Cambodia - Consultative group meeting, Paris, July1-2, 1997

84055 CAMBODIA CONSULTATIVE GROUP MEETING PARIS, JULY 1-2, 1997 Tableof Content PAGE SUMMARYREPORTOF THE PROCEEDINGS 1 .................................................... I LIST OF ANNEXES Annex 1: List of Participants ................................................... 14 OpeningSession Annex 2: Agenda .23 Annex 3: OpeningRemarksby Mr. Javad Khalilzadeh-Shirazi, WorldBank.. 24 Annex 4: OpeningRemarksby H.E. Keat Chhon, Sr. Minister in charge of Rehabilitationand Development,Minister of Economy and Finance, Cambodia .27 Macro-EconomicIssues Annex 5: Statementby H.E. KeatChhon, Cambodia .30 Annex 6: Statementby Mr. Hubert Neiss, IMF.33 Annex 7: Statementby Mr. Kyle Peters, WorldBank.38 Annex 8: Statementby the Delegatefor Japan.41 Annex 9: Statementby the Delegatefor Australia .47 Annex 10: Statementby the Delegate for the United States 54 ........................................... Annex 11: Statementby the Delegate for ADB.................................................... 57 Annex 12: Statementby the Delegatefor the EuropeanCommission 59 ............................ Annex 13: Statementby the Delegate for the United NationsAgencies........................ 61 Annex 14: Statementby the Delegatefor Norway.................................................... 64 Annex 14A:Statementby the Delegatefor Denmark . 66 ................................... Annex 15: Statementby the Delegatefor Sweden .................................................... 68 Annex 16: Statementby the Delegatefor Germany....................................................71 Annex 17: Statementby the Delegatefor the United Kingdom 73 ..................................... Annex 18: Statementby Delegatefor the NGO Community 76 ......................................... Public InvestmentProgram Annex 19: Statementby H.E. KeatChhon,Cambodia 77 ................................................... Annex 20: Statementby Mr. RajatNag, ADB. 80 .................................................... Annex 21: Statementby Mr. Guy Darlan,World Bank 84 .................................................. Annex 22: Statementby Mr. Kip Thompson,IFC.................................................... 3 5 Annex 23: Statementby the Delegatefor Australia ....................................................39 Annex 24: Statementby the Delegate for Japan.................................................... 95 Annex 25: Statementby the Delegatefor Germany....................................................98 mi I V''  Aid Coordination Annex 26: Statement by H.E. Keat Chhon,Cambodia ................................................... 99 Annex 27: Statementby Mr. Paul Matthews,UNDP..................................................... 102 Annex 28: Statementby Mr. Natarajan,World Bank..................................................... 110 Annex 29: Statementby the Delegatefor Japan......................................................... 112 Financing Requirements and Indications of Assistance Annex 30: Statementby H.E. Keat Chhon,Cambodia ................................................... 116 Annex 31: Statement by Mr. Kyle Peters, World Bank .................................................. 118 Annex 32: Statementby the Delegatefor Japan......................................................... 120 Annex 33: Statementby the Delegatefor Australia....................................................... 125 Annex 34: Statementby the Delegatefor the United States ........................................... 130 Annex 35: Statementby the Delegatefor ADB.......................................................... 131 Annex 36: Statementby the Delegate for Germany....................................................... 1 32 Annex 37: Statementby the Delegatefor Denmark....................................................... 134 Annex 38: Statementby the Delegatefor Belgium ......................................................... 136 Annex 39: Statementby the Delegatefor Sweden ......................................................... 138 Annex 40: Statementby the Delegatefor IFC......................................................... 140 Closing Session Annex 41: Closing Statementby Mr. Javad Khalilzadeh-Shirazi, World Bank.............142 Annex 42: Press Release......................................................... 146 Annex 43: Letter from the Chairmanto the PrimeMinisters....................................... 148 .I__f . _. .I  CAMBODIA CONSULTATIVE GROUP MEETING Paris, July 1-2, 1997 Summary Report of the Proceedings 1. The Second ConsultativeGroupmeetingfor Cambodiawas held on July 1-2, 1997 in Paris under the chairmanshipof the WorldBank. The Cambodiandelegationwas led by His ExcellencyKeat Chhon, SeniorMinisterin chargeof Rehabilitationand Development,and Ministerof Economyand Finance. The meetingwas chairedby Mr. Javad Khalilzadeh-Shirazi, RegionalManager,EastAsia and Pacific Region. 2. The meetingwas attendedby delegationsfrom Australia,Belgium,Cambodia, Canada,China, Denmark,France,Germany,Japan,the Netherlands,Norway,the Republic of Korea, the Russian Federation,Sweden,the UnitedKingdom,and the United States. The internationalorganizationsparticipatingin the meetingincludedthe Asian DevelopmentBank, the EuropeanUnion, the InternationalFinance Corporation,the InternationalMonetaryFund,the UnitedNationsDevelopmentPrograrn,and the World Bank. Representativesfrom the ASEAN(represented by Malaysia),NGOs, and the Organizationfor EconomicCooperationand Development participatedas observers. The list of participantsis shown in Annex 1. 3. This report summarizesthe proceedingsof the meetingbased on the Agendathat is shown in Annex 2. The main statementsdeliveredat the meetingare in Annexes3 to 41 and the Press Releasein Annex42. The documentation preparedby the Government of Cambodia for the meeting included the Socio-economic Development Requirements and Proposals, the 1996/97 Development Cooperation Report, and briefs on "special programs." The World Bank preparedan economicreport(Cambodia:Progressin Recovery and Reform) for discussion at the meeting. Opening Statements 4. In his opening statement(Annex3), Mr. Khalilzadeh-Shirazi welcomedall the delegatesto the meeting,extendinga specialgreetingto H.E. Keat Chhonand H.E. Ung Huot, Cambodia's Ministerof ForeignAffairs. He also expressedhis appreciationto the Governmentsof Franceand Japan for the roles they playedin the organizationof this meeting. UT, _ I* -I  -2 - 5. 'Mr. Khalilzadeh-Shirazi then brieflyreviewedthe developmentsin the Cambodianeconomysince the last CG Meetingheld in Tokyo on July 11-12,1996. Cambodia,he said, has passedthrough anotheryear of intensechallenge. Eventson the political front had seizedthe world's attentionand compoundedthe difficultiesthat Cambodiafaces in meetingits developmentobjectives. Whilethe primaryfocus of the CG Meetingwill be on issuesrelatedto economicdevelopment,Mr. Khalilzadeh-Shirazi suggestedthat participantsbear in mindthe complexpolitical issuesfacingthe CambodianGovernment. 6. Under difficultconditions,there has been progress,he said. However,alongwith the accomplishments, there have been disappointments.On the positive side, the Governmenthad maintainedmacroeconomic stabilityand fosteredeconomicgrowth. The economygrew by almost 7 percentin 1996,the inflationrate was containedwithin single digits, and the currentaccount deficitof 16 percentof GDP was financedwithout jeopardizingCambodia's futurecreditworthiness.On the fiscal side, an ambitious 1997 Budgetand the Law on Taxationwere enactedinto law. In the forestrysector,the Governmentformedthe NationalCommitteeon Forest PolicyReform,improvedcontrols on illegal logging,and signedthree of the four contractswith internationalfirms that will help carry out activities recommendedin the ForestryPolicyAssessment. 7. On the negativeside, Mr. Khalilzadeh-Shirazi mentionedseveralissuesfor which progresshad fallen short of the expectationsgeneratedat the Tokyo meeting:(i) the long- awaited implementingregulationsof the InvestmentLaw were not put in place;(ii) there has been slow implementationof steps to improvefiscalmanagement,as revenueshave again beenbelow target;(iii) managementof Cambodia's forestresourceshas not yet exerted the necessaryimpacton the ground;and (iv) there has been a lack of concrete progresson both civil service reformand militarydemobilization.He addedthat a fundamentalissue that underlinesthese disappointments is that much moreneeds to be done to improvetransparencyand accountability in fiscaland economicmanagement. 8. With this background,the Chairmanset the followingobjectivesfor the meeting: (a) to hear the Government'sviews on Cambodia'scurrentsituation,its development prospects and financingrequirements;(b) to share donor experiences on assistance programs for Cambodia;and (c) to hear the internationalcommunity'splans for financial support to Cambodiafor the comingyear. He then turnedover the floor to MinisterKeat Chhon. 