Cambodia - Technical Assistance Credit

Document of The World Bank FOR OFFIaAL USE ONLY Rqet NO. T-6424-KH TECHNICAL ANNEX KINGDOM OF CAMBODIA TECHNICAL ASSISTANCE PROJECT NOVEMBER 10, 1994 Country Operations Division Country Department I East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their ofircial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENT (October 1994, official rate) Riel 2,630 = 1 US dollar WEIGHTS AND MEASURES Metric System ABBREVIATIONS ADB Asian Development Bank CDC Cambodian Development Council CIB Cambodian Investment Board CJ Council of Jurists CMEA Council of Mutual Economic Assistance CRDB Cambodian Rehabilitation and Development Board EMT Economic Management Team ESAF Enhanced Structural Adjustment Facility FCBD Financial Cooperation and Public Debt ICB International Competitive Bidding ICORC International Committee for the Reconstruction of Cambodia ICSID International Centre for Settlement of Investment Disputes IDA International Development Association IDF Institutional Development Fund IMF International Monetary Fund ITC Interministerial Technical Committee on Administrative Reform LCB Local Competitive Bidding MEF Ministry of Economy and Finance MIGA Multilateral Investment Guarantee Agency MoP Ministry of Planning NBC National Bank of Cambodia PHRD Policy and Human Resources Development Fund of the Japanese Government PIB Public Investment Budget PIP Public Investment Program PMU Project Management Unit SDR Special Drawing Right SSCS Secretariat of State for Civil Service STF Systemic Transformation Facility UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme USAID United States Agency for International Development FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Credit and Project Summary . .......................................... 2 1. BACKGROUND ........................1......................... A. Introduction . .......................................... 1 B. The Institutional Setting .......... ......................... 2 C. Institutional and Organizational Issues .......................... 5 11. PROJECT DESCRIPTION ....................... 7 A. Public Expenditure Control ........................ 8 B. Public Investment Management .............................. 13 C. Foreign Debt Management ............... .................. 24 D. Personnel Management ................ ................... 28 E. Legal Assistance for Private Sector Development ................... 32 F. Training . ............................................ 37 G. The Study Fund ................. ....................... 44 111. PROJECT MANAGEMENT AND IMPLEMENTATION ...................... 45 IV. AGREEMENTS REACHED AND RECOMMENDATION ..................... 50 A. Agreements ........................................... 50 B. Recommendation ........... ............................ 51 ANNEXES ................................................... 52 Annex I Project Implementation Plan .......................... 52 Annex IIA Summary of Project Costs ........................... 55 Annex IIB Summary of Project Costs by Component .................. 56 Annex III Main Job Descriptions .............................. 57 bThis document has a restricted distribution and may be used by recipients only in the performance of their | official duties. Its contents may not otherwise be disclosed without World Bank authorization.   KINGDOM OF CAMBODIA TECHNICAL ASSISTANCE PROJECT Credit and Project Summnar Borrower: Kingdom of Cambodia. Beneficiary: Not applicable. Poverty: Not applicable. Amount: SDR 11.6 million (US$17 million equivalent). Terms: Standard IDA terms with a 40-year maturity, including 10 years of grace. Commitnent 0.50% on undisbursed credit balances, beginning 60 days after signing, Fee: less any waiver. Financing Government US$1.7 million equivalent. Plan: IDA US$17 million equivalent. Total US$18.7 million equivalent. Net Present Not applicable. Value: Technical No. T-6424KH. Annex: This report is based on the findings of pre-appraisal and appraisal missions that visited Cambodia in May and July 1994. The report was prepared by Guy Darlan (Task Manager) assisted by Su-Yong Song (Public Finance), Yoshio Sanaka (Public Investment), David Steedman and Nilmadhab Mohanty (Civil Service), Maurice Gervais (Training), Mostafa El-Erian and Eric Haythorne (Private Sector Development). Michael Ward, Janme Sinha, and Annie Green reviewed the manuscript and provided comments on substance or form. The project was prepared under the supervision of Khalid Ikram, Division Chief, EA1C2, and Callisto Madavo, Director, EAI.   - 1 - KINGDOM OF CAMBODIA TECHNICAL ASSISTANCE PROJECT TECHNICAL ANNEX I. BACKGROUND 1.1 This Technical Annex describes the International Development Association's ("IDA" or "World Bank") effort to support the implementation of the Kingdom of Cambodia's ("Cambodia") economic reforms, and to help develop the institutions and strengthen those organizations which are essential to the reconstruction and economic recovery process as well as the development and efficient operation of a market economy and the private sector in that country. The program of economic reforms will be described in the Statement of Development Policy which is being prepared by the Government of Cambodia ("Government") in the context of the Economic Recovery Credit operation which is currently under preparation. A. Introduction 1.2 After numerous years of war and internal conflict, the Government has undertaken the task of rebuilding the country. This requires implementing a series of reforms to effect the transition from a command economy to a market-based system and provide the proper macroeconomic framework for economic recovery and growth, as well as the development of private sector activity. From 1989 onwards, the Government carried out a series of initial reforms in the following areas: (i) economic liberalization (restoration of private property and liberalization of prices); (ii) public enterprise reform, privatization, and private sector development; and (iii) trade reform and exchange rate adjustment. Although the results of the initial market-oriented reforms were globally positive, these reforms have yet to yield their full benefits, mainly because of the country's extremely weak institutional and implementation capacity. The Government intends to address these institutional deficiencies in areas critical to Cambodia's economic recovery. 1.3 The Project will assist Cambodia's transition to a market economy by helping to implement the Government's economic reform program. This will be done, first, by strengthening the economic management team ("EMT") and, second, by helping put in place the foundations for an environment which is conducive to private sector development. Strengthening the EMT will involve: (i) reinforcing the EMT units which have already been set up under the initial phase of the Government's reform program (e.g., the Budget Department in the Ministry of Economy and Finance ("MEF")); (ii) assisting those units which have been established only very recently (e.g., the Cambodian Development Council, ("CDC")); (iii) setting up those units which have yet to be established (e.g., the Debt Unit in MEF); and (iv) reorganizing and strengthening those units which were not considered a priority so far but will play a critical role in the implementation of the  - 2 - economic recovery program (e.g., budget and project monitoring units in key line ministries.) In turn, assisting in building the foundations of an enabling environment for private sector development will involve: (i) establishing a legal reform unit and providing legal advisory services for key Government institutions; (ii) putting in place an Official Journal for regular publications of laws and regulations; and (iii) establishing a system for publishing judicial decisions. 1.4 To achieve these objectives, IDA Credit financing will be made available to mobilize consultants' services, prepare and implement training programs, and provide equipment and works in support of the policies to be carried out in the following areas: (i) public expenditure control; (ii) public investment management; (iii) foreign debt management; (iv) public sector personnel management; and (v) private sector development. The proceeds of the Credit will also finance sector studies to improve policy design in other sectors, mainly Agriculture, Education, Energy, Environment, Health, Statistics, and feasibility of electronic cash transfers to provinces. 1.5 The Project's overall administration and management will be the responsibility of a Project Management Unit ("PMU") established within MEF. The PMU is expected to benefit from the experience of two prior/on-going project units under the Emergency Rehabilitation Project (IDA Credit No. 2550-KH) and an Institutional Development Fund ("IDF") operation. The total Project cost will be US$18.7 million equivalent, of which the IDA Credit will finance US$17 million equivalent and the Government US$1.7 million equivalent. Co-financing arrangements have been agreed upon in principle with the UNDP, France, and USAID and will be finalized during Project negotiations. The Project is expected to be implemented over a six (6)-year period, with the Project Completion Date scheduled for December 31, 2001. Summary of Project costs and Project costs by components and by type of expenditure are presented in Annex IIA and IIB. B. The Institutional Setting 1.6 In Cambodia, the economic management team is composed of the CDC, the MEF, the central bank (National Bank of Cambodia ("NBC")), and the Ministry of Planning ("MoP"). Project monitoring units in key line ministries can also be considered part of the extended EMT. Under the Public Sector Management component of the Project, ministries and agencies which will be supported are: MEF, CDC, and key sectoral ministries. Depending on the amount of resources available from other sources, the Secretariat of State for Civil Service ("SSCS") and the Interministerial Technical Committee on Administrative Reform ("ITC") could also be supported under that component. NBC is receiving substantial support from the IMF, UNDP, and the Asian Development Bank (ADB), and the MoP is being supported by ADB; they will, therefore, not receive assistance under this Project. Under the Legal Assistance for PSD component of the Project, the main agencies to be supported are the Council of Jurists ("CJ") and the ITC, which are both attached to the Council of Ministers. The Ministry of Economy and Finance 1.7 The principal functions of MEF are the following: (a) Budget: formulate finance laws and regulations governing the national budget, and the budgets and special funds of public organizations; execute the national budget and exercise financial control over it; exercise financial supervision of local and provincial public organizations; and approve public transactions and awards;  - 3 - The Ministry of Economy and Finance 1.7 The principal functions of MEF are the following: (a) Budget: formulate finance laws and regulations governing the national budget, and the budgets and special funds of public organizations; execute the national budget and exercise financial control over it; exercise financial supervision of local and provincial public organizations; and approve public transactions and awards; (b) Finance: oversee the mobilization of internal and external resources necessary for the Treasury to meet its obligations; participate in concluding and reviewing agreements with foreign countries, economic groups, and international organizations with regard to the provision of financial assistance; and administer the internal and external public debt; (c) Taxes: formulate fiscal policies of the State, including local and provincial public organizations; prepare tax legislation and related regulations, and take the necessary measures for their implementation; (d) Custom Duties: formulate custom codes, prepare custom duties and import tax legislation and related regulations, and take the necessary measures for their implementation; and (e) Public Enterprises and Privatization: exercise financial control over public enterprises; implement Government policies on public enterprise reform with the technical ministries concerned; and implement the disposition of the privatization program. 1.8 Hence, activities under the fiscal management, public investment budgeting, and foreign debt management components of the Project will be carried out by MEF, or otherwise under its direct responsibility. MEF has benefitted from the early support provided to Cambodia under the UN Peace Accords mandate. That support continued under World Bank and other ongoing aid programs. As a result, MEF is in a much more enviable situation than any other public ministry in Cambodia when it comes to capacity. However, much remains to be done in strengthening capacity in areas already covered (e.g., the current budget), and in building new capacity in areas that were not priorities during the first phase of rehabilitation but must now be urgently addressed (i.e., public debt and the capital budget). The Cambodian Development Council 1.9 Overall responsibility for implementation of the Government's reform program is entrusted to the CDC. The CDC was established recently (December 1993) as a committee of ministers responsible for orientation, strategic decisions, and overall coordination of Government action in the field of reconstruction and development. The CDC is headed by the First Prime Minister and includes the ministers in charge of Rehabilitation & Development, MEF, and MoP. Other key ministers who are not members of the CDC, such as the Secretary of State for Civil Service, are invited to participate in its deliberations whenever issues concerning administrative reform are discussed.  - 4 - 1.10 The CDC's main tasks are as follows: (a) Public Investment: prioritize the country's needs in the field of reconstruction and development on the basis of clear project selection criteria (this responsibility includes strategic planning); (b) Aid Coordination: direct and coordinate foreign aid so that it matches the country's public investment needs; and (c) Private Investment: provide information, assistance, and administrative services to prospective private investors. The CDC functions through two technical bodies, namely the Cambodian Rehabilitation and Development Board ("CRDB"), responsible for public investment, and the Cambodian Investment Board ("CIB"), responsible for private investment. 1.11 As mentioned above, the CDC was only established recently. Hence, it has very limited manpower and capacity. It cannot perform its tasks without an efficient planning and programming system that would provide it with the needed information. It is of prime importance, therefore, that the main components of a planning, programming, budgeting, and implementation ("PPBI") system be properly developed in coordination between CDC, MEF, MoP, and line ministries for the effective management of the public investment program. Also, the CIB will need support in performing its tasks. The Ministry of Planning 1.12 Since the creation of the CDC, the role of MoP has been put into question. In principle, MoP is responsible for preparing a list of projects for CDC's review and approval, coordinate with line ministries and provinces to prepare and follow up of the public investment program, and gather statistics needed for overall planning. This ministry is presently still involved in routine tasks which have little impact on the Government's rehabilitation program however. Efforts will have to be made to bring this ministry in synchronization with MEF, CDC, and line ministries. However, given the assistance provided to MoP by the ADB, no support will be given to it under this Project. The Secretariat of State for Civil Service 1.13 Despite its large size, until recently the Cambodian administration had no overall department responsible for the civil service. Under pressure from both the World Bank and the IMF during the PFP negotiations in February 1994, this hiatus has been filled with the establishment of the SSCS within the Council of Ministers. This set up means that the Secretary of State will be under the supervision of a Senior Minister. However, it is still unclear what precise structure the SSCS will rely on to perform its tasks. This issue needs to be resolved by the Government as quickly as possible. .14 The Government has also recently established the ITC with responsibility for the coordination of the administrative reform program. Both the SSCS and ITC will receive support from  - 5 - UNDP. If needed however, complementary assistance will be provided to both the SSCS and ITC under the Project. Line Ministries 1.15 Line ministries such as Agriculture, Health, Education, Public Works & Transport, Industry & Energy are responsible for various aspects of public investment programming and management: namely, project identification and formulation, feasibility studies, design, procurement, project monitoring, and project implementation. The staff in line ministries have very limited skills to perform these functions. The Project will assist the key line ministries in performing their project monitoring and other PIP functions. The Council of Jurists (attached to the Council of Ministers) 1.16 The CJ was established on March 10, 1994. The CJ is responsible primarily for: assisting line ministries in preparing draft laws, regulations and decisions; reviewing and advising the Government on the various legislation, laws and decisions already in effect; giving legal opinions to the Council of Ministers on draft laws, decisions, treaties, conventions and other international agreements submitted to the Council of Ministers for consideration; and otherwise ensuring that laws and regulations are adopted and applied by governmental bodies in accordance with applicable legal procedures. 1.17 Having been established just recently, and given the tremendous legal reform needs facing Cambodia today, especially in the economic and financial areas needed for a successful transition to a market economy and private sector development, in order to be able to properly carry out its mandate the CJ needs legal advisory and technical assistance expertise. The Project will, therefore, assist in strengthening the legal advisory and technical capacities of the CJ, especially insofar as economic and financial legal matters are concerned. C. Institutional and Organizational Issues 1.18 The main generic institutional and organizational issues to be addressed under the Project can be summarized as follows: (a) the institutional foundations (laws, regulations, rules, procedures and related institutions) are often lacking and most organizations must be built from the ground up; (b) the dominant feature of the Cambodian administration is its weak capacity and the lack of professional experience of most of its staff. The experience gap is mainly due to the blatantly inadequate middle management skills (ages 30 to 40) resulting from total lack of or poor education from 1970 to 1990; (c) the number of Government staff is disproportionate, partly as a result of the absence of policies and guidelines on selection and hiring; and most Government employees do not work the minimum time requirement because of very low pay which has to be supplemented elsewhere;  - 6 - (d) budget allocations for current expenditures and logistical support are grossly insufficient for all Government ministries and agencies, resulting in deteriorating working conditions and underpayment of employees; and (e) in spite of recent efforts, the roles and functions of various departments and committees are still generally not clearly defined, which results in unclear demarcation lines and relationships between and among agencies.  - 7 - II. PROJECT DESCRIPTION 2.1 In Cambodia, the capacity building needs are overwhelming and cannot all be addressed at once. Strict priorities must be established and adhered to. Given the Government's goal to reach financial stabilization at the earliest possible time, thereby facilitating the establishment of a market economy, the Project's primary focus will be on improving public finance management, and its secondary focus will be on helping build an enabling environment for private sector development. 2.2 Public Sector Management. The reduction of the budget deficit is at the center of the Government's stabilization efforts. The objective is to eliminate the deficit of the current budget (i.e., the gap between current expenditures and current revenues) by 1996 (it stands at 2.3 percent of GDP in 1994), and to reduce the overall budget deficit (i.e., including capital expenditures which are expected to be financed almost entirely from the external sources) from 7.2 percent of GDP in 1994 to a more manageable level of about 6 percent by 1996. The medium-term agenda for fiscal consolidation takes account of the following factors. First, reforms are needed in the tax system and administration to raise the revenue-to-GDP ratio very substantially over time given its current low level, and to reduce reliance on import duties in the face of an expected fall in customs revenues owing to a sharp decline in imports in transit to neighboring countries. Customs collections represent about 60 percent of government revenues. Second, current expenditures will have to be constrained in total over the 1994-96 period, at the same time that the outlays for health, education, and other social services are being increased substantially. Third, the civil service will need to be restructured and downsized to improve the efficiency of public administration and to reduce the burden on the budget. For the latter purpose, military expenditures will need to be reduced as well. Fourth, subsidies from the budget will need to be reduced through public enterprise reform and privatization. Fifth, a substantial increase is likely in counterpart expenditures associated with foreign aid projects, although some donors may be willing to finance part of the local costs. Finally, the Government's capital spending, which averaged only 0.5 percent of GDP during 1990-92, is projected to increase to 6.5 percent by 1996 as the Government's reconstruction program gathers pace. This acceleration will need to be managed carefully to ensure that external funds are directed to areas of high priority and economic return, and with due attention to problems of the absorptive capacity of the economy. 2.3 Under the Project, assistance will be provided to help the Government implement the program summarized above. Assistance will focus on strengthening capacity and preparing action plans to be executed in the following areas of public sector management: expenditure control, in the framework of budget management and Treasury management; investment management, as it relates to public investment programming and budgeting, and strategic planning; debt management; and personnel management, in the specific field of voluntary departure schemes and other social safety nets. During Project negotiations, agreement has been reached with the Government that: (i) the Government will appoint all the necessary counterpart personnel responsible for implementing that component under the Project; and (ii) not later than June 30, 1995, the Government will prepare separate action plans for implementing the Project activities for the various areas of public sector management under that component (mentioned above), and thereafter these plans will be reviewed and updated not later than March 31 annually. 2.4 Private Sector Development. In parallel, as part of an agenda expected to bear fruit in the longer term, the Government plans to work toward restoring the external balance and aim to  - 8 - reduce the current account deficit triggered by the overwhelming trade deficit. This would be accomplished by raising the overall efficiency and productivity levels, raising savings relative to consumption (a process which should start with reducing Government dissaving), and promoting exports. These reforms will focus on providing more appropriate incentives for the productive sector by further deregulating the markets for domestic goods, liberalizing the trade regime, removing the constraints on labor mobility, removing obstacles to savings and investment, and reforming the financial sector. 2.5 Starting immediately, implementation of these reforms will focus on helping establish an enabling environment conducive to private sector development ("PSD"). The principal objective of the PSD component of the Project will be to help re-establish and strengthen certain legal institutional capacities and procedures which are essential to the efficient operation of a market economy and the development of private sector activity (e.g., Official Journal; judicial codification). A. Public Expenditure Control Background 2.6 Cambodia's present fiscal system has its roots in the centrally planned framework established after 1979. The administration that came to power in 1979 organized the reconstruction of the country in the framework of a command economy. The State was responsible for all economic sectors. In the initial years of central planning, the state budget was centralized as part of the national Plan. After 1985, budget management and monitoring was shared by two ministries, the MoP and the Ministry of Finance at the time ("MEF"). Problems that arose included the following: (i) Inadeguate coordination of budget preparation and control. Budget preparation was the responsibility of the MoP, which determined the key elements of expenditures including the wage bill and public investment. Expenditure monitoring and control remained the responsibility of the MEF and was an ex post rather than interactive ongoing process within the fiscal year. While the release of funds through Treasury accounts at the central level was controlled, actual payments were not. Similarly, control at the provincial and municipal levels focused, as at the central level, on the release of funds. (ii) Excessive decentralization. Budget authority became decentralized along with economic activity. While authorization was given to particular spending agencies to carry out specific activities within predetermined limits, the approach remained too aggregative to serve as a basis for designing expenditure plans and consequently for the implementation and monitoring of those plans. (iii) Deficiencies in budget nomenclature. Budget nomenclature distinguished expenditures according to their nature and function (e.g., construction, operating costs, etc.) and were further subdivided by ministries and PEs under their authority. In addition, the classification between current and capital expenditures was not maintained. Budget nomenclature did not evolve to accommodate expenditure control and the format did not allow for a direct and precise economic  - 9 - analysis of administrative operations. This problem also extended to the revenue side as receipts were not classified by type and purpose. (iv) The lack of a unified budget in the context of an overall macroeconomic framework. The absence of a macroeconomic framework complicated the task of establishing spending priorities and controls linked to state revenues. The lack of a unified budget contributed to the degradation of the budgetary practice in the face of a persistent gap between revenues and expenditures. 2.7 The underlying weaknesses of Cambodia's budget structure and implementation became apparent with the loss of aid from the former Soviet Union and other CMEA countries. By 1990, the country was in a deep fiscal crisis with monetary financing covering close to two thirds of the fiscal deficit. The Government's Program 2.8 The challenge in the area of public expenditure control is to stabilize current expenditures at a level that meets macroeconomic requirements and accommodates the minimum provision of basic services, while reorienting the Government's spending priorities from military to civilian needs. To secure the required substantial increases in outlays for health, education, and other social services, savings are expected in the near term from cutbacks in subsidies for state-owned enterprises. Subsequently, a medium-term restructuring of the Government service will be required, including demobilization and retraining of troops. 2.9 With the assistance of the World Bank (through activities funded by the IDF Grant), the Government has taken initial measures in 1993/94 to improve budget management; however, the Government must pursue its efforts in the years ahead. An important first step was the adoption of an Organic Budget Law in December 1993, which provides clear rules and procedures for the proper allocation and use of public funds. In particular, the law provides for annual presentation of the budget to the National Assembly, and clearly establishes the authority of the central Treasury over all revenue collected by Government agencies. In addition, the budget presentation includes a new nomenclature consistent with contemporary accounting and budgetary standards. The budget law also gives MEF authority to freeze and subsequently cancel budget expenditures, should this be required by macroeconomic and budgetary developments. There are also provisions to ensure correct and transparent procedures and to prevent fraud, while also establishing competitive bidding as the principle for expenditures for the public procurement of goods. 2.10 On the basis of the new budget law, the Government has already taken significant steps to improve management of public funds. Efforts include bringing off-budget ministerial expenditures back within central control, and off-budget social spending within the overall budgetary framework. In addition, adequate budget monitoring and control mechanisms are being put in place through the establishment of: public procurement procedures; audit and inspection procedures; and Treasury cash and debt management functions. This is intended to help ensure that public funds are spent in a transparent and efficient manner. However, although the Government has made considerable headway in establishing a more modern and appropriate budget and accounting system, there is much to be done with respect to consolidating system changes.  - 10 - Project Support 2.11 To secure the support needed in addressing budget management issues over the medium term, the Project will extend assistance beyond the life of the IDF funded activities scheduled to disburse fully before the end of 1994. While the IDF funded operation has been providing support for the conception and delivery of new systems of budget management and Treasury management, the Project will provide support for the implementation of these new systems. Project activities will aim at: (i) strengthening the budget preparation capacity of MEF, technical ministries, and provinces; (ii) strengthening budget monitoring and control mechanisms; (iii) strengthening Treasury cash management functions, including cash forecast capacity; and (iv) training administrators of the technical ministries and provinces to understand and apply the new procedures, and training treasurers to understand the new expenditure and accounting system. 1. Budget Management 2.12 Concerning budget management, activities to be supported under the Project will include, inter alia: - development of macroeconomic analysis capacity and the effective use of such techniques for the preparation of annual budgets. This activity will be conducted in the Economic Unit of MEF (paras. 2.53); - strengthening budget preparation capacity at the line ministry and provincial levels; - ensuring that the tasks related to budget management are fully integrated in the planning- programming-budgeting cycle. This activity will seek to: (a) develop the budget into the primary instrument for implementation of the country's recovery program, (b) integrate the current expenditure budget and the three (3)-year Public Investment Program ("PIP"), and (c) help rationalize the process of allocating budgetary resources for development; - improving the budget implementation system and techniques, including transfer of funds, monitoring and control of public expenditures, and adherence to budget provisions. This includes finalizing the institutional (regulatory and procedural) framework for expenditure control and establishing the team of financial controllers; - reorganizing MEF's Budget Department, including its branches in the provinces; - strengthening the channels of communication between MEF and line ministries, including helping to establish budget management units in other ministries; - preparing and conducting training programs in relation with all activities supported under the budget management component of the Project. Given the central role of MEF and its relatively good capacity in comparison with other ministries, training programs will be organized mainly along extension methods, with MEF used as the base. The School of Finance will be the venue for most of the training programs.  - 11 - 2.13 To carry out the program described above, the Project will finance the following, inter alia: - a resident Senior Public Finance adviser ("SPF") for a period of twenty-four (24) months. At the end of the two (2) -year period, the long-term contract will be replaced by five (5) short-term visits that would take place over a period of two (2) more years. These visits will be particularly needed during crucial periods of budget preparation; - a resident Senior Budget and Treasury adviser ("SBT") for a period of twenty-four (24) months. At the end of the two (2)-year period, the SBT's long-term contract will be replaced by short-term visits under the same conditions as the SPF's. - five (5) resident Budget Technicians ("BT") to support the two (2) senior advisers, especially in training budget officers, Treasury accountants, and financial controllers in Phnom Penh and in the provinces. It is estimated that the budget technicians will be needed for a period of three (3) years. The Project will seek to recruit at least two (2) expatriate Cambodians as budget technicians; - training programs prepared by the SPF and SBT; and - office equipment to be identified by the SPF and SBT. 2. Treasury Management 2.14 Concerning Treasury and cash management, activities to be supported under the Project will include, inter alia: - monitoring of the Treasury's financial situation and preparing monthly financial statements (Tableaux des Operations Financiere ("TOFE")); - establishing a system for projecting monthly revenues and expenditures; - organizing the administrative and accounting rules and procedures for revenue collection and expenditure operations; - developing the legal, regulatory, and procedural framework for public accounting. Among other things, this activity will include: (a) reorganizing Treasury accounts in line with the new budget nomenclature and establishing new rules for managing these accounts; and (b) operationalizing the system in the central and provincial administrations; - improving the centralization of accounting operations at the provincial level. This activity will be carried out in connection with adapting the regulatory and procedural framework so as to improve the communication of information between the central Treasury and its provincial correspondents;  - 12 - - establishing an accounting system for foreign currency operations, and developing the regulatory framework for these operations. This activity will include fully integrating foreign currency operations in Treasury accounts, and transferring the responsibility for managing these accounts to the central bank, NBC; - reorganizing the Treasury along functional lines: revenue collection, expenditure management, accounting, etc.; - developing the computerization program started in 1993; and - preparing and conducting training programs in relation with all activities supported under the Treasury management component of the Project. The School of Finance will provide technical support and, when required, will be used as the venue for training. 2.15 To carry out the program described above, the Project will finance the following, inter alia: - a resident Treasury & Public Accounting Expert ("TPA") for a period of twenty-four (24) months. The TPA will work under the supervision of the SBT (para. 2.13); - training programs prepared by the SBT and TPA; and - office equipment to be identified by the SBT. This will include improving the sanitary conditions in the money counting office of the Treasury in Phnom Penh; the current conditions pose serious health concerns for the predominantly female employees. The main objective will be to install specially-designed tables with a dust-collecting system in that office. Training 2.16 Given that a large number of the staff targeted for training belong to agencies other than MEF, training will in large part be organized along extension techniques, using the T&V system. The MEF Budget Department will play the role of nucleus in this T&V system. The team of advisers and technicians presented above (paras. 2.13 and 2.15) will, with the support of the School of Finance, be responsible for preparing and carrying out the training programs. Duration 2.17 It is expected that Project support to both Budget and Treasury management will be extended over the entire life of the Project. However, the provision of external consulting services will be limited to three (3) years, (as explained in para. 2.13). The School of Finance will then be responsible for follow-up and sustainability. Agreements Reached During Project Negotiations 2.18 During Project negotiations, the Government has agreed that: the experts' counterpart staff will be assigned to the Project by an official decision signed by the Minister of Economy and Finance. This will be a condition of disbursement of Credit proceeds for financing the  - 13 - implementation of the training programs and logistical support to both the Budget Department and Treasury. Summary and Cost of Project Support (a) Budget Management - SPF: (i) resident contract: twenty-four (24) person/months; (ii) short-term visits: five (5) person/months; - SBT: (i) resident contract: twenty-four (24) person/months; (ii) short-term visits: five (5) person/months; - Five (5) BTs: one hundred eighty (180) person/months; - Training programs: US$250,000 equivalent; and - Office equipment: US$75,000 equivalent. b) Treasury Management - TPA: twenty-four (24) person/months; - Training programs: US$150,000 equivalent; - Money counting office: US$50,000 equivalent; and - Office equipment: US$15,000 equivalent. B. Public Investment Management Background 2.19 Over the next several years, Cambodia's public investment needs for rehabilitation and reconstruction are considerable. The medium-term framework projects a sharp increase over time in gross domestic investment, from an estimated 15 percent of GDP in 1993 to just over 20 percent by 1996. While much of the increase would take place in the public sector to meet the immediate infrastructure needs, an increase in private investment would also be expected. 2.20 The dependence of the country on the donor community for economic and social rehabilitation is virtually total. It is expected that the donor community will sustain the current level of assistance to Cambodia throughout the 1994-96 period. On the other hand, the Government is expected to shoulder an increasing share of the cost of rehabilitation and reconstruction and to prepare for the time when the usual cost-sharing arrangements for LDCs are put into effect. The sustained rise in investment would therefore need to be associated with a substantial increase in national savings, primarily as a result of improved tax efforts and restraints on current spending. The country will also have to rely to a larger extent on inflows of foreign private investment.  - 14 - 2.21 Also, Cambodia should prepare contingency plans that would address a deterioration in the economic outlook, an unexpected drop in donor assistance, or any other similarly adverse event. To the extent that the availability of foreign savings is less than envisaged and the Government is unable to mobilize sufficient resources to compensate the unavailability of such savings, the targeted increase in investment would be smaller, with adverse implications for future growth. At the present time, the demands of stabilization would have to take precedence over those of growth. Thus, in the face of a shortfall in external resources, the Government would have to ensure that the shortfall is matched by a cutback in investment, rather than returning to monetary financing of the budget. These cuts in investment expenditures would be made on the basis of prioritized objectives and policies. An economically rational framework would therefore be prepared within which to make judgements on cuts. 2.22 Cambodia's current planning, programming, and budgeting systems are not well suited to the pursuit of rational public expenditure policies. In the framework of the 1994 budget, improvements were made. The Government needs to take additional measures however. The Government Program 2.23 The degree of success of the Government's reconstruction program and the rate at which it will be implemented will depend heavily on improving investment programming at the national level. To properly mobilize the resources needed to sustain the recovery process, it is necessary that the various government agencies work together to establish investment priorities for the relevant sectors and identify investment and budget requirements. In this context, the Government has already decided to: - integrate the annual budget exercise into a three-year programming and budgeting process based on estimates of resource availability and prioritization of investments; - create a specialized unit in the General Budget Department of MEF to manage public investment expenditures and the resources needed to finance these expenditures within the framework of the national budget. The new unit is called the Public Investment Budget ("PIB") unit; and - establish the CDC. 2.24 Next, the Government will adopt and start to implement an action plan to improve public investment programming, involving the CDC, the MoP, the MEF, and line ministries. However, for the Government to succeed, the institutional shortcomings need to be addressed as a matter of urgency. In this respect, the Government must build up its capacity for macroeconomic analysis; inter-agency communication; strategic planning; project preparation, negotiation, and monitoring; aid coordination; and financial resource management. * Developing macroeconomic analysis. The capacity for macroeconomic analysis must exist to forecast major expenditure commitments and revenue developments and coordinate them closely with budget management so that the budget's impact on the economy can be analyzed. Such techniques must be introduced and the personnel trained for their use.  - 15 - * Developing strategic planning. The Government needs to address the planning and policy formulation shortcomings of ministries and agencies involved in implementing the country's reconstruction program. This effort will include developing capacity to undertake long-term sector strategy studies to guide policy formulation, planning, and investment. * Investment programming. The degree of success of the reconstruction program and the rate at which it will be implemented will depend on improving investment programming at the national level. To properly mobilize the resources needed to sustain the recovery process, it is necessary that the various Government agencies work together to establish investment priorities for the relevant sectors and identify investment and budget requirements. A system of rules, procedures, and organizational arrangements based on the three (3)-year rolling programming method needs to be developed and implemented. * Improving budgeting. To ensure that the resources needed to finance public investment are managed properly, the Government will establish within MEF a specialized unit to manage the public investment budget. This unit would be given the capacity to monitor public investment operations in order to help ensure the timely disbursement of counterpart funds. * Improving proiect preparation, management, and monitoring. The information flow from spending ministries to MEF must be timely and contain analysis by main economic aggregates (wages and salaries, interest, etc.), if not by detailed breakdown of expenditures. The same reporting requirements must be extended to extra-budgetary accounts. A move to full investment budget classification meeting international standards is not an immediate necessity; it will progress gradually with the reorganization of other features of public expenditure management. However, broad groups of economic transactions need to be identified in the short run to allow the appropriate analysis. The requirements described here demand developing the requisite capacity in line ministries to document project progress and maintain a computerized project MIS. The project MIS to be established in line ministries will have to be fully compatible with the PIB unit's project database. It will also require developing capacity in line ministries to gather the necessary information on projects implemented in provinces. * As far as the PIB unit of MEF is concerned, the PIP preparation and monitoring task will require developing capacity in MEF to: (a) ensure that projects included in the PIP have been adequately recorded and are fully financed, particularly in terms of local costs and recurrent expenditures, and (b) collect and use information on the status of projects through the information system to be developed between the PIB unit and LM/MoP. This task will require strengthening the accounting literacy of the staff of the PIB unit as well as line ministries. Periodic budget reviews will also help project monitoring by the PIB unit. Financial monitoring of projects will require taking corrective measures in case of disparity between initial budget allocations and actual budget disbursements. * Developing the accounting system. The capacity of MEF to undertake the complex accounting that corresponds to the requirements of a market economy can only be built up over time. Strengthening the accounting literacy of the concerned units in MEF and  - 16 - in line ministries will have to begin in the short run to enable the development of the required information and control mechanisms. A new national accounting system has just been introduced in 1994. However, there are serious doubts that this system is best suited to serve the purpose of sound economic analysis and it may have to be reconsidered. * Improving contract management and procurement. Here the concern is to procure goods and services according to rules and procedures that will maximize cost-effectiveness, assure transparency and minimize corruption. * Improving government coordination. The Government recently established the CDC. Headed by the First Prime Minister, the Council is a committee of ministers responsible for orientation, strategic decisions, and overall coordination and arbitrage on matters related to public and private investments. The CDC will be made fully operational and its organic texts will be drafted. Also, the division of labor between the CDC, the MEF, the MoP, and the line ministries will be made clearer through the promulgation of official texts. * Improving aid coordination. In order to avoid the duplication of efforts, to ensure that the available financing is in fact allocated to support the Government's priority program, and also so as to improve the coordination of the various technical assistance programs, consultation among donors is important. After the periodic assessments of the macroeconomic situation by MEF, an estimate will be made of the overall resources required from external sources, together with a judgment on the division of these resources between budget support and project financing. In this context, it will be desirable to examine some sectoral and project possibilities in more detail. This will be achieved at meetings of sector coordination groups to be held in Phnom Penh from time to time, with representation from the major donors and the relevant agencies of the Government. As far as the vehicle for aid coordination outside Cambodia is concerned, the International Committee on the Reconstruction of Cambodia ("ICORC") will continue to serve this purpose until a Consultative Group arrangement is adopted. 2.25 A good public investment management system starts with a clear delineation of responsibility between the various government agencies concerned. Based on the current budget law and the Government's National Programme To Rehabilitate and Develop Cambodia, responsibilities of individual agencies and the steps leading to the adoption of the public investment program and budget can be described as follows. Step I Before the start of the annual budget preparation process, MEF prepares the medium- term macroeconomic forecast. On the basis of that forecast, MEF then formulates the macroeconomic framework (including crude assumptions on economic growth) within which the investment budget will be prepared. The mid-year budget review, starting in August, is coordinated with the preparation of the macroeconomic forecast for the following cycle and the budget consultations for the following fiscal year. The mid-year budget review provides the basis for the annual review of the PIP. CDC, line ministries and agencies, and MoP will play a role in preparing the PIP.  - 17 - Step 2 Once the macroeconomic framework is adopted by the Government, CDC issues guidelines to MoP and line ministries for preparation of the three (3)-year PIP, with detailed instructions for the first year (i.e., the PIB). CDC's guidelines to line ministries include spending limits and criteria for project selection; they are based on previously formulated sectoral policy objectives and strategies. In sectors where policies have yet to be clearly formulated, CDC instructs the concerned ministries to prepare strategic studies to guide policy formulation, planning, and investment. The main criteria for project selection are: (i) rate of return; (ii) number of beneficiaries; and (iii) capacity for implementation. Step 3 Under MoP's technical coordination, line ministries and agencies identify investments/projects and budget requirements. Investments are given a priority ranking. The proposed PIP is then presented by MoP to CDC and discussed. If needed, it is sent back to MoP/the line ministry with instructions for modifications. This iterative process continues until the PIP is approved by the CDC. Step 4 CDC sends the three (3)-year PIP to MEF for inclusion into the budget. The first year of the three (3)-year investment program appears in the form of the PIB for the current fiscal year and constitutes binding guidelines for capital expenditures. Step 5 The final draft of the national budget is sent to the National Assembly for adoption no later than December 1. Once the budget is adopted, implementationlmonitoring begins. 2.26 The National Public Investment Management System (NPIMS). The regulatory and procedural system that will govern the NPIMS must be developed as a coherent whole. To avoid incompatibilities and contribute to a clearer delineation of responsibilities among government agencies, the NPIMS must be used as the basis for the strengthening of individual ministries under different donor-financed technical assistance projects, namely: (i) the World Bank technical assistance project for MEF's PIB, CDC's strategic planning function, and selected line ministries' project units; (ii) ADB for MoP and selected line ministries; and (iii) UNDP for CDC's aid coordination function and the Ministry of Health. To ensure proper coordination, a master plan for the NPIMS will be prepared before PIM strengthening activities are carried out under these different technical assistance projects. The master plan, coupled with the budget law, will form a clear and sound legal basis for delineation of responsibilities among government agencies in the area of public investment management. The master plan will be financed by a Japanese grant (PHRD) administered by the World Bank. The schedule calls for the master plan to be available by the end of December 1994. Once approved by the Government, the master plan will be made available to interested ministries and donors to be used as guidelines in strengthening the individual ministries' PIM capacities. 2.27 The NPIMS master plan will be developed on the basis of the division of labor between the different ministries and agencies. (This division of labor is summarily described in para. 2.25.) The master plan will include an overview description of the main transactions and flows of information that are likely to take place between ministries and agencies in the context of public investment management, including planning, programming, budgeting, and monitoring/implementation. It will make recommendations concerning the accounting system to be used for budget and project accounting. It will also describe the information interfaces to be built between the various correspondents in the national PIM system. Furthermore, the master plan will  - 18 - recommend computer applications, including the basic features of each of these applications and justifications for choosing them. The master plan will specify: (a) the areas of computerization, and (b) the action plan for computerization including priority application systems requiring immediate attention. It will describe the conceptual model of the suggested computerized NPIMS. Project Support 2.28 Under the Project, Public Investment Management will refer to all activities directly related to public investment (i.e., planning, programming, budgeting, and monitoring). The Project will address the following needs: (i) development and delivery of a computerized public investment management system in MEF, CDC, and selected lines ministries; (ii) establishment of the PIB unit in MEF; (iii) strengthening of Project monitoring units in selected line ministries (budget units will be strengthened in the context of activities to be carried out under the Budget Management component of the Project (paras. 2.12 and 2.13)); (iv) development of strategic planning and aid coordination capacity in CDC; and (v) strengthening of macroeconomic analysis capacity in MEF. This assistance will be provided in coordination with other technical assistance providers. 1. System Development 2.29 The Project will help develop the computerized PIM system in MEF, CDC, and selected line ministries, based on the guidelines contained in the NPIMS master plan. Specifically, the project will finance the services of consultants to develop and install: (a) the PIB management system in MEF, (b) the information system in CDC, and (c) the Project monitoring system in selected line ministries. This will be done in two steps. 2.30 First, the project will recruit a team made up of an Organizational Expert in PIB management and PIP monitoring and a Computer System Engineer ("CSE"). Based on the NPIMS master plan, this team will prepare a detailed implementation plan for the establishment of the PIB unit in MEF and for the establishment and/or strengthening of project monitoring capacity in CDC and the selected line ministries. The implementation plan will include (a) specific recommendations pertaining to the organizational and staffing plans, modus operandi, and logistical support for MEF, CDC, and the selected line ministries, and (b) bidding documents on the basis of which the computerized management systems will be developed and delivered. The person recruited as CSE will have to be independent of equipment suppliers. Proper attention will be paid so as to ensure that, during and after system delivery, the concerned technical staff and managers will be trained and acquire the skills needed to use, run, and maintain the system. 2.31 Second, the Project will finance the contracts of the System Suppliers who will have been selected through competitive bidding. During delivery of the computerized system in MEF, CDC, and line ministries, the CSE will be responsible for surveillance to ensure that the delivery and installation of the hardware and software are done according to specifications and that the staff are properly trained. This will be done during follow-up, short-term visits. 2.32 Agreements Reached During Proiect Negotiations. The Government will provide the office space and the personnel recommended in a timely manner. The personnel will be assigned to the Project by an official decision issued by the responsible ministers. The entry on duty of key  - 19 - personnel will be a condition of delivery of the computerized management system to the PIB and line ministries units. 2.33 Summary and Cost of Proiect Support. The following will be financed in support of system development in MEF, CDC, and line ministries: - Organizational Expert (master plan): three (3) person/months; - Computer System Engineer, six (6) person/months (several short-term missions); - System Supplier: budget allocation US$300,000 equivalent (with US$1,000,000 equivalent cofinancing from other donors) including training (exact cost will be determined by the Supplier's offer). 2. Public Investment Budget Unit 2.34 The Project will help establish the PIB unit in MEF and provide it with all the support needed, in addition to the computerized system mentioned in the preceding section. The PIB's tasks will require developing capacity to: (a) ensure that projects included in the PIP have been adequately recorded and are fully financed, particularly in terms of local costs and recurrent expenditures, and (b) collect and use information on the status of projects through the information system to be developed between the PIB unit and MoP/the line ministry. This task will require strengthening the accounting literacy of the staff of the PIB unit as well as line ministries. 2.35 In the course of the fiscal year, the unit will manage the investment budget. This task will include taking appropriate dispositions in a timely fashion for the disbursement of counterpart funds and management (mobilization and disbursement) of external resources channeled through the budget. Financial monitoring of projects also will require taking corrective measures in case of disparity between initial budget allocations and actual budget disbursements. 2.36 To carry out this program, the Project will finance the following, inter alia: - a resident Public Investment Budgeting Adviser ("PIBA") for a period of twenty-four (24) months. At the end of the two (2)-year period, the long-term contract will be replaced by short-term visits that would take place over a period of one (1) more year. These visits will be needed particularly during the crucial periods of budget preparation. The PIBA will work closely with the Senior Public Finance Adviser responsible for overall budget management and, in the conduct of training programs, will receive support from the Budget Technicians (para. 2.13). The PIBA will coordinate the work of the four PIP Specialists (mentioned in para. 2.41) and will also be assisted by them. - training programs prepared by the PIBA; and - office equipment to be identified by the PIBA.  - 20 - 2.37 Duration. It is expected that Project support to PIB will be extended over the entire life of the Project. However, the provision of external consulting services will be limited to three (3) years. The School of Finance will then become responsible for follow-up and sustainability. 