry o f Interior. Implementation
43
PRGO-2, and adoption o f RGC’s policy and supporting sub-decree on registration o f IP communal land rights i s a trigger under PRGO-3.
130. The RGC will continue implementation of locally initiated social land concessions to gain practical implementation experience as the basis for improving i ts approach as well as attracting additional development partner support. The RGC has initiated implementation o f social land concession guidelines and the state land management sub- decree, and identified land for social land concessions in two provinces. The provinces o f Kampong Cham and Kratie have indicated land areas they consider suitable for social land concessions. Officials from both provinces were trained at the provincial, district, and commune levels to carry out the procedures for land use planning and state land registration to confirm areas suitable and available for social land concessions prior to initiating process o f selecting land recipients and designing supporting sub-projects. During the PRGO series the RGC proposes to settle 2,000 eligible households on social land concessions, with livelihood support provided and identify an additional 10,000 hectares o f land, including from cancelled or reduced ELCs, through the established bottom-up commune land use planning process.
131. As a milestone the RGC supported the establishment o f cadastral commissions for alternative land dispute resolution. The legal framework for the establishment o f Cadastral Commissions (CCs) at district, provincial, and national levels was completed in 2003. Cadastral Commissions are now operational in all provinces and municipalities, and all districts that have a district office o f the M L M U P C (more than 90%). In addition, a new body, the National Authority for the Resolution o f Land Disputes (NARLD), was established in early 2006. This represents an important advance as the appeals process i s expected to contribute to more rapid and equitable resolution o f land use disputes however coordination mechanisms and respective roles of NARLD and the cadastral commissions are s t i l l being worked out. Statistics provided by the National Cadastral Commission Secretariat (NCCS) show that, as of the end of April 2006, the CCs had received 4,254 cases. Of these, 1,246 (29%) had been successfully resolved and 950 (22%) dismissedwithdrawn; 2,196 (5 1%) cases were pending. According to the NCCS, the majority o f successfully resolved cases involved small numbers o f families. To date the CC has resolved few o f the more complicated cases involving powerful people or numerous parties.
132. In order to implement a sustainable and efficient approach to state land management, the Government w i l l strengthen the legal framework defining the procedures for mapping, allocating, and managing state lands, as well as implementing provisions for participatory management o f natural resources and improving public access to information on the use o f state lands.
LNRM Outcome 2 Management o f state lands through transparent, participatory mechanisms, including review and check on commercial contracts and concession agreements on natural resources and state assets
End of PRGO Program Performance Indicators Five state land maps and databases established Review o f all ELCs greater than 10,000 has. completed, including any cancellations or reductions required by law, and results reported to public every 6 months Technical Secretariat for ELCs reports publicly and regularly on outcomes o f concession review process 100% o f communities managing forest areas have approved Community Forest Agreements and 25% have approved Community Forest Management Plans Information on PAS and forests i s available to the public and updated on a regular basis
9 k
k
9
9
44
133. The fol lowing prior actions, milestones, and triggers contribute to the RGC’s objective:
134. Prior action: Council o f Ministers adopts Sub-decree and implementing prakas on State Land Management. The Sub-decree was adopted by the Council o f Ministers on September 30, 2005 and contains the basis for increased public participation and transparency in management of state lands, reflecting some comments received during public consultation process. The prakas was issued in March 2006, though criteria for classification o f state public and private lands have been delegated to provincial state land management committees under broad and somewhat vague guidelines. In March 2007, Cambodia completed i t s first registration o f state land following the decentralized and participatory process outlined by the sub-decree in the context o f allocating land for the social land concession pilot in Kratie Province. As a milestone for PRGO-2 state land mapping; w i l l be conducted in five districts and the results placed in a publicly accessible state land database.
135. The RGC i s attempting to improve the performance of economic land concessions by ensuring that they are based on effective land assessment, local consultation, formal registration of land boundaries, and competitive bidding procedures. Prior action: The Council of Ministers adopts the Sub-decree on Economic Land Concessions (ELCs) and establishes a technical secretariat. The Sub-decree was adopted by the Council o f Ministers in December 2005. While the sub-decree contains several important provisions regarding public disclosure and local participation in review o f existing ELCs, similar provisions for the process o f granting new concessions are not well-specified. The RGC established the E L C Technical Secretariat required under the sub-decree in June 2006 to address this shortcoming in the implementation prakas and to commence the time-bound concession review process. a prior action the RGC established a mechanism to periodically but regularly disseminate information on ELCs in accordance with the notice issued by the Prime Minister in June 2005. In February 2006, MAFF placed a significant amount o f information on i t s website. In response to concerns about the completeness o f the information and quality o f map coordinates, MAFF committed to update and further improve the information disclosure. The provision o f information f rom agencies other than MAFF i s s t i l l pending. The related triEEer for PRGO-2 w i l l be to complete this process o f information disclosure, prepare a log book with information on al l concessions established, complete a review o f at least five concessions in excess o f 10,000 hectares, register al l concessions in the state property inventory (consistent with the recently issued sub-decree) and issue six-monthly reports on the status o f the review process, al l issued as oublic documents.
136. In order to reach a common understanding on the way forward in management of natural resources, a dialogue with the Government and other stakeholders on forestry and rural development options i s underway and drawing, where appropriate, on recent analytical work undertaken by the Bank and others. During the proposed PRGO series this dialogue w i l l be deepened and w i l l proceed with the explicit aim o f exploring both the short-term imperative to address concerns related to access to natural resources by the rural poor, illegal logging and forest land encroachment, and continuing forest loss, as wel l as the longer-term options for sustainable management o f forest resources, attempting to balance the competing objectives of biodiversity conservation and expanding opportunities for economic growth. At present the focus i s on the gradual expansion o f community-based approaches to natural resources management and building on progress with biodiversity conservation in Ratanaluri under the Biodiversity and Protected Areas Management Project (BPAMP). &
45
trigger under PRGO-2 the RGC w i l l define operational procedures for forest boundarv demarcation that are fully consistent wi th both the state land management - and forest demarcation sub-decrees and under PRGO-3 forest boundary demarcation w i l l be carried out in five provinces fol lowing the agreed procedures.
Impact on Growth and Poverty Reduction
137. The PRGO program would support growth in rural areas through more secure property rights, provision of social land concessions to small-holders, and crop diversification. Agriculture remains central to the livelihoods o f the great majority o f Cambodians, and particularly poor Cambodians. In 2004, 91% of the poor l ived in rural areas; 63% o f poor households (and 51% o f all households) reported agriculture as the occupation o f the head o f household. In the interests o f poverty reduction i t i s thus critical that land, as the key productive asset in agricultural production, i s managed equitably. Improved land resource management can be expected to exercise a strong positive influence on growth and the reduction of poverty via: (1) enhanced agricultural productivity arising f rom increased security o f land tenure; (2) increased attention to public interest and developmental goals (equity, rural livelihoods, state revenue generation and environmental sustainability) in the management o f state land assets; and (3) direct improvements in the welfare o f poor households which are the beneficiary o f equitable and efficiently-managed land distribution.
138. Analyses find that secure land tenure, in the form of certificates or application receipts, significantly raises crop yields, value of land, and household consumption (WB, 2006). Secure land tenure, i.e., formal land title in the form o f a certificate, increases rental value by 57 percent; sale value by 38 percent; crop yields b y 65 percent; and household consumption by 24 percent. The main reason i s that well-defined property right improves private appropriability of returns. Owners with secure land titles are more wi l l ing to invest in higher-risk and potentially higher-payoff activities, such as planting perennial trees and diversifying into vegetable and cash crops.
139. Moreover, reallocating idle “economic” concession land to smallholders through “social” concessions has a clear rationale in terms of improved productive efficiency. As in other countries, i t appears that rural households in Cambodia are small but efficient agricultural producers, particularly when they have access to improved technology and inputs through public programs or contract farming arrangements. According to analyses f rom the CSES 2004, small farms are more efficient than large farms, whether measured b y crop income, crop yields, profit or output value per hectare. Increased land utilization compared to the existing economic concessions w i l l boost aggregate economic activity.
140. I f managed in a manner consistent with poverty reduction objectives, state- managed lands represent an important potential asset for helping the poor move out of poverty. Currently, state management o f land and forests has had very l imited or even adverse impacts on the poor. Allocations to large business interests and unsustainable resource exploitation have reduced access to land for the poor; the revenues generated through these allocations, which could be utilized to support public service provision, has been very poor. The PRGO w i l l support implementation o f the existing legal framework for land distribution to the poor through better management o f state lands consistent with RGC’s poverty reduction and growth objectives through the agreed prior actions and triggers.
46
141. The PRGO wil l also support distribution of state lands to the landless and land- poor. While the landless only represent about 12 to 15 percent o f the poor, their ability to move out o f poverty in rural areas i s dependent in large part on their ability to access productive land and support services. The PRGO w i l l support the development o f guidelines for implementation o f social land concessions, as well as the provision o f land and supporting services for land recipients.
142. The PRGO wil l contribute to expediting state land mapping through development and implementation of forest boundary demarcation procedures. Forest demarcation w i l l help strengthen forest law enforcement by clarifying jurisdiction and facilitating prosecution o f forest encroachment cases in the courts. Clearly defined procedures w i l l also help expedite the process o f state land mapping and foster improved inter-ministerial coordination once competing sub-decrees on forest demarcation and state land management are ful ly reconciled at the operational level.
