Countries and Regions

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p. 6 of 8 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation Appendixes

Country Strategy and Program 2005-2009: Cambodia

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V. ADB's Assistance Program

A. Overall Assistance Level

71. Cambodia has been classified as a category A borrower since ADB resumed lending operations in 1992, and may borrow only from the ADF. Although the resource envelope under ADF IX has increased, Cambodia’s indicative planning figure (IPF) for 2005–2006 is $104.30 million, or $52.15 million per year (with a carry-forward possibility, allowing a minimum of $39.11 million per year and a maximum allocation of $65.19 million). The lower IPF allocation to Cambodia is mainly due to revisions in the policy on performance-based allocations, specifically the greater weight given to governance. This more than offset an improvement because of the smaller weight given to population (the “small-country bias”). During 2005–2006, subregional (GMS) projects will also be considered as an addition to the country allocation. ADB will continue to maintain flexibility in its assistance program by using a combination of program lending, sector development programs, sector lending, and special funds to match Cambodia’s needs. The 2005–2006 non-lending program based on Technical Assistance Special Fund (TASF) and Japan Special Fund (JSF) resources (and excluding cofinancing and regional TA) is expected to average around $3.3 million per year. Of this amount, approximately 71% will be for project preparatory TA and the remainder for advisory TA. Advisory TAs will mainly focus on institutional strengthening and capacity building to develop more effective sector institutions, improve governance, and enhance the overall impact of development assistance. ADB will continue to actively pursue cofinancing, particularly from grants and concessional loan sources, for both its lending and non-lending programs.

72. Given the wide range of development issues to be addressed in Cambodia, the full range of ADB’s operational and financial instruments will be employed. SWAps and programbased approaches (PBAs) will be promoted where feasible, and on the basis of need (see paragraph 90 below). Policy dialogue and reforms will continue to be addressed through sector development programs. Where ongoing reforms are led by other donors, ADB will lend on a project basis. A new innovation in the lending program for Cambodia is the availability of grant financing. As a poor debt-stressed country, Cambodia could receive up to 50% of its total ADF assistance in the form of grants under the ADF IX grants allocation framework. This is a positive development for a country which while having an estimated debt service ratio (relative to exports of goods and services) of only 2.9% in 2003, had a debt service to government revenue ratio of 14.8%, placing it in the category of debt stressed countries. Moreover, with the phasing out of the MFA at the end of 2004 and its likely adverse impact on the country’s principal source of exports, garments, Cambodia remains highly vulnerable to adverse external developments. Cambodia also ranks as one of the poorest countries in Asia, and is unlikely to attain the MDG target of halving the population below the national poverty line by 2015. Many of the nonincome MDG targets will also be unattainable. Given intense poverty, the pressing need for basic social investment, and limited prospects for such investment because of the very low government revenue base, selective and focused grant assistance would represent a major addition to resource availability. The Government has indicated that it wishes to use ADF grants, in either stand-alone or blended forms, for projects addressing national poverty reduction objectives encapsulated in the MDGs. This approach is consistent with ADB’s overarching goal of sustainable poverty reduction in Cambodia and the strategic priorities in the CSP. In the 2005 lending program, grant financing is envisaged for projects dealing with rural water supply and sanitation, and for controlling communicable diseases.

B. ADB Assistance for the Strategic Priorities

1. Broad-Based Pro-Poor Economic Growth

a. Economic Infrastructure

73. Transport. As with much economic infrastructure, the transport sector was severely damaged by the years of conflict in Cambodia. Although notable progress has been made since the early 1990s in restoring a core road network connecting the main centers within Cambodia, and the national economy with neighboring countries, much remains to be done. Most of the roads, especially those to rural and agricultural communities, are in a poor condition. This has led to high transport costs and restricted the access of the poor to markets and social services, adversely affecting competitiveness, the expansion of economic opportunities, rural livelihoods, and poverty reduction. Critical sector issues and constraints include the lack of a reliable management and financing mechanism for road maintenance, the need for consolidation and transparent management of public expenditures on roads to increase efficiency in allocation, institutional strengthening and capacity building of sector institutions, inadequate legal and regulatory frameworks to promote greater private participation in the sector, and lack of capacity among domestic private sector contractors. Improved access is a cornerstone of the government’s Rectangular Strategy, as it will help to reduce costs of farm inputs, increase prices available to farmers, and open up non-farm income earning opportunities.

