Cambodia : Strengthening Public Financial Management Program, Subprogram 2

Sovereign Project | 49041-004

The proposed program is part of the long-standing support of the Asian Development Bank (ADB) to strengthen governance and institutional capacity in Cambodia through public financial management (PFM). It assists reforms to bolster (i) the policy and regulatory framework for expenditure and revenue management, (ii) the implementation capacity of line ministries, and (iii) external audit functions. Subprogram 2 contributes to the following Sustainable Development Goals (SDGs): (i) promoting gender equality and empowering all women and girls at all levels (SDG 5.c); (ii) integrating climate change measures into national policies, strategies, and planning (SDG 13.2); and (iii) developing effective, accountable, and transparent institutions at all levels (SDG 16.6). The program is aligned with pillar IV (improve governance) of ADB's country partnership strategy (CPS), 2019-2023, for Cambodia.

Project Details

  • Project Officer
    Ouch, Chamroen
    Southeast Asia Department
    Request for information
  • Approval Date
    23 November 2023
  • Country/Economy
    Cambodia
  • Sector
    • Public sector management
Project Name Strengthening Public Financial Management Program, Subprogram 2
Project Number 49041-004
Country / Economy Cambodia
Project Status Approved
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan 4391-CAM: Strengthening Public Financial Management Program, Subprogram 2
Concessional ordinary capital resources lending US$ 50.00 million
Operational Priorities OP1: Addressing remaining poverty and reducing inequalities
OP2: Accelerating progress in gender equality
OP3: Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability
OP5: Promoting rural development and food security
OP6: Strengthening governance and institutional capacity
Sector / Subsector

Public sector management / Public expenditure and fiscal management

Gender Effective gender mainstreaming
Description The proposed program is part of the long-standing support of the Asian Development Bank (ADB) to strengthen governance and institutional capacity in Cambodia through public financial management (PFM). It assists reforms to bolster (i) the policy and regulatory framework for expenditure and revenue management, (ii) the implementation capacity of line ministries, and (iii) external audit functions. Subprogram 2 contributes to the following Sustainable Development Goals (SDGs): (i) promoting gender equality and empowering all women and girls at all levels (SDG 5.c); (ii) integrating climate change measures into national policies, strategies, and planning (SDG 13.2); and (iii) developing effective, accountable, and transparent institutions at all levels (SDG 16.6). The program is aligned with pillar IV (improve governance) of ADB's country partnership strategy (CPS), 2019-2023, for Cambodia.
Project Rationale and Linkage to Country/Regional Strategy

ADB approved the programmatic approach and PBL for subprogram 1 on 26 September 2016. Building on subprogram 1 achievements, subprogram 2 aims to further strengthen and deepen reforms under the policy and regulatory framework, improve the uptake of policy-based budgeting, advance effective expenditure management and accountability, and strengthen the oversight responsibilities of the National Audit Authority (NAA). Subprogram 2 had an original implementation period of July 2016-June 2019. It originally comprised 21 policy actions, which have been consolidated into 12 actions and include a key reform of the 2008 Public Finance System Law (PFSL). Initial plans for the revision of the PFSL were for the amendment of selected articles of the law only. However, the subsequent full overhaul of the PFSL reflected the need for a modernized PFM system in Cambodia and were identified as essential reforms in the Budget System Reform Strategy (BSRS) 2018-2025. This revision delayed the conclusion of the subprogram's implementation from June 2019 to March 2023. The revised PFSL required extensive consultations among government stakeholders, given their far-reaching impact on the public finances of the country. The consultation process was also particularly challenging during the coronavirus disease (COVID-19) pandemic when in-person consultations were restricted, and government resources were focused on delivering the pandemic response to meet Cambodia's socioeconomic priorities.

The programmatic approach allows for flexibility in program design. This was key to meeting Cambodia's evolving needs during the PFM reforms and addressing the macroeconomic shocks encountered. The multiyear structured engagement facilitated deepened PFM reforms across the government. The program also supported the implementation of stage 3, 2016-2022 (improving budget-policy links) of the government's Public Financial Management Reform Program (PFMRP). Subprogram 1 backed foundational reforms such as (i) the implementation of the initial framework to shift to policy-based budgeting; (ii) revenue mobilization efforts that led to an increase in revenues to 2.5% of gross domestic product (GDP) from 2014 to 2015; (iii) a new budget classification system and a financial management information system (FMIS) at the National Treasury for sound financial reporting; (iv) a robust debt management and financial analysis system to improve public debt management; and (v) a more stringent framework for internal and external audit functions. The program completion report for subprogram 1 rated it as successful.