ENVIRONMENTAL ASSESSMENT AND SAFEGUARDS
143. The proposed PRGO has been screened under the applicable policy (OP/BP 8.60) to assess i t s potential to cause significant effects on the Cambodia’s environment and natural resources. The PRGO i s not expected to have significant negative effects on Cambodia’s environment and may have positive effects, particularly on Cambodia’s forest and land resources as tenure security improves and government capacity to implement existing rules and regulations i s strengthened.
144. The Cambodia Environment Monitor (World Bank, 2003) identified the exploitation and degradation of natural resources, air pollution, water scarcity and pollution, solid and hazardous waste disposal, land use and biodiversity conservation as the most urgent challenges. A country safeguards implementation review, completed in 2006, also highlighted weaknesses in RGC environmental monitoring and enforcement capacities. To successfully address these challenges requires environmental management at all levels.
145. To gain a ful ler understanding of potential impacts of the PRGO series on the environment and to further develop the analytical basis for identifying and monitoring appropriate indicators, analytical work wil l be undertaken through the Environment Monitor and other instruments in FY08. In addition the Bank i s currently preparing a concept note in response to a request from the RGC to support strengthening environmental management in Cambodia, including increasing the capacity o f the Ministry o f Environment to prepare Environmental Impact Assessments in conformity with the existing legislation.
OTHER CAS AREAS
Deconcentration and Decentralization (D&D)
146. The D&D reforms embodied in the organic laws that are currently being drafted and discussed within RCG, have the potential to be among the most profound and complex constitutional development in Cambodia since the adoption of the Constitution. Such reforms, i f ful ly implemented, would redirect accountability o f the state to i t s citizens, as
47
well as affect all sectors and levels o f government by redistributing political and administrative authority, functions, financial resources and personnel.
147. As the D&D reforms would be far reaching and complex to design and implement, i t i s envisaged the reforms would be undertaken in a phased approach:
Preparatory Phase (2007), during which the organic laws are being drafted, consultation on the drafts undertaken, and the laws finalized and submitted for approval. An Implementation Strategy wi l l also be drafted.
Initial Phase (2007-2009), during which the reform process w i l l begin implementation, including: (a) establishment o f the Implementation Authority; (b) design o f modified sub- national structures and systems; (c) functional assignments, structural changes, transfer o f personnel; (d) inter-governmental fiscal arrangements for transfer o f resources.
Transition Phase (2010-2012), during which the progress on the reform process would be reviewed and appropriate adjustments made.
148. PRGO-2 could draw from the D&D Reform Implementation Strategy, once finalized, to adopt an appropriate set of triggers and milestones. As the D&D Reform Implementation Strategy i s currently under discussion and i s contingent on approval o f the organic laws, i t i s not possible to identify the specific actions on D&D to be included at this time.
Human Development
149. The Royal Government of Cambodia has espoused an ambitious reform agenda in health and education and has made some important progress in recent years. Salient priorities within the NSDP 2006-20 10, which could be incorporated into future PRGOs, include: (1) removing barriers to access, expanding coverage and addressing problems o f affordability; (2) improving the quality and efficiency o f service delivery; (3) strengthening sectoral expenditure management and improving the efficiency of spending; (4) promoting c iv i l service reform to address the low pay for teachers and health care providers, a critical determinant o f poor service quality, through salary increases and incentive programs such as the Meri t Based Pay Initiative (MBPI); and (5) developing institutions and building capacity-not only at the central level, but also at the provincial and community levels.
Infrastructure
150. The Government’s Rectangular Strategy places great importance on the rehabilitation of the country’s existing infrastructure and the construction of new infrastructure assets to meet the demand of i ts growing economy. The road sector continues to be a high priority and i s also an area where the Bank has been engaged. After years of repair and rehabilitation, the time i s now ripe for Cambodia to introduce the concept and practices o f road asset management to ensure the maximum benefits of road investments. The Bank i s keen to support a Government Road Asset Management Program, preferably through co-financing with ADB and other DPs. On this basis, the DP support should aim to help build institutional capacity for road asset management, fill the funding gaps for routine
48
and periodic maintenance before the domestic funding sources reach the sustainable level, and finance the restoration of badly deteriorated roads to the maintainable condition. The Government, ADB, and Bank are currently discussing investment options and complementary policy measures; the road sector could thus be integrated into the PRGO program starting with the second operation. In addition, with the recent announcements about the discovery o f o i l and gas in offshore Block A, work in the o i l and gas sector i s being ramped up. While public finance issues are already addressed under the PFMRP, there i s new work being undertaken on sectoral o i l and gas issues, including the legal framework for and regulation o f the sector. These issues could also be incorporated into future PRGOs.
VI. OPERATION I M P L E M E N T A T I O N
FIDUCIARY ASPECTS
15 1. The 2003 IFAPER, which incorporated a Country Financial Accountability Assessment (CFAA) and which was followed by a Country Procurement Assessment Report (CPAR) in 2004, concluded that the overall level of fiduciary risk in Cambodia i s high. High fiduciary risk i s a result of weak control over public expenditure execution, which derives from unreliable systems and procedures. As a consequence the PFM system cannot provide assurance that public funds are used for authorized purposes. The Government ful ly accepted the diagnosis and recommendations o f the IFAPER and the CPAR, and has developed and endorsed a Public Financial Management Reform Program (PFMRP) that ful ly incorporates the analytical foundations o f both.
152. Since 2005 implementation of the Government’s PFMRP has been addressing-and therefore reducing-the fiduciary issues identified in the IFAPER and the CPAR. The first two platforms o f the PFMRP are designed to tackle the underlying fiduciary weaknesses inherent in the system. Platform 1 w i l l make the budget more credible in delivering resources in a timely and predictable manner to spending ministries, and has been under implementation since February 2005. I t i s expected that Platform 1, which i s improving budget comprehensiveness, Treasury operations, and procurement procedures, w i l l be completed before the end of 2007. The overarching objective o f Platform 2 i s to improve financial accountability, and this w i l l be accomplished b y strengthening accounting systems, automating budget reporting and analysis, and building internal audit procedures and controls. Detailed development o f Platform 2 i s currently underway and i t i s expected that implementation w i l l commence before the end o f 2007.
153. The principal means of addressing fiduciary risk i s therefore through vigorous support for the PFMRP. The Bank has led the PFM Development Partner Committee (DPC) since 2003 in supplying both analytical and implementation support to the RGC. I t i s the view o f the Bank, as well as the DPC, that the Government has demonstrated credible commitment to the PFMRP, as indicated by i t s largely successful track record of implementation from 2005-2007. The PFMRP w i l l take a decade to complete, but significant impact i s already being noted.
154. In addition to addressing fiduciary risk through the PFMRP, the Bank will complement standard fiduciary arrangements with additional safeguard measures. According to standard procedures, grant proceeds w i l l be disbursed in accordance with the Bank’s procedures for development policy lending as set out in OP 8.60 and against
49
satisfactory implementation of the PRGO-1 program. Once the grant i s approved by the Board and becomes effective, the proceeds w i l l be disbursed in a single tranche. The borrower w i l l open and maintain a dedicated foreign currency deposit account in U S dollars at the National Bank of Cambodia (NBC), and the grant proceeds w i l l be deposited by the Bank into that account. Within thirty days, an equivalent amount w i l l be converted into Riel and credited to the National Treasury (NT) in order to finance budget expenditure. The N B C has been subject to a full IMF Safeguard Assessment with respect to a possible successor PRGF arrangement (though the assessment i s now somewhat dated). The assessment, completed in March 2004, addressed four broad areas and made specific recommendations to strengthen: external audit, legal structures and independence, financial reporting, and internal audit and control.
155. Additional safeguard measures will also be utilized. These include the establishment o f a dedicated NT budget account (to be used exclusively for PRGO funds) to receive the funds from the dedicated foreign currency account; and a mandatory audit o f both the foreign currency deposit account and the NT budget account (including the balances and transactions o f both accounts). MEF wi l l report to IDA on: the amount received into the NBC’s foreign currency deposit account, and the amount withdrawn f rom the foreign currency deposit account and the equivalent amount in Riel deposited into the dedicated NT account for budgeted expenditure (the information provided i s to include the date and namehumber o f the NT account into which the local currency amount has been deposited). The dedicated accounts and related funds flows to and from these accounts w i l l be audited by independent auditors and in accordance with terms o f reference to be agreed wi th IDA.
156. The RGC will also ensure that the grant proceeds are not used for ineligible purposes or items (Le., to finance goods or services on IDA’S ‘negative list’) as agreed during negotiations and defined in the Financing Agreement. If the proceeds o f the grant or any part o f the grant proceeds are used for purposes other than the agreed expenditures as specified in the Financing Agreement, the Bank w i l l require the RGC to either return the amount to the Deposit Account or the NT Account to be used for eligible purposes, or to refund the amount directly to IDA for cancellation.
IMPLEMENTATION, MONITORING AND EVALUATION
157. The beneficiary i s the Royal Government of Cambodia (RGC). PRGO-1 i s a single tranche grant that w i l l be disbursed upon effectiveness after the opening of a dedicated foreign currency account at the NBC. I t i s envisaged that there w i l l be two further single-tranche PRGOs in the series on a twelve to eighteen month basis, depending on the speed o f the reform program.