74. ADB has been one of the lead partners in the transport sector and has helped to connect Cambodia to Viet Nam and Thailand through highway projects, and to link primary roads to local communities. ADB will continue to assist the Government to improve access by further restoring Cambodia's secondary national and provincial roads and by rebuilding the institutional and physical infrastructure of Royal Railways of Cambodia. This will be done with greater private sector participation in both road and rail sectors. ADB will also support strengthening the Fund for the Repair and Maintenance of Roads by helping to establish appropriate institutionalized funding mechanisms. It will help develop policy-making and regulatory oversight capacities of the road transport agencies. ADB’s GMS program will continue to support the harmonization of cross-border trade and transport regulations, ensuring that Cambodia derives more value-added from its role as a "land bridge" between Thailand and Viet Nam. The GMS program will also provide TA support for policy reform of the telecommunications sector as a follow-up to ongoing GMS support in this area.

75. Power. The adequate supply of reliable and affordable power is a prerequisite for private-sector-led economic growth. Cambodia has the lowest electrification rate in Asia and among the highest electricity costs in the world. Only about 15% of the total population is serviced by the power system. ADB will continue its important supporting role in restoring power supplies to Phnom Penh and principal provincial towns, helping provide competitive and reliable power for private rural distributors. Future ADB assistance will focus on expanding the country’s power generation, transmission, and distribution systems, including to rural and poor areas. This will be done in close coordination with ongoing and future GMS power sector projects to ensure lower costs and economies of scale.

b. SME Development and the Financial Sector

76. ADB will help to create an enabling environment for SMEs by

1. establishing a development framework and appropriate institutional structures so policy towards SMEs is effectively coordinated and implemented across various ministries
2. enhancing governance and business regulations by improving company registration processes and developing a transparent business licensing system
3. improving SMEs’ access to finance by developing a credit information system, assisting enterprises in accounting and taxation systems, and developing a legal framework for leasing
4. assisting in the development of business services and public–private partnerships

77. Although ongoing interventions by ADB and IMF to support the financial sector have strengthened the banking system (the deposit base grew from only 4% of GDP in the early 1990s to 12% by the end of the decade), the financial sector continues to exhibit low levels of intermediation, restricted outreach, a lack of development of nonbank financial institutions, and a limited range of products and services. Several factors have inhibited credit growth, including inadequate mechanisms to support the enforceability of financial contracts, lack of reliable borrower information, high operating costs, low levels of transparency and weak human resources capacity. Given the critical role of the financial sector in economic development, ADB will continue its leading role in supporting financial sector development and is currently working with the Government to update its financial sector blueprint. Future ADB involvement will depend on the outcome of this update, but is expected to focus on

1. strengthening bank and nonbank supervision
2. further developing the payments system and the interbank market
3. implementing new accounting regulations to improve transparency and facilitate information sharing
4. building the legal infrastructure to support financial intermediation and commercial activity
5. fostering private sector development of the insurance business while strengthening the regulatory framework and supervisory system
6. additional investments in human resource capacity building

78. Tourism has the potential to support further economic growth and job creation, and is a key area for private sector participation. ADB has supported the development of tourism in Cambodia through improved transport (roads and airports) and urban development in key tourism areas. Future support in this area will focus on the promotion of regional tourism within the GMS.

c. Agriculture and Water Resources Management

79. While a significant proportion of Cambodia’s economic production comes from agriculture, the sector has lagged in growth. With 90% of the poor living in rural areas, the low growth rates in agriculture have been a major impediment to poverty reduction. Boosting agriculture productivity, diversification, and competitiveness would enhance economic growth, employment, equity, and social justice. ADB’s strategy, built around its past and ongoing agriculture sector projects, will focus on

1. improving farmers’ ability to raise productivity, diversify towards higher-value products, and connect to markets
2. enhancing the market environment for private agriculture-based enterprise growth
3. strengthening institutional capacity for competitive agriculture commercialization

This will include strengthening extension support to farmers’ groups, advisory support and export promotion for agriculture-based enterprises, quality and safety standards for agriculture produce, price information, and implementation of land concessions. ADB’s support for irrigation development will be integral to its support for agriculture and will emphasize improved water management for high and stable crop yields and incomes. ADB will promote an integrated basin-oriented approach to irrigation design, and encourage water-using farming communities to manage small and medium-sized irrigation schemes sustainably. While the main thrusts of ADB’s interventions in agriculture are directed at increased commercialization, food security issues will be addressed by agriculture and irrigation components of projects under the Tonle Sap basin strategy.