2.38 Actions Agreed During Negotiations. The Government will provide the office space and the personnel recommended in a timely manner. The personnel will be assigned to the PIB unit by an official decision issued by the Minister of Finance. The entry on duty of key personnel will be a condition of implementation of the delivery of the computerized system and the provision of logistical support. 2.39 Summary and Cost of Project Support. The following will be financed under support to MEF's PIB: - PIBA: (i) resident contract: twenty-four (24) person/months; (ii) short-term visits: five (5) person/months; - Training: budget allocation US$100,000 equivalent; and - Office equipment: budget allocation US$50,000 equivalent. 3. Project Units in Line Ministries 2.40 Given the weak capacity at the line ministry level, special efforts will be made to develop simple procedures and regulations for public investment programming and project monitoring. The institutional development work will commence at the beginning of the Project with the preparation of manuals and textbooks. Workshops will then be held to confirm with users the applicability of the textbooks and handbook contents to the line ministries' particular situation in Cambodia. At the beginning of the second year, an organizational and staffing plan will be developed for selected the line ministries' accounting units, project units, and budget, procurement, and awards committees. In the meantime, the textbooks and handbooks will be finalized for use in more extensive training. Potential trainers and trainees will be identified. Extensive training will be held in the second half of the second year. 2.41 The Project will thus finance the services of a team of consultants over a period of two (2) years: - A Project Management Specialist will train selected line ministry staff on contract management and procurement and asset management, as well as coordinate the institutional development effort during the first two years. His/her work on contract management and procurement will include topics on supplier accreditation and database; procurement planning and scheduling; pre-qualification, bidding, awarding, negotiation, arbitration, and evaluation of contracts and bids; donors' approval requirements; selection of a procurement method; receiving, inspection, storage, insurance, returns, and damaged items; payment modes and terms; and storage and issuance. Asset management will include asset control and maintenance; asset repair, improvement, replacement, and disposal; and asset depreciation;  - 21 - - A Programming and Budgeting Specialist will train selected line ministry staff on programming and budgeting. This will include topics on the importance of programming; criteria for prioritization; cost estimation and justification of projects; fund sourcing; budgeting for new and on-going projects and for the rehabilitation, maintenance, and operation of completed projects for both central and provincial levels; process of obtaining funds from national budget and international funding agencies or non-governmental organizations under loans, grants, technical assistance or other modes; and steps and standard processing time in the budget execution process; - A Project Accountant will train selected line ministry staff on project accounting, including guidelines and procedures; accounting and monitoring forms and report formats; monitoring records on payments, bill of quantity, quality control records, and clearing; monitoring methods such as supervision, progress reporting, quality control, and quantity surveying; and project inspection and payments, including criteria for expenditure decisions; - A General Accountant/Auditor will train selected line ministry staff on general accounting and government audits. General accounting will include budget control and accounting for expenditures for all levels from the project level, provincial level, and line ministry level; and fixed assets accounting, including periodic inventory. 2.42 The project will also assist selected line ministries in organizational development. A team of two (2) Organization Specialists will be recruited on short-term contracts to help define the functions and responsibilities, draw up position and functional organization charts, prepare job descriptions, and staffing plans of line ministries' budget and project units. The functions to be addressed in this context include procurement and government auditing. This team will be fielded at the most opportune moment(s), after consultation between the Government and the World Bank. 2.43 Training. The experts will determine if the line ministries' staff need training in basic accounting concepts, language proficiency, and basic software tools such as word processing and financial tools before embarking on the specialized systems. Actual training of the line ministries' staff on these basic subjects, however, will be undertaken by the teachers in the School of Finance. 2.44 The experts will conduct workshops and training of line ministries' staff in their respective specialized systems, such as investment budgeting, general accounting, project cost accounting and monitoring, and government audits. During the second year, there will be continued implementation and training assistance by at least one expert in each system. For organizational development of selected units, there will be seminars to orient the concerned officers and staff of their duties and responsibilities. Starting from the third year, training assistance will be continued by the School of Finance. 2.45 Agreements Reached During Negotiations. The Government will inform all concerned staff on the purpose and nature of the technical assistance, emphasizing the importance of their support and cooperation to the success of the Project. It will also provide office space for the Project and counterpart personnel. For best results, counterpart personnel should be attached to the Project on a full time basis by an officially issued decision. Ideally, the counterpart personnel selected would have a college degree and at least five (5) years of experience, but in the Cambodian context there is very little hope that such requisites could be met. The Government will ensure that staff is available  - 22 - for needed interviews and to provide required data and information. It will also provide translators for translating textbooks and other data from English to Khmer and vice versa. For efficiency in training, compulsory attendance of the concerned staff will be required. 2.46 Summary and Cost of Project Support. The following will be financed under support to line ministries: - Project Management Specialist, twenty-four (24) person/months; - Project Accountant, twenty-four (24) person/months; - Government Accountant/Auditor, twelve (12) person/months (with twelve (12) person/months cofinancing from other donors); - Programming and Budgeting Specialist, twelve (12) person/months (with twelve (12) person/months cofinancing from other donors); and - Two (2) Organization Specialists, twelve (12) person/months (six (6) each) 4. Strategic Planning and Aid Coordination 2.47 Under its project CMB/94/002, UNDP will provide essential support to CDC, mainly in the area of aid coordination; but it will also strengthen the Council's overall capacity. The Project will focus its attention on developing the strategic planning capacity of CDC. 2.48 Aid Coordination. During the transitional period, up to November 1993, aid coordination fell largely outside the scope of the national authorities. Thus, at a time of unprecedented interest in Cambodia, the Government has limited experience and no well-developed institutional mechanisms for effective aid coordination and management. The recent establishment of the CDC is a crucial step to correct this situation. The CDC, however, is still in the process of trying to operationalize its mandate. In terms of staffing, apart from the directorate level, recruitment is processing at a very slow pace given the scarcity of qualified personnel. Functional offices have been assigned to CDC, but the agency is still short of basic office equipment, despite some donations by bilateral donors. The UNDP support program will provide both direct and capacity-building support in strengthening CDC in assuming its role within the Government and in relation to its development partners. The objectives set out under that project can be summarized as follows: (i) provide support to CDC in preparing the programming of pledges made at ICORC and other fora, in line with the priorities contained in the Government's own action plan, and assist the Government in obtaining concerted donor support for its rehabilitation and development program; and (ii) assist CDC in its lead role in ensuring optimal allocation and use of external resources. 2.49 The World Bank supports these objectives and, under the Project, will provide assistance complementary to UNDP's in the area of aid coordination. It was agreed that activities under the Project will be specified after preparation of the UNDP operation. Those activities are likely to include financing an Aid Coordination Adviser who will assist in organizing the CDC as a lean agency to coordinate Government activities in the area of foreign aid mobilization. The adviser will also recommend ways to manage the study fund (paras. 2.122-2.126).  - 23 - 2.50 Strategic Planning. The Project will also support the strategic planning function to be assumed by CDC. This will require developing or strengthening CDC's capacity to perform the tasks linked to the strategic function, such as: (a) preparing a vision for Cambodia's economic future; (b) preparing guidelines to be addressed to MoP and line ministries for the preparation of the three (3)- year PIP; and (c) in sectors where Government policies have yet to be clearly formulated, drafting terms of reference for strategic studies to be monitored by line ministries. Specifically, the Project will finance: (i) a consulting firm of international reputation to assist CDC in developing a vision for Cambodia's economic future. The work of the consultant will help determine orientations in private as well as public sector investment; (ii) carefully selected expatriate Cambodians (or other internationally-recruited) experts to support CDC's strategic function (both in CIB and CRDB); (iii) office equipment in complement to that provided by other donors; (iv) strategic studies in specified sectors. 2.51 Summarv and Cost of Project Support. The following will be financed under support to strategic planning: - Studies on vision for the economic future: US$350,000 equivalent; - Aid Coordination Adviser: twenty-four (24) person/months; - Two (2) resident consultants for one (1) year renewable: twenty-four (24) person/months; - Two (2) short-term consultants: six (6) person/months; - Office equipment: US$50,000 equivalent; and - Strategic studies: to be financed under the Study Fund. 5. Macroeconomic Analysis 2.52 MEF must develop its capacity for forecasting major expenditure commitments and revenue developments and coordinate them closely with budget management, and for preparing the macroeconomic framework. To be able to do so, it will need to develop the necessary skills in macroeconomic analysis. That function has been entrusted to the Economic Unit. 2.53 Currently, the Economic Unit is placed under the Minister of Finance's Cabinet office. In time, under the Project, it will be developed into a separate unit. The unit is presently headed by a French-trained Cambodian econometrician recruited and paid irregularly under a private contract. It is composed of eight (8) college-educated civil servants working full-time for the Unit, of which four (4) were trained in the former Soviet Union. It has four (4) PCs, one (1) printer, no photocopy  - 24 - machine, and no separate office space. For the moment, the Unit is essentially doing statistical data collection and analysis: weekly price index, monthly business survey, cash flow situation and forecast, and adjusting IMF macroeconomic framework by incorporating recent developments. 2.54 The project will finance the following activities, inter alia: - maintaining the Cambodian expert as the Unit's technical adviser for the duration of the Project; - building a database by centralizing the information available throughout MEF; - developing a macroeconomic model; - training in revenue forecasting, economic analysis, and macromodeling; and - office equipment: (photocopier, five (5) personal computers and other computer equipment and software). 2.55 Summary and Cost of Project Support. The following will be financed under support to the Economic Unit: - Cambodian Technical Adviser: seventy-two (72) person/months; - Build a database: US$75,000 equivalent; - Develop a macroeconomic model: US$75,000 equivalent; - Training: US$10,000 equivalent; - Office equipment: US$50,000 equivalent. C. Foreign Debt Management Background 2.56 The Government no longer holds records on its external debt in convertible currencies contracted before 1979, and it has little experience in debt management and no specialized agency for that purpose. Also, no legal and regulatory framework for debt creation and management is in place. Furthermore, the Government is aware that debt reporting to the World Bank in accordance with the World Bank's format is the responsibility of all member countries of the World Bank and the international financial community, and that it is a prerequisite for the approval of World Bank lending.  - 25 - The Government Program 2.57 Henceforth, the Government's objective is to maintain a cautious approach to the contracting of public external debt on commercial terms over the medium term. Such borrowing should not be undertaken except in highly exceptional cases to finance potentially high return investments of a purely commercial nature. In addition, the Government should strictly limit short- term public sector borrowing and the guarantee or contracting of such borrowing on commercial terms. Concessional external debt should continue to be contracted only after careful review, taking into account economic viability and prospective returns. Reflecting this cautious approach to contracting external debt coupled with efforts to promote foreign direct investment, a relatively low debt service burden is expected to be maintained over the medium term, while total external indebtedness relative to GDP would be kept within prudent limits. 2.58 To implement its debt policy the Government has decided to centralize all aspects of foreign public debt management in a new unit to be created in MEF. That unit, called Financial Cooperation and Public Debt ("FCBD") unit, will be part of the Department of External Finance of the ministry. Its main missions are to: (i) develop, with other interested agencies such as the CDC, a regulatory framework for debt creation and management; this will involve establishing a clear set of rules for debt creation, data registration, and debt monitoring; (ii) participate in the preparation and negotiation of international financial agreements involving the Cambodian government; (iii) participate in the programming and monitoring of external financial resources obtained through these agreements; (iv) supervise and, when warranted, countersign withdrawals on foreign loans; (v) monitor and project the country's foreign debt; (vi) monitor the guaranteed debt contracted by public enterprises and centralize its management; and (vii) prepare agreements for credits extended by the national budget or the Treasury to public enterprises, and monitor the reimbursement of these credits. Project Support 2.59 The Project will assist in: (i) developing the institutional and legal framework for the management of Cambodia's public external debt, and (ii) establishing the new debt office in the MEF. This program will include building capacity for debt reporting to the World Bank. 2.60 First, the Project will finance the services of an international consulting firm to do the following: - create a system for the inventory of Cambodia's foreign debt and prepare that inventory; - assist the Government in preparing for debt rescheduling negotiations, either in the framework of the Paris Club or bilaterally; - develop a system of rules, procedures, and organizational arrangements for the centralization of international financial agreements, and their implementation and follow- up; - develop a system of rules, procedures, and organizational arrangements for data registration, monitoring, and repayment of the country's direct and guaranteed debt; this will include the development of a suitable debt accounting system;  - 26 - prepare for debt reporting in accordance with the World Bank's format (support under this activity has already begun with a seminar in June 1994 carried out by World Bank staff, International Economics Department ("IEC"), on debt reporting and management; IEC will continue to supervise this activity); 2.61 To perform its mission, the firm will provide an Institutional Expert in Debt Management ("IEDM") for short-term visits over a period of two (2) years. Also, to supply the expert with the needed backing in areas requiring highly specialized skills, the firm will be expected to field short-term missions (two (2)) over the two (2) year period. One such mission will be to help the Government prepare for Paris Club meetings. 2.62 Second, the project will finance a short-term mission (two (2) person/months) by an Organizational Expert in public debt management. That mission will prepare a master plan for the establishment of the FCPD unit. The master plan will include recommendations pertaining to: (a) the unit's organizational and staffing plan, modus operandi, and logistical support, and (b) a computerized debt management system. Once discussed between the Government and the World Bank, the recommendations of the master plan will lead to the preparation of a detailed program of activities for the establishment of the unit and the delivery of the debt management system under the Project. Special attention will be accorded for the preparation and implementation of training programs for local staff. 2.63 Implementation of the master plan recommendations will translate into the following activities and steps: (a) Computerized debt management system - design of the debt management system by a consultant independent of equipment suppliers (the Computer System Engineer ("CSE")); the CSE will present at least two (2) system options tailored for Cambodia; - preparation of bidding documents by the CSE, once the design has been approved by Government and the World Bank; the bidding documents will specify, among other things, that: (a) the accounting system developed under the institutional development phase (described in para. 2.60) will have to be accommodated in the system, and (b) the bidding offers must include a detailed training program for the concerned technical staff of the FCPD unit and for other MEF officials likely to use the system; - conception and delivery of the system by the supplier selected by competitive bidding (the System Supplier). It is expected that, for Cambodia, pre-defined system configurations could be of interest. In which case, suppliers of such systems (UNCTAD and the Commonwealth Secretariat) will be invited to bid; - surveillance by the CSE during system delivery; - implementation of training programs during and after system delivery to ensure that the concerned technical staff and managers will acquire the skills needed to use, run, and maintain the system.  - 27 - (b) Other organizational arrangements (to be implemented under the supervision of the IEDM). implementation of the organizational and staffing plan; implementation of training programs other than those identified under the computer system component; such programs will aim at developing capacity to perform the tasks identified under the institutional development phase, namely: inventory of Cambodia's foreign debt; debt rescheduling negotiations; centralized management of international financial agreements; monitoring and repayment of the country's direct and guaranteed debt; and debt reporting to the World Bank. The School of Finance will be used as the main venue for training; provision of logistical support (filing cabinets, computers, high- capacity photocopiers, etc) to facilitate centralization of financial agreements in the FCPD unit. Duration 2.64 It is expected that Project support to debt management will be extended over the entire life of the Project. However, the provision of external consulting services will be limited to two years starting from the IEDM's arrival. The School of Finance will then be solely responsible for follow-up and sustainability. Actions Agreed During Negotiations 2.65 The Government will provide the office space and the personnel recommended under the Master Plan in a timely manner. The personnel will be assigned to the Project by an official decision issued by the Minister of Economy and Finance. The entry on duty of key personnel identified under the Master Plan will be condition of implementation of all the other aspects of the Master plan, in particular, the preparation and delivery of the computerized management system and the provision of logistical support to the FCPD unit. Summary and Cost of Project Support - IEDM: six (6) person/months; - Support to the IEDM, four (4) person/months; - Organizational Expert (Master Plan), two (2) person/months; - Computer System Engineer, six (6) person/months (several short-term missions); - System Supplier: budget allocation US$300,000 equivalent; - Office equipment: budget allocation US$25,000 equivalent; - Training programs, other than those included in Supplier's contract: budget allocation US$15,000 equivalent.  - 28 - D. Personnel Management Background 2.66 The current state of the Cambodian public administration is an important factor in the country's limited implementation capacity. The administration retains a number of organizational features inherited from a command economy's concept of the state role and from the need to respond to security problems. These features are not consistent with the country's current requirements, which are aimed at producing the maximum results possible with the limited means available. The size of the administration (close to 160,000 civil servants, or about 2 percent of the population) is much larger than public management norms would recommend, which leads to the problems of duplication and conflict of assignments within the administration and is the root cause of current overstaffing. 2.67 At present, the organization of the civil service subsumes all categories of state personnel within a single system: the various branches of the administration, the state-owned enterprises, the political parties, the mass organizations, and the trade unions. The size of the administration also increases coordination requirements, slows decision-making, and dilutes the authority of the state when it is confronted with endemic implementation problems. This framework prevents effective monitoring of the administration's policies and transforms control mechanisms into mere formalities. Furthermore, since resources are spread thin, key departments (Education, Health, Finance, etc.) lack minimum staffing, and a number of civil servants lack the basic equipment and supplies for their duties. Civil service salaries are not sufficiently motivating, despite the 10 percent wage increase of April 1992 and the 20 percent wage increase of November 1993. The wage scale structure, the civil service staff rules, and the career perspectives offered are not conducive to dedication. The Government Program 2.68 The Government has been working since June 1993 in collaboration with the UNDP on the preparation of a wide-ranging public sector reform. The final steps to approve the program are expected to be taken shortly by both sides; in the meantime two (2) UNDP supported advisors are already doing the groundwork in Phnom Penh before the formal launching of activities during the fall of 1994. 2.69 The program will be placed under the authority of the Council of Ministers and will operate from the Secretariat of the ITC; the executive secretary and staff of the latter will be the working counterparts of the technical assistance staff provided by the Project. 2.70 The program is ambitious and broad in scope and is scheduled to last until late 1997. It has been organized around five (5) general thrusts: (i) Restructuring the public sector: rationalizing the organization of the Government; redefining the mandates and responsibilities of the various ministries and agencies; legal reform to put an appropriate legal framework for public sector activities in place, codify texts and re-establish the Official Gazette; judicial reform.  - 29 - (ii) Strengthening the management of line ministries: administrative simplification, rationalization and standardization of procedures; creation of information systems; intensive training of senior managers; improvement of responsiveness to public needs and enhanced service delivery. The program will be started in pilot ministries and then adapted as needed for the rest of the Government. (iii) Civil service management reform: establish control over the civil service by controlling recruitment and other personnel movements, carrying out a census, eliminating irregularities, establishing a reliable data base and a payroll system; develop a strategy for reducing the size of the civil service through departure programs and the provision of packages; preparation of detailed ministerial staffing plans and matching of posts and individuals. Capacity-building in the SSCS and in ministerial personnel units in order to equip the Government with a functioning personnel management system. Reform of all the key systems and functions: career management, remuneration, evaluation, training and the pension plan. The Government also intends to reform the military along similar lines. (iv) Human resource development for the public sector: training needs identification and development of a training policy; setting up of an administrative training center; implementation of the program. (v) Strengthening provincial administration: establishment of the legal context, including the definition of the rights and responsibilities of the different jurisdictions and the legal status of provincial personnel; capacity-building in the Ministry of the Interior and in three (3) pilot provinces. Project Support 2.71 The Government and the World Bank have worked closely with UNDP and other donors in defining this agenda and some of the latter are expected to provide funding and technical advice; France, for example, is interested in contributing assistance in the preparation of legal texts and the European Union has expressed interest in helping finance technical assistance to improve civil service management. 2.72 The Government has asked the World Bank to participate in the funding of component (iii) (para. 2.70) by providing advisory services to help plan and design a strategy to reduce the number of staff in the civil service and the public enterprises. As mentioned in paras. 2.66-2.67, the size and cost of the public sector and of the wage-bill are excessive. The combined civilian and military wage-bill accounts for 41 percent of the recurrent budget, the civilian alone for about 29 percent. 2.73 Given the World Bank's expertise in financial management, its concern with the budget and the wage-bill and the Project's emphasis on technical assistance for economic and financial management, it is appropriate for the World Bank to finance this sensitive dimension of the economic transition. The Project will, therefore, provide support necessary to design alternative strategies to reduce the size of the civil service, improve remuneration levels for a renewed and smaller service and provide departure packages for those leaving the civilian civil service and the public enterprises. In defining a series of options for the reduction of public sector employment, a team of technical  - 30 - advisors will be recruited under the Project and will work closely with officials from the MEF, the SSCS and the ITC. 2.74 The following program of work will be undertaken: (i) determine as accurately as possible given the state of the data, the size, composition and profile of public sector employment -- defined as the civilian civil service and public enterprises; (ii) oversee the creation of a simple database on the size and cost of public sector employment and use it as the basis of a dynamic tool which may be used to model the differential impact of various departure and restructuring scenarios; (iii) on the basis of parallel studies on the shape and structure of the government and of individual ministries undertaken within the context of the administrative reform, begin to define the size, profile and cost of the new structures; (iv) in the light of (iii), determine the options and tradeoffs facing the Government as it studies: (a) what kind of public sector it needs in order to meet its development priorities, and (b) what size of public service it can afford if it is to provide salaries and benefits which ensure a decent living wage and which are competitive -- especially for professional and technical personnel -- with the private sector; (v) help the Government implement running controls on the opening and closing of positions, recruitment and other personnel actions required to maintain control over the establishment and of the wage-bill and to meet the related benchmarks of the IMF program; (vi) design optional approaches to the reduction in public sector employment. Based on the priorities identified for the reformed civil service in terms of functional areas and staff skills, develop redundancy packages designed to meet the stated objectives. Work also with those responsible for the public enterprise sector and reform of the military to identify the numbers of staff needed and plan appropriate departure schemes which are congruent with those intended for the civil service. PE audits and studies on reform of the military will need to be carried out in this context. (Note: the carrying out of actual restructuring of state-owned enterprises and the army is not included under the Project). 2.75 In undertaking this assignment, the team of technical advisors will help the Government factor the following considerations into its strategic planning: (i) the need to determine, based on the existing profile of the civil service (age, level, skills, etc.) and the new sectoral requirements, which categories of personnel should be encouraged to retire or leave; exempt as necessary any groups identified as particularly important to retain; (ii) collect any available data on household incomes and expenditures; if necessary, design and carry out a sample survey in order to ascertain the amount and  - 31 - composition of their family incomes and expenditures; this information will prove useful in designing appropriate incentive packages; (iii) ascertain the level of private sector remuneration in the professional and technical job markets of Cambodia and neighboring countries; and (iv) propose a new remuneration policy on the basis of the data and analysis for both the civil service and the PE sector; 2.76 After analyzing this information, it should prove possible to design and cost a phased departure and renewal program for the public service over several years. Optional strategies will be modeled which take into account both the technical variables and the political reality of the local context. Scenarios for reconfiguring the profile of the civil service according to identified needs will be developed and will include some or all of the following elements: - early retirement, either optional or obligatory for certain categories of staff; - voluntary departure for targeted classes and/or categories. - retrenchment; and/or - recruitment in order to ensure that key skills are brought into Government at the same time as the downsizing is implemented. 2.77 In addition to departure bonuses and/or enhancod retirement packages, a broader social safety net will be developed and studies undertaken to plan the transition to a capitalized pension plan for civil servants and to a fully fledged national retirement and social security system. During the transitional period before a permanent social security system is in place, departing staff will be offered, in addition to departure packages, other facilities and opportunities such as: retraining programs, credit facilities for establishing small businesses, labor market information and other employment services and support to companies for training and apprenticeship initiatives. 2.78 The work will also include the costing and budgeting of various scenarios and the determination of options for paying the costs of the departure program. If it does not prove possible to cover the latter from the Government's recurrent budget, donor grants will be sought out for the purpose of paying off redundant staff. In any case the costs of the departure program and their impact will need to be taken into consideration during the annual economic and budget planning cycles and monitored closely during implementation, since the wage-bill is both an important macro-economic variable and a significant percentage of the recurrent budget. An instrument will be developed for this purpose which will model different hypotheses and scenarios for the evolution of the wage-bill, the reduction in the number of civil servants, the introduction of a new remuneration policy, etc. 2.79 Duration. It is expected that the study phase for the departure schemes will last twelve (12) to eighteen (18) months. Then, on the basis of the recommendations, the Government and the World Bank will identify activities to be carried out under the implementation phase. Other studies, such as those on the pension and social security system, will take longer to complete.  - 32 - 2.80 Summary and Cost of Project Support. The following will be financed under this component: - technical advisers from a consulting firm: twenty-four (24) person/months (with twelve (12) person/months cofinancing from other donors); - resident PE sector adviser: twenty-four (24) person/months; - audits of public enterprises and studies on the military: US$100,000 equivalent (with US$300,000 equivalent cofinancing from other donors); - short-term support missions (e.g., audits of PE's, compensation specialist, pension expert): eighteen (18) person/months; and - implementation phase: to be financed by the Study Fund. E. Legal Assistance for Private Sector Development Background 2.81 Historical Background. Given the recent history of Cambodia, the country's existing legal and regulatory framework in general, and its capacity to enforce existing laws and regulations in particular, is exceedingly weak. Starting in 1975 under the Khmer Rouge regime, all aspects of what was the then prevailing legal system and commercial private sector were physically destroyed: law libraries, the University of Phnom Penh Law School, all registry offices, Government ministries, courts and their records, businesses, property rights, etc. The Khmer Rouge regime sought the total eradication of the past and the complete restructuring of Cambodian society. Nearly all industries were abandoned or placed under state control, institutions were destroyed and cadres were eliminated physically. Money was abolished and the private ownership of land and rigidly collectivized all agriculture. Following the ouster from power of the Khmer Rouge regime in December 1979, and for the ensuing twelve (12) years, Cambodia was subjected to a political and judicial system similar to that of socialist regimes, with strong centralization of power and a socialist economic system. 2.82 On October 23, 1991, the "Agreements on a Comprehensive Political Settlement of the Cambodian Conflict" (the "Paris Accords") were signed by the various political factions in Cambodia, including the Khmer Rouge, providing for democratic elections following an interim period of United Nations peacekeeping supervision in accordance with the Peace Accords mandate. The election of the new Cambodian National Assembly took place in May 1993 with no single party obtaining a clear majority, and a coalition FUNCINPEC-CPP Government was subsequently appointed. On September 21, 1993, the present Cambodian Constitution was ratified by the National Assembly, giving rise to the Kingdom of Cambodia as a constitutional monarchy and liberal democracy - with separation of executive, legislative and judicial powers - aimed at the establishment and on-going encouragement of a market economy. 2.83 The Existing Constitutional Framework. The Constitution establishes a system of government based upon an elected constitutional monarchy and the separation of powers between the executive, the legislature and the judiciary. By the terms of the Constitution, the King is Head of  - 33 - State with responsibility for reigning over - but not governing - Cambodia. The King is elected by the Royal Throne Council which is composed most notably by the Speaker of the Assembly and the Prime Minister. The King appoints the Prime Minister on the recommendation of the Speaker of the Assembly and exercises essentially a role symbolic of national unity and continuity. 2.84 The Constitution expressly provides for the adoption of a multi-party democratic political regime and a free market economic system. The National Assembly is composed of 120 members elected for 5 years. As the legislative body, it is empowered to adopt laws, approve the national budget and ratify and annul treaties and international conventions. According to the Constitution, the senior level of the executive branch of government is comprised of a Prime Minister, Deputy Prime Minister and a Council of Ministers, although since 1993 there have been two (co-) Prime Ministers and two Deputy Prime Ministers, representing the two major political factions. Pursuant to the Constitution, the judiciary is independent. The Constitution also provides for a Constitutional Council which is to be charged with interpreting the Constitution and opining upon the constitutionality of both proposed and enacted laws. 2.85 Although today there does exist a body of law, however imprecise, and much on-going preparation of new laws and regulations aimed at completing and improving the existing legal framework, the evolution of the State to one in which the rule of law prevails, the remaining part was reduced in importance by the much more rapid growth of the emerging private sector, with which the enterprise sector competes on product and factor markets. Reliable data on the private sector are not available, owing to the lack of systematic enterprise registration, reporting, and surveys. Yet in Phnom Penh and other urban centers, the mushrooming of dynamic private businesses is evident, in particular in construction, commerce, cottage industries, and miscellaneous services. State enterprises are also withdrawing from downstream activities and are even leaving areas such as the retail distribution of power (in Phnom Penh) to private wholesalers. Foreign investors have bought or leased most of the privatized enterprises: most of these are medium-scale industrial ventures. An area in which foreign investment is particularly booming is tourism. 2.86 However, in spite of encouraging developments, the private sector still faces a number of major physical constraints. For example, infrastructure bottlenecks hamper the rapid growth of an efficient private sector. The power supply is frequently interrupted, and it has become very costly, which causes private businesses to operate generators. Transport suffers from security problems, and equipment wears out quickly on Cambodia's roads. 