Reforms consistent but need consolidation. Cambodia's PFM reforms have led to consistent improvements, but more is needed to embed them. The Public Expenditure and Financial Accountability (PEFA) ratings for Cambodia (2010, 2015, and 2021) have highlighted the need for a programmatic approach with long-term engagement to sustain and deepen reforms. Between 2015 and 2021, the overall consolidated PEFA ratings improved from C to C+. Advancements between 2015 and 2021 included budget reliability (from C+ to B) and transparency of public finances (from C to C+), which were reform areas supported by the program. Most other ratings remained stable around the C level. Among the areas in need of further improvements are (i) public access to key fiscal information, (ii) public investment management (PIM), (iii) medium-term fiscal forecasting, and (iv) payroll management. These improvements require a longer time horizon since the reforms need to be deepened with targeted and sustained efforts. Robust PFM systems are vital in creating additional fiscal space, boosting efficiency in spending, supporting inclusive economic growth, and responding to emerging challenges, including climate change.

Economic performance sound but vulnerable. Cambodia has experienced strong, consistent growth-real GDP growth averaged more than 7% per year between 2014 and 2019. Driven by this, the poverty rate declined from 33.4% in 2009 to 17.8% in 2020. High rates of economic growth coincided with the government's implementation of its flagship PFMRP, launched in 2005. The PFMRP targeted an increase in revenues, greater financial accountability, and more efficient expenditure management, and these improvements in turn led to better service delivery as well as progress in the (i) primary school completion rate, which rose from 80.1% in 2014 to 88.2% in 2020; (ii) lower secondary school completion rate, which climbed from 45.2% in 2014 to 57.4% in 2019; and (iii) maternal mortality ratio, which declined from 189 per 100,000 live births in 2014 to 168 in 2017. Growth, however, has not been inclusive, and gaps remain in the provision of inclusive public service delivery-Cambodia lags its Southeast Asian neighbors when it comes to key public health and education indicators. For example, in 2021, Cambodia's education index was only 0.593, below East Asia and the Pacific's average of 0.749. Cambodia also had only 1.3 hospital beds and 1.7 health workers per 1,000 inhabitants, among the lowest in Southeast Asia.

Crisis response hinging on strong public financial management. Cambodia was severely impacted by the COVID-19 pandemic and experienced an economic contraction of 3.1% in 2020 (footnote 13). The government implemented a comprehensive fiscal stimulus package to meet its socioeconomic objectives in countering the pandemic. The well-coordinated response supported a strong economic recovery: GDP growth rebounded to 3.0% in 2021 and to 5.2% in 2022. Cambodia's ratio of public debt to GDP is expected to increase from 28.1% in 2019 to 34.7% in 2023, but the country remains at low risk of debt distress and continues its conservative fiscal stance. As per ADB's assessment, the 2023 budget is anchored on sound fiscal policies to balance macroeconomic stability, effectively manage fiscal risks, and promote post-pandemic recovery. In 2023, GDP growth is projected at 5.3%, driven by industrial sector performance and tourism. Inflation is also expected to moderate. The current account deficit is expected to shrink further as tourism and merchandise exports recover (footnote 13). Moreover, the success of Cambodia's pandemic response was grounded in the ongoing improvements to its overall PFM system, which allowed the government to adopt prudent fiscal management in pre-pandemic years and rationalize public expenditures during the pandemic to prioritize socioeconomic needs. Having responded strongly to external shocks, the government then refocused its attention on continuing the PFM reforms and enhancing the country's resilience by bringing the economy back to the path of pre-crisis growth while ensuring sustainability and inclusiveness.

Development constraints. The government has identified three development constraints to a modernized PFM system: incomplete policy and regulatory frameworks, line ministries' limited capacity to implement the PFM reforms effectively, and weaknesses in external audits. These constraints can hamper the overall effectiveness, efficiency, and accountability of PFM practices and undermine revenue management, resource allocation, and public expenditure management.

Completing the policy and regulatory frameworks. The government has put in place a multistage strategy for its PFM reforms under the PFMRP (footnote 6). Despite strong overall progress, gaps remain in the current PFM system. While subprogram 1 brought initial progress in policy-based budgeting and in revenue and expenditure management (para. 4), the PFM legal framework does not reflect the key achievements delivered under the PFMRP. The lack of a comprehensive medium-term fiscal forecasting and medium-term budgeting tool led to weak multiyear planning and budgeting practices. Ineffective medium-term planning and the absence of defined budget ceilings for line ministries made it difficult to achieve fiscal and budgetary discipline objectives effectively and to meet government priorities relating to climate change, disasters and gender equality in key social sectors. The budget planning process does not facilitate the inclusion of gender, poverty reduction, and climate change considerations, hindering inclusive growth and sustainable development outcomes. Continued improvements and additional regulations are also needed to further strengthen revenue administration. The PIM system does not enable the government to manage investment projects effectively. Further, the PFM system is not automated, leading to operational inefficiency. Internal audit guidelines are incomplete, and audits of the information and communication technology (ICT) environment, as well as performance audits to assess the reliability of the digitalized PFM system and establish accountability, have yet to commence. Public debt management does not include government guarantees for contingent liabilities associated with public-private partnership projects. Finally, debt reporting is neither comprehensive nor disclosed regularly.