158. The RGC will be responsible for the overall implementation of the PRGO program. MEF coordinates with other ministries through the multi-ministerial Committee for Economic and Financial Policies (CEFP), and through bilateral meetings. MEF also prepares a regular report on PRGO progress. Bank supervision w i l l focus on regular verification processes that monitor implementation o f the policies being supported by the PRGO and the PFMRP. The Bank’s monitoring w i l l be aligned with the government’s monitoring and evaluation o f the NSDP, which w i l l occur through the TWGs. The PSD, PFM, and Land TWGs are chaired by the Bank on behalf o f the partner community, which allows for close supervision o f PRGO actions and triggers.
50
R I S K S A N D R I S K MITIGATION 159. A n innovative pilot stakeholder analysis was carried out in 2005-2006 to analyze the risks at the level of specific prior actions. Using a modified expected utility model, the positions, salience, and resources o f key stakeholders were analyzed. The results o f the analysis were used to assess the feasibility o f consensus on individual prior actions. The detailed results have been reported ~eparately.~
160. The general risks concerning the PRGO and i ts implementation can be grouped into the following categories: (i) political r isks and ownership; (ii) weak capacity o f public institutions; (iii) weak governance and accountability environment, including corruption.
Political risks and ownership
161. The Government’s ownership of the reform program i s indeed the key to i ts successful implementation. While there i s strong ownership in MEF, there appears to be less commitment in some o f the other agencies involved. There i s a risk o f a narrowing o f the coverage o f the operation, as opposed to the typical broadening o f coverage that takes place over time in many countries. Further, despite the Government’s experience with the Bank’s policy lending operations (through the Structural Adjustment Credit), i t did not establish a clear track record of reform through the SAC, as implementation of policies agreed was uneven.
162. National elections in 2008 raise a serious risk of a slowdown in the reform program. Upcoming elections could be used as a pretext to retard and/or delay reform. If this i s the case, the second operation o f the series would l ikely be delayed until wel l after the election. The reform program could also be stymied i f there are perceived threats or perceived encroachment on their territories by powerful vested interests.
163. There i s also a risk that the Wor ld Bank and other ‘traditional’ DPs could lose influence. The f low o f o i l revenue in a few years’ time could alter the rules dramatically. This could mean that the leverage o f the PRGO would derive principally f rom technical assistance in the form o f analytical and advisory services f rom the Bank. There i s also a risk that o i l revenue could be poorly and non-transparently managed, which could put macroeconomic stability at risk.
A few preliminary points are noted on three key P F M prior actions: (1) Treasury payments to suppliers by check: A consensus formed around a policy measure such that approximately 1/3 o f total payments to suppliers are now made by checks; (2) Customs payments made by check to the NBC: The negotiations around this issue eventually produced a consensus, though resolution was delayed due to the somewhat difficult nature o f the discussions (in the sense o f important stakeholders having high salience on the issue, but also having different positions). A more incremental prior action position yielded greater consensus but less progress on the desired outcome; (3) Expansion of MBPI to three other ministries: Negotiations are proceeding on this issue, and it appears that support for the prior action i s growing. Many stakeholders wi l l likely support the MBPI expansion to three other ministries, while many other stakeholders would prefer to see an expansion to four. In either case there i s robust support for this prior action at the level o f MEF and the line ministries, though not necessarily in CAR.
51
164. These risks, however, should also be reduced slightly by the connection between the PRGO and the March 2006 C G Meeting, which l inked the Government’s implementation o f reforms and DPs’ contributions by rewarding Cambodia wi th higher ODA (just as the 2004 CG saw both the Asian Development Bank and the World Bank reducing their pledges because o f poor performance on governance). Moreover, the operation i s now f irmly embedded in the C G process, including in the joint Government-DP discussions in the Technical Working Groups, where regular updates on the operation are provided. In sum, the Government has realized that i t must move f rom announcements in these three areas to actual implementation if i t i s to continue to receive DP support. The PRGO process i s designed to strengthen this linkage between results and DP assistance.
165. The Government has set up a monitoring mechanism in the fo rm o f a Government Donor Coordination Committee (GDCC) that meets on a quarterly basis and monitors the entire reform program wi th a special focus on identifying lagging areas. Many o f the actions agreed to at the C G Meeting are cross-sectoral in nature and this monitoring mechanism brings an internal cohesion to the reform program that had been lacking. The PRGO’s prior actions and triggers are based on the JMIs agreed at the CG Meeting, so that the reform program remains government-owned and led and supported b y the entire DP community collectively.
166. However, any wavering commitment could result in a possible risk that the reform program would take place in a piecemeal basis; reform actions taken could be diluted by subsequent measures; and worse yet, these could be subject to reversals-as was reflected in the past pattern o f reform in Cambodia. The Bank, through i t s active dialogue with Government counterparts, could provide some external support to preserve the momentum o f reform among the senior decision-makers, while serving as an ally, through the PRGO instrument, to the Government and especially the MEF to help maintain and sustain the government strategy for and i t s commitments to the reform program. Still, despite the PRGO, powerful pockets o f resistance within Government to some of these reforms are l ikely to remain.
167. One o f the major concerns here i s that governance reforms not directly supported by this operation could soon become the binding constraints to growth and poverty reduction. In this scenario, though reforms in PFM, PSD, and LNRM proceed, the lack o f reform in the legal and judicial and c iv i l service arenas would block further sectoral reform from having much impact. The lack o f progress on c iv i l service reform i s particularly worrisome and has the potential to undermine the entirety o f the PRGO reform program. The operation i s attempting to tackle c iv i l service reform on a ministry by ministry basis, but even this modest approach i s proving difficult.
Weak capacity of public institutions
168. Even with the government’s full commitment, implementation o f the reform program could be delayed because o f weak capacity o f public institutions, especially at the sub-national levels which could impede the implementation o f proposed reforms. The Bank aims to mitigate this risk by: proposing and formulating a clear phased strategy in policy actions and ensuring that in all the key areas o f PRGO implementation, institutional capacity i s built up through wel l designed and targeted capacity development support, which
52
would ideally encompass mechanisms such as the MBPI to address c iv i l servants weak incentives for performance. A related risk concerns the piloting o f reform and the possibility that pilots are not rolled out into more systematic reform efforts. Piloting i s occurring in all three sectors and i s an accepted way o f working in Cambodia. The threat, however, i s that pilots proceed without ever having system-wide impact, due either to weak capacity or lack o f political wi l l .
Weak governance and limited accountability
169. Corruption in Cambodia i s a critical constraint-with economic and social advancement often driven by nepotism and graft instead of productivity, integrity, and entrepreneurship. All these have exerted a negative impact on the implementation o f the reform program. The Bank’s ability to mitigate these political r isks i s limited, except through promotion o f activities that foster greater participation o f c iv i l society and greater transparency.
170. In a weak governance environment there is also a reputational risk of providing budget support. Following the declaration o f misprocurement in the Bank’s portfolio with a development policy operation i s l ikely to generate criticism from some quarters. For this reason the task team i s proposing enhanced fiduciary arrangements, while vigorously supporting Government’s efforts to improve the PFM system.
Exogenous shocks
171. Given the fragile and fledging economic base o f the country, Cambodia i s prone to exogenous shocks including adverse terms of trade, lower exports, increasing regional insecurity and global economic slowdown, ill effects o f health-related problems such as avian flu or SARS, and natural disasters. All these could cause a widening o f the external financial gap and disrupt macroeconomic stability as Cambodia depends heavily on exports.
Collaboration with DPs and civil society
172. To strengthen the country’s commitment, enhance sustainability of reforms, and mitigate any adverse impact on would-be losers, the Bank has been closely coordinating with other DPs, NGOs, and the private sector. Strong partnerships with other DPs in helping the implementation o f the reform program are highlighted in the TA matrix. In particular, under the NSDP framework, the PRGO program has been closely coordinated with the IMF. Close coordination among DPs would mitigate the burden imposed on the government, minimize overlapping DP demands, and insure consistency o f the reform program across all areas.
53
ANNEX 1: LETTER OF DEVELOPMENT POLICY
* . . _ . *
S * ...,.......... 2071. ....... WEFl ...............
Phnom Penh, 25 April ,2007
H.E. Paul D. Wolfowib President
Washington, D.C. ' The World Bank
Excellency,
On behalf o f the Royal Government o f Cambodia, I am writing to thank the World Bank for providing Cambodian with Poverty Reduction and Growth Operation (PRGO), which will play a crucial role in supporting and driving further structural reforms in key sectors, The Royal Government has clearly understood that the proposed reform measures will lead to poverty reduction .and prosperity for al l Cambodian people.
This letter i s intended to briefly outline the recent progress in Cambodia, to reiterate once again the Royal Government Cambodia's commitment to reform and to seek the International Development Association's support on these reforms and the implementation o f our government political platform, the Rectangular Strategy (RS), as well as the National Strategic Development Plan (NSDP) through the implementation of the PRGO.
Recent Progress in Cambodia
Cambodia has gone through sweeping change not only in political and security, but also in its economic and social landscape. While peace, territorial unity and political stability have been achieved, this stable, safe, and secure environment i s an essential precondition to Cambodia realizing i ts economic and social potential as a peaceful and prosperous nation. Poli'tical stability has opened up a window of tremendous opportunities for social and economic development for Cambodians from all walks o f life.