2.87 In addition to such constraints, the legal environment specifically for business and investments is glaringly deficient. Only a few relevant laws have been passed, including the Foreign Investment Decree-Law of 1989. Many other critical areas of commercial and business laws (for example, companies, contracts, bankruptcy, mortgages, insurance, labor, accounting, and mining) are absent. For existing laws, transparent implementation regulations are scarce and are not easily accessible. Most regulations (including those on taxes, land, and foreign investment) are thus negotiable on the enterprise level, and private business is not, on the whole, governed by the rule of law. Under the current legal system, potential future advances tend to be limited by the rather restrictive and, at the same time, insufficiently clear investment code. Moreover, there is little recognition of companies or provision for their proper functioning. The secure establishment of private companies, which would require the provision of limited liability, the recognition of the private ownership of property, the transfer of assets and other forms of collateral, and a reasonably  - 34 - free access to land, is not adequately provided for. This state of affairs provides considerable flexibility but also fosters non-transparency, insecurity, and lack of legal rights and guarantees. 2.88 An additional constraint is that the accounting system in Cambodia was tailored to a centrally planned economy and is of little use to private businesses in the current market environment. The lack of a meaningful and reliable accounting system not only deprives enterprises of an important management tool but also affects the collection of taxes, which are hence commonly estimated and negotiated. In sum, the country has yet to introduce an environment suitable for a private-sector- driven market economy. The Government Program 2.89 The Government's medium-term program to develop a suitable enabling environment for the development of private sector activities includes, inter alia: introduction of a new national accounting system; enactment of economic and financial laws, including provisions for bankruptcy; enactment of implementing regulations to the investment law which was accepted at the July 1994 session of the National Assembly; streamlining the foreign investment regime and ensuring that the twin objectives of fiscal revenue and external competitiveness are served; adoption of legislation to implement the provisions of the MIGA and ICSID conventions, with a view to providing security for foreign investors; organization of the CDC's Cambodian Investment Board ("CIB") as a "one-stop" service agency to provide information, assistance and administrative services to prospective investors. Project Support 2.90 The Project will focus on assisting Cambodia to develop certain fundamental elements of a suitable enabling legal environment for the development of private sector activities. The principal objectives will be to: (i) assist in the re-establishment and strengthening of certain key legal institutional capacities and procedures which are required for developing the economic and financial legal framework necessary for private sector development in Cambodia; and (ii) provide the Government (specifically, the Council of Jurists, the Interministerial Technical Committee, and the Ministry of Commerce) with the assistance of qualified legal advisers. The PSD component of the Project will provide legal advisory services, training and related equipment for implementing the following principal activities on the basis of an implementation program to be agreed upon with the Government. (a) preparing a diagnostic study to determine: (i) the process and status of development to date of Cambodia's economic and financial laws; (ii) the degree of compatibility of the various economic and financial legal texts currently in force or under consideration for adoption; and (iii) Cambodia's medium-term economic and financial legal reform priority agenda. This activity will be carried out in conjunction with similar ongoing efforts which are being financed by other donors, such as the UNDP-financed preparation of a compendium of existing laws which is currently under implementation; (b) carrying out a comprehensive legal training needs assessment. This activity will be carried out in coordination with other international and bilateral institutions involved in similar activities in Cambodia;  - 35 - (c) formulating, on the basis of the findings and recommendations of the legal diagnostic study and the training needs assessment, a time-based master plan which clearly sets out the specific economic and financial legal priority drafting and training measures to be implemented under the Project; and (d) re-enforcing the Government's institutional capacities and official procedures for publishing, on a regular basis, Cambodia's Official Journal in the Khmer, French and English languages, and for disseminating it more effectively throughout Cambodia; and establishing an automated system for the systematic reporting, codification, and publication of the decisions of Cambodia's higher courts (Supreme Court/Courts of Appeal), and for the development of a system of jurisprudence and doctrinal writings. 2.91 To carry out the PSD component activities described above, the Project will finance the following activities, inter alia, on the basis of the implementation program to be agreed upon with the Government: - a Resident Legal Advisor (RLA-CJ) and qualified legal staff, for an initial period of two (2) years, to help manage the legal advisory unit to be established by the Project under the responsibility of the Council of Jurists; - a Resident Legal Advisor (RLA-ITC), for an initial period of two (2) years, to provide legal advisory services to the Interministerial Technical Committee on Administrative Reform; - a short-term Legal Specialist (LS-DS) assisted by qualified legal staff, for a period of four (4) months, to carry out the legal diagnostic study; - a short-term Legal Specialist (LS-LTNA) assisted by qualified legal staff, for a period of six (6) months, to carry out the legal training needs assessment; - an Institutional Specialist (IS-OJ) assisted by qualified technical staff and translators, for a period of up to twelve (12) months, to re-establish the Official Journal and train Government personnel in its administration and continued operation; - an Institutional Specialist (IS-CJ) assisted by qualified legal staff, for a period of twelve (12) months, to establish a system for codifying the decisions of the higher courts of Cambodia and for developing a body of jurisprudence. - Note: Logistical support to CDC's Cambodian Investment Board will be provided under the Public Investment Management Component (Strategic Planning) of this Project. Training 2.92 Training under the PSD component will be carried out according to a time-based master plan to be developed on the basis of both the recommendations of the legal training needs assessment and the Government's legal reform priority agenda. Training interventions will be selective and carried out in coordination with other similar ongoing efforts. Training will also be provided to  - 36 - sustain the legal institutional building activities to be implemented under this component (the establishment of the Official Journal and system of codification). Duration 2.93 It is expected that Project support to the PSD component activities will be extended over the entire life of the Project. Actions Agreed During Negotiations 2.94 During negotiations, agreement has been reached with the Government that: (i) The Government will establish a legal advisory unit attached to the Council of Jurists as a condition of disbursement of the Credit proceeds allocated to the PSD component of the Project. The Unit will be maintained throughout the Project in a manner satisfactory to IDA, and would be responsible for assisting the Council in reviewing and finalizing all economic and financial legal texts drafted by line ministries and other governmental institutions, and would otherwise help coordinate the legal drafting activities of these ministries and institutions; (ii) The Government will adopt officially, not later than December 31, 1995, a medium-term agenda for the enactment of economic and financial legislation, all in accordance with its economic policy priorities; and (iii) The Governmnent will carry out, not later than June 30, 1995, an action plan for carrying out the PSD component activities. Summary and Cost of Project Support - RLA-CJ: twenty-four (24) person/months - RLA-ITC: to be financed from other donors - LS-DS: four (4) person/months, plus support - LS-LTNA: six (6) person/months, plus support - IS-OJ: twelve (12) person/months, plus support - IS-CJ: twelve (12) person/months, plus support - Training programs: US$125,000 equivalent - Equipment and materials, including printing equipment for Official Journal: US$150,000 equivalent (with US$200,000 equivalent cofinancing from other donors).  - 37 - F. Training 2.95 The Government appears determined to move from a centrally planned to a market-based economy, and to create suitable institutions and instruments for macroeconomic management. However, some of the tasks are unfamiliar to those in the Government administration who have to execute them. Hence, there is a need to mount a major effort to help build capacity and reform the institutional framework. This requires a large and sustained investment of resources in technical assistance and training. The Government intends to recruit high caliber expertise with a commitment to training nationals and the ability to transfer economic management skills. The Project will help the Government implement this strategy by helping ensure a strong quality control of the technical assistance product and accelerate the process of transferring responsibility and accountability for management of the economy to Cambodians. Focus on Public Finance ManagementL 2.96 The reform of Cambodia's public finance management system is a major step in adapting public sector management practices to the requirements of a market economy. The reform of the management system is driven by the new budget law, promulgated in December 1993, which establishes a comprehensive framework for public finance management and accountability. The system which is being implemented is an adaptation of the French public finance management system which emphasizes a-priori controls over expenditures and the centralization of Treasury operations. Its complexity needs to be absorbed by Cambodian staff who have yet to shift to a market-based public finance management system. Thus, to be sustainable, it will require a major effort to strengthen and upgrade local skills in the public finance complex (i.e., MEF, the budget and Project units within line ministries, and the provincial and municipal financial offices). 2.97 An important constraint on capacity building is the basic weaknesses of Government staff. Staff weaknesses originate from a collapse of higher education in the mid-1970s, further weakening of average capacities as a result of politically-motivated recruitment, and low staff salary levels. Thus, the challenge is to achieve a quantum jump in staff capacity to match the requirements of the new financial management system. For this reason, the Project will support a major training effort to strengthen basic staff capacity as well as to provide focused knowledge transfer to enable local staff to absorb the specific features of the new management system. Staff Upgrading Programs 2.98 The strategy for upgrading local skills and capacity consists of four (4) complementary programs: (i) basic preparatory training in essential generic skills; (ii) specialized short- or medium- term courses in topics relevant to public finance management; (iii) on-the-job training of counterpart staff and of other staff employed in units which are being created or strengthened with the assistance I' Although the Project covers several aspects of economic management and private sector development, this section is limited to training which falls in the public finance domain. Other concerns -- for instance, strategic planning, legal training, etc. -- are addressed under the relevant Project components.  - 38 - of the Project; and (iv) in exceptional cases, training abroad. Categories (i) and (ii) will be coordinated and/or undertaken by the staff of the School of Finance, with guidance provided by the external advisors, while categories (iii) and (iv) will be managed by a Training Coordinator financed under the Project, in conjunction with the specific training programs of external advisors financed by the Project. The Training Coordinator will liaise very closely with the adviser provided by France to act as the Deputy Director of the School. The French technical assistance will be essentially responsible for helping in the development of school policy, regulatory framework, and curriculum. 2.99 Basic Preparatory Training. Courses taught will include basic accountancy, computer literacy, language training, mathematics, finance and economics. In particular, attention will be given to ensuring that the accounting skills of staff are reinforced. While courses will generally be taught in the School of Finance (basic finance and economics), some training will be contracted out to local private training institutes (computer literacy, languages, basic accounting). 2.100 Specialized Short- and Medium-Term Courses. Such courses which may be given either on an intensive full-time basis for several weeks or for a few hours each day for a longer period, will provide applied general training in generic functions of the public finance management system. For example, officials dealing with the budget system and its controls will be trained in the concepts, principles and procedures of public budgeting, accounting and auditing procedures; other training specific to resource mobilization will also be undertaken (tax laws, tax assessment, inspection, customs clearances and management); as well as computer techniques applied to public finance management. In addition, senior staff in the financial complex will be introduced to macro-economic concepts relevant to financial management (e.g., the role of deficit management, inflation, credit and borrowing policies, etc.). The ministry's training facility will organize and coordinate basic training programs, some of which will be contracted out to the private sector (basic accountancy, language skills, computer literacy). Currently, the identification of basic training requirements, the development of training modules, and limited training are being carried out with French and USAID technical assistance. However, physical facilities for staff training are very limited (private villas have to be rented around Phnom Penh to be used as classrooms) and there is a need to provide expanded capacity on a permanent basis for staff in-service training. 2.101 On-the-Job Training. Two types of training, which will be carried out by project- financed advisors, supplemented by MEF higher-level staff, are envisaged under this heading: (a) training of counterparts who will be assigned to the advisors before their arrival in their duty stations; and (b) an on-site outreach program in the financial complex through a training and visit (T&V) scheme. Both programs will focus on the specific financial management systems being introduced by the project. Each advisor will prepare an annual training program concerning counterpart and T&V activities, as part of their annual performance programs acceptable to the Bank. 2.102 The Project will help the Government implement this strategy by helping to ensure that the best possible quality control of the training will be carried out by international experts. All training will be conditioned upon preparatory steps which are crucial to ensuring that the various functional units supported under the Project are ready to receive and profit from the training activities: (a) potential candidates for the various positions will have been identified and several counterparts selected for each external advisor; (b) the units will have been reorganized, staffing plans prepared and, when required, the necessary facilities and equipment installed; (c) a training plan, based on a thorough assessment of the needs of the local staff will have been prepared.  - 39 - 2.103 Training Abroad. Priority will be given to training the largest number of Cambodians locally. However, in special cases, training abroad may be justified. Proposals for each external training program to be financed under the Project will be targeted to assuring the replacement of external advisors. External training proposals on a case-by-case basis, including their justification and costs, will be submitted to IDA for its comments/approval. Training Support Requirements 2.104 The School of Finance. To provide an adequate infrastructure in support of the massive upgrading of public finance management staff, the Project will support the construction and equipment of a small training facility (the School of Finance, under MEF's responsibility), with a capacity to train approximately 600 staff members per year. The estimated physical space required is about 2,000 square meters, at a unit cost of about US$350 per square meter (total cost of the building: about US$800,000 equivalent). Equipment requirements, including a generator and a computer lab, are estimated at about US$200,000 equivalent. The infrastructure will include a conference facility for about 150 people for major seminars and conferences, a library, rooms for visiting teachers, and offices for the school's management and teaching staff. Studies to produce detailed architectural plans, specify the equipment configuration and produce bidding documents are financed by UNDP. USAID has indicated its willingness to participate in building the school. 2.105 It is expected that in the initial stages of the Project, the faculty of the school will consist mainly of the external advisors financed by the Project, supplemented by resident and short-term trainers financed by other donors. As suitable Cambodian trainers are identified and their skills upgraded, the teaching staff will take over some of the basic training duties carried out by consultants as the latter are phased out. Together with other donors, the Project will support the upgrading of skills of the School's teaching staff. 2.106 During the Project, at least three external training experts will be supported by external donors: (a) the French Government has committed itself to finance two (2) advisors/trainers, one (1) of whom is already in place. They will focus on preparing and coordinating basic preparatory training and specialized short- and medium-term courses coordinated and/or taught in the School of Finance; (b) as noted in para. 2. 101, a Training Coordinator financed under the Project will coordinate the on-the-job training system being extended by Project advisers; (c) other donors have indicated their willingness to support the School of Finance through the provision of short-term seminars and the training of trainers (UNDP, France, USAID). To ensure that training objectives are met, the Project will provide stand-by support on a selective basis to compensate for eventual shortfalls by other donors. 