2. Improving Livelihoods and Reducing Vulnerability

a. Education and Training

80. Increased educational opportunities are central to reducing vulnerability and poverty. While considerable progress has been made in improving access to primary education over the past decade and budget allocations for education have increased, Cambodia is unlikely to meet its MDG target for access to lower secondary education. There has been some improvement in making access more equitable, but gender disparities in education persist, and the quality of education needs to be improved at all levels. ADB has been a lead donor in supporting a SWAp and the Government’s Education Strategic Plan (ESP), 2001–2005, which aims to improve the equitability of access to education services, improve the quality and efficiency of education, mobilize resources to increase budgetary support, strengthen and develop the institutional capacity for decentralization, and strengthen partnerships with other donor agencies, other countries, and national and international organizations. The ongoing education sector development program is supporting policy reforms, institutional capacity building, development of education facilities at primary and secondary levels, and technical and vocational education and training. ADB will continue its support for the ESP and Education Sector Support Program, 2004–2008, through

1. supporting implementation of policy reforms which will expand opportunities for the poor at primary, secondary, and post-secondary levels
2. enhancing access to secondary education by means of a targeted investment program for facilities development
3. consolidating decentralized vocational training efforts through the life-long community learning centers concept and encouraging public–private sector partnerships
4. providing a targeted and expanded program of education incentives for the poor with an emphasis on girls and minorities
5. providing capacity building support for decentralized education, especially at the post-basic level and in non-formal education.

ADB will also continue to support the Phnom Penh plan, which provides training for senior GMS officials

b. Rural Livelihoods and Reducing Vulnerability

81. Under ADB’s SWAp to the Tonle Sap basin, the focus will continue to be on promoting management and conservation of natural resources, with a view to promoting sustainable livelihoods within the basin area. Specifically, interventions will focus on protecting and supplementing the assets of the poor (physical, social, and natural) through community-based natural resource management, the provision of small-scale community infrastructure (e.g. rural access roads, foot bridges, small irrigation pumps, community wells for safe water), skills development training, and institutional development and capacity building, to promote alternative livelihood activities.

82. As agreed with the World Bank, given the acute resource constraints, ADB will gradually move out of the health sector, while the World Bank allocates more resources to health. ADB will instead include rural water supply and sanitation as a new area of focus, given the lack of any appreciable donor support in the sector and its importance in achieving health-related MDGs. Interventions to improve rural water supply and sanitation are meant to be catalytic, and ADB’s future involvement in this area will be centered on the Tonle Sap basin. ADB will, however, continue to be involved in health through efforts to control communicable diseases that could be more effectively addressed through a regional (GMS) perspective.

3. Strengthening Governance for Development

83. As outlined in paragraphs 16–23, Cambodia faces serious governance challenges. Given the size of the agenda, it is essential that development partners coordinate their efforts. ADB will therefore support government initiatives to

1. improve accountability and service delivery to its people through PFM, decentralization, and increased participation in local resource management
2. increase efforts to secure legal, regulatory and policy reforms in areas critical for growth, such as the financial sector, SMEs, agriculture, education, telecommunication and the railways
3. continue to support institutional capacity building to improve corporate governance and efficiency in sectors in which it operates
4. improve the design and implementation of projects, such as the development of standard operation procedures, to improve efficiency and effectiveness

Because of resource constraints and involvement of other partners, ADB will not be directly involved in other areas such as public administrative reform and legal and judicial reform (see also Appendix 1, Table A1.5).

84. Corruption is a very serious challenge. There is widespread recognition in Cambodia that corruption seriously constrains economic growth, private sector development, and poverty reduction, and that it undermines the rule of law. ADB will work jointly with Cambodia’s other development partners and the Government to increase accountability and fight corruption. ADB’s approach to fighting corruption is based on tackling the systematic and institutional aspects of corruption by

1. reducing opportunities for corruption by developing and promoting simplified laws and processes
2. increasing the “voice” against corruption by encouraging participation in development
3. increasing transparency and efficiency in public management, especially PFM and the financial sector
4. undertaking strict oversight of ADB-assisted projects

a. Strengthened Public Financial Management

85. ADB will work in close collaboration with other development partners to support implementation of the Government’s comprehensive and sequenced PFM reform program. ADB assistance–the first phase of which is to make the budget credible–will be in the context of an agreed SWAp and will build on results achieved during previous ADB interventions (i.e. public expenditure tracking surveys, budget process, medium term expenditure frameworks, and public audit).