During the past decade, prudent and sound macroeconomic management. particularly in the area o f fiscal policy has helped the economy to achieve remarkable progress. The recent economic performance of Cambodia has been noteworthy. During 1999-2006, annual average GDP growth reached around 9.7 percent. In 2005 and 2006, the real GDP growth reached an all time peak of 13.4 percent and 10.5 percent respectively. Growth in 2005 and 2006 was largely driven by continued high export growth: increased tourism receipts, robust construction activity, and especially, strong agriculture production bolstered by massive investment in irrigation facil i t ies and well conceived government policies.
Per capita income has almost doubled from US$247 in 1994 to US$ 506 in 2006. Inflation averaged 3 percent from 1994-2006. The exchange rate has been broadly stable. The country's international reserves increased by 10 times from a low level o f US$lOO million in 1994 to
M # giro3 : GrjM-Igrn-ribCI 3aG yml : Gdd-Im-GGd fl8d g m t l ~ILI r d p i i p i i%;smy ntm@rnq n p
Phune, aSSZ.L714 664 V a l ' WSS-23417798 $.92. Sangksl HI81 Phiilrn, Khm nun Pmh. Phnom Pmh. CAMBbIllA.
more than US$ I billion in 2006. The high economic growth has resulted in rapid poverty reduction, which declined from an estimated 47 per cent in 1994 to 34.5 per cent in 2004, i.e. we have managed to reduce poverty by 1 percent per annum.
The strong economic growth and massive investments in infrastructure, especially rural infrastructure, have also led to significant improvement in social sector such as health and education. During the last decade, we have increased education spending by more than fivefold from 102 billion of Riels in 1998 to 546 billion of Riels or US$134 million in 2007. Net enrolment rates at the primary level are up significantly from 65 percent in 2000 to 76 percent in 2004. The lower secondary net enrollment has more than doubled since 1997, increasing from 7.6 percent to 16.4 percent. Advances in important indicators such as literacy, repetition rates and years of schooling for younger age cohorts are further positive signs that the rebuilding o f the national education system i s taking root.
At the same time, substantial progress has been achieved in the public health sector. During the last decade, we have increased health spending by more than sevenfold from 44 .billion of Riels in 1998 to 337 billion o f Riels or US$83 million in 2007. The mortality rate o f children below five decreased from 124 in 2000 to only 83 per thousand births, which means 30% reduction. Moreover, the malnutrition of children below five went down from 15% to 7%, which means reduction by more than half.
In general, undoubted progress has been made on al l fronts and positive and progressive changes are clearly manifest. Major highlights are:
Restoration of, and vast improvements in, internal peace and security. Territorial unity and political stability have been achieved. Democracy taking roots, both at the national and sub-national levels. Major advances in rule o f law and improvements in maintenance of law and social order. Vast enhancement in personal freedoms and freedom of expression. Better and steadily improving fiscal discipline and management. Accelerating integration of Cambodia with the region and the rest of the world, Measurable improvements in other social indicators such as: significant reduction in communicable diseases, spectacular in HIVIAIDS; improved urban access to safe water, and rural access to sanitation; and, reduction in gender disparity in many fields.
Rectangular Strategy (RS)
To keep the momentum of this progress and to make sure the government w i l l be able to achieve the CMDGs by 2015, the Royal Government in the third term of the National Assembly has laid out the Rectangular Strategy which clearly stated the importance of "Promoting Economic Growth" "Generating Employment for Workers" "Promoting Social Equity" as well as "Strengthening the Public Sector's Capacity".
The Rectangular Strategy for Growth, Employment, Equity and Efficiency (RS) was launched by Samdech Prime Minister HUN SEN on 16 July 2004 during the first Cabinet Meeting of the Third Mandate Royal Government o f Cambodia. This Strategy represents the RGC's political platform which constitutes the common national vision and mission statement to guide the implementation of the economic policy agenda of the Government during i ts term in office.
The RS, which can be visualized as a series o f interlocking rectangles, has good governance at i ts core. The other rectangles focus on the desired environment to implement the strategy, and on promoting economic growth through agriculture development, rehabilitation and construction of physical infrastructure, private sector development, and capacity building and human resource development.
First, the core of the RS i s Good Governance, focused at four reform areas: (1) anti- conuption, (2) legal and judicial reform, (3) public administration, and (4) reform of the armed forces, especially demobilization;
Second, the environment for the implementation of the RS consists o f four elements: (1) peace, political stability and social order; (2) partnership in development with all stakeholders, including the private sector, donor community and civil society; (3) favorable macroeconomic environment; and (4) regional and international integration.
Third, the four strategic “growth rectangles” are: (1) agriculture enhancement; (2) private sector development and employment generation; (3) continued rehabilitation and construction o f physical infrastructure, and (4) capacity building and human resource development.
Fourth, each strategic “growth rectangle” has four sides:
Rectangle I: Enhancement of Agricultural Sector which covers: (1) improved productivity and diversification of agriculture; (2) land reform and clearing of mines; (3) fisheries reform; and (4) forestry reform. Rectangle 2: Further Rehabilitation and Construction of Physical Inftastructure, involving: (1) further restoration and construction transport infrastructure (inland, marine and air transport); (2) management of water resources and irrigation; (3) development of energy and power grids, and (4) development of information and communication technology. Rectangle 3: Private Sector Development and Employment Generation covers (1) strengthened private sector and attraction of investments; (2) promotion o f SMEs; (3) creation o f jobs and ensuring improved working conditions; and (4) establishment o f social safety nets for civil servants, employees and workers; and Rectangle 4: Capacity Building und Human Resource Development, including: (1) enhanced quality o f education; (2) improvement of health services; (3) fostering gender equity, and (4) implementation of population policy.
National Strategic Development Plan (2006-2010)
The National Strategic Development Plan (2006-201 O), has been formulated using the comprehensive Rectangular Strategy of the Royal Government of Cambodia and synthesizes various policy documents (Cambodia Millennium Development Goals, National Poverty Reduction Strategy, National Population Policy, etc.) and through extensive consultations were also held among al l stakeholders. It provides the framework and compass for growth, employment, equity, and efficiency to reach CMDGs and well-focused and directed future equitable development, pro-poor and pro-rural. I t will take the country on an assured growth path, at once sustainable. I t lays out the vision, goals, strategies and priority actions for the next five years. I t makes balanced, realistic and feasible allocations to various sectors on a priority basis. I t s implementation wil l be closely and regularly monitored to make annual adjustments.
With peace and internal stability taking strong hold, improvements in social order, and robust economic growth in the past few years, Cambodia i s at a critical threshold for faster future progress. The next ten years represent a decade ofopportunity to realize ambitious CMDGs and uplift the poor and vulnerable.
The National Strategic Development Plan (NSDP), 2006-1 0, contained in this document should therefore be considered an operational and guiding tool to achieve the said objectives, goals and targets. I t i s a document "for and by the whole o f Cambodia". I t i s not a mere academic exercise. I t i s a practical document to achieve realistic, specific high priority national targets by 2010 to move towards longer-term goals, using the framework o f the Rectangular Strategy. Emphasis i s on results (outputs, outcomes) to be achieved, not merely on inputs, activities and processes. The NSDP i s also a compact and concise document. I t highlights the most essential overarching goals, strategies, targets and actions and leaves more details to be developed and spelt out in sectoral and sub-national plans based on national priorities contained in the NSDP.
The NSDP i s therefore a practical, result-oriented implementing tool with the clear purpose Of :
Rapidly improving the lives o f a l l Cambodians. More specifically, bringing about meaningful and measurable reduction in poverty levels especially in the rural areas where these are high.
In Cambodia, greatest and quickest gains in poverty alleviation will be possible in rural areas where most o f the poor live. The NSDP will, therefore, direct over 60% of resources to rural areas, with increased attention to productive activities like agriculture, rural development and to health and education to increase and enhance human capital and better contribute to overall development.
Successful and timely implementation o f NSDP strategies and achievement of NSDP targets would need substantial and well-directed additional investments and their focused and effective use. Such investments need to be made both in the public and private sector, but only the public sector aspect i s considered here.
Based on projected macro-economic growth and needed investments in the public sector, and taking into account the absorptive capacity o f the public sector apparatus, i t is estimated that Cambodian Riel (CR) 15,225 billion equivalent to US$ 3,500 million will be needed for the public sector during 2006-2010 to achieve the goals and targets set forth in the NSDP. Within this envelope, priority attention i s needed to some major sectors. To ensure a rural focus for poverty alleviation, allocations have to be more for activities which wil l benefit rural areas directly.
The resources to be available for the NSDP will come from: (a) surpluses in current account in the annual national budgets; (b) grant aid from external development partners; (c) concessional loans from multilateral financial institutions (MFIs); (c) resources from non traditional partners including semi-concessional loans from MFIs; and (d) funds made available from possible past debt relief. A high priority i s to direct resources in a meaningful way to "real investments", including through significant reductions in technical assistance projects, and to persuade EDPs to fully align their assistance to NSDP. RGC i s confident and optimistic that a small gap of about CR 980 billion or US$ 225 million in resources could be covered by increases in internal revenues and external support.
Finally, the NSDP recognizes that critical to i t s success i s regular, timely and clear monitoring and evaluation of results being achieved as implementation progresses so that needed corrections could be made from time to time. I t i s therefore to be considered a dynamic, live, evolving and flexible document to be regularly monitored and evaluated against progress, and to be revised, adapted and adjusted to reflect new data and to realign actions on an annual basis. An annual review of progress, shortfalls and corrective actions wil l be produced for dissemination and consultations.