2.107 The Training Coordinator will be attached to the School of Finance and will ensure that an effective on-the-job training program is carried out during the life of the Project. This person will coordinate and supervise on-the-job training throughout the financial complex. In particular, he will: (a) compile, analyze, and appraise annual training programs prepared by Project advisers and review the effectiveness of completed programs; (b) assist advisors/consultants recruited under the Project in the assessment of training needs and the formulation of programs; (c) provide pedagogical backup and training materials to advisers/consultants; (d) coordinate training programs prepared under the Project with other training programs supported by the School of Finance; (e) carry out limited training programs; and (e) assess the training performance of project advisors/consultants in the training of their counterparts and the implementation of T&V activities.  - 40 - 2.108 Members of the Government and other high-ranking officials will be asked to make presentations on subjects related to both the Government's reform program and their own responsibilities in implementing the program. Sustainability 2.109 Over the life of the Project, it is expected that between 2,000 and 3,000 person/years of in-country training would be carried out under the various programs supported by the Project. 2.110 As the Project evolves and external advisors are withdrawn from MEF, the School of Finance will become the main instrument available to the MEF to reduce the reliance on external consultants for public finance management. Training assessments will be carried out periodically by the School of Finance and the external advisors supported by the Project to improve the targeting of training needs and curricula development. Before the departure of external consultants, an evaluation of the effectiveness of the training programs, including training provided by the School of Finance, will be carried out. The evaluation will provide an in-depth assessment of the transfer of knowledge to Cambodian staff, the need for continued external advisory assistance and measures to be taken to ensure that the School of Finance is able to assume the responsibility for sustaining capacity building within the financial complex. Assuming that the evaluation provides positive results, the Project will then proceed with the phasing out of resident advisors and will shift its emphasis from on-the-job training to more generic upgrading of skills in the School of Finance. In case of negative results, corrective measures will be applied. Before the Project ends, the necessary steps will be taken to make the School of Finance a well established and fully funded program of the MEF. Specific Training Programs, By Component Budget Management 2.111 The new budget law, approved by the National Assembly in December 1993, establishes the legal framework for public finance management in Cambodia. The new public finance management system, including management rules and procedures is now being implemented with the help of an expatriate advisory team. A major effort is required to enshrine these methods within the routine operation of the MEF, to install the relevant hardware and software, to operationalize these systems and to prepare national staff in their maintenance and use. 2.112 A focused training program will be prepared annually to raise capacities within MEF, line ministries and provincial governments to implement the new budget system. The seven (7) advisors financed by the Project will be charged with carrying out a program to train their counterparts and senior staff in MEF. Together with senior MEF staff members, who are on the whole better prepared than their counterparts in line ministries and provincial offices, they will also provide on-the-job training support to line ministries and provincial offices. Basic courses in budget management will also be offered at the School of Finance on a regular basis and will be adapted to requirements as they evolve.  - 41 - 2.113 Presently identified training priorities include: (a) at all levels of Government, training in basic budget systems, including: expenditures, revenues and their classification, objectives and uses of the classification of expenditures and revenues, etc. (b) at all levels of Government, training in budget preparation processes, including stages in budget formulation and the respective roles of the MEF, the line ministries and their provincial offices; procedures and computerized formats used in budget preparation; (c) for selected teams of ministerial and provincial officials, training in the principles and procedures of budget implementation, including expenditure control, and the formats for fiscal reporting; (d) at all levels of Government, training in the national and international procurement of goods and services in conformity with the budget law and the procurement code; (e) for selected teams of internal accountants and auditors, training in the relevant systems and the need for timely information on commitments and disbursements, receipts, cash balances and debt transactions. (f) for selected staff, training in the interrelationships between budgeting and investment planning and programming: e. g., the integration of annual current expenditures and the three year PIP; methods of rationalizing the allocation of resources as part of the budget preparation exercise, etc. Treasury 2.114 The new financial management system includes a central Treasury Department organized along the French model. As such, the Treasury receives all Government revenues and executes all payments to Government staff, suppliers and creditors. It maintains the Government's accounts, and is the primary focal point for monthly reporting to the Government on all financial transactions. The Treasury Department maintains treasury units at all levels of Government. 2.115 As in the case of budget management, the Treasury Department initiated its reform in 1994, with the assistance of a team of external advisors. To ensure that the new Treasury system will be implemented in a sustainable fashion, a focused on-the-job training program will be implemented by the external advisors financed under the Project and MEF senior staff. Basic and complementary training will be provided by the School of Finance. On-the-job training will emphasize the implementation by the Treasury of the newly developed public accounting system, applied informatics for treasury operations, management and controls of cash transactions, and reporting formats, including flash reports by decentralized treasury units and monthly reports to be integrated into the table of Government financial operations. As presently identified, other topics, which will be taught in short, intensive courses are:  - 42 - (a) role and functions of the Treasury in the public financial management system. (b) the nature of accounting operations at the central and provincial levels and the need for maintaining central accounts. (c) the role and functions of the central and commercial banks and their interface with the Treasury. (d) nature of Government securities and the principles and procedures of the management of debt and cash. (e) operations of the foreign exchange market and the accounting system and regulatory framework for foreign currency operations. Public Investment Management 2.116 The training needs analysis and subsequent training initiatives will be spearheaded by the Public Investment Budget unit of the MEF in close collaboration with the School of Finance. In addition, this unit will work with the line ministries to reinforce their capacities in this area. As the PIB unit in MEF and its correspondents in CDC and line ministries are established, staff will be identified and training plans developed in the following areas: (a) maintenance and trouble shooting of the computer systems developed for the PIP preparation and monitoring; selected training in specialized software; (b) sectoral planning and investment programming and the reconciliation of tradeoffs among sectors based on national priorities; (c) investment analysis and programming methods; (d) preparation of the annual investment budget and the three-year investment program. (e) public investment monitoring: ensuring that projects are properly recorded, funded and evaluated. Macroeconomic Analysis 2.117 A program of specialized on-the-job training and short-term courses by resident and visiting experts. This program will be tailored to the specific needs in this area and carried out over a period of several years in order to upgrade the skills of the staff as the nature of their responsibilities evolve. External Debt Management 2.118 The Master Plan for the establishment of the Financial Cooperation and Public Debt unit will cover key items such as the organization and staffing plans and the choice of a computerized debt management system. The successful preparation and implementation of training programs in this  - 43 - highly specialized area will be key to establishing national capacity to manage and refine the system over the medium term. Once staff have been selected within the MEF and/or recruited from elsewhere in the Government or outside, they will receive appropriate preparatory training as required in order to bring them up to the level necessary to be trained in debt management concepts and systems. 2.119 Subsequently specialized on-the-job training and short, intensive courses will be provided in the following areas: (a) computerized debt recording, reporting and management system; the bidding documents will specify in detail that the supplier of the hardware and software will be expected to provide such training as an integral and central component of the contract. Training will cover trouble-shooting and routine maintenance of the system as well as its technical applications; and (b) technical training in the potential and applications of the system, including: (i) inventory of outstanding debts, debt recording, intensive schooling in the related accounting and nomenclature methods; (ii) the systematic recording, maintenance and follow-up of international financial contracts and agreements; (iii) tracking, monitoring and repayment of the direct and guaranteed debt; (iv) establishing a debt recording system to meet the requirements of the annual report on debt to the World Bank. Specialized staff from the Bank have already started to train Cambodian officials in this area and will continue to do so; and (v) training in the technicalities and methods of international debt negotiations within the framework of the Paris Club and bilaterally. 2.120 During Project negotiations, agreement has been reached with the Government that all training activities to be carried out under the Project will be carried out in accordance with terms of reference and arrangements which are acceptable to IDA. Summary and Cost of Proiect Support 2.121 The following will be financed under the Training component: - Training Coordinator: seventy-two (72) person/months - School building, including construction surveillance: US$830,000 equivalent - School equipment: (expected to be financed by other sources) - In-country training programs: US$600,000 equivalent - Scholarships abroad: two (2) scholarships/year, starting in year two; to be financed from other donors - Training of trainers: US$200,000 equivalent - Training under specific project components: (budget is included under each component).  - 44 - G. The Study Fund 2.122 The Credit will also include funding of additional studies for which the terms of references can not be clearly defined at this stage, but would be formulated during Project implementation. Activities to be financed under this component will result from recommendations contained in master plans and other studies financed in the design phase of the technical assistance program. 2.123 The Government would specifically agree that prior to undertaking any technical assistance, training or studies, or acquiring any equipment to be financed under this component, it would submit detailed proposals to the Bank for its approval. Once approved, the TORs would receive Bank clearance prior to financing. Finally, as part of the annual project review process, particular attention would be paid to activities undertaken under this component. 2.124 During negotiations, agreement has been reached with the Government that all studies to be financed under the Study Fund component of the Project will be subject to eligibility and selection criteria, and will be otherwise carried out and supervised under terms of reference and arrangements, which are acceptable to IDA. 2.125 Limited resources will be set aside to finance studies in areas not connected to the Project but deemed to be of primary importance to the Government rehabilitation program. Examples of such studies include, inter alia, studies in transport sector strategy, environment assessment, poverty assessment and household surveys, financial markets development, commerce and industry, and the feasibility of electronic cash transfers to provinces. 2.126 The Aid Coordination Adviser recruited under the Project to assist in organizing the CDC will recommend ways to organize and manage the Study Fund.  - 45 - III. PROJECT MANAGEMENT AND IMPLEMENTATION 3.1 Project Management Unit. A Project Management Unit ("PMU") will be established in the MEF and staffed satisfactorily; thereafter, throughout Project implementation, the PMU will be maintained with satisfactory staff, resources, and overall terms of reference. The PMU will include a limited number of staff and have a structure and mandate allowing it to act quickly and efficiently to meet Project management needs and facilitate project implementation. Specifically: - the PMU will operate under the authority of a Project Coordinator who will officially communicate on the Government's behalf with IDA. The Coordinator will retain his/her existing official responsibilities. It will therefore be necessary for him/her to delegate responsibility for day-to-day management of the Project to an Administrator and an Adviser; - the Project Administrator will work full-time for the Project and be responsible for the preparation of biannual reports which will set out in detail the concrete achievements (or the slippages) made under the Project and compare these to projected achievements for the period, give a calendar of actions for the next six (6) months and specify the measures needed to fulfill it. The biannual reports will contain a description of the financial situation of the Project (amounts disbursed and outstanding, monitoring of counterpart and other co-financing, etc.) - a Project Adviser will be recruited, possibly among resident advisers working under the Project. In that capacity, the Adviser will work under the direct authority of the Coordinator and will be specifically responsible for: (a) coordination of the work programs of the team of consultants recruited under the Project, and (b) supervision of training programs prepared by the team of consultants. If necessary, a Procurement Adviser could also be recruited to assist, particularly during the Project start-up years when the workload related to the recruitment of consultants will be particularly heavy; - the Administrator will be assisted by a Project Accountant recruited on a full-time basis to manage the project office and keep Project records; and - the PMU will also recruit support personnel --secretaries, chauffeurs-- or other staff as may be necessary for the efficient operation of the PMU. 3.2 The PMU will be provided with the financial and material resources necessary to carry out its mandate in the most effective way. Generally speaking, the Government's contribution to the Project will consist of financing salaries of civil servants assigned to the Project and covering incremental operational costs. For example, the Government will provide satisfactory office space, office furniture, and maintenance services. In addition, and as may be necessary and available, the Government will provide other resources, such as vehicles and office supplies. The Government's contribution will count towards the Government's minimum counterpart contribution of US$1.7 million to the Project. The credit will finance the salaries of non-civil servants recruited by the PMU, and technical equipment such as computers. In complement to the Government's contribution,  - 46 - the Credit could also finance vehicles, office furniture, office supplies, and limited construction works linked to the installation of the technical equipment. 3.3 Coordination. Coordination with government agencies involved in implementation of the Project will be the responsibility of the Project Coordinator. Within each participating ministry or agency, one or several designated officials will be responsible for liaison with the PMU to coordinate Project activities in that ministry or agency; they will be designated as Project Component Directors ("PCD"). The list of PCDs is provided in the table that follows. Project Components Implementing | Project Component Agency Directors (PCDs) Budget Management MEF Director of Budget Department Treasury Management MEF Director of Treasury Department Macroeconomic Analysis MEF Head of Economic Unit Public Investment MEF, Line Director of External Budgeting Ministries Finance Department, with Correspondents in Line Ministries' Project Units External Debt Management MEF Director of External Finance Department Aid Coordination and CDC CRDB Secretary Strategic Planning for General public investment Strategic Planning for CDC CIB Secretary General private investment Personnel Management Council of Executive Secretary Ministers (ITC) of ITC Legal Assistance for PSD Council of - CIB Secretary General Ministers - Head of the Council (CJ) of Jurists - Representative of MOC Training (for public MEF Director of the finance) School of Finance  - 47 - 3.4 Administrative Arrangements for Implementation. The Project Coordinator, the PCDs, the Project Administrator, the Project Advisor, and the Training Coordinator (see para. 2.98) will make up the Project Implementation Team. This team will meet regularly under the chairmanship of the Project Coordinator, with the Project Administrator acting as technical secretary for the meetings. The main purpose of these meetings will be to help: (i) focus the implementing agencies' attention on the Project objectives; (ii) keep the implementation of Project activities on track; (iii) take corrective measures whenever necessary; and (iv) prepare for upcoming World Bank review missions. 3.5 Training. A seminar in relevant Bank procedures and practices (including procurement), financed from the proceeds of the Credit, will be organized in Phnom Penh as part of the Project start-up activities. This seminar will address the needs of the PMU staff (especially the Project Administrator and Project Accountant) and PCDs. It will focus, among other things, on Project management objectives and techniques and on agreed methods for recruitment and periodic evaluation of technical assistance. If needed, similar training activities could be repeated during the life of the Project. 3.6 Project Implementation and Review. To ensure close Project monitoring by the Government and the Bank, the Project will be carried out on the basis of the overall Project Implementation Plan (see Annex I) and corresponding rolling annual work programs, with benchmarks, to be reviewed and updated with the Bank by March 31 in each year, beginning in 1995. The work program for the first year of the Project was finalized during negotiations. Similarly, a comprehensive mid-term review of the Project will be carried out by June 1997 and the necessary remedial measures will be implemented thereafter. 