Catalog

	Table of Contents
p. 15 of 21 BACK | NEXT Executive Summary I. Background II. Overview of Development Issues III. External Development Assistance IV. Priority Sectors for ADB's Future Operations A. Strategic Thrust B. Guidelines for ADB Interventions in Cambodia C. Priority Area One: Rural Economic Development D. Priority Area Two: Human Resource and Social Development E. Priority Area Three: Private Sector Development V. ADB Strategy in Operation

Country Operational Strategy - Cambodia : IV. Priority Sectors for ADB's Future Operations

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E. Priority Area Three: Private Sector Development

127. The third priority area for ADB concessional loan and grant interventions will be development of an enabling environment for the private sector through support for improved governance, and interventions in transportation, finance, and energy. ADB will assist in the development of institutional capacity for public-private partnerships in the provision of public infrastructure and services. In addition, ADB will consider private sector catalyst investments as appropriate opportunities arise. Because Cambodia is at a very early stage of development and because the primary goal is to support poverty reduction, ADB's interventions will emphasize support for domestic small and medium-size enterprises in the rural areas, especially farming and other agricultural activities. However, to achieve balanced growth and ensure linkages between the rural and urban sectors, ADB will make selected investments to address the constraints to larger scale direct foreign investment.

128. Several factors taken together create a very poor business environment in Cambodia. The transportation network is in an almost complete state of disrepair. The banking system barely functions. Power provision is inadequate (especially outside of Phnom Penh), unreliable, and inefficient. Labor force productivity is very low because of lack of education and health care. Perhaps most critical is an environment of extremely poor governance, including weak public administration, inefficient public financial management and the serious corruption problem widely regarded by the private sector as the single largest deterrent to business activity in Cambodia. ADB's strategy to support improved governance is discussed in Chapter V. In considering interventions to support private sector development, it is essential that ADB focus on the development of both official and private cofinancing partnerships to maximize its comparative advantage in addressing sectorwide issues with limited ADF financing.

1. Transportation

129. The transportation system in Cambodia is old and heavily damaged. The primary road network (about 7,700 km of national and provincial roads), constructed about 50 years ago, has endured war, floods, and heavier traffic than that for which it was designed. Only 2,700 km of this network is of all-weather construction and much of the remaining is passable only by motorcycle or four-wheel vehicles. Travel by road is exceedingly slow and jarring. Only one road has been completely restored, Route 4 by USAID in 1992. There are no secondary roads to speak of and tertiary roads often feed directly into the primary network. The road transportation industry, including road construction, maintenance, and commercial transport, was completely devastated by the long conflict.

130. The rail system is barely functioning, limiting its ability for efficient transfer of bulk commodities. The Southern Line from the main seaport at Krong Prean Sihanouk to Phnom Penh suffers from frequent service disruptions. The Northern Line from Phnom Penh to the Thai border is incomplete in the border region. With assistance from aid agencies, including ADB, Cambodia has reestablished commercial operations at airports in Phnom Penh and Siem Reap. For water transportation, there is a need to dredge the canals and upgrade ports at Krong Prean Sihanouk, Phnom Penh, and other riverfront towns.

131. There is broad agreement between ADB and the Government that, to reduce poverty, the first priority in the transportation system in Cambodia is the reestablishment of the primary road network, followed by the secondary and rural road networks. Private sector involvement, perhaps in public-private partnerships, is envisioned in ports, railways, airport operation, and in roads. Planned assistance from ADB, World Bank, and Japan over the next five years will largely succeed in restoring the primary road network. ADB's assistance, which began with road rehabilitation activities under SRAL, will continue with the planned restoration of substantial parts of Routes 5, 6, and 7 under the Primary Roads Restoration Project approved in 1999. The port at Krong Prean Sihanouk is being rehabilitated with assistance from Japan.

132. Because of the historical importance of ADB assistance in roads and at government request, ADB will facilitate government leadership of the development of the road network. In 2000, ADB will assist government efforts to update its investment plan through a transportation sector study. This study will guide the next road project, scheduled for 2002. A triggering action for that intervention however, will be demonstrated government commitment to road maintenance. Other policy considerations include the development of a local road construction industry, an emphasis on employment generation through the use of appropriate technologies in project implementation, and the establishment of a road use regulatory framework. Although the focus is on roads for ADF investments, ADB will extend TA to strengthen the Government's capabilities in multimodal transportation planning and public-private partnerships to achieve maximum efficiency in the transportation system, particularly in the regional context.