Macroeconomic Management
The last decade fantastic macroeconomic performance has further strengthened the Royal Government o f Cambodia's commitment in maintaining this stability in years to come. The Royal Government of Cambodia understands that the macroeconomic stability i s vital in promoting growth and reducing poverty. Without low and stable inflation, careful control of public finances, manageable public debt and sustainable level o f government spending, we would not expect or hope for a strong and sustainable growth and a reduction in poverty.
The government wil l manage the fiscal policy prudentially and to maintain the budget deficit at the lowest possible level. At the same time, the Royal Government wil l ensure that the government's expenditure will be consistent with macroeconomic stability a well as making the expenditure program as a part of a systemic reform package aimed at promoting domestic saving, productive investment, and efficient resource allocation. Moreover, as the country i s now peaceful, the government wil l channel more resources into the social and economic sectors in order to improve the well-being of the people and to fight against poverty.
Though, macroeconomic stability i s a necessary condition for growth, i t is not sufficient by itself. To be truly effective, reforms must extend right across the policy spectrum. To be effective, the Government places a great deal o f emphasis on improving governance as a necessary condition for promoting private investment. Indeed governance reform i s a cornerstone of the Rectangular Strategy. The reforms underway include Judicial Reforms and Civil Administration Reforms. The Government , i s working on an anti-corruption law. Structural adjustment in the key sectors o f the economy i s proceeding smoothly. The main objective i s to promote private sector led growth supported by proactive public policy. The role of the Government i s envisaged as efficient provision o f infrastructure and helping the private sector to improve competitiveness. We have also created a Steering Committee on Private Sector Development with the aim to improve the investment climate, business environment and trade facilitation. To further strengthen financial sector development, the Royal Government of Cambodia adopted in 2006 the updated Financial Sector Development Plan for 2006-2015.
At the same time, to promote macroeconomic stability, the government wil l promote the economic diversification by promoting the agriculture sector, agro-industry and small and medium enterprises through the implementation of a number o f the following reform programs:
1. Continue to prudentially implement macroeconomic policy as a base for high economic growth and sustainability with low inflation.
2, Continue to implement the Public Financial Management Reform Program, especially to achieve the goal of the first platform, which i s a more credible budget through reducing expenditure procedures, maintaining and sustaining revenue, strengthening cash management in order to improve efficiency in providing services, introducing measures to reduce arrears to private suppliers, starting to implement the new Chart of
Accounts and Budget Classification and testing the implementation of program budgeting, which i s the base for the second and third platforms.
3. Continue restructuring in order to strengthen a favorable environment for the development o f the private sector, especially promoting agriculture sector, agro- industry and small and medium enterprises as well as enhancing trade facilitation through the Single Window and promoting the participation fiom the private sector in the infrastructure construction.
4. Continue to implement land management reform in order to support the agricultural sector in accordance with the Land Law in order to transform this sector to be a strong base for economic growth and poverty reduction.
5. Continue to strengthen the banking system, insurance sector and financial sector in order to mobilize capital for financing the projects in the private sector.
6. Implement the Judicial Reform, the strengthening o f rule o f law, building and strengthening the implementation o f law and other legal document, which i s the necessary factor to build confidence o f investment.
7. Continue to implement the public administrative reform, especially strengthening the implementation o f Priority Mission Group, merit base payment initiative, and functional analysis in order to improve civil service productivity and efficiency.
Poverty Reduction and Growth Operation (PRCO-1)
The PRGO has been implemented in order to enhance reforms in core sectors. In this program, the Royal Government agreed to select three prioritized areas, the Public Financial Management Reform Program, Land Management Reform Program and Private Sector -Development. The PRGO i s a good instrument to improve coordination between donors and government, alignment o f donor priority with government reform priorities and more effective govemment-development partner dialogue on cross cutting issues. Moreover, the PRGO also provides a number o f opportunities to strengthen the strategic linkages between the Rectangular Strategy and the National Strategic Development Plan.
The selection o f these three sectors in the first PRGO reflects the Royal Government o f Cambodia's prioritized reform programs both in the Rectangular Strategy and National Strategic Development Plan 2006-20 10. These are cross-cutting areas that wil l have potent impacts, or positive externalities, on other reform programs by contributing both poverty reduction and growth.
The progress in these three sectors wil l contribute tremendously to the improvement of the private sector by reducing transaction costs associated with trade and investment, introducing transparency in investment processes, facilitating access o f enterprises to export markets; improving public financial management by reducing corruption and improving transparency in the public spending; and providing a secure and proper property rights to a l l the people. The PRGO-1 has been divided into three different components with detailed agreed actions and clear output.
Components and PRGO-1 Prior Actions:
The first component in the PRGO-I focused on Private Sector Development (PSD). Even though the government had a pro-poor trade strategy, the Private Sector Forum, WTO membership, and reforms of the foreign investment regime, i t was acknowledged that further work was needed to develop a clear strategy on private sector development. The objective o f ' the PSD initiative was the establishment o f a single entry point, or 'ASYCUDA-based Single Window,' that would allow al l parties involved in trade to fulfil l the documentary and
53
payment requirements for import or export in a single transaction. Prior actions for PRGO-I include:
1. Issuance o f Prime Ministerial Order requiring all relevant agencies to define their cri t ical data needs for the adoption o f a single administrative document (SAD)
2. Issue a sub-decree and implementing regulations on trade facilitation through a risk management approach to inspections and clearance o f imports and exports o f goods
3. Adopt sub-decrees establishing Special Economic Zones (SEZs) and an SEZ Board in CDC
Component 2 focused on the strengthening public financial management by improving the quality of publicly provided social services and increasing the amount and effectiveness o f public resources, which would enable the government to deliver poverty-reducing services in health, education and other important social sectors. The transparent and effective public expenditure and financial management system will definitely enhance allocative and operational efficiency and reduce the level of fiduciary risk to public funds. Component 2 o f the prior actions for PRGO-1 are:
4. Fortify decentralized procurement by strengthening the 1995 procurement sub-decree and the 1998 implementing regulations to promote economy, efficiency, and transparency
5. Develop and implement first phase o f new transaction processes from budget release to commitment in order to streamline budget execution
6. Increase reliance on the banking system for tax and customs payments, and for RGC payments to creditors and civil servants via transfer and/or check
7. Introduce an official merit-based pay and employment reform pilot in MEF in support o f the PFMRP
Finally, the component 3 focused on Land and Natural Resources Management Reform. The Royal Government o f Cambodia i s redoubling its efforts to reduce poverty by providing a l l Cambodian people with more secure property rights and access to land. Improving land management has the potential to directly reduce rural poverty by enabling people to make greater use o f the nation productive assets. The secured land tit le wil l definitely contribute to the improvement o f the productivity, rebuilding the agricultural sector and contributing to the poverty reduction. Component 3 prior actions for PRGO-1 are:
8. COM adopts Sub-decree on State Land Management including participation o f local communities in mapping and land use planning, as well as open public access at provincial level to register o f state land use information and issues implementing regulations
9. COM adopts Sub-decree on Economic Land Concessions that includes provisions for resolution with local communities o f issues o f prior occupancyhse of lands and classification o f land to exclude forests and protected areas
10. Establish a mechanism and periodically disseminate information on Economic Land Concessions
PRGO-2 Triggers
Realizing that the selected three reform programs in PRGO-I are potent to the poverty reduction and economic development and have not been completed yet, the Royal Government of Cambodia wil l continue to focus on these three reforms programs in the PRGO-2. The Royal Government o f Cambodia has engaged actively with the World Bank to set the triggers under these three reform programs,
Moreover, the recent confirmed discovery o f oil reserves has sparked debate over the management of oil revenue. The Royal Government understands that the proper and transparent management and accountability of oil revenue will be crucial in serving the development purpose and avoiding the resource curse. Oil revenue wil l provide additional resources for financing development projects in Cambodia and present opportunity to bolster Cambodia's medium to long term growth, promote greater economic diversification and poverty reduction.
In this regard, the Royal Government of Cambodia i s considering the endorsement of the Extractive Industries Transparency Initiative (EITI) in order to define the proper policies for efficient management of oil revenues. The Prime Minister has indicated that all oil revenues will go directly to the budget and will be managed under the PFM Reform Program.
Conclusion
The good performance in the last decade and the rapid poverty reduction show that Cambodia has been on the right path of development. This progress would have never happened without the reforms initiated by the Royal Government of Cambodia and help from all development partners. However, the road ahead i s s t i l l long. With CMDGs as the goal, the Royal Government of Cambodia once again reiterates i ts stand and commitment to stay on the course of reform and would like to request all necessary assistances from the International Development Association, so that those reforms will be successfully implemented and prosperity will avail for all Cambodian people.