3.7 Procurement. All procurement of goods and services to be financed under the Credit will be in accordance with Bank Guidelines. Under the Credit, procurement will cover goods, works and consultants' services. Contracts for computer systems for the public investment and foreign debt management components of the Project, estimated to cost US$300,000 equivalent per contract, up to an aggregate amount estimated to cost US$600,000 equivalent, will be awarded through International Competitive Bidding (ICB), using the Bank's standard bidding documents. A preference for domestic manufacturers would be accorded under ICB. Contracts for equipment, materials, civil works (for building the School of Finance), and vehicles in excess of US$50,000 equivalent per contract, but less than US$200,000 equivalent, and up to an aggregate amount of US$900,000 equivalent, will be awarded on the basis of local competitive bidding (LCB) in accordance with procedures acceptable to IDA, since LCB is deemed to be the most efficient and economical way of procuring these goods and works which, by their very nature and scope, are unlikely to attract international competition. Contracts for equipment, materials, civil works and vehicles estimated to cost less than US$50,000 equivalent per contract, up to an aggregate amount of US$600,000 equivalent, will be awarded on the basis of local shopping after solicitation of quotations from no fewer than three suppliers eligible under the Bank Guidelines. The above procurement arrangements are summarized in the Table that follows.  - 48 - SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS (in US$ million equivalent) Project Elements Procurement Methods ICB LCB Other a/ N.B.F. b/ Total Advisers, Consultants, Studies 13.4 13.4 (13.4) (13.4) Equipment, Materials, Vehicles 0.6 0.3 0.4 1.3 (0.6) (0.3) (0.4) (1.3) Civil Works 0.6 0.2 0.8 (0.6) (0.2) (0.8) Training c/ 1.5 1.5 (1.5) (1.5) Salaries & Incremental 1.7 1.7 Operating Costs (0.0) (0.0) Total 0.6 0.9 15.5 1.7 18.7 (0.6) (0.9) (15.5) (0.0) (17.0) A/ Includes shopping and consultancy services. b/ Non-Bank Financed (government and cofinancing contribution). c/ Reflects cost of logistical support to training. Other training expenditures are included under IDA financing of consultants. Note: Figures in parentheses are the respective amounts to be financed by IDA. 3.8 The selection of individuals and firms (where appropriate firms would be selected to ensure cohesiveness and backstopping of services) for consultancy assignments will be in accordance with the Bank's Guidelines for Use of Consultants (August 1981). IDA and the Government attach high priority to mobilizing national consultants to the extent feasible. Contracts to be awarded for consultancy assignments are expected to aggregate up to an amount not to exceed US$12,000,000 equivalent. The terms of reference of all consultancy assignments will be subject to IDA's prior review. Given the limited amount of qualified Cambodian experts, most contracts for local consultants are expected to be awarded through direct contracting procedures acceptable to IDA. As far as international consultants are concerned, most contracts will be awarded on the basis of selective lists of experts, due to the highly specialized nature of services involved and the limited number of qualified experts available. In addition, direct contracting will be considered for the two incumbent senior advisors at MEF, currently being financed by an IDF grant, to maintain the continuity of technical assistance in Budget and Treasury management at MEF. The recruitment of consulting firms -- as opposed to individuals -- will be seriously considered, especially in public investment management and personnel management, because it may provide a more effective implementation of the services, and also prove to be more efficient.  - 49 - 3.9 As a general matter, the knowledge and experience of the project implementation agencies in international commercial practices and the Bank's procurement procedures is limited. Therefore, all procurement activities under the Project will be coordinated by the PMU, which will be assisted by qualified procurement consultants. Moreover, although standard bidding documents will be used under the Credit, in order to ensure compliance with the Bank's procurement Guidelines, all contracts awarded through ICB, as well as the first two contracts under LCB and local shopping procedures will be subject to IDA's prior review. The consultancy assignments shall be coordinated by the PMU, which will also be assisted by procurement consultants. Documentation and contracts for consultancy assignments with consulting firms valued at or above US$100,000 equivalent, and with consulting individuals valued at or above US$50,000 equivalent, will be subject to IDA's prior review and approval, including all contracts for single-source selection of consulting firms and assignments of a critical nature as determined by IDA. All other contracts will be subject to selective subsequent review by IDA. 3.10 Disbursement. The Credit is expected to disburse over a six (6)-year period. The Project is expected to be completed by December 31, 2000, with an Credit Closing Date of June 30, 2001. Full documentation will be required for civil works contract above US$100,000 equivalent, equipment, materials, vehicles above US$50,000 equivalent, consulting firm contracts above US$100,000 equivalent, and individual consultants above US$50,000 equivalent. Disbursements for contracts below these amounts, as well as for all training expenditures will be made on the basis of Statements of Expenditures (SOEs). The supporting documentation for SOEs will be retained at the PMU and will be made available for review by IDA supervision missions and independent auditors acceptable to IDA. 3.11 To facilitate payment of eligible small expenditures, a Special Account will be established at the National Bank of Cambodia under terms and conditions satisfactory to IDA. The Special Account will be opened in the name of the Borrower and will be administered by its authorized representatives. Two (2) signatories will be required to effect any transaction from the Special Account. This Account will be maintained in US dollars with an authorized allocation of US$1 million equivalent, and would be used for all expenditures both local and foreign of less than US$100,000 equivalent. Replenishment applications would have to be submitted on a monthly basis or when amounts withdrawn are equal to one-third (1/3) of the authorized allocation, whichever occurs first. 3.12 Reporting and Monitoring. The PMU will prepare an annual report summarizing progress in all key Project areas of activity and defining a work program with monitorable outputs for the following year. This will include, in particular, progress reports on training programs. The PMU will also submit a Project Completion Report to the Bank not later than six (6) months after the Closing Date of the Credit. 3.13 Summary and Cost of Project Support. The following will be financed for project management and implementation: - Project adviser: seventy-two (72) persons/months - Office equipment, vehicles and miscellaneous: US$140,000 equivalent  - 50 - IV. AGREEMENTS REACHED AND RECOMMENDATION A. Agreements 4.1 During negotiations, agreement has been reached between IDA and the Borrower on the following principal understandings, in addition to the standard requirements applicable to all World Bank (IDA) Credits: (i) the Project Management Unit (PMU) will be established and staffed satisfactorily; thereafter, throughout Project implementation, the PMU will be maintained with satisfactory staff, resources, and overall terms of reference; (ii) the Project will be implemented on the basis of a Project Implementation Plan (see Annex I) and corresponding annual work programs to be reviewed and updated annually; the annual work program for the first year of the Project was formally adopted during negotiations; (iii) under the Public Sector Management component of the Project, separate action plans, prepared on the basis of terms of reference specified in the corresponding Project annual work program, will be carried out, not later than June 30, 1995, for expenditure control, investment management, debt management and personnel management, and thereafter these plans will be reviewed and updated annually; (iv) all of the Government's necessary counterpart personnel responsible for implementing the Public Sector Management component of the Project will be officially appointed well prior to the arrival of pertinent technical advisers or the delivery of major. computerized management systems; (v) the Private Sector Development component of the Project will be implemented on the basis of an action plan to be finalized during negotiations, and thereafter to be reviewed and updated annually; (vi) a Legal Advisory Unit, attached to the Council of Jurists, will be officially established, and thereafter maintained throughout Project implementation with satisfactory membership (including a resident legal adviser) and resources; (vii) not later than December 31, 1995, the Government will adopt an official statement specifying priority economic and financial laws and regulations to be enacted during the medium term; (viii) all studies --notably those to be financed by Credit proceeds allocated to the Study Fund-- and training activities financed by the Credit will be subject to satisfactory terms of reference, and trainee selection and supervision criteria; and  - 51 - (ix) not later than June 30, 1997, a mid-term review of the progress achieved by the Government, in implementing the Project will be carried out, and thereafter all the necessary remedial actions will be taken by the Government. B. Reconunendation 4.2 With the above agreements, the proposed Technical Assistance Project is suitable for an IDA Credit of SDR 11.6 million (US$17 million equivalent) to the Kingdom of Cambodia, at IDA's standard terms with a 40-year maturity including 10 years of grace.  An3a I Prject bnppemetko Plan Pw I of 3 Projct| Key Project Target Work Program Objectves | Activities Date Key Deliverables Target Date Public ExDendfture Control (Budaet and Trasury Manaaement) Strthn: Recri: -Budget preparation capacity -Public Finance Adviser (SPF) Jan 1995 Prepare annual training programs for counterpart staff Mar 31 -Expenditure control -Budget and Treasury Adviser (SBT) Jan 1995 Prepare annual T&V programs for counterpart staff in LM and provinces Mar 31- -Treasury cash management -5 Budget Technicians (BTs) Jan-Jun 95 Finalize the institutional framework for expenditure control Dec 31, 1996 -Treasury & Public Acc. Expert (TPA) Mar 1995 Establish first team of financial controllers Dec 31, 1995 Provide: Prepare annual budget review conferences Sep 30- -Office Equipment 1995/96 Finalize system for projecting monthly revenues and expenditures Dec 31,1995 Finallize rules and procedures for revenue collection and expenditure operation Dec 31, 1995 Reorganize Treasury accounts in line with new budget nomenclature Dec 31, 1995 Establish new rules for managing Treasury accounts Dec 31, 1996 Public Investment Manaaement -Strengthen PIP management PIP Unit and PIP System Developmnent -Develop public investment budgeting Recruit/Select: Establish PIB unt, with staff appointed Dec 31, 1995 L.n -Strengthen project units in LMs -PIB Adviser Mar 1995 Prepare training programs for counterpart staff 1995/96 -Strengthen aid coordination -PIB Organization Expert Mar 1995 Prepare T&V programs for counterpart staff in LM 1995/97 -Strenghen strategic planning -Comp System Engineer (CSE) Jun 1995 Deliver computer system and train staff to use and maintain R Mar 1996 -Develop macro analysis capacity -System Suppliers Nov 1995 CSE to monitor delivery of computer system and training Jan-Mar 96 Provide: Deliver office equipment and fumiture Apr-Dec 95 -Office Equipment 1995/96 Proiect Units in Line Ministries Recruit: Develop procedures for project monitoring June 30,1996 -Project Mgmt Specialist Jan 1996 Prepare manuals and textbooks Oct 31, 1996 -Programming Specialist Jan 1996 Conduct workshops to train staff in project monitoring 1996/97 -Project Accountant Jan 1996 Deliver computer system in interface with PIB system in MEF Mar 1996 -General Accountant/Auditor Jan 1996 Train staff to use computer system June 1996 -2 Organization Specialists Strategic Planninc and Aid Coordination Recruit: -Aid Coordination Adviser Jan 1995 Establish the study fund Jun 30, 1995 -Consultant for vision for future Jun 1995 Prepare and implement training programs ++ -Expatriate Cambodians 1995 Submit vision" study to Govemment Mar 31, 1996 Provide: Deliver computer system in inerface wvith PIB system in MEF Mar 1996 -Office equipment 1995/96 Deliver office equipment 1995/96  Annex I Project Implementation Plan Page 2 of 3 Macroeconomic Analysis Recruit: Prepare training program in forecasting, economic analysis, etc. Dec 31,1995 -Adviser to MEF's Economic Unit Jan 1995 Establish a database Dec 31, 1996 Provide: Develop macroeconomic model Mar 31, 1997 -Office Equipment 1995/96 Deliver office equipment 1995/96 Debt Manaaement -Develop institutional framework Recruit/Select: Develop institutional framework for debt management 1995/96 for extemal debt management -Institutional Expert in Debt Mgmt. Mar 1995 Prepare action plan for extemal debt reporting Mar 1995 -Strengthen capacity for debt reporting -Organization Expert (Master Plan) Jun 1995 Prepare the master plan for new debt unit Oct 31, 1995 to World Bank -Computer System Engineer (CSE) Dec 1995 Prepare training programs (other than comp) for debt management Dec 31,1995 -System Suppliers Jun 1996 Fully implement new organizational and staffing plan of Debt uni Dec 31,1996 Provide: Delilver computer system and train staff to use and maintain it Jun 30, 1997 -Office equipment CSE to monitor delivery of computer system and training 1996/97 Deliver office equipment 1995/97 Personnel Manaaement -Assist in administrative reform Recruit: Conduct PE audits to determine redundant employees -Develop strategy for reducing the -Consulting firm Apr 1995 Collect data on household income and expenditures Dec 31, 1995 k' size of the civil service and PE -PE Adviser Jan 1995 Proprose a new civil service renumeration policy Jun 30, 1996 sector Submit departure scheme proposals to Govemment Dec 31,1996 Study the cost of departure schemes Dec 31, 1996 Study new pension plan and social security systems Jun 30,1997 Leaal Assistance for PSD -Develop certain key eements of Recruit: Establish a legal reform unit in Council of Jurists Jun 30,1995 enabling legal environment for PSD -Legal Adviser to CJ Adopt official statement on priority economic and financial laws Dec 31,1995 -Strengthen capacity for legal -Legal Adviser to ITC Carry out legal diagnostic study Dec 31, 1995 drafting and training -Legal experts for diagnostic study and Carry out legal training needs assessment Jun 30, 1996 training needs assessment (CJ/MoJ/MoC) Prepareicarry out time-based master plan for legal drafting and training Dec 31,1996 -Legal experts for legal drafting and Prepare and carry out action plan to re-establish Official Joumal Dec 31, 1995 training master plan (CJ/MoJ) Prepare and carry out action plan to establish system for codifying -Legal specialists for Offcial Joumal judicial decisions Dec 31. 1996 and jurisprudence (COM/MoJ) Formulate action plan for developing a body of jurisprudence Jun 30,1997 -Inatitutional Sp t (CJ) Deiver offe, computer, and printing equiment and train staff Prvide: to ur and maktan It 19958 l Officke m pUn 0 mW_t  Annex I Project Implementation Plan Paae 3 of 3 Trainina for Public Finance Management -Provide a suitable venue and Recrud Finalize study and plan for training facility building Jan 1995 environment for training -Training Coordinator Sep 1995 Complete construction of training facility Jan 1996 Build: Prepare courses for staff to be trained at the facility -Training facility 1995 Monitor training activities of Project consultants Study Fund -Finance pniority studies/activities Recruit: Aid Coordinator to prepare rules for study fund management Jun 30,1995 not clearly identified at appraisal or -Aid Coordinator Adviser in CDC Jan 1995 Prepare TORs for studies/activities to be financed by Fund + in areas not covered under Project Ensure best possible use of studies Proiect Management Unit Appointrecruit: Establish Special Account at NBC Jan 1995 -Project Coordinator Oct 1994 Hold regular meetings of Project Implementation Team -Project Administrator Nov 1994 Organize first seminar for PMU staff and PC Ds Mar 31 -'Project Accountant Nov 1994 Hold annual rreviews of Project with World Bank Mar 31^ -Project Adviser Nov 1994 Hold mid-term review of Project with World Bank Jun 30,1997 -Support Staff Jan 1995 Update annual work programs and prepare annual progress reports Dec 31^ Provide: Send annual Project audits to the Bank ' n -Office equipment and fumiture Jun 1995 Submit Project Completion Reports to the Bank ... _ -Vehicles + Submit plan for future operation of the Project . Notes: The Target Date is the dat by wtdc the acton should take pace * Yly occtreno ReguqWy den as needed Not lr than 6 mwh ar te closing Dae of the Crew + When needd ++ Pemm  Annex IIA - 55 - SUMMARY OF PROJECT COSTS (in US$ thousands) Total % I. PUBLIC SECTOR MANAGEMENT 10,260.5 54.9 A. Public Expenditure Control 3,472.7 18.6 1. Budget Management 2,901.7 15.5 2. Treasury Management 571.0 3.1 B. Public Investment Management 4,467.4 23.9 1. System Development 525.0 2.8 2. Support to MEF's PIB Unit 611.3 3.3 3. Support to MEF's Economic Unit 642.0 3.4 4. Support to Line Ministries 1,398.1 7.5 5. Support to CDC 1,291.0 6.9 C. Foreign Debt Management 790.0 4.2 D. Personnel Management 1,530.4 8.2 II. LEGAL ASSISTANCE FOR PSD 1,508.8 8.1 III. TRAINING 2,696.8 14.4 IV. THE STUDY FUND 1,200.0 6.4 V. PROJECT MANAGEMENT AND IMPLEMENTATION 1,333.9 7.1 VI. SALARIES AND INCREMENTAL OPERATING COSTS 1,700.0 9.1 TOTAL PROJECT COSTS 18,700.0 100.0  Annex IIB SUMMARY OF PROJECT COSTS BY COMPONENT AND BY TYPE OF EXPENDITURE (in US$ thousands) Computers International International Equipment Resident Short-term National Furniture Civil Total Component Consultants Consultants Consultants Vehicles Training a Studies Works Other Costs I. PUBLIC SECTOR MANAGEMENT 4,589.0 3,000.0 1,080.0 1,066.5 525.0 10,260.5 A. Public Expenditure Control 2,034.7 250.0 648.0 140.0 400.0 3,472.7 B. Public Investment Management 2,173.9 1,150.0 432.0 601.5 110.0 4,467.4 C. Foreign Debt Management 450.0 325.0 15.0 790.0 D. Personnel Management 380.4 1,150.0 1,530.4 l II. LEGAL ASSISTANCE FOR PSD 383.8 850.0 150.0 125.0 1,508.8 III. TRAINING 1,025.0 41.0 840.8 790.0 2,696.8 IV. THE STUDY FUND 1,200.0 1,200.0 V. PROJECT MGMNT AND IMPLEMENTATION 1,197.9 136.0 1,333.9 VI. SALARIES AND INC. OPERATING COSTS 1,700.0 1,700.0 TOTAL PROJECT COSTS 7,195.7 3,891.0 1,080.0 1,352.5 1,490.8 1,200.0 790.0 1,700.0 18,700.0 a/ Reflects cost of logistical support to training. Other training expenditures are included under IDA financing of consultants.  - 57 - ANNEX III MAIN JOB DESCRIPTIONS During Project appraisal, terms of reference for the following consultancy positions were prepared. They are available in the Project file. Public Finance (Expenditure Control) * Senior Public Finance Adviser * Senior Budget and Treasury Adviser Public Investment Management * Design of the master plan of the NPIMS * Public Investment Budgeting Adviser * Organizational Expert in Public Investment Management * Computer System Engineer - Public Investment Programming - Project Manager Specialist - Programming and Budgeting Specialist - Project Accountant - General Accountant/Auditor - Organizational Specialists Foreign Debt Management * Institutional Expert in Debt Management * Organizational Expert in Debt Management * Computer System Engineer * System Supplier Personnel Management (Civil Service Reform) * Technical Advisers on Civil Service Reforn Legal Assistance To PSD * Senior Resident Legal Adviser (Council of Jurists) * Senior Resident Legal Adviser (Interministerial Committee) * Short-term Legal Adviser (Diagnostic study) * Short-term Legal Adviser (Legal training needs assessment) * Legal Adviser (Official Journal) * Legal Adviser (Codification of legal decisions) Training * Training Coordinator