2. Energy

133. About 15 percent of the population have access to electricity but this is only in Phnom Penh and the provincial towns. Generation is small-scale and inefficient. In Cambodia, the cost of electricity is highest and consumption lowest in the region. There is no national power grid, and rural consumers as well as industries frequently use costly generators to ensure an uninterrupted supply. An autonomous State-owned enterprise, EdC, operates the electricity system in Phnom Penh, Krong Prean Sihanouk, Siem Reap, and Kompong Cham. There is a growing but still small private sector (domestic and foreign) presence in power generation. The Government's immediate goals in this sector are (i) development of a generation and transmission grid, (ii) provincial towns' electrification plan to upgrade supplies, and (iii) development and implementation of a rural electrification plan.

134. ADB's assistance to the energy sector has thus far included rehabilitation of power transmission. The Power Rehabilitation II Project, scheduled for the year 2000, will upgrade power supply in key provincial towns in support of ADB's efforts to promote geographically balanced development. ADB assistance in this area includes important policy reform dialogue and efforts to strengthen the management capacity and financial autonomy of EdC. Currently EdC is suffering from financial instability because of a large amount of arrears (about $10 million) on government accounts.

135. The World Bank is expected to play a major role in facilitating government leadership of sector development in the area of public utilities and is developing plans to initiate a rural electrification scheme. Australia, France, Japan, and Sweden are also active in this sector. A power sector strategy study will be initiated in 2000 to investigate ADB's future role and involvement in this sector. It will examine the capacity building and investment needs in this sector over the medium term, develop a financing plan to address the needs that include cofinancing and private capital support, recommend priority areas for ADB support, and identify reforms to be sought by ADB in its involvement. Emphasis will be on upgrading transmission and distribution networks in provincial towns and rural areas.

3. Financial Sector

136. Despite progress in transforming NBC from the only state bank into a regulator and supervisor of the commercial banking sector, the formal banking sector is still very weak. The financial system comprises an excessive number of banks, many of which are small, weak, and inefficient, with weak supervisory and regulatory capacity at the central bank. These are typically large- and medium-size privately owned banks with inadequate delivery of basic banking functions such as checking and savings deposits and credit extension, especially in rural areas. Indeed, rural finance is informally provided by NGOs and is limited. There is also pervasive use of the US dollar, which limits the scope for monetary policy.

137. Overall, the banking sector contributes very little to the economy of Cambodia. Only about 1,000 people are employed by commercial banks. Total commercial banking assets are less than 20 percent of GDP. The interbank market is virtually nonexistent. There are three types of commercial banks. The first type, typically foreign branch banks, accepts deposits but makes few loans, preferring to hold foreign assets and excess reserves. Second are the banks that take few deposits and have large holdings of fixed assets, raising questions about their source of earnings. The third type which might be considered the true intermediaries hold large portfolios of loans and deposits.²⁹

138. Under the PRGF framework, the Government will undertake several banking reforms. First, under a new commercial banking law adopted in 1999, all banks are required to reapply for a license. NBC will take steps to close banks that do not comply with the law. NBC will withdraw from all commercial banking activities by privatizing the Foreign Trade Bank. This will leave the wholesaling RDB as the sole Government-owned bank. Finally, with assistance from the IMF (commercial banks) and ADB (microfinance institutions), supervisory capacity at NBC will be improved.

139. ADB undertook a financial sector strategy study in 1999 that produced a preliminary road map for the development of the financial sector over the next 20 years. A project preparatory TA scheduled in 2000 for a financial sector intervention in 2001 will complete the in-depth analysis of constraints to the efficient mobilization and allocation of funds by the financial sector. It is anticipated that interventions in this area will complement the rural credit and savings intervention, focus on the provision of basic financial services, and include a strong package of policy reform, institutional development, and capacity building. Because of the importance of good governance in the banking sector, and the relative lack of ADB experience in this sector in Cambodia, it is essential that the Government demonstrate willingness to undertake key reforms. A trigger for further financial sector involvement, therefore, will be a satisfactory midterm review of the Rural Credit and Savings Project, scheduled for approval in 2000.

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