Your
- Excellent 1
-I
1 , the
Senior Minister Minister of Economy and Finance
assurances o f my highest consideration. F-
W 0
a, c 1 ' R
E
W g m c 0
m c 0
.- .- 4 7 U E m
0 7 0
P I -3 I r
a a a -3 -3
0 0 0 0 0 0
x 0
P P P
8
s z K W
0 z
I
cc C C cu
I:
CD 0 0 W
0
W c 7
CD 0 0
W c 3 7
z E 9
r% z
n % E3 N
E 2 C
c n
7J S m
m W
E? 0 c 8 4 f
W 0 0 N
n zl E s z
4 0
P a 2
P a 2
a < 0
w o c ru
o w - '5 .- I
t-
I E n od 0
E F n n od ed n n
0 0 0 z z r
m c 0 .- 7 0
U W 5
E E E F
U b i
W
3 K LL w
I- z
(0 W
cu 0
8 x E 2 n
cu W
cu 8
-r
-2 m
vi % e a
0
= u ._ E c 0 0
a? 0
b m r c m Q W
V 0 v)
c
+ -
E E s m P n
- .
W W
T T F P P a a
5 5
> * * .-
W 0 0 cu
-
n 2
0 0 n
m 5 c .- E 5 8
8 m 0
c
E
t-
0 Q, z 2
0 0 n n n v) v) v) v) v) a a a a a
W 0 v) 0 P n
Joint Monitoring Indicators for 1st CDCF Meeting (19-20 June 2007)
To be implemented and monitored in the period between the first and second meetings of the CDCF
INSDP Social Sector Prioi
Approve final MPSP as a strategic document to be implemented with coordinated EDP support. Bring together the NSDP APR and the alignment section o the CDC AER to document and assess progress on key NSDP indicators and resources committedJaligned to NSDP priorities.
Strengthening Ownership, Managing for Results and Mutual Accountability. Development partners: (i) report to CDC on details of all new and on-going support; (ii) provide up-dated information in the CDC Database; and (iii) hold periodic consultations with CDC to validate data and to assess progress in implementing H-A-R priority actions;
Promoting Harmonisation and Alignment. Progress in implementing the H-A-R Action Plan and TWG Guideline is reported by TWGs and consolidated as a background document for each GDCC meeting;
Managing for Results. The H-A-R Action Plan is augmented with a set of indicators, the Aid Effectiveness Report assesses progress in H-A-R Action Plan implementation and is presented to CDCF.
NSDPI
IEF
DC
RDBICDC P+H TWG :L- RDBICDC P+H TWG
RDBJCDC All TWGs
RDBJCDC P+H TWG
I
UN B 3 be
etermined yhers
ully JICA ?sourced MDSP
?S
MOEYS W G Education
:' Improved opportunities or primary 1. Increase the net enrolment in primary school (total, and
by sex).
I I 2. Increase the sulvival rate from grades 1 to 6.
1. Recruitment and deployment of at least 68 midwives for . Increase the proportion MoH 4f deliveries attended by Okilled health personnel in the public sector to 45% by December 2007 (38% in December 2006)
68 health centres that do not yet have any midwife by the end of 2007
2. Provide salary incentives to midwives - an incentive based on the number of deliveries was adopted under the Inter- Ministerial Prakas of the MEF and the MoH No 268, April 2 2007 and the adapted midwife salary scales and compensation payments for professional related health risks as proposed by MoH are to be endorsed at a full session of the Cabinet of Ministers.
5. Enhanced national NAA&NACD TWG response to HIVIAIDS Increase coverage of effective drug & HIVIAIDS
prevention, comprehensive care and support, and effective pandemic mitigations interventions.
Under RGC leadership, a Strategic Framework to 6. Food security and
mainstream food security and nutrition is developed by nutrition integrated into
TWG-FSN and endorsed by relevant ministries. relevant sector
NSDP Economic Sector Priorities
TWG-FSN MOP CARD
I
71
. Implement and monitor partnership-based
pproach to agriculture an1 later sector priorities.
. Implement the legal ,amework established by l e Land Law
I With the aim of stoppin! l e loss f Cambodia's forest ?sources, the legal .ameworks established by l e Forestry Law and in articular the Sub-Decree n Economic Land oncessions must be fully nplemented at all levels o iovernment agencies. 0. Take appropriate actio1
reflect the priorities of ie Fisheries sector to nprove the livelihoods of iral communities in mmune, district and rovincial development lans as well as donor inding levels.
1. Further reduction of 7C 0 landmines/ERW ssualties and a decrease -10% of contaminated iine/ERW land
1. Progressive implementation of the Strategy for AgricLltun and Water, as required by the NSDP:
a) Reaching agreement by the end of June 2007 on a Statement of Principles to guide donors and Government agencies working the in agriculture and water sectors
b) Obtaining approval by MAFF, MOWRAM and donors or the terms of reference for the design of the 5 National Programs under the SAW, by July 2007
the end of December 2007, and
end of July 2008.
a) Ensure relevant stakeholders have up to date information on activities by posting twice each year (a end June and end December) on the TWGAW website an updated project database listing the donor and government activities in the agriculture and water sectors.
c) Completing the design of two National Programs by
d) Completing design of all 5 National Programs by the
2. Improved donor and government coordination
1. To adopt RGCs Policy on Registration and Use Rights of Indigenous Communal Land and pilot interim protective measures (identification, mapping, classification and provisional endorsement of indigenous land legal claims) to safeguard the indigenous community's land in two provinces within the framework of provincial level state land management committees and district working group: as per Sub-Decree #118).
eligible households are settled on social land concessions with livelihood support and at least 10,000 hectares of suitable land confirmed as available for social land concessions
1. Implement all provisions of the sub-decree on ELCs, including establishing and making public log book of ELCs, including those issued at provincial level, and review a minimum of 5 economic land concessions over 10,000 hectares, taking appropriate action consistent with Chapter 6 of the Sub-Decree on ELCs.
demarcation in accordance with the sub-decree No. 53, dated 1 April 2005.
L To improve the livelihoods of the rural poor, i.e. 500
?. Rapid implementation across Cambodia of forest
1. Cambodian Code of Conduct for Responsible Fisheries (Camcode) drafted by the end of 2007
?, Work with the government agencies/ revenue authorities and donors to ensure the FiA is adequately funded including the revenue from the sector to carry out its mandate with reference to Article 14 of the Fisheries Law
3 . Donors in fisheries use the planning, accounting and monitoring systems of the Fisheries Administration to be in line with MTEF and MBPI by the end of 2007.
L . Ensure the implementation, monitoring and evaluation of existing mine action/ERW policy, strategy, and action plans.
!. Ensure timely disbursement of RGC and development partner funds.
1. Improve mechanism to monitor the use of resources and their impact in a transparent, efficient and effective manner.
IAFF IOWRAM
ILMUPC
1AFF
IAFF
MAA
WG-AW
WG-Land
WG-F&E WG-L
WG- isheries
WG-MA
72
I
Relevant agencies (Le. MOC, MoH, MAFF, MIME and MEF) to sign and implement the Service Level Agreements, attaching agreed - upon lists of prohibited goods betweenand trade related agencies.
Review implementation of risk management and act accordingly to reduce the inspection rate to fifty percent including in SEZ's. Review to be conducted under the purview of the Sub-steering Committee on Trade Development.
National and Rural Road Network
14 Increase use of improved sanitation, hygiene and drinking watei supply, especially in rural areas
NSDP Governance and 15. Further develop the Public Administration to serve people better and to become an effective
MOC, MoH, MAFF, MIME
MEF
MOC
i
Develop Action Plans for the Establishment of the Road Network Maintenance Management Systems by June 2008.
Preserve Road Assets by (i) piloting and review of out- sourcing of 3 periodic road maintenance contracts (June 2008); and (ii) improving and developing Overload Control Programs (June 2008).
unctioning, transparent nd accountable legal and
'udicial system that protect individual rights as defined in the Constitution I
MPWT MRD
Make specific recommendations on 20 priority licenses impacting on SMEs to ensure relevancy, efficiency, and cost effectiveness
IIME
WG-PSD
l l
WG-I
Develop and adopt a rural water supply and sanitation (RWSS) strategy and budget that is based on the official RWSS policy and aligned to the NSDP
;s-Sectoral Priorities Implement the approved "Joint Government-Donor Strategy for Phasing Out Salary Supplementation Practice in Cambodia" by: a. implementing approved sectoral action plans; and b. establishing Priority Mission Groups (PMGs), and PMG/Merit Based Pay Initiatives (PMG/MBPIs) in MOH, and at least one other ministry/agency.
Improve pay and employment conditions in the civil service by developing and implementing: a. a medium term strategy and action plan to enhance remuneration; and b. a redeployment policy and action plan. Design and implement an HRM policy and action plan to improve merit and performance management by introducing an HRM Guide and further developing the Human Resource Management Information System (HRMIS) for the Civil Service. Enhance service delivery though developing a One Window Offices (OWOs) policy, legal framework and implementation plan, including establishment of at least 5 OWOs across Cambodia. URS Strategic Objective 2. Complete the drafting and
approval of the remaining fundamental Laws (Penal Procedure Code, Penal Code, Civil Code, Law on the Statute of the Judges, Law on Court Organization and Functioning, Law on the Amendment of the Law on the Organization and Functioning of the Supreme Council of the Magistracy). URS Strategic Objectives 2 & 7. Review and finalise guidelines for the legislative drafting process that draws
orking roup is to
stablished under a relevant
G to be
AR
03
WG-PAR
IR-TWG
73
18. Preparation made for full implementation of the RGC's Strategic Framework fro Decentralisation and Deconcentration (D&D) reforms.