b. Decentralization

86. ADB's support for decentralization has focused on strengthening the institutional capacity of commune councils, by supporting the establishment of commune facilities and the production of maps to facilitate commune-level implementation of the Land Law. These investments are complemented by capacity building activities for commune councilors, staff, and supporting government departments in local government administration. ADB will continue to support the provision of commune facilities and local government capacity building while working with the Government and other development partners to develop a cohesive system of local governance with harmonized structures for service delivery. Other ADB interventions in the area of rural livelihoods, particularly natural resources management, will directly support the Government’s efforts to enhance the role and authority of local government.

C. External Funding Coordination and Partnership Arrangements

87. Cambodia is one of the leading Asia-Pacific countries in preparing to implement the Rome Declaration on Harmonization. The Government—in close cooperation with leading development partners, including ADB—has actively promoted greater harmonization between partners and improved alignment of their assistance programs with the Government's core development strategy. An action plan on harmonization and alignment has been drafted with the assistance of partners and will serve as the principal framework for improving coordination. A Partnership Declaration signed by Government and leading development partners is based on country-level implementation of the Rome Declaration on Harmonization, and sets out the key objectives of greater harmonization and alignment of external assistance. The principal mechanism for coordination among the Government and development partners are a series of TWGs. At the request of the Government, the TWGs have been restructured to enhance Government ownership and provide the basis for more effective management of ODA in 17 priority sectors and thematic areas, facilitate Government and donor dialogue with civil society, the private sector, and other stakeholders. ADB’s Cambodia Resident Mission will continue to play a leading role in donor harmonization and in the TWGs.

88. ADB's assistance program has been formulated in close cooperation with other leading development partners. In particular, ADB, the World Bank, and DFID prepared their Cambodia country strategies in unprecedented close cooperation and coordination. The strategies were developed in close consultation with Government, donors, civil society, and the private sector. By working together, the partners hope to improve their common understanding of the development challenges in Cambodia and to implement a coordinated response, thereby reducing the Government’s transaction costs in dealing with its partners (see also paragraph 64). The partnership is not exclusive, being part of an effort to increase cooperation with other development partners at both strategic and operational levels (for example, the UN recently joined the strategy process of the other three institutions).²² ADB will also strengthen civil society involvement in its Cambodia operations and endeavor to strengthen links among NGOs, community groups, the private sector, and line ministries to promote better governance, community participation, and service delivery.

89. ADB will continue to work closely and further develop relationships with other development partners at strategic and project levels. Initiatives to support the GMS will be particularly important and ADB has worked closely with the UN, the Mekong River Commission, and World Bank and with several bilateral partners, including the Government of Japan, on country and sector strategies in the Mekong region. The Government of Japan has been a major supporter through TA support from JSF for capacity building and from JFPR for poverty reduction. ADB has also entered into partnership arrangements with NGOs such as the Worldwide Fund for Nature. The Government of Finland has been an active supporter of the Tonle Sap initiative. ADB is working closely with most development partners through the education SWAp. In the health sector, ADB is working with DFID and the World Bank to support the health sector strategy. ADB will work with Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) and the World Bank to support the Government to develop a legal framework for land resources. The Government of France has worked with ADB in rural development and the power sector.

90. Greater use will be made of SWAps or PBAs to harmonize external assistance. ADB has been a pioneer of SWAps in Cambodia and will bring its experience to bear in selectively applying SWAps or PBAs to the assistance program in order to improve the focus of external assistance, bring down transaction costs, and ensure policy coherence. Where SWAps or PBAs are not viable (e.g. because of the nature of the intervention, or lack of other active development partners) ADB will actively pursue cofinancing from official and commercial sources. ADB will maintain dialogue with the Government to identify appropriate financing for the projects it will support during 2005–2009, specifically the use of its credit enhancement products.

D. Indicative Internal Resource Requirements

91. Based on ADB-wide staff time coefficients for 2004, and the proposed 2005 work program for Cambodia, the current staff resource requirement to implement ADB’s core operations in Cambodia is provisionally estimated at 903 staff weeks²³. This does not, however, include the processing of the GMS loan and TA program and a number of other initiatives such as managing for results, donor harmonization, and activities related to the 17 TWGs, which require more resources and a considerable increase in staff time.

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