In line with the Asian Development Bank's (ADB) commitment to advancing public-private partnerships (PPPs) in Cambodia, a small-scale policy and advisory technical assistance (S-PATA) has been proposed to the Government of Cambodia (the Government). The proposed S-PATA will: (i) advise the Government on improving the PPP policy, legal and regulatory enabling environment; (ii) strengthen public sector institutional capacity to develop and catalyze pilot PPPs; and (iii) help establish a Project Development Facility (PDF) to support the development by the Government of competitively-bid, bankable PPP pilot projects. The S-PATA is based on the findings of a joint PPP Assessment mission fielded by ADB and Agence Fran aise de D veloppement (AFD) from 22-31 August 2011 to investigate the potential for PPPs in Cambodia.
A. Impact and Outcome
The impact of the S-PATA will be increased PPP to generate public infrastructure investments needed to accelerate Cambodia's economic growth, and to enable the leveraging of limited public sector investments in infrastructure. The outcome will be an improved enabling environment to catalyze PPP infrastructure investments in sectors such as power, water, transport, education and health sectors. This environment needs to be underpinned by strengthened institutional capacity in the public sector to develop PPPs.
B. Methodology, Key Activities and Risks
The S-PATA will provide rapid and responsive assistance to enable the Government to take a more proactive role implementing its PPP program, and manage associated risks. The S-PATA outputs will be delivered in a phased manner in accordance with defined milestones and provide the basis for generating greater PPP participation.
The outputs of the S-PATA will be as follows:
(i) Enhanced Policy, Legal and Regulatory Framework The S-PATA will commission a strategic study for the Government on the preparation of a PPP policy, legal and regulatory framework, and outline institutional arrangements that reflects international standards and best practices.
(ii) Institutional Arrangements for PPPs Refined and PPP Preparation Process Developed The S-PATA will review options and develop the basic outline of a model institutional structure that would reflect international best practice and meet the needs of Cambodia for the development and implementation of PPP projects. Effective institutional arrangements are one of the key factors that define a country's success implementing a PPP program. The two critical agencies that need to be developed by the Government are a PPP Unit and a Risk Management Unit (RMU). A PPP Unit is a centralized agency that acts as a source and custodian of standardized PPP contractual structures and project screening, preparation, transaction, and management processes. The PPP Unit disseminates this information to prospective GCAs at the national and/or sub-national level considering the development of a PPP project, and provides technical assistance and oversight of project quality. A RMU is a centralized agency that provides approval to GCAs to provide government support needed to make projects bankable , while ensuring they are affordable to the Government, and the projects generate value for money (VFM). The provision of government support by the Government creates both direct and contingent liabilities (risks), and these need to be managed in the context of the Government's overall portfolio of liabilities.
(iii) Increase Understanding and Awareness of the PPP Project Lifecycle. Workshops will be held under the S-PATA to increase the awareness within key ministries, and line agencies responsible for PPPs in Cambodia. The workshops will help prospective GCAs gain an understanding of the requirements to develop, implement and manage PPP contracts. These workshops will help generate stakeholder support for PPPs in Cambodia.
(iv) A Pipeline of Bankable Projects Identified to be Developed Through a Project Development Facility (PDF). The S-PATA will recommend the appropriate structure, level of resources, and operational arrangements for a PDF. The PDF is a mechanism that enables prospective GCAs to source funds to cover a portion of PPP project preparation and transaction costs, thereby reducing the impact of PPP procurement costs on their budgets. A well designed PDF will increase the quality and quantity of bankable PPP projects that are offered to the market.
Strong political commitment is required to catalyze private sector investments through PPP for infrastructure development. The Government needs to take a range of actions to strengthen the enabling environment, develop consensus among different government ministries/agencies and other stakeholders, develop appropriate incentives for private sector participation through government support, and provide effective fiscal risk management arrangements. Risks for the S-PATA include lack of political will to promote and invite private sector participation through PPPs; delays in approval and implementation of policy, legal and regulatory arrangements; inadequate institutional capacity and ability to access resources; and difficulties identifying bankable infrastructure projects.
|Project Rationale and Linkage to Country/Regional Strategy
Cambodia faces substantial challenges providing new and improved infrastructure for its growing economy. Urbanization rates and increasing connectivity with neighboring countries are driving demands for new and improved infrastructure and related services. The unmet demand is reducing the country's competitiveness and its ability to achieve high levels of economic growth, reducing poverty, and meeting Millennium Development Goal targets. Despite the many positive characteristics of the economy, the business climate for private sector is challenging. Cambodia was ranked 147 out of 174 countries in the World Bank's Doing Business Survey for 2011. In a similar study conducted by the World Economic Forum, Cambodia's ranking in the 2011 Global Competitive Report, rose 12 places to 97 out of 142 countries. Despite these improvements, weaknesses in infrastructure, particularly in areas such as electricity and transport logistics, are consistently cited by businesses as principal constraints to private investment and productivity growth in Cambodia.