Limited absorptive capacity of line ministries to implement reforms. The capacity of line ministries for robust expenditure management and accountability, such as in program budgeting, financial management, and internal audits, had been gradually strengthened under subprogram 1 (para. 4). But further improvements are needed. Line ministries are unable to effectively implement the policy and regulatory requirements that lead to improved PFM outcomes, including strengthened budget and expenditure management. For example, ministries are unable to implement budget strategic plans (BSPs) effectively to link budgets to policy and development priorities. The lack of integrated recurrent and capital budgets led to poor planning outcomes and weak infrastructure sustainability. Ministerial budget execution is low because of the limited availability of timely and relevant data and the lack of clear guidelines on budget execution. Budget execution is also hampered by ineffective internal controls and weak ministerial capacity to carry out internal audits such as ICT and performance audits, which further weaken accountability.

Ineffective external audit function. The capacity of the external audit function of the NAA had been strengthened under subprogram 1, for instance, by adopting regulations to operationalize the 2020 audit law, issuing guidelines on financial, compliance, and performance audits, and ensuring timely submission of the annual audit reports of public financial statements to the National Assembly. However, more effort is needed to improve accountability for public expenditures. Regulations to implement the 2000 audit law were adopted but are not yet fully operationalized. The existing audit guidelines are not aligned with international standards, hampering the overall effectiveness of the NAA. The timely submission of the annual audit reports to the National Assembly needs to be sustained to ensure transparency and accountability in government operations. Finally, capacity development for the NAA must be more systematic and anchored on a comprehensive capacity development strategy.

Alignment with the government's national plan and ADB priorities. The CPS 2018-2023 and the government's Rectangular Strategy IV identified weak governance as a binding constraint to improved public service delivery. Both strategies sought to improve governance by strengthening accountability and integrity in public institutions, and both remain relevant to date. The program aligns with pillar IV of the CPS: improving governance. Moreover, the program is well aligned with ADB's Strategy 2030 and five of its seven operational priorities (OPs): addressing remaining poverty and reducing inequalities (OP1); accelerating progress in gender equality (OP2); tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability (OP3); promoting rural development and food security (OP5); and strengthening governance and institutional capacity (OP6). PFM reforms are pivotal to improving governance and public service delivery outcomes across sectors where ADB engages.

Impact
Project Outcome
Description of Outcome
Progress Toward Outcome
Implementation Progress
Description of Project Outputs
Status of Implementation Progress (Outputs, Activities, and Issues)
Geographical Location Nation-wide
Safeguard Categories
Environment C
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects In compliance with ADB's Safeguard Policy Statement (2009), the program is classified as category C for environment. The program is not expected to have any adverse environmental impacts within the meaning of ADB's Safeguard Policy Statement.
Involuntary Resettlement In compliance with ADB's Safeguard Policy Statement (2009), the program is classified as category C for involuntary resettlement. The program is not expected to have any adverse social safeguard impacts within the meaning of ADB's Safeguard Policy Statement.
Indigenous Peoples In compliance with ADB's Safeguard Policy Statement (2009), the program is classified as category C for indigenous people' s safeguards. The program is not expected to have any adverse social safeguard impacts within the meaning of ADB' s Safeguard Policy Statement.
Stakeholder Communication, Participation, and Consultation
During Project Design Program design had been consulted closely with the Secretariat of PFM Reform Steering Committee, general departments of the Ministry of Economy and Finance (MEF) which are responsible for implementation of PFM reform areas, NAA and development partners.
During Project Implementation The Strengthening PFM Program, Subprogram 2 (SPFMP, SP 2) supported the implementation of stage 3 of PFM Reform Program. The reform areas under the SPFMP, SP 2 were parts of the overall reforms under the PFM Reform Program of the government. Progresses of the PFM Reform Program are monitored by the technical working group (TWG) for PFM Reform. The TWG meets bi-annually to discuss the progresses of the reform. Representatives of MEF, line ministries, NAA, development partners and civil society organizations attend the meetings of TWG which are chaired by Deputy Prime Minister and Minister of MEF.
Responsible ADB Officer Ouch, Chamroen
Responsible ADB Department Southeast Asia Department
Responsible ADB Division Cambodia Resident Mission (CARM)
Executing Agencies
Ministry of Economy and Finance
Timetable
Concept Clearance -
Fact Finding 24 Oct 2022 to 08 Nov 2022
MRM 17 Oct 2023
Approval 23 Nov 2023
Last Review Mission -
Last PDS Update 23 Nov 2023

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