9. In his openingremarks(Annex4), MinisterKeatChhonhighlightedthe fact that this was the first "regular"CG Meeting,and thankedthe Bank for organizingthis event and agreeingto do so in the future. He then mentionedthe difficultpoliticalsituationthat the Governmentwas facing and the violentincidentsthat had occurredin recent months. The Minister asked the internationalcommunitynot to rushto harsh conclusionson Cambodiabased on isolatedincidentsbut, instead,to judge the RoyalGovernnent by the progressmade sinceit took office, fouryears ago, both in politicsand in economic -v.. -- V -r  managemnent. He concluded by calling on the donor community to continue supporting the Royal Government's efforts. Macro-economic Issues 10. Statement by the Royal Government of Carnbodia. Minister Keat Chhon opened the session on macro-economic issues with a report on economic developments in the last 12 months and the achievements of the Royal Government in the areas of GDP growth and financial stability in particular (Annex 5). Notwithstanding the achievements so far, he acknowledged that many areas of weakness remain and need to be addressed in the months and years ahead. In the first months of 1997, domestic revenues have fallen short of budget targets, particularly as a percentage of nominal GDP. Defense, security, and wages still represent half of total expenditures, leaving very little for operating expenditures. Until now, current revenues have not been fully adequate to meet current expenditures, and in the years ahead, this gap is likely to widen due to the implementation of programs such as the organization of national elections, military demobilization, and civil service reform. 11. In his statement the Minister stressed the importance for Cambodia of attracting foreign direct investment, not only to compensate for the weak domestic resource mobilization capacity, but also as a matter of national policy. In this context, he said, government efforts focus on building the enabling environment for FDI and preparing for entry into the WTO. He also reminded the audience that the Government had privatized or commercialized most of the State Owned Enterprises. In conclusion, Mr. Keat Chhon said that the Royal Government will continue to need external budget and investment support to stay the course. 12. Intemational Monetary Fund. The IMF representative, Mr. Hubert Neiss, first congratulated the Government for its achievements in the area of macroeconomic management (Annex 6). He then explained that Cambodia's problems of govemance threatens the economic future of the country. He mentioned in particular the rapid depletion of forest resources and the diversion of revenues from the national budget. He flagged the most important sources of revenue diversions as follows: concessions, such as monopoly rights and land leases given to foreign investors without payments to the budget; tax and tariff exemptions granted to domestic and foreign companies, including those that arise from improper exemptions granted under the overly generous Investment Law; non-collection of taxes by tax officials; and nonpayment of taxes on commercial activities by the military, including leases of government land. 13. As a result of the non-observance of the safeguards built in the ESAF program supported by the IMF, the program has been delayed and disbursements disrupted, Mr. Neiss said. The program for 1997 is still on hold and will not resume until there are clear indications that determined efforts are made by the Government to reverse the deterioration in governance and take remedial actions, he added. A significant IV TTI  -4 - strengfhening of policies to combat corruption is feasible, provided that there is cooperation and strong political support for such policies by both Prime Ministers, the IMF delegate said. He cautioned that while there are crucial political problems to be addressed in the immediate future, there is also a vital economic objective: that Cambodia steer through the pre-election period without a breakdown of macroeconomic stability, and without a further serious erosion of its economic resource base. The IMF is ready to do its utmost to support the Government's efforts toward achieving this objectives, Mr. Neiss concluded. 14. World Bank. In the statement that he presented on behalf of the World Bank (Annex 7), Mr. Kyle Peters confirmed the Government's encouraging assessment of the Cambodian economy. He stressed in particular the very favorable macroeconomic performance and steady growth. But he added that there are concerns that the current economic growth will be difficult to sustain over the medium tern, as it has been very narrowly based. Similarly, there are concerns regarding macroeconomic stabilization, as it has been sustained through methods that are likely to harm long-term growth. An inadequate revenue effort, resulting from overly generous tax exemptions and lax tax administration, has necessitated severe compression of current expenditures. This compression, Mr. Peters explained, has fallen disproportionally on economic infrastructure and the social sectors, because of continued high defense and security expenditures. The Government must therefore face the difficult challenges ahead, of which the following are the most important: enhancing public resource mobilization; improving the efficiency of public expenditure; strengthening the institutional capacity to implement economic reforms and development programs; and ensuring the sustainability of development through responsible forest management. He concluded that the Royal Government had made remarkable achievements in restoring economic growth and stabilizing the economy, but that continued growth at these levels, and lifting the people of Cambodia out of poverty, would require a new round of reforms. 15. Statements by Participants and Discussion. During the discussion, there was broad consensus among the delegations on their assessment of the economy, the remaining agenda for reform, and the importance of political stability. Delegates congratulated the Government for the progress so far. They exhorted the Government to stay the course, follow the recommendations outlined in the World Bank economic report, and carry out the remedial actions needed to resurne the prograrn with the IMF. [n the words of one delegate, Cambodia could not afford to take time off from its important task of reconstruction. First and foremost in the minds of many donors was the need to continue expanding the revenue base and reverse the unfortunate trend of the last six months. In that context, delegates pointed out the urgent need to improve transparency in the management of public resources, particularly in relation with the logging and log export issue. Several delegates expressed disappointment that the Government did not fully follow through on its pledge at the 1996 CG meeting regarding forest management issues. Many delegates concluded their statements by saying that their country was looking forward to the Cambodian Government to, first, continue its efforts with regard to sound macroeconomic management and, second, strengthen its resolve in relation to ml - K --  -5- good governance and revenue collection, so that the assistance provided by donors can continue and be effective. Should taxpayers in donor countries feel that the Royal Government is not taking measures to ensure that all possible domestic sources of revenue are appropriately tapped, some delegates cautioned, it may be increasingly difficult to safeguard the current level of aid to Cambodia. 16. Donors also forcefully stressed the need for political stability and the organization of free and fair elections now scheduled for May 1998. In the words of one delegate, the willingness of aid donors and foreign investors to work in Cambodia will weaken unless the coalition partners are able to resolve tensions between them, ensure stability and security, and maintain an apolitical public sector during the period leading to the national elections. The NGO representative who had been invited as observer to the meeting by the Royal Government stressed that the development of Cambodia could only take place in a climate of security. Many delegates expressed the view that full cooperation by both Prime Ministers was needed for the political climate to improve. 17. In his response, Mr. Keat Chhon assured donors that the Government shared their views and that many of the recommendations were either already in place or very high in the Government's list of priorities. He reiterated the Government's commitment to redress the situation in the forestry sector. He mentioned the signing of three of the four consultant contracts related to the forest policy studies as evidence that the Government is following up on its pledge to the donor community. In conclusion, he said that he will convey to the two Prime Ministers the concerns of the donor community regarding the political climate in Cambodia. Priority Program and Investment Needs 18. Statement by the Royal Government of Cambodia. Referring to the government documents tabled at this meeting, Minister Keat Chhon walked the participants through some aspects of the Government's three-year public investment program (Annex 19). He stressed that the Government's overarching goal is to reduce poverty. To achieve this goal, the Government is aiming to spend at least 65 percent of the PIP in rural areas where 85 percent of the population live. The Minister also mentioned the important role expected of the private sector in helping to sustain growth in Cambodia. 19. He stated that the PIP calls for a total investment of US$1.5 billion during 1997- 99, including capital investment, technical assistance, and budget support. In presenting the PIP he singled out "special programs" which the Government considers essential: namely, public administration reform, military demobilization, demining, the Social Fund, and the organization of the 1998 elections. 