The coverage of infrastructure in Cambodia is low compared to other countries in Asia, and it is having a negative impact on economic growth and development of new sectors. Cambodia faces substantial challenges providing new and improved infrastructure for its growing economy. Industrialization and urbanization rates are rising rapidly, and they are driving increasing demands for new and improved infrastructure and related services. Government investment programs for infrastructure are articulated in long-term sector development plans. The total investment requirement for infrastructure in Cambodia is estimated to be in the range of $12-16 billion over the next 10 years. Infrastructure investment is state-led and the public sector capital investment rate as a percentage of gross domestic product (GDP) is approximately 6%-7% per annum (pa). This figure is broadly in line with international standards, although it is low compared to countries such as Viet Nam and Peoples' Republic of China, which are achieving levels of approximately 10% pa.
The Government has been taking steps to improve the investment climate, and levels of investment in infrastructure, which are defined in comprehensive sector development plans. These plans are coordinated under the overarching development program defined in the Rectangular Strategy on Growth, Employment, Equity, and Efficiency, Phase II, which provides the development policies for the fourth legislature (2009 2013). Despite the presence of these plans, implementation appears to be unbalanced. Most of the infrastructure investment has been focused in the urban areas, which only comprises 20% of the estimated 14 million population of Cambodia. While most economic growth is occurring in the cities, the majority of the population of Cambodia lives in the rural areas and relies on agriculture, and is dependent the transport and power sector networks. With the accession of Cambodia to World Trade Organization, and rapid growth in areas such as rice production for export, there is a need for the Government to develop an infrastructure program that meets the needs of both the rural areas and the urban centers. This program should reflect the requirements of the country's supply chains for various products such as rice and garments, and coordinates infrastructure developments for road, rail, ports, and ensures availability of low cost and reliable power.
Implementation of the sector plans is constrained by institutional weaknesses and limited borrowing capacity. Most funding for infrastructure is sourced from user fees from services provided by state owned enterprises (SOEs), and through public sector borrowing on a concessional basis. SOEs have limited capacity to borrow due to the lack of availability of long term debt in local financial markets. The amount of public sector borrowing is limited by the size of the country's tax base, which is low and does not reflect demand for infrastructure facilities and services. At the current time, all public sector debt is sourced on a concessional basis, and there is no commercial debt program. Government and Official Development Assistance funding resources are insufficient to meet Cambodia's large infrastructure funding needs.
PPPs would provide the Government with increased opportunities to address these issues by helping to reduce the need for public debt, leveraging limited public revenues, and bringing in private sector skills and finance. PPPs are contractual arrangements between the Government and the private sector. Under these arrangements the private sector agrees to provide infrastructure and related services in exchange for the provision of government support. Government support can range from contingent government guarantees for limited political risks through to direct fiscal offtake obligations under Build Operate Transfer (BOT) contracts and it will vary for each project.
The use of PPPs can improve service delivery and increase availability of resources to the Government due to the need for the private sector contractor to accurately meet users' requirements on competitive terms. These benefits are captured through the PPP contract where payment to the private sector contractor for outputs provided only occurs when services of the required standards are delivered. The output payments provide suppliers with explicit incentives to deliver the required outputs for the full term of the contract and minimize costs by making adequate provisions to maintain assets over the life of the contract.
ADB's Country Partnership Strategy (CPS) 2011-2013, was endorsed by the Board in July 2011, and it calls for PPPs to be actively sought in all areas of operations . The CPS provides an undertaking for ADB to carry out a PPP Assessment in 2011 to identify the potential for PPPs in the Cambodia Program. This strategic initiative is in line with ADB's overall Strategy 2020 goal where 50% of its operations will relate to private sector-related program areas. In line with these strategic objectives, it was agreed by the management of ADB and AFD that a joint PPP assessment mission would be carried out in Cambodia. This study was conducted in August 2011, and the joint assessment by ADB and AFD was completed in October 2011.
The joint assessment concluded that while Cambodia is an attractive destination for private investment, there were significant constraints on the development of PPPs, and the required institutional arrangements to manage a PPP program are not yet in place. These conditions suggest that PPP policy, legal, and regulatory framework; and institutional strengthening be the areas