19. A more credible budget and more effective financial accountability
20. Adopt laws and sub- decrees and relevant legal documents, and implement plans against all forms of violence and exploitation against women and children, according to international standards
on lessons from past experience. Guidelines should seek to inform externally mobilised TA, with an emphasis on building the capacity and ownership of the relevant Ministry's legal unit.
. URS Strategic Objectives 7 & 4. Ongoing training and transparent selection of judicial professionals to improve the supply of judicial services and the functioning of the courts.
. Finalize and approve Anti-Corruption Law, based on best international practices.
. Prepare an implementation plan to enforce and manage the implementation of the Anti-Corruption Law.
. Disseminate information on reported cases on corruption and conviction on semi-annual basis.
I Develop a clear policy framework on Access to Information.
I Continue preparation and initiate broad stakeholder consultations on the organic laws on democratic development at sub-national level during 44 of 2007.
developed, agreed, and resourced for implementation to begin in 2nd quarter of 2008.
. National programme design process and modalities
. RGC and development partners design the principles of engagement in support of D&D reform in Cambodia.
Continue implementing the PFMRP by: a) sustaining actions already implemented and
completing the remaining key actions necessary for Platform 1;
implementation of Stage Z/Platform 2), including to make recommendations on the endorsement of Em; and
c) continue monitoring impact through the agreed PFM Performance Indicators.
b) preparing the consolidated action plan for
. Sub-decree on the administrative decision on domestic violence adopted.
. Law on suppression of human trafficking and sexual exploitation adopted, and in compliance with the UN Protocol on trafficking and UN convention on transnationa organized crime, and the Cambodian draft penal code.
. National Action plan to combat violence against women implemented. The specific target for 2007 is to establish a working group in MoI/DOLA for training materials on the Sub-decree.
targets for 2007 include: Adopt comprehensive Strategy Paper on Migration that links Migration with Trafficking, Smuggling and the Labour Law Reform and closes existinc legal gaps to enhance legal protection of migrants.
. Policy and legislation on migration reviewed. Specific
10NASRI :OM
CDD
CDD
CDD
IEF
loJ lo1 IOWA IOLvr
74
LL 0 U
c ._
W t-
I t
ANNEX 4: FUND RELATIONS NOTE
Cambodia: Assessment Letter for World Bank PRGO June 18,2007
Contact person: Mr. Jeremy Carter
A. Recent Economic Developments and Outlook'
1. fiscal policy, significant aid, and increasing foreign direct investment. Growth in 2006 i s currently estimated to have been 10% percent. Inflation has stabilized in the low single digits while continued strong performance in the garments and tourism sectors led to a narrowing o f the external current account deficit in 2006. Financing from aid and increased FDI allowed further reserve accumulation. Financial intermediation continues to expand rapidly (40 percent annually) but the level remains very l ow-c red i t represents about 12 percent o f GDP. The exchange rate has been broadly stable.
Recent macroeconomic performance has been very strong, underpinned by cautious
2. FDI w i l l support activity in export-oriented sectors while agriculture is well-placed to expand steadily. Nevertheless, risks do remain. In particular, the accession o f Vietnam to the WTO wil l challenge Cambodia's competitiveness in the garments sector and the soundness o f the banking sector remains a key concern. Improving governance remains crucial to sustainable economic and social development-a weak rule o f law and widespread corruption continue to place a drag on economic activity, investment, and government revenue.
Rapid growth i s expected to continue in the coming years. Continued high levels o f
3. the budget position. There i s still considerable uncertainty as to scale and timing o f o i l production, Chevron, the only active operator, has yet to announce the results o f their latest exploration drilling. As a result, the Fund staf fs principal current medium-term macroeconomic framework does not include estimates o f the potential impact.
For the longer term, oil production could have a significant impact on activity and
4. With grants and concessional lending more than financing the fiscal deficit, public debt is sustainable with only moderate risk of distress. The D S A shows public external debt declining f iom 33 percent of GDP in 2006 to 9 percent in 2027 and debt service at very,low levels. Cambodia remains in arrears on debts to the United States and the Russian Federation, dating from the 1970s and 1980s and totaling $800 million. Nevertheless, caution needs to be exercised in borrowing based on the recently-acquired sovereign credit rating. Stress tests that illustrate the effect o f large-scale (1 0 percent o f GDP) borrowing on commercial terms yield significant fiscal costs, though do not materially change the findings o f the DSA.
' This assessment i s based on Article I V policy discussions in May-June 2007. The 2007 consultation i s expected to be concluded by the IMF Executive Board in early August. The 2006 Article I V was concluded on July 7,2006.
83
B. Fiscal policy
5 . Fiscal policy is prudent but weak administration impedes the effectiveness o f the tax system and the quality of expenditure. Whereas moderate primary deficits are more than financed with aid, revenue i s very low and excessively dependent on taxes on international trade. It i s important that with trade liberalization reducing external tariffs, medium-term revenue policies focus on steps to broaden the base and improve the efficiency and equity o f the domestic tax system (including incorporating the nascent oi l sector). Successful implementation o f the authorities’ Public Financial Management Reform Program wi l l also enable gains in budget management needed for sustained increases in poverty-reducing expenditure. An important part o f that strategy wil l be civil service reform.
6. The 2007 budget reflects the government’s cautious approach in recent years of setting very low revenue targets, while constraining spending. Taking account o f the enhanced economic outlook and continued strong collections, revenue should be expected to exceed budget projections significantly. Reflecting the additional resources available-even after the recent within-year wage increase, which added less than 0.1 percent o f GDP to the 2007 wage bill-the government could then ensure that budgetary allocations to priority sectors are fully executed, allow additional growth in poverty-reducing expenditure, or further reduce domestic payment arrears.
C. Monetary and financial sector
7. I n the staff‘s view, dollarization has been, and will continue to be a valuable foundation for Cambodia’s macroeconomic stability and financial sector growth. Recent strong growth in money demand i s to be expected at this stage o f Cambodia’s development and i s consistent with low inflation over the medium term. Active monetary policy i s precluded by the high level o f dollarization. The National Bank o f Cambodia (NBC)’s passive monetary approach o f supplying r ie l through foreign exchange purchases in response to demand while .
avoiding fiscal financing i s appropriate. Staff continues to support the policy o f a stable nominal exchange rate against the US dollar, which has been part o f a successful policy o f reserve accumulation, strong export performance and low inflation. . .
8. The rapidly expanding banking sector remains vulnerable and the central bank needs to be strengthened. Reported system-wide non-performing loans are low (around 10 percent), but there are concerns as to the quality o f asset classification and the level o f exposure to the booming real estate market. Information on both i s limited. Enforcement o f prudential regulations remains patchy. Rapid credit expansion reinforces the importance o f effective bank supervision and stronger enforcement o f prudential regulations. In particular, decisive measures to address weaknesses in the two largest, jointly owned, banksxanadia and FTB-are important.
84
D. Relations with the Fund
A proposed PRGF arrangement remains stalled as negotiations on outstanding 9. bilateral debt obligations continue. A Fund arrangement cannot be put in place while arrears exist to official creditors unless agreement i s reached to reschedule, within the context of the Paris Club. An in-principle agreement has been reached with the United States but i s still to be finalized. However, agreement i s yet to be reached on the rescheduling o f Russian debt. At the authorities’ request, staff has agreed to maintain an intensive policy dialogue until a formal program can be presented to the Board. The monitoring will address progress against the authorities’ macroeconomic targets and structural reform priorities. The Fund continues to provide extensive technical assistance, particularly to the central bank and in public financial management (working closely with the World Bank) and revenue administration.
85
Table 1. Cambodia: Selected Economic Indicators, 2004-08 Nominal GDP (2006): $7254 million GDP per capita (2006): $513 Population (2006): 14 2 million Fund Quota. SDR87.5 million
2004 2005 2006 2007 2008 Est. Proj. Proj.
Real economy Real GDP
Real GDP excluding agriculture Real agricultural output
GDP deflator CPI Inflation (end of period)
Domestic investment Government investment Non-budgetary grant-financed investment Nongovernment investment
Government saving Nongovernment saving
National saving
Money and credit Broad money Net credit to the government 1/ Private sector credit Velocity of money 21
Government operations Revenue 3/
Of which : Tax revenue
Expenditure Current expenditure Capital expenditure 41
Overall budget balance Overall budget balance (ind. grants) Foreign financing, net Domestic financing 51 Balance of payments Exports Imports Current account (exd. official transfers)
(in percent of GDP) Current account (ind. official transfers)
(in percent of GDP) Overall balance Gross official reserves
(in months of imports of goods and non-factor services) (in percent of uncovered dollar deposits in banks) 61
(in percent of GDP)
(in percent of exports of goods and services)
Public external debt 71 8/
Public debt service (cash basis)
Memorandum items: Nominal GDP (in billions of riels)
Exchange rate (riels per dollar: end of period) (in millions of U S . dollars)
... Sources: Data provided by the Cambodian authorities: and Fund staff estimates and projections.
1/ Contribution to broad money growth. 2/ Ratio of nominal GDP to average stock of broad money. 31 In 2006, includes transfer of MDRI proceeds as capital revenue transfer. 41 Includes repayment of arrears in 2004 and 2005. 51 Includes funds in transit and payment orders in excess of cash released. 6/ Dollar deposits in commercial banks net of their unrestricted reserves at NBC. 71 From January 2006 includes the impact of debt forgiveness from the IMF under the MDRI. 8/ Russian Federation debt Is valued at 0.6 USSR Roubles per US$ with the standard 70 percent discount.
Most recent estimate (latest year available, 1999-05)
Poverty (“A of population below national pover?y line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under5) Access to an improved water source (“A ofpopulation) Literacy (% ofpopulation age 15+) Gross primary enrollment (99 of school-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
GDP (US$ billions) Gross capital formationlGDP Exports of goods and servicesIGDP Gross domestic savingsiGDP Gross national savingsiGDP
Current account balanceIGDP Interest paymentsiGDP Total debffGDP Total debt serviceleworts Present value of debffGDP Present value of debffexports
1985
1985-95 1995-05 (average annual growth) GDP 8.2 GDP per capita .. 5.9 Exports of goods and services .. 19.3
14.1 430 6.1
2.0 3.1
35 20 57 97 45 41
137 142 131
1995
3.4 14.4 31.2 -1 .o 5.4
-5.4 0.1
66.3 0.7
2004
10.0 7.8
28.4
East Asia & Pacific
1,885 1,627 3,067
0.9 1.3
42 70 29 15 79 91
115 116 114
2004
5.3 17.5 64.5 10.1 14.0
-2.3 0.2
65.4 0.8
54.5 83.5
2005
13.4 11.2 16.7
Low- Income
2,353 580
1,364
1.9 2.3
31 59 80 39 75 62
104 110 99
2005
6.2 19.7 65.1 10.9 14.4
-4.3 0.2
56.8 0.8
2005-09
8.5 6.4
Development diamond’
Life expectancy -
GNI Gross per primarb capita enrollmenl
1 Access to improved water source
-Cambodia Low-income oroup
~ Economic ratios’
I Trade
Domestic Capital savings formation
I Indebtedness
-Cambodia Low-income group
STRUCTURE of the ECONOMY lQB5 lgQ5 2004 2005 1 Growth of capltal and GDP ( O h )
PA of GDP) Agriculture Industry
Services Manufacturing
.. 49.6 32.7 34.2
.. 14.8 27.7 26.7 9.5 20.3 19.1
.. 35.5 39.6 39.1
Household final consumption expenditure .. 95.2 85.3 85.0
80 T I 60 40 20
0
-20
60
0
40 20
-20 I -GCF - 0 - G D P General goVt final consumption expenditure 5 8 4 5 4 1 ~
Imports of goods and services 46 6 71 9 7 3 9 I I 1985-95 995-05 (average annual growth)
Agriculture .. 3.8 Industry .. 15.9
Manufacturing .. 18.2 Services .. 8.2 11.7 12.1
Household final consumption expenditure 8.4 11.8 12.2 General poVt final ConSumDtion exoenditure 6.8
87
Cambodia
PRICES and GOVERNMENT FINANCE
Dornesfic prices (% chanqe) Consumer prices Implicit GDP deflator
Government finance (% of GDP, includes current grants) Current revenue Current budqet balance Overall surolusideficit
TRADE
(US$ millions) Total exports (fob)
Rubber Logs and sawn timber Manufactures
Total imports (cif) Food Fuel and energy Capital qoods
Export price index (ZOOO=lOO) Import price index (2000=100) Terms of trade (ZOOO=lOO)
BALANCE of PAYMENTS
/US$ miilionsj Exports of qoods and services Imports of qoods and services Resource balance
(US$ millions) Total debt outstandinq and disbursed
IBRD IDA
Total debt service IBRD IDA
Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)
World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers
1985
1985
1985
1985
7
5
1995
1 1 11 7
7 5 -0 6 -6 6
1995
855 41
185 27
1,167 62
105
59
1995
969 1,375 -406
-57 277
-1 86
110 2 450 8
1995
2,284
65
7
312 63
151
2004
5.6 5.3
10.4 1.3
-4.7
2004
2,589 115
18 1,963 3,270
42 575 961
2004
3,394 3,784 -390
-221 428
-122
198 -76
884 4,019.0
2004
3,439
467
28
5
174 163
131
2005
6.7 5.7
10 0 1.6
-3 2
2005
2,910 118 19
2,171 3,928
45 788
1,030
2005
4,028 4,575 -547
-254 440
-268
40 1 -133
1,050 4,097.0
2005
3,515
462
31
6
210 160
379
7-- ,Export and import levels (US$ mill.)
15,000 - ! I ‘4 000 +
~ 99 00 01 02 03 04 05
I X I Eworts Tp Imports
Current account balance to GDP (%)
1
:omposition of 2004 debt (USS mill.)
8: 467
i - IBRD E - Bil; 3 - IDA D - Other muitilateral F - P m ; - IMF G - ShC
Development Economics 411 7/07
88
K A M P O TK A M P O T
K A M P O N GK A M P O N GS P E US P E U
K O H K O N GK O H K O N G
P U R S ATP U R S AT
BANTEAYBANTEAYMEANCHEYMEANCHEY
S I E M R E A PS I E M R E A P
P R E A H V I H E A RP R E A H V I H E A R
K A M P O N G T H O MK A M P O N G T H O M
KAMPONGKAMPONGCHHNANGCHHNANG
KAMPONGKAMPONGCHAMCHAM
RATANAKIRIRATANAKIRI
M O N D O LM O N D O LK I R IK I R I
S T U N G T R E N GS T U N G T R E N G
TAKEOTAKEO
KANDALKANDAL
B AT TA M B A N GB AT TA M B A N G
SVAYSVAYRIENGRIENGPREYPREY
VENGVENG
S I H A N O U K -S I H A N O U K -V I L L EV I L L E
K R A T I EK R A T I E
Cardamom Mts.
PhnumPhnumAoralAoral
(1,810 m)(1,810 m)
KohniehKohnieh
ChbarChbar
LomphatLomphat
Siem PangSiem Pang
MeloupreyMelouprey
Kompong SralaoKompong Sralao
Cheom KsanCheom Ksan
RoviengRovieng
KralanhKralanh
PailinPailin
Phum KompadouPhum Kompadou
Krong Koh KongKrong Koh Kong
ChambakChambak
Siem ReapSiem Reap
PursatPursat
SisophonSisophon
BattambangBattambang
Phnum TbengPhnum TbengMeancheyMeanchey
Kampong ThomKampong Thom
Kampong SpeuKampong Speu
SvaySvayRiengRieng
KampongKampongChamCham
KratieKratie
Prey VengPrey Veng
TakeoTakeo
SenmonoromSenmonorom
BunBunLongLong
Stung TrengStung Treng
PHNOM PENHPHNOM PENH
O D D A RO D D A RM E A N C H E YM E A N C H E Y
PHNOM PENHPHNOM PENH
Ta KhmauTa Khmau
SamraongSamraong
KampotKampot
PA I L I NPA I L I N
To To BuriBuri
To To Khu KhanKhu Khan
To To Pak CharangPak Charang
To To ChampasakChampasak
To To PhiafaiPhiafai
To To Play CuPlay Cu
To To Duc LapDuc Lap
To To Ba RaBa Ra
To To Tay NinhTay Ninh
To To Ho Chi Minh CityHo Chi Minh City
To To Cao LanhCao Lanh
To To Long XuyenLong Xuyen
To To Rach GiaRach Gia
Kohnieh
Chbar
Lomphat
Siem Pang
Melouprey
Kompong Sralao
Cheom Ksan
Rovieng
Kralanh
Phum Kompadou
Chambak
Siem Reap
Pursat
Sisophon
Battambang
Phnum TbengMeanchey
Kampong Thom
Kampong Speu
Sihanoukville
SvayRieng
KampongCham
Kratie
Prey Veng
Takeo
Senmonorom
BunLong
Stung Treng
Samraong
Krong Koh Kong
Kampot
Kep
Ta Khmau
Pailin
PHNOM PENH
K A M P O T
K E P
K A M P O N GS P E U
K O H K O N G
P U R S AT
BANTEAYMEANCHEY
S I E M R E A P
P R E A H V I H E A R
K A M P O N G T H O M
KAMPONGCHHNANG
KAMPONGCHAM
RATANAKIRI
M O N D O LK I R I
S T U N G T R E N G
TAKEO
KANDAL
B AT TA M B A N G
PA I L I N
SVAYRIENGPREY
VENG
S I H A N O U K -V I L L E
K R A T I E
O D D A RM E A N C H E Y
PHNOM PENH
T H A I L A N D L A O P . D . R .
V I E T N A M
ChhakKampong
Saom
Bassak
Tonle Sap
Ko
ng
Sreng
Peam
Mekong
San
Srepok
Kong
Sen
Chas
Mek
ong
Gul f ofThai land
Tonle
Sap
Poro
ng
To Buri
To Khu Khan
To Pak Charang
To Champasak
To Phiafai
To Play Cu
To Duc Lap
To Ba Ra
To Tay Ninh
To Ho Chi Minh City
To Cao Lanh
To Long Xuyen
To Rach Gia
Cardamom Mts.
PhnumAoral
(1,810 m)
103° E 104° E 105° E 106° E 107° E
103° E 104° E 105° E 106° E 107° E
11° N
12° N
13° N
14° N
11° N
12° N
13° N
14° N
CAMBODIA
0 20 40 60
0 60 Miles4020
80 Kilometers
IBRD 33381R
JUN
E 2006
CAMBODIA
SELECTED CITIES AND TOWNS
PROVINCE CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.