20. Asian Development Bank. Mr. Rajat Nag, ADB Programs Manager, was the Lead Discussant for this session (Annex 20). He presented the key public investment programming issues that will need to be addressed by the Government and its development partners. On the size and composition of the three-year program (1997-99),  -6 - he said that the proposed level of investment (US$1.2 billion) is consistent with the economic priorities of the Government and within the range of available external resources. He emphasized, however, that the pace and success of PIP implementation will depend critically on further government efforts to increase domestic budget resources and strengthen the technical capacity in implementing ministries. The critical constraint to PIP implementation, he said, is the scarcity of resources in the national budget. In addition to counterpart capital requirements for externally assisted projects, the PIP has major operating and maintenance cost implications for all projects. Another constraint is the ability of the spending ministries to implement projects on time, as the development of such capacity has not kept pace with the expansion of external assistance. There is therefore a need to ensure that implementation schedules are realistic, so that expenditure profiles can be better planned. 21. The second issue presented by Mr. Nag was the focus on rural development. The Government had set a target of 65/35 ratio between rural and urban projects to be achieved by the year 2000. This emphasis is appropriate, he said, because 85 percent of the population reside in rural communities, and because of the poor state of social and physical infrastructure in rural areas. However, only 45 percent of planned investments can be considered "rural", with many of the projects in that group straddling the urban/rural divide. Subsequent PIPs should therefore be framed so that the rural distribution of benefits would be made more transparent in order to serve as a useful tool to help the Government achieve the 65/3 5 target. Mr. Nag noted that agriculture, including forestry, irrigation, fisheries, and livestock, receive only about 4.7 percent of the total PIP. This is obviously a group of sub-sectors that should receive higher allocations, he said. 22. Third, Mr. Nag discussed PIP implementation and monitoring. In view of its importance for sound macroeconomic management, and effective management of the development process in general, it is essential that the PIP process be maintained and expanded to include regular analyses of PIP outcomes and their costs. Current procedures for implementation and monitoring of public investment in Cambodia are not adequate and should be strengthened as a matter of priority. To remedy this situation, he recommended the establishment, with donor assistance, of a fornal PIP monitoring and evaluation system that would assess both investment and policy impact. 23. World Bank. Focusing his presentation on the "special programs" (Annex 21), the World Bank speaker, Mr. Guy Darlan, highlighted the fact that those were fairly large, high priority programs for which immediate and full funding was sought by the Royal Government. He explained, however, that before donor support could be fully mobilized, the Government needed to take preliminary actions. Concerning administrative reform, he said, the Government needs to clarify the concrete steps it intends to take to carry out the reform. In particular, the Government needs to put in place the operational plan and capacity to implement the reform over the period 1997- 1998 during which local and national elections will be contested. Regarding military demobilization, a detailed program has been prepared and has received the support of IF V -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  -7- three donors so far. However, more resources will be necessary to carry the program to completion. In order to help secure those resources, the Government needs to commit to full implementation of the demobilization program. Finally, the Government is asking for additional resources to continue the Social Fund's assistance to rural communities. The implementation of the program has proceeded ahead of schedule, Social Fund management of its finances have received favorable reviews, and community demand for Social Fund assistance far exceeds its current resources. Thus, the Social Fund deserves immediate additional donor support, without which it will cease operations in the first half of next year, Mr. Darlan concluded. 24. Statements by Participants and Discussion. A large number of participants congratulated the Royal Government on the quality of its documents for this meeting. They also agreed that many constraints remain that must be addressed to improve the chances of sustaining growth in rural areas. Lifting many of these constraints does not necessarily require large sums of money, but it does require strong government commitment and action, followed by well focused and coordinated donor support. 25. Reflecting on the private investment climate in Cambodia, the 1EC representative, Mr. Kip Thompson, said that Cambodia presents a paradox to potential investors: it offers both an attractive and a challenging environment to do business (Annex 22). Focusing on the challenges, he mentioned political instability, the uncertain legal and regulatory enviromnent and lack of transparency, and the limited physical infrastructure. He warned that until such time as the country properly addresses these significant impediments to long-term private sector investment, Cambodia will not be able to attract the kind of investment that it needs for sustainable private sector-led growth. 26. Regarding public investmnent, speakers generally supported the Government's view that poverty will be reduced first through strong economic growth, particularly in rural areas. In that respect, the emphasis placed on rural development in the Government's program is appropriate. The general feeling was that if Cambodia is to achieve its stated objective of a just and peaceful society through accelerated economic growth, it will have to resolve serious trade-offs between investments in urban and industrial areas and economic and social investments in rural areas where 85 percent of the population live and where most of the poverty exists. In particular, increased resources will need to be allocated to agriculture. 27. Several delegates also emphasized the role of education and health. Raising education levels is obviously necessary to improve living standards and reduce poverty, one delegate said. Donors welcomed the allocation of higher levels of funding by the Government for education and health in the next three years, but regretted that defense expenditures--with three times the level funding of the social sectors--were still crowding out much needed social expenditures. Some donor representatives also stressed the importance of fully and effectively implementing the proposed strategies. 1|sR ; ~~  -8 - 28. In his response to questions, Minister Keat Chhon reminded participants that the Government intended to organize follow-up sectoral meetings in Phnom Penh to discuss some of the special concerns in greater detail. He also acknowledged that the climate for private investment in Cambodia is not yet conducive to long-term FDI, but said that the Royal Government is addressing the main impediments to private sector growth. Aid Coordination 29. Statement by the Royal Government of Cambodia. Minister Keat Chhon reminded participants (Annex 26) that government capacity for preparing and implementing development programs is still extremely weak but that a series of actions have been and will continue to be taken by the Government to overcome the government's capacity constraints. He reported a perceptible improvement in skill absorption by the governrmentstaff in the past year. The shift, he said, is more pronounced in the Ministry of Economy and Finance (MEF) where an explicit strategy of gradual withdrawal of foreign advisers is being carried out. The number of expatriate experts in MEF has been significantly reduced, and the setting up of the new School of Finance will continuously provide training to government officials. The Government's goal is to gradually reduce Cambodia's dependence on external experts in all branches of government, as it is being done in the MEF. 30. With regard to aid coordination, Minister Keat Chhon said that the need for a well orchestrated effort is evident, given the large volume of ODA that has been flowing to Cambodia, including through NGOs, and the amount of private investment already pledged and expected to come. Only through such coordination can the Government ensure the optimal and effective use of resources and be fully accountable both within the country and to the aid-providing agencies. For this purpose, a single and high level Council for the Development of Cambodia has been set up, he said. The CDC's first responsibility is to identify priority investments and assistance needed from external resources and coordinate internally in the context of the Public Investment Management System (PIMS). He concluded his remarks by urging all external partners to assist the Government by directing assistance to Cambodia through the CDC. 31. UJNDP. The presentation (Annex 27) of the Lead Discussant for this session, Mr. Paul Matthews, UNDP Resident Representative and UN Resident Coordinator, can be summarized as follows. The Consultative Group and the in-country coordination system- -in conjunction with the PIMS of the Royal Government--are at present the two principal instruments for aid coordination with respect to Cambodia. Their establishment is reflective of the need for more comprehensive and in-depth analysis and prioritization of aid requirements, relative to emerging national policy framework. These inter-active and mutually supported mechanisms constitute a move away from general needs assessments and open-ended resource mobilization that prevailed during the earlier emergency phase. The effectiveness of these aid coordination mechanisms is critically reliant on the further straightening of the national policy and management framework that is being put in place. u-. - - - . __ -  -9 - The longer-termsustainabilityof these mechanismsalso clearlydependson staffingthem appropriatelyand providingadequatesalariesand other incentivesto motivatethe personnelassignedto them. 32. On behalf of the WorldB Mr. R. Natarajanremindedthe audiencethat the subject of aid coordinationhas beenat the forefrontof developmentissues in Cambodia because of the destructionof institutionsand traditionsand large scaleloss of educated, trained and skilled people during a traumaticperiodin the country's history. He calledon all donorsto thereforepay special attentionto this issue in their efforts to assist Cambodia's socio-economicdevelopment(Annex28). 