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p. 5 of 22 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Poverty Reduction and Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work IX. Local Cost Financing

Country Assistance Plans - Cambodia : I. Country Performance Assessment

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D. Governance: Sound Development Management

35. Whether Cambodia can achieve sustainable development is, in a sense, a question of governance, of the country’s ability to mobilize and efficiently use public and private resources for economic and social development. Public investment, which declined from 7.6 percent of GDP in 1996 to 5.9 percent in 1999, is financed primarily by foreign assistance—68.0 percent in 1999. Thus, improved revenue mobilization is critical to generate the public savings necessary for increased investment in economic and social development. The Government’s 1999 revenues were 11.5 percent of GDP, up from 4.8 percent in 1993 but still among the lowest of all reporting DMCs.

36. The intended focus of efforts to increase revenues in 2000 to about 11.8 percent of GDP is on broadening the revenue base and increasing the efficiency, transparency, and equitable application of revenue collection procedures. Specific revenue-enhancing measures for 2000 include efforts to improve customs administration (particularly the resumption of pre-shipment inspections), improved VAT administration through faster refunds of excess VAT payments, collection of arrears on nontax revenues, and stronger efforts to collect tourism-based revenues.

37. The 1999 increase in the timber royalty from $14 to $54 per cubic meter was expected to increase forestry revenue collections. However, a combination of factors, including low world prices and the need to pay facilitation fees, make extraction of some species uneconomical at the new royalty rate according to the concessionaires. Hence, extraction and expected revenues have reportedly declined. One recommendation of the Cambodian Forest Concession Review Report is to review and revise royalty rates to base them on quality and species of timber, market prices, extraction costs, and investment risk.

38. To ensure the efficient use of revenues and foreign assistance, improved public expenditure management is essential. Expanding expenditures on economic and social development, as well as ensuring their efficient use, is a large task, involving several major reform efforts, including reducing the proportion of expenditures devoted to the security forces, increasing the efficiency of the civil service, and improving the management of public finances.

39. The Government plans to demobilize 31,500 soldiers over the 2000-2002 period, leaving military strength at about 100,000. The program involves disarmament and pre-discharge counseling, a severance payment of $240, and the provision of a basic basket of household goods plus an enhanced package of social services. During a 1999 registration process, the Government eliminated 15,551 ‘ghost’ soldiers and 163,346 ‘ghost’ dependents from the payroll. A pilot exercise to demobilize 1,500 soldiers, at a cost of $2.25 million, was undertaken in four provinces in 2000. According to a World Bank document, the total cost of demobilizing the remaining 30,000 soldiers is estimated at $45 million.⁸ The plan calls for the severance payment to be financed by the Government while aid agencies are asked to fund the remaining costs of administering the program and providing the package of goods and services. Once completed, demobilization should reduce defense expenditures from 2.9 percent of GDP in 1998 to 2.0 percent in 2002.

40. With resources being freed up from defense for economic and social development, the Government must improve its ability to efficiently administer these development programs. To do so, the Government has embarked on a comprehensive program of public administration reform. Two key elements of that program are efforts to reform the civil service and to strengthen local governance. Efforts by aid agencies to build the capacity of Government to manage development are hampered by low civil service salaries. Many aid agencies pay salary supplements to counterpart staff.⁹ As a prelude to comprehensive civil service reform, the Government is considering forming a Priority Missions Group that will be managed and paid differently from the rest of the civil service and will be responsible for spearheading reforms.

41. In addition to civil service reform, the Government is committed to a decentralization program designed to achieve greater local involvement in and benefit from the development process. Elections will be held, tentatively in 2001, for a commune government that will be responsible for preparing, adopting, and implementing a commune development plan. These communes will be empowered to raise revenues and be eligible to receive funds from the national Government. The program’s success hinges on a few key issues. First, greater legal clarity is needed regarding the status and scope of authority of provinces, municipalities, districts, and commune councils. Second, rather than create new entities, existing institutions and mechanisms at the local level should be used to the extent possible.¹⁰ Last, building the capacity of local officials for financial management will be critical to ensuring the financial integrity of commune councils.

42. To cope with the greater complexities of decentralization, the Government must improve public finance management. Of critical importance are improvements in the transparency and accountability of fiscal operations to ensure budget execution is in accordance with budget allocation. The Government intends to take several steps in this direction this year. The Government is establishing a unit within the Ministry of Economy and Finance (MEF) to monitor budget implementation in the priority areas of health, education, and rural development. The Government will also provide line ministries with monthly spending plans in a more timely manner, and publish monthly budget allocations and disbursements. Finally, the Government intends to appoint an independent National Auditor General to head the newly formed National Audit Authority.¹¹

43. Overall, the Government has demonstrated sufficient resolve in fiscal reform to gain the confidence and support of international aid agencies. Aid agency efforts are now being mobilized to provide technical assistance so that the Government can continue to improve fiscal performance. However, mobilizing private investment in support of sustainable economic development is perhaps a more comprehensive and difficult task. Lackluster investment performance is, in part, a result of inadequate public infrastructure and institutions of governance to support private sector activities. With aid agency support, public investment funds are being marshaled to improve public services in transportation, energy, and communications. Moreover, the Government is committed to continue trade liberalization as an Association of Southeast Asian Nations (ASEAN) member and applicant to the World Trade Organization.

44. It is in the area of the rule of law that the most difficult and comprehensive reforms are required to enhance private sector development. To improve its ability to attract foreign investors, Cambodia must reduce corruption. A recent study recommended the Government (i) improve civil salaries, (ii) establish an effective personnel management system, (iii) improve public oversight of government functions, and (iv) routinely and publicly disclose the assets of public officials.¹² The Government‘s draft governance action plan includes the following as short term anti-corruption actions:

• Prepare and adopt codes of ethics for judges and public officials.
• Prepare and submit anti-corruption legislation to the National Assembly.
• Prepare an action plan to correct institutional arrangements, particularly in public procurement, prone to corruption.

45. Additional planned short term actions to improve the rule of law include (i) publication of all legislation, (ii) participation of civil society and the private sector in the legislative process, (iii) a strengthened Council for Judicial Reform, and (v) separation of the budget of the Judiciary from that of the Ministry of Justice. Although the draft governance action plan was generally well received by the international aid community at the 2000 Consultative Group (CG) Meeting in Paris, the level of private investment the country can attract will be an important test of the credibility of these measures.

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