33. Statementsby Participantsand Discussion. Theframeworkof aid coordination was judged to be developingwell in Cambodia,due to the Government'screationof coordinatingbodies at the nationaland sectorallevel. Delegatessupportedthe strengtheningof Cambodia's aid coordination capacities,reachingdown to the local level so that, ultimately,the Governmentwould assumefull responsibilityfor this crucial function. 34. Nevertheless,severalparticipantscautionedthat the "aid fatigue"of donor countriesis increasingand aid budgetsare being reduced. Under such circumstances,it will be necessaryto utilize limitedfinancialassistancemore efficientlyand without overlapping. Therefore,aid coordinationis likely to becomeeven more importantin the years ahead. 35. In his response,Mr. Keat Chhon announcedthe Governnent's planto improve the effectivenessof aid through better monitoringand auditingof foreignassisted projects. Financing Requirementsand Indicationsof Assistance 36. Word Bank, The WorldBank speaker,Mr. Kyle Peters, presentedan estimateof Cambodia's requirementsfor externalassistancebased on an economicscenarioprepared jointly by the Bank and the IMF and broadlyin line with the Government'sown developmentstrategy. Mr. Peter's presentation(Annex31) can be summarizedas follows. 37. This scenario,and the associatedfinancialsupport,is predicatedon the implementationof the reformprogramoutlinedin the Government'sPolicyFramework Paper for 1997-99. It wouldrequire continuedprogressin consolidating macroeconomic stability,combinedwith an accelerationof economicreformsand significant improvementsin the transparencyand accountability of economicmanagement, particularlyin the fiscal accounts. Therefore,externalfinancingrequirements remain substantial. With the maintenanceof political and economicstabilityand a re-invigorated reformprogram,an increasingproportionof Cambodia'sexternalfinancingrequirements _  - 10- could be met by inflows of foreigndirect investment. However,evenwith this increase in private capital flowsand an increase in domesticresourcemobilization,disbursements of official assistancein the form of grants and concessionalloans at aboutthe same level as in 1996would still be needed in the nextfew years. This meansan average commitmentlevel of officialassistanceof about US$455per year during 1997-99. Even if the Governnent makesa concertedeffortto increasedomesticresourcemobilization, domestic savings and budgetaryrevenueare likely to rise only slowly. As a result, official assistancewould still need to cover somerecurrentexpenditures,domestic counterpartfunds,and the foreignexchangecosts of the public investmentprogram. Therefore,in the nearterm, there wouldremain a need for some of the officialassistance (about $60 million)to be given in the form of balanceof paymentsand budgetary support. This budgetsupportwould be justified only if Cambodia'sown efforts at domesticresourcemobilizationare strengthened. Theseprojectedrequirementsof officialassistanceexcludethe financialsupportthat wouldbe requiredfor the electionsin 1998. 38. Statementsof Participants. The various donorsoutlinedtheir respectiveprograms of support to Cambodia,coveringfinancialassistancefor investmentprojectsand budget support,commodityaid, and technicalassistance. They indicatedthe primarysectors and areas of special interest to their countriesand institutions. Collectively,they pledgeda total of US$450 million for 1997/98,with one donor indicatingthat it did not wish to provide a precise figureat this time. Also,this amountof officialdevelopmentassistance does not include NGOs commitments. The total of US$450million is consistentwith Cambodia's estimatedexternal financingrequirements. 39. Many donorsannouncedthat theyintendto implementthe programof assistance that they announced,but added that whetheror not theseprogramscan actuallybe carried out will depend on a numberof factorsopenlydiscussedduringthe meeting. These factorsinclude:how seriouslyCambodiawill work on improvingits domesticsituation towardthe 1998 elections;whethergood governanceis instated;and whetherCambodia's own resourcemobilizationefforts are significantlystrengthened. Conclusion and Closing Statements 40. Statementby the Royal Govemmentof Cambodia. In his closingstatement, MinisterKeat Chhon said that the Cambodiandelegationdeeplyappreciatedthe spiritof completecandor in the deliberationsand the constructive commentsreceived. He echoed the donors' support for the annual CG format. While thankingthe donor communityfor the pledgesmade, he said that he fullyrealizedthat these pledgeswere mere intentionsof supportthat would only materializeif the Governmentfulfilledits commitrnents to the donor community. On the key issues,he summarized the governmentposition he had expressed in earliersessions and addedthat he had takenfull and careful note of the delegates' remarks and suggestions,promisingthat he wouldshare them with the two PrimeMinisters and that the Royal Government would do its utmostto addressthem.  - I1 - 41. Chairnan. Mr. Khalilzadeh-Shirazi expressedhis appreciationfor the frank and fruitful discussionsheld during the meeting. He summarized the main messagesthat arose from the discussionsas follows. On one hand, delegateswere uniformlyimpressed with macroeconomic managementand the economy's growthperfornance, considering the difficultconditionsin Cambodiaover the lastyear, includingfloodsand many pressuresto expand expenditures. On the otherhand, delegatesfound the Government's achievementsin severalareas disappointingwhen comparedto the expectationsgenerated in Tokyo at the 1996 CG meeting. His statement(Annex41) can be summarizedas follows. 42. The constancyand disciplineof fiscalmanagement,amongother factors, containedinflationarypressuresin 1996and reducedinflationin 1997. The exchange rate remained stable, and the currentaccountdeficitwas financedwithoutjeopardizing Cambodia's future creditworthiness.In this stabilizedenvironmentthe economy continuedto grow rapidly,reachingnearly 7% last year. 43. Recallingthe discussionsof last year's CG meeting,delegatesstressedthe shortfallsin the governmentperformancefor the followingareas: * effectivestepsto improvefiscalmanagement,specificallymeasuresto improve revenueperformance, havenot been forthcoming,with adverse implicationsfor socialsectorprograms; * managementof Cambodia'sforestryresourceshave not yet producedtangible results in the controlof loggingactivities; * civil servicereformand militarydemobilization have not progressedbeyond initial planningand conceptualization; and * and the expectedimprovements in transparencyand accountabilityin economicmanagementhavenot materializedand in some respects governancehas deteriorated. 44. Theseshortfalls,delegatesobserved,threatento dilutethe gains from successful stabilizationand growth,erodethe chancesfor sustainedlong term development,and underminethe goodwillof the internationalcommunitytoward Cambodia. In this context, severaldonorshighlightedthe reformsin tax policyand forestrymanagement which the Governmenthad committedto undertake,but so far not carried out, as prior actions for the third-yearIMF programunderthe ESAF. Donors urgedthe Government to implementthese reforns speedilyto pave the way for a resumptionof the ESAF process. 45. Althoughit was not the customat these meetingsto addresspoliticalissues, delegateswidely expresseddisquietover rising politicaltensionsand episodesof conflict that threatenedto underminepolitical and economicstability. Delegatesacknowledged that political factorsand securityconsiderations will continueto play a pivotal role in Cambodia's economicand socialperformance,and in the abilityof the donor community ml,,. ' I ,  - 12 - to carry out its programof assistancein the country. In the samevein, delegates acknowledgedthat sustainingmacroeconomic and political stabilitywill be highly challengingtasks in the year leadingto elections,and that this will place heavy but unavoidabledemandson Cambodia's leadership. The stakes are high, but Cambodia's leadershipcannot afford to take time off from the task of nationalreconstructionand economicmanagement. 46. Delegateswere unanimousin their call for a revitalizationof the reformprocess. In that regard,an issue of strong interestto delegateswas fiscal management,specifically the deterioratingperformancein revenuemobilization. Delegatesnotedthat declining revenueperformancewould raise donor concernsthat their resourceswould only substitute for Cambodia's ownrevenues,and entrenchits dependenceon increasingly scarce donor assistance. At the sametime decliningrevenueswould raise doubtsamong investors about growthprospects,and compelthe contractionof vital expendituresin the economicand social sectors, an alreadyvisible result. 47. One of the main areas of concernis the managementof naturalresources, in particularthe unsustainableexploitationof Cambodia'sforestryresources. The Governmentnoted that some progresshad been achievedsincethe last CG meetingin Tokyo and more was planned. While welcomingthe intentionsof the Government, delegatesviewedthe actionsthat have beentaken as delayedand short of the high expectationsgeneratedat the Tokyo CG meeting. They calledfor more effectivecontrols over illegal logging and for full marketpricing in loggingconcessions. In addition, closer monitoringof loggingpracticesand the strict enforcementof more sustainable harvestingpracticeswould be practicalnear-termsteps to bring uncontrolledand illegal logging into a sustainablefrarnework. The Governmentindicatedits intentionto address these tasks and to transmitthe urgencyof donor concernsto higherauthorities. 48. As in 1996,delegatesagain expressedtheir interestin the accelerationof agriculturalproductivity,improvedrural socialand economicservices,and better maintenanceof the growingrural transportnetwork. The Governmenthas articulatedthe high priorityof rural developmentand povertyreduction,which delegateswere eager to support in their assistanceprograms. However,delegatesregisteredthe need to translate these developmentprioritiesinto concreteprogramsand expenditures. 49. Regardingfinancialsupportfor Cambodia'sreconstruction and development efforts, donors pledgedabout US$450million,with one donor indicatingthat it did not wish to providea precisemagnitudeat this time. Manydelegatesindicatedthat political and economicdevelopmentsin Cambodiain the comingyear willhave a bearingon the extent to which these indicationsof aid flowswould be realized. 50. In regard to the CG process,delegatesstronglysupportedthe continuationof the annual meetings. They offeredtheir complimentsto the CambodianGovernmentfor its professionalapproachto the CG meeting.  - 13 - 51. In his conclusion,Mr. Khalilzadeh-Shirazi said howhe had been struck by the two different messagesfrom delegates:one of hope and continuedsupport;and the other of disappointmentover slow,or lackof, progressin severalkey policy areasand unease about rising political tensions. This message,althoughdivided,is complementary, he explained. It reinforcesthe suggestionthat Cambodiastandsat a crossroads,not only in charting its future but also in maintainingstronginternationalsupportfor its efforts. This forthcomingCG cycle will be a decisiveone in that regard,as it unfoldsover the eventful year before us, Mr. Khalilzadeh-Shirazi said. 52. The delegatesrequestedthe Chairmanto communicatein a letterto the two Prime Ministers the main messagesfrom the Meeting. The Chairmanundertookto do so immediately(see Annex43). 53. The Chairmanofficiallyclosedthe meetingat 12:20p.m. on July 2, 1997. i1lL.'''.  Annex 1 JSAN7M 71? - 14 - Page 1 of 9 MEETING OF THE CONSULTATIVE GROUP FOR CAMBODIA Paris,1-2 July, 1997 Chairman: Mr.JavadKhalilzadeb-Shirazl Director, Country Department 1, East Asia& PacificRegion The World Bank List of ParticipAnt AUSTRALIA Dr. Peter McCawley Headof Delegation DeputyDirectorGeneral Asia,Africaand CommunityProgramsDivision Development AustralianAgencyfor International (AusAID) HE. AnthonyKevin Ambassadorto Cambodia Mr. JohnWilson First Secretuy Development Cooperation Mr. C. Moraits Counsellor AustralianEmbassy,Paris BELGIUM Mrs. Marl*neThomas Headof Deleption Division Asian Departnent, GovernmentalCooperation Cooperation BelgianAdministrationfor Development Mrs.VeroniquePetit Secretaryfor EconomicAffairs BelgianEmbassy,Paris CANADA Mr. Eric P. Yendall Headof Delegation DirectorGeneral,Indochina,Thailand,Malaysia Asia Branch Development CanadianInternational Agency(CIDA) H.E. D. GordonLongmuir Ambassador to Cambodia 1-'  Consultative Group Meeting for Cambodia - 15 - Annex 1 Parls,1-2July,1997 Page 2 of 9 CHINA Mr. Li Li Second Secretary Chinese Embassy, Paris DENMARK Ms. Christine Norgaard-Larsen Head of Section Danish International Development Agency (DANIDA) Royal Danish Ministry of Foreign Affairs FRANCE Mr. Michel Mollard Head of Delegation Chef du Bureau Asic, Afrique du Nord, Moyen-Orient. Protocoles Financiers Direction du Tresor Ministere de l'Economie, des Finances et de l'lndustrie Mr. Herve de Villeroch6 Adjoint au Chef du Bureau Asie, Afrique du Nord, Moyen-Orient, Protocoles Financiers Direction du Tresor Ministere de l'Economie, des Finances et de l'Industrie Mr. Patrick Pillon Attache Financier pour l'Asie du Sud-Est Ministere de l'Economie, des Finances et de l'lndustrie SE. Gildas Le Lidec Ambassadeur de France, Phnom Penh Mr. Dominique Causse Conseiller Commercial Ambassade de France, Phnom Penh Mr. Jacques Pellet Charge Camnbodge Direction d'Asie Ministere des Affaires Etrangeres Mr. Gerard Larose Conseiller Geographique Cambodge, Laos et Bangladesh Caisse Fran9aise de Developpement Ms. Celine Bougot Chargee de Mission Laos-Cambodge Caisse Frangaise de Developpement 1v ...  CosuaftIe GroupMeetingforCambodia - 16 - Annex 1 Palitm,1-2 July,1997 Page 3 of 9 Fl=ce (cont'd) Mr. NicolasTissot Inspectiondes Finances Mr. Jean-LucLe Bras Chargdde MissionG6ographique pour le Cambodge d'Etat i la Cooperation Secretariat Mr. BertraudBadre InspectionGineraledes Finances GERMANY Ms. GiselaHanmmechmidt Headof Delegation SeniorOfficer SouthEast AsiaDivision BundesministeriumfbrWirtschafliche (BMZ) undEntwicklung Zusammenarbeit Mr. Bernhard Zander Deputy Director East AsiaandPacific2 (KfW) f1r Wiederaufbau Kreditanstalt Lunau Dr. Klaus-Dieter Headof Section East AsiaDivision fir Technische DeutscheGesellschafi (GTZ) Zusammenarbeit Tabatabai Dr. Hcssameddin SeniorAdvisor Emergency& RefugeePrograms GTZ JAPAN Mr. Kumihiko Makita Headof Delegation DeputyDirectorGeneral Asian AffairsBureau Ministryof ForcignAffairs H.E. ShoheiNaito Ambassador to Cambodia Mr.MasashiMizukami Development Director, Division Cooperation Economic Bureau Cooperation Ministryof ForeignAffairs El, - CoasuIltive Group forCambodia Meeting Annex I Part, 14 July. 1997 - 17 - Page 4 of 9 Japao (coat'd) Mr. Kaysuhito Shinoham Regional Coordinator, Ihe First Southat Asia Division Asian Affairs Bureau Ministry of Foreign Affairs Mr. Tadayuki Miyashita Official, The FirSt Southeast Asia Division Asian Affairs Bureau Ministry of Foreign Affairs Mr. Tsuyoshi Kato Researcher, Aid Policy Division Economic Cooperation Bureau Ministry of Foreign Affairs Mr. Takeshi Osug First Secretary Japanese Embassy, Paris Mr. Daisuke Yabuki Special Assistant Japanese Embassy, Paris Mr. Sciichi Kanai Observer Resident Representative Japan International Cooperation Agency (JICA), Paris Mr. Hitoshi Hirata Observer Resident Representative Overseas Economic Cooperation Fund (OECF), Paris KOREA Mr. Bu-Guamn Jeon Head of Delegation Minister Plenipotentary Embassy of the Republic of Korea, Paris Mr. Kyong Yul Lot First Secretry Embassy of the Republic of Korea, Paris Mr. Sungsoo Choi Deputy Director Economic Cooperation Division II Ministry of Foreign Affairs  CS.s.Iativ@ Gr*vpMestlaforCambodia Annex 1 Park,, 1-i i.ly, IM - 18- Page 5 of 9 NETERLANDS H.E. Ms.MLA.C. VanDen Assum Headof Delegation Ambassadorto Thabnd RoyalNetherlands Embassy, Bangkok Mr. Rienk W. Wiersma First Saetazy DevelopnentCooperation Secion RoyalNetherlands Embasy, Bangkok Ms.Asitridde Vries Desk Officer South-EastAsiaandOcenia Division Ministryof ForeignAffar NORWAY H.E. LarsA. Wensell Headof Delegation Ambassador RoyalNorwegian Bangkok Embassy, M.LSidsclBicken SeniorExecutive Officr NorwegianAgency for Development Cooperation (NORAD) RUSSIA Mr. VladimirPlotnikov Headof Delegation DeputyDirector 2nd AsiaDeparment Ministryof ForeignAffairs Mr. VictorKatachov SecondSecetary EconomicCooperation Deparment Ministryof Foeign Affain SWEDEN Mr. LwsIErikWingren Headof Delption Headof Divisionfor Asia nd die Pacific Ministryfor ForeignAffa Mr. Sven-AkeSvensson ResidentReprsentative SwedishInternational Development Cooperation Agency(Sida),PhnomPenh 1|T'11*  CesuvlbdveGroupMedingfor Cambodis Annex 1 197 Porls,12July, - 19 - Page 6 0f 9 Sweden (cont'd) Mr. MagnusCedergren ProgramOfficer Sida Asia Department, Ms.MariaTengroth FirstSecretary Divisionfor Asiaand thePacific MinistryforForeignAffairs UNfTED KINGDOM Mr. AdamWood Headof Delegation Division Head,SouthEastAsiaDevelopment Mr. Paul Ackroyd Head,Asia,LatinAmericaandOceansEconomics Departnent (DFID) Development Departnentfor International UNITEDSTATES Mr. KellyKammerer Headof Delegation for AsiaandNearEast ActingAssistantAdministrator UnitedStatesAgencyforInternational (USAID) Developmnent Mr.GordonH. West MissionDirector USAID,PhnomPenh Ms.MarieT. Huhtala Director, Laos,ThailandandVietnam Officefor Burma,Cambodia, Affais USAID Department of State Ms.DeborahKingsland DeskOfficerfor Cambodia USAID Departnent of State Mr.ClintonDoggett Desk Officerfor Cambodia USAID Departnentof State ElT'C -- _,,  Annex 1 - 20 - ~~~~~Page 7 of 9 for Cambodia Consulttive GroupMeeting - 20 - Paris, 1-2July, 1997 ASIAN DEVELOPMENT BANK (AsDB) Mr. Rajat M. Nag Head of Delegation Programs Manager Division 3 (Cambodia, Lao PDR, Myanmar, Thailand,Viet Nmn) Programs Department (West) Mr. Someth Suos Resident Representative in Canbodia EUROPEAN UNION (EU) Mr. Gwyn Morgan Head of Delegation Head of Unit South East Asia Mr. Mario Ferrucci Principal Administrator Asean, Indochine, Myanamar INTERNATIONAL FINANCE CORPORATION (IFC) Mr. Kip Thompson Acting Division Manager, Southeast Asia INTERNATIONAL MONETARY FUND (IMF) Mr. Hubert Neiss Director, Asia and Pacific Department ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Ms. Sachiko Imoto Aid Policies Review Division Development Cooperation Directorate UNITED NATIONS DEVELOPMENT PROGRAMME (NDP) Mr. Paul Matthews Head of Delegation Resident Representative and UN Resident Coordinator Phnom Penh Mr. Philippe Boreo Regional Manager, World Food Programme South East Asia RegionalOffice 1, , . l- C.multtivoGroupMinag br Cambodia Annex 1 Parls,1-2July,1997 - 21 - Page 8 of 9 4 NGOs Dr. Luise Ahrens RoyalUniversityof PbnomPenh ASEAN Ms.NurAshikinMohd.Taib SecondSecretary Embassy, Malaysian Paris CAMBODIA H.E.KeatChhon Headof Delegation in Chargeof Rehabilitation Sr. Minister andDevelopmentt Ministerof EconomyandFinanceNice Chainnanof the Councilforthe Development of Cambodia H.E.UngHuot Cooperation Ministerof ForeignAffairsandIntemational Mr.Chhieng Yarn of the Cambodian Secretary-General and Rehabilitation Development Board Councilforthe Development (CDC) of Cambodia H.E.AunPomMoniroth Official PolicyPlanner,SeniorEconomic Ministryof EconomyandFinance CDC Mr. ChouKim Leng Directorof ExternalFinanceDepartnent Ministryof Economyand Finance Mr. Vongsey Vissoth FinanceDepanment DeputyDirectorof External Ministryof EconomyandFinance Mr. HeanSahib of Information Director Divison Cambodian andDevelopment Rehabilitation Board CDC Mr. Rith Vuthy OfficeChief,BilateralDivision Cambodian Rehabilitation Board and Development CDC Mr. HamadiHamdi Adviserto CDC ChiefTechnieal UT~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  ConsultathieGroupMeeingfor Cambodi Annex 1 Pari, 1-2July, 1997 - 22 - Page 9 of 9 Cambodia (cont'd) Mr.ManuelCarranceja SeniorAdviserto CDC Mr. HierkMengHuor CabinetDirector Ministryof ForeignAffairs Mr. SokMathoeung Adviserto Ministryof ForeignAffairs Mr. SamEmmara Director,EuropeDepartment Ministryof ForeignAffairs Ms. RosSimara Mr. Suon Salin Counsellor Cambodian Embassy, Paris EXECUTIVEDIRECTOR Mr. YoungHoiLee Executive Director The WorldBank WORLDBANCK Mr. Javad Khalilzadeh-Shirazi Chairman Director, CountryDepatment I EastAsia & PacificRegion Mr. R. Natarajan Chief,LiaisonOffice,Cambodia Mr. R. KylePeters PrincipalEconomist, EAICO Mr. GuyDarlan Senior Economist/CountryOfTicer,EAICO Mr. Christopher Chamberlin SeniorEconomist,EAIHR . . ,. ... I  Annex 2 - - 23 Page 1 of 1 CAMBODIA CONSULTATIVE GROUP Paris, France - July 1-2, 1997 Tuesdav. Julv 1 9:00 am. - 9:30 a.m. Registration 9:30 a.m. - 10:00 a.m. Opening Session Chairman Statement Government (RGC) Statement 10:00 a.m. - 1:00 p.m. Session 1: Macro-EconomicIssues - Lead Discussants: World Bank, IMF - Discussion & RGC response 1:00 p.m. - 2:30 p.m. Luncheon 2:30 a.m. - 3:45 p.m. Session Il: Priority Programs and Investment Needs - RGC Presentation -Lead Discussants: ADB, World Bank & RGC response -Discussion 3:45 p.m. - 5:30 p.m. Session III: Aid Coordination Issues - RGC Presentation - Lead Discussant: UNDP - Discussion & RGC response WednesdaX.July 2 9:00 a.m. - 11:00 a.m. Session IV: Financing Requirements and Pledeing Session - RGC Presentation - Lead Discussant: World Bank - Discussion and pledging 11:00 a.m. - 11:30 a.m. Coffee break 11:30 p.m. - 12:30 p.m. Closing Session - Concluding remarks by RGC - Summation by Chairman - Distribution of Press Release 2-30 p.m. - 3:00 p.m. Press Conference - '''''''-- ' 0'1-' r  Annex 3 -24 - Page 1 of 3 CAMBODIA CONSULTATIVEGROUP MEETING Paris, July 1-2, 1997 Opening remarks by the Chairman Mr. Javad K. Shirazi The World Bank Your Excellencies,Delegates,Ladiesand Gentlemen. It is my pleasureto welcomewarmlyall the delegatesto this ConsultativeGroup Meetingfor Cambodia. Let me also extenda specialwelcometo the Cambodian delegation,headed by His ExcellencyKeatChhon,the SeniorMinisterin charge of Rehabilitationand Development, and includingHis ExcellencyUng Huot, the Ministerof Foreign Affairs,and othersenior governmentofficials. To our close partnersin this consultativeprocess,the Governments of Franceand Japan, we express our sincereappreciation.I would also like to thankthe Governmentof France for organizingthe informalmeetingyesterdayin whichwe receivedsome hopeful political news. Sinceour last meeting,Cambodiahas passed throughanotheryear of intense challengeand rapidchange. Evenas we convenetoday,eventson the political front have seized the world's attentionand, in an alreadychargedatmosphere, have compoundedthe difficultiesthat Cambodiafacesin meetingits development objectives. Thus, whilethe primaryfocus of this meetingwill be on issuesrelatedto economicdevelopment,we must bearin mindthat the RoyalGovernmentfaces political issues of considerablecomplexityand significance. Let me say it is a tribute to the resolve and determinationof the Government and its internationalpartnersthat we are here today, carryingout our work as we haveover the past four years, and that we are well preparedto engagein a frank dialogueon Cambodia'sdevelopment progressand its challenges. has articulatedits development the RoyalGovernment To facilitateour discussions, programin the documententitledCambodia'sSocio-Economic Development Reqirents and osals. which wasdistributedto all participants. A second Public Investmentprogramhas also beenpreparedand is summaized in an Annexof the Govenment's report. At our last meetingin Tokyo,we identifiedsix centralissuesthat wouldmeasurethe Government'ssuccessin meetingits development challenges: First, maintainingmacroeconomic with emphasison stabilization improvingfiscal management, especiallythrougha wideningand deepeningof the revenuebase; * Second,acceleratingrural and agriculturaldevelopment;  Annex 3 - 25 - Page 2 of 3 * Third, enhancingthe enablingenviromnent for long-termgrowth; * Fourth,ensuringthe sustainability of development through, in particular, improvedmanagementof Cambodia'sforestryresources; * Fifth, buildingthe institutionalcapacitynecessaryto meet these challenges;and * Finally,achievingbetter governance, transparencyand accountabilityin economicmanagement. Under difficultconditions,there has indeedbeen progress. The Governmenthas maintainedmacroeconomic stabilityand fosteredeconomicgrowth. The economy grew by almost seven percentin 1996despitefloodsthat reducedagriculturalgrowth and that put upwardpressureon food prices. Nevertheless,the inflationrate was containedwithin singledigits,and has begunto deceleratein 1997. A currentaccount deficit of ! 6% of GDPwas financedwithoutjeopardizingCambodia'sfuture creditworthiness. On the fiscal side, an ambitious1997budgetand the Law on Taxation,which includesnewmeasuresto enhancerevenuesand to strengthentax enforcementlaws and procedures,were enactedinto law. formedthe NationalCommitteeon Forest In the forestry sector,the Government Policy Reformand has improvedcontrolson illegallogging. The technicalassistance recommendedin the ForestryPolicyAssessment has been selected,and three of the four contractshave been signed. We understandthat the fourth contractfor monitoringservicesis beingnegotiatedfor signature. Along with these accomplishments, however,therehavebeen important disappointments.The progresson some issueshas fallen shortof the expectations generatedat this sameforum last year,and this is causefor concem: * First, the long-awaited implementing regulationsof the InvestmentLaw, which arenecessary to limit the exemptions currentlyerodingthe tax base, were not put in place. * Second,there has been slowimplementation of steps to improvefiscal management. Revenueshaveagainbeen belowtarget;and the brunt of fiscal adjustmenthas beenon non-defense, non-wageexpenditures. This continuingbias in expenditures will slowgrowthoverthe mediumterm and impededevelopment. * Third,managementof Cambodia'sforest resourceshas not yet exerted the necessaryimpacton the ground:illegallog exportsare not yet controlled; new forest concessionshave beensigned;and exporttax exemptionshave been granted. The unsustainable and uncontrolled exploitationof this valuedresourcecontinuesapace,with disturbingimplicationsfor the environmentand publicrevenues; * Fourth, there has beena lack of concreteprogresson both civil service reform and militarydemobilization, with adverseeffectson institutional developmentand fiscal management. * Finally,a fundamentalissuethat underliesthesedisappointments is that muchmore needsto be done to improvetransparencyand accountability in fiscal and economicmanagement  Annex 3 Page 3 of 3 Thus, this last year providesevidenceof concrete progressand disappointing shortfallsin performance. Othersmaywish to amplifyon this recordand raise additionaltopics for what I am surewill be two daysof fruitful,substantive we very muchlook forwardto hearingfrom discussions. In these deliberations, Minister Keat Chhonand his delegationas to the Government'sviews on Cambodia's current situationand its development prospects. This meetingalso providesan ideal opportunityfor the donorcommunity to indicatetheir plans for financialsupportto Cambodiafor the comingyear. Before I conclude,it maynot be an exaggeration to observethat Cambodiastands at a crossroads. With admittanceto ASEAN,stable macroeconomic indicators, continuingflows of foreigninvestment,and strong GDPgrowth,there is a valid basis for confidencein the country's future. The otherpath at the crossroads,however, points toward a differentdestination.Issues relatingto policyreform, economic goverance and corruptionthreatento diminishthe carefullyconstructedintemational goodwillthat Cambodiahas enjoyedin recentyears. Thus, at this criticaljuncture, the Governmentcan sustainthe country's progress,but only with timely,decisive actions and sustainedfollowthrough. Withsuch a demonstration of its renewed resolve, Cambodiawill surelyreceive from its internationalpartnersthe essential supportfor its development programs. Ladies and Gentlemen,our agendais a full one and our time is short. With those brief remarks,it is now a pleasurefor meto invite His ExcellencyKeat Chhon,the Senior and Development Ministerin charge of Rehabilitation to addressthis meeting. Thank you.  -27 - Annex 4 Page I of 3 CONSULTATIVE CAMBODIA MEETiNG GROUP 1-2July1997 Paris, Opening Remarks of MR. KEATCHHON in-charge Sr.Minister and ofRehabilitation Development ofEconomy Minister andFinance Govermment Royal ofCambodia Mr.Chairmnan Excellencies and Ladies Gentlemen 1. I have greatpleasure injoining theChairman inwelcoming I also allofyoutothismeeting. bring from toyougreetings theRoyalGovemment and ofCambodia. thepeople 2. Wemetlastyearin Tokyo Group-type in a Consultative (CG-type)meeting.It wasa transition from threeICORC theearlier meetings, whichwere intended to provide andeconoric bothpolitical supportto theRoyalGovernment formed after prolongedconflictsand TheICORC tragedies. process wastoendwitha lastmeeting thisyearbutthishasbeen postponed.The CGprocess continuesand willbe theforum withourextemal for dialogue partners andallocation for aidmobilization for our development 3. This isthefirstregular CGmeeting forCambodia. Wethank theWorld Bank this fororganizing and event foragreeing to dosointhefuture.This meeting isanimportant forus.Today andtomorrow look wewillcollectively attheCambodian macro-economic situation, status, progress made sofarand theneeds andprospects Wetherefore forthefuture. seeourexercise hereinterms of ournormality arnongthe intemational community. Weregard of our ability thisas a recognition to manage our economy and tosetourtargets andourcapacity toworktowardsachievingthem. 4. This CGmeetingwillconsiderthemacro-economic ofCambodia dimensions froma professional and perspective. technical Itwillparticularly focusonourproblems andprogressinthelastoneyear. before However, wecommence such ananalysis, it isgood in mind tobear historic certain perspectives developments. andgeneral 5. Since wemetin Tokyo in JulylastCambodia come hasrepeatedly under thespotightof world mediaMany eventsin thecountry,which mighthavepassedfor partof day-today in occurrences other have countries, attracted politcally tainted coveragebya media evereager to sensationalize. These have theperceptions colored about Cambodia.Letuslook more atthesrtuation and objectively context intheright 6. Afterlongyearsof war,genocide, internal isolation strifeand intemational and neglect Cambodia was infusedwithfreshlease of lifethroughthePeace Accordshere in 1991. in Paris Wth thegeneral organized elections and conducted bytheUnited a new Nations, wasadopted constitution anda coalition RoyalGovernment wasformed in 1993,asa measure of national and reconciliation Since solidarity. thenthe coalitionpartners, whohadbeenadversaries wth mutual mistrustand suspicioninthepasthave beensteering theship ofstatefortheprogressofourpeople.Democracy is roots taking asamply demonstrated by,aflourishing andunfettered both media, andprintby electronic formation andenergeticactivitiesof civilsociety organizationsrepresenting groups; various and, M KeeChhon's Qui Rmw*s.CGM.*tg P., 1-2 I1 J*41. Pop  Annex 4 -28 - Page 2 of 3 generalfreedom of movement We havea veryactiveanda largegroupof NGOsand and activity. otherswhokeepa vigilant watchoverwhat happens Wehaveattained in Cambodia. a levelof political and socialfreedom tookin the pastin reaching in a fractonof thetimemanycountries in the country thesamestage during normalevolution. 7. In the pastyear,political differencesin the country haveaccentuated in the normal course of adjustments. In democracies elsewhere,it is not uncommon to witnesssirmilar shifts in politcal affiliations withina party,as groups and loyalties try to enhance theirinfluence and holdwithinthe party.And, between parties,constant elbowing goeson to gainmorevoterfollowing evenby using recriminatDry I submit utterances. thatCambodia's situationis nodifferent 8. Inspiteof thesetum of events, theleaders haverepeatedly of themaincoalition their reaffirmed full and unequivocal commitment to adherence to democraticprocesses and means.They have reassured theirstrongintentionto holdtheelections nextyearforwhich preparationshavecommenced in earnest.Theyhavereiterated economic thatpolitical, will be pursued. and socialstability Every ripple political neednotbeseenas atitanic wave. 9. Therehavebeensomeviolent incidentsin the lastfew months. Onehasdrawna lot attention everywhere. But like just as in any gDod govemrnents elsewhere, all sections of the Cambodian leadership werequickand unsparing in condemning the incident in strong terms. Furthemnore, in the interest andin anextraordinary ofjustice, stepfora sovereign country, we alsosought and secured the help of an outsidereputed investigatingagency. Sketches of the likely culprits havebeen widely published in orderto bringthemto justice. I believe it is important to understand that in a suddenly liberalizedsocietysuch as ours, whichalso has manydisparate elements left over from earlier prolonged unrestsomecriminal elemnentscananddoexploit such freedom in order to destabilizelaw and orderor to discredit one leadership or another. Regrettably, certainself-serving and politically motivated sections usesuchevents to malign the country andvilifythe leadership. Unfair utterances and propaganda, intended sympathy to gainpolitical and advantage, rnostly outside, can onlyincite peopleand tarnishthe country's reputation.All rightthinking peopleshould condemn such ulterior actions. 10. Meanwhile, everydaylifefortheordinary in Cambodia citizen and to be quitenormal continues peaceful by anystandards.Dayto dayworkprogresses anyhindrance. without Thestatemachinery is functioningnormally,although highly charged politically decisionssometimes dosufferfromdelaysdue to differences which withinthecoalition, again is something elsewhere. notoutof theordinary, 11. A majordevelopment in the pastyearhasbeen fromthe outlawed the largescaledefections Khmer Rouge intothe govemrnment bringing foldimportant areas provincial and theirpopulationsand in onestroke, elirminating; hitherto theriskof insurgencies practiced forces. bythedefecting 12. Ourprogress in the pastfewyearsandthe overall stability havealsobrought in the country recognifion and acceptance As you knowwe will soonjoin the ASEAN by our neighbors. as a full- ledgedrnember withall the opportunities andchallenged and Wearetrulyexcited prepared it entails. to availof theopportunitiesandmeet thechallenges. 13. I wouldlike to therefore community urge you and the intemational not to rush to harsh on Cambodia conclusions basedon motivated propaganda or on isolatedincidents. of individuals Judgeus notby a snap-shotlookat wherewe areandhowfar westill haveto go,but ratherby the progresswe have madestartingfromwherewe did onlyfour yearsago, both in politicsand in Ar Kat Chhon's A 1997Pigs2 MtV P**, 1-2 Cntg RwnkasCcG  29 - Annex 4: Page 3 of 3 econorn*rnanagement andthe promisesuchspeed of progressholdsforthe future.Alsocompare we arein relation where to many andthose similalysituated othercountries in ourregion. 14. In thisCG meeting wewillpresentto youourcaseandneeds spheres. in several Weae here to youall andothers to reaflirn our grafitude community in the intemational for yourverygenerous adviceand assistance in the pastfew years,without whichwe couldnot haveprogressed. We do confnue to needgenerous extemalassistanceaswemove andbecome forward self-eliant 15. Aswemoveahead to considervanous aspects of economicmanagement in moredepth,I ask thatall of us bearin rnind ourhistory,andourstep-by-solid stepprogress handic's in spiteof serious andshortomings in manyways. I alsoaskthatourdiscussions beveryopen andflankin thetruespirit of partnership. My colleagues andI will do ourbestto takecarefulnoteof yourconcers, comments andadvice, andto clarifyyourqueries. Onceagain, youallforbeinghere I thank Cambodia. to support Thankyouforyourattention. I*. Kaa CMon' qw*nyRW*&CGAuig P, 142.6* lot:? p 3  30 Annex 5 Page 1 of 3 CONSULTATIYE CAMBODIA MEETING GROUP 1-2 Paris, July1997 Ibrm Agenda Issues 1: Macro-EconowIc of Statement MR.KEAT CHHON in-charge Sr.Minister and ofRehabilitation Developmnent Minister and of Economy Finance Royal ofCarnbodia Govermment Mr.Chairman, Excellencies, and Ladies Gentiemen 1. In my opening remarks I stressed earlier, the need withinthe tD keepall ourdiscussions ( perspectve progress of ouroverall since theRoyal Government tDok neady office ago. fouryears Kis todoso,parffcularly important in thecontext performance. ofourmacro-economic 2. Soonafterthe Royal Government tookoffice oneof its firstactions in 1993, wasto reach agreement vision onthelong-term forthecountry's of development future. This was vision in articulated our NationalProgramme and Develop to Rehabilitate Cambodia (NPRD)prepared in 1994 and updated These in 1995. were presented totheICORC meetingsin 1994and 1995. 3. Our long-termvisionenvisages thattheprivate sector wiN bethemain engine foroureconomic growth withindividualscreativelyusing theirimagination, innovation, and skills opportunities to realize theirfullpotentialandcontribute to steady progress.Theroleof thegovernment as the is strictly 'strategistmanager Thisrolenotpassive andfacilitator'. butpro-actve forestablishing, nurtuRng and managing a conducive cimatefor private sector growth through the useof the rule of law and appropriate supportI entails institutional the provision of infrastructureand promnotion of human development through socialservices, education,training andskills developrment TheState willsteer through a changing extemal environment andensure thatCambodia's comparative advantages and naturalresources areexploited in a sustainablemanner. It wiNensure theruleoflawand wil beopen, transparent, predictable accountable, and increasingly efficient and in allitsactions. effective Allof usin Cambodia arecomnitted to this visionand are determined to ensure that pervasive poverty is eradicated quickly anda steady prosperity is ensured forall ourpeople, withequality of access to opportunibes and stateservices. 4. Withthisstrong determination, vision, hardwork wehave andstict discipline, broughtmacro- economic to ourcountry stability for thefirsttimein severaldecades, in spiteof allthe historically- imposedhandicaps onus bylong brought years oftragedies and TheWodd conflicts. Bank notesin its paperthatCambodia's achievements are'remarkablewhen compared with theexperiences of similar counties....¶. post-conflict Thelarge-scale externalfundingin the pastfouryearshavehelped us immensely.We areforevergrateful. 5. Thelastfouryearshave shown tremendous macro-economic progress.RealGDPgrowth, a mere1.2% in 1991hasbecome a healthy6-7% in thepast fewyears.Percapita GDP, although still low, very haszoomed fromUS$ 130 in 1991to $ 291 in 1996,despite of a 21% in population increase dunngthatpenod. is down Inflation from over150% digits. to sinole Ournational curency is virtually Ir ChhMnw' Mr Slwef Maaloms: h CGtrMA'2, PPus, 1-2 PapI J* 1997 11 , . ._,F  Annex 5 -31 - Page 2 of 3 stable the USdollarunder vis-a-vis Our market conditions. official aregrowing reserves steadily, and todaystandsatover ofourneeds. 2 months 6. Our monetary and have financial sectors witnessed many Ournational reforms. bank hasbeen of itscommercial divested andisnow functions functoning rnore asa central forsupervision bank, and of financial regulation mosty institutions, banks have that grownin number. 7. Onthebudget side, wehave revamped ourphilosophyand Today, procedures. thebudget is a transparent toolto captureand monitorallourpublic revenuesand isused alocation forresource forall publicexpenditure.In orderto enhance andthe checks transparency andbalances' in budget we aresoonsetting administration, up a National anda Tribunal Authority Audifing for Budgetary Weinvitealsoour extemal Discipline. partners fromtheirside, to undertake, of projects audits and programmes forwhich they their bring financialsupport 8. Thedomestic publicrevenue basehasbeen widened anddeepened. With tighercontrols and vigilance, ourrevenue collectionshave increasedbothin norminal termsandas a percentage of a growing GDP. Theincrease isfrom4.3% in 1991to 9.1% in 1996. In nominalterms,it wasfrom108 billionrielsto 746billion riels, increase or a seven-fold injustfiveyears. weareconscious Still, that even verylowcompared thisisstbll tomost other Along countries. withanincrease in ourtaxrevenues, theshare ofdomestic taxes is goingup.Expenditureis undervery and tightcontrol nobank financing is resorted to. 9. To further boostrevenue we haveintroduced collection, far-reachingmeasuresandreforms through our1997 budgetlaw.New measures such astheturnover taxand tax,withholding loweringof thelimitforpersonalincome tax,havebeen introducedanda limitedscalevalueaddedtaxwillcome intoforce in 1998. Taxes,perse,orincreases inthem arepopularnowhere intheworld; Nevertheless ournational with gritanddetermination, assembly andtheexecutive branch have to these resorted wide-ranging measures thecountry's tostrengthen economicbase. 10. A predictable macro-economic andgrowth, stability withpolitical together stability, security and social order and ruleoflawareessental forinvestments sector. in theprivate Thatwehave able been to attracta steady investments flowof increasing intothecountry, whichhelpscreate employmentand instill newskills, is atestimonyto oursuccess and promoftng in attracting, fostering investment private In 1996, totalinvestments areestmated atover $500 million. 11. Thebackground document to youforthismeeting distributed of ourproposals details contains for the future.Our challengesahead,in the macro-economicsphere,focuson increased public resource morerational mobilizabton, resource the climate andon improving allocation, for private investment areintegrated All thesematters in ourPolicy FrameworkPaper(PFP). Letrmeaddress them onebyone. 12. As I statedearlier, ourrevenues have increased enormously termns in norminal in thepast few years,animbalance existsas a largeportioncomes fromtrade relatedreceipts.In theshort-term, as we become a member of ASEAN/AFTA, wehave to adjustand lower ourtariff regirmen to correspond tothatofothercountries. Our customs revenues wigl registera declinebut theshorifallmaybemade up by anincrease in volumes.Meanwhile, ourdomestic revenue base willbroaden. Increased vigilance and enhanced capacity will net in morerevenues. of the tax administration Likewise, we have implementedmeasures to bringin allpublic revenues intothebudget Ofparticularimportance arethe stepsin placein theforestrysector where weareengaging intemab'onallyreputed firms to lookinto K.eC#m'sSW~ Allr. U.mZm"k sas. CGUs.t,P, 1-2 1997 Ady Pop2 1V n.,  Annex 5 -32 - Page 3 of 3 various as recomrnended aspects by thejointWorldBank, FAO,UNDP These study. steps willhelp drastically illegal reduce logging andexport,andincrease revenues fromconcessions. 13. Therehasbeen someconcern that,in the firstfivemonths of 1997for whichfigures are available, ourdomesticrevenues, in pro-rata terms,have fallen short of budgeted proposals. Wehave realized37%hof the budget target, butthis amount represents morethana 10%/ increase of the figures corresponding for1996. Since ourtaxabion mneasures arejustnowgetfinginto - we fulleffect have issuedclearandstrictinstrucions forfullimplernentation- wethink thatweshould beableto make up mostof theshortfalls in thecorning months. However, as a percentage of norminal GDP we maynotmeet ourtargets fortheyear. 14. Inrespect of currentpublicexpenditures, wespent in 1996,43%onwages aloneevenwhen thesearerelativelylow.A totalof 51%,including 28% on wages, goesto defenseandsecurity.We haveonlyminimal operating expenditures. Although we havesecured peaceIn mostpartsof the previously rebel heldareas through defectons from the Khmer Rouge, thepeace willtake dividend some timeto become a reality, aswehave to adjustourarmed forces andgraduallyreduceourmilitary expenditures. Letusnotforget thatsimilarpeace dividends including thoseanffcipated fromthebreak upof the coldwararestilltomaterialize, in otherparts oftheworld. 15. Wehave not touchedtheessential social sectors likehealth and in applying education austerity measures. Mostof ourcapital expenditure is foressental infrastructure andconstruction. In addition, manycapital works aredirectly byourextemal undertaken partners. 16. Until now,ourcurrent revenues havenotbeen fullyadequateto rmeet ourcurrentexpenditures and we havehadto depend on extemal financing to rneetthe gap.Although the 1997budget envisages surplus, a small thesituation maynot continue in thefutureyearsunlesswereceivespecific externalfundsto mneet additionalexpenditure relatng to the conduct of elections, rilitary demobilization, andcivilservice To meet reforms. suchshortfallsin current revenues andto meet budgetfinanced works, capital wewillthereforecontinueto needexternalsupportWearealready in with negotiations theWorld Bankinthisregard. 17. Promotion ofprivatesector investrnentandgrowth isonthetopof ouragenda. Wehave taken severalmeasures includingtheestablishment ofa 'one-stop service'attheCDC withpropermonitoring andareofferingattractiveincentives.Together withtheMFNandGSP statuswe have obtainedfrom many of ourtradingpartners,these measures have broughtin considerable investment private inthe country jobsand creating instllingmore skills. Wehave formulateda seriesoflegislation toprovidethe necessarylegalpredictability and stability fortheprivatesectortooperate inconfidenceand wehope to havethem adopted bythe National Assembly verysoon.In addition,wewillalsobejoining WrOto giveusthescope andadvantage to make useof ourcomparative Wehave strengths. commercialized and/orpnvatized mostof our SOEs, For the future, we are alsousing BOTtermsand IPPs for infrastructure relatedwork. 18. Ladies and Gentlemen,I willconclude hereby stressing thatwehavethecollective will political anddetermination to continue ourmacro-economic stability althoughsometenporaryupsanddowns areunavoidable, Wewillalso continue toneedgenerousexternalsupport tokeepusonthiscourse. Thankyouforyour kindattention. Ar KMtChn's StMmentMWmEWct Issun CGhf"f, Pam,1.2MJY 1997POP3 - , , . r  Annex 6 - 33 - Page 1 of 5 INTERNATIONAL MONETARY FUND CAMBODIA ConsultativeGroupMeeting, Paris, July 1-2, 1997 Representative Statementby Hubert Neiss, IMF Mr. Chairman, Excellencies,DistinguishedDelegates: Over the past four years, the goverment of Cambodiahas made remarkable progress in economicand social recoveryunder its medium-termreform program. Most significantly,the macroeconomicsituation has been kept stable, thanks to responsible budgetary and monetary policy efforts -- MinisterKeat Chhon deserves special commendation- as well as large-scalefinancialsupport from the internationalcommunity. Growth has been robust, inflationhas fallen into single digits, and the externalposition has improved significantly.Progress has also been made in advancingthe wide-rangingagenda of structural reform, though with delays and some backtracking,particularly in civil service and tax reform. But we should not ask for ideal economicperformance, especiallynot in a country in as difficult a situationas Cambodia. As true friends of Cambodia, we should, however, insist that Cambodia's well known problems of governancenot be allowedprogressivelyto mount to an extent that seriously threatens the economicfuture of the country. This, unfortunately,is now a reality in Cambodia. The rapid depletionof the natural resourcebase and the massivediversion of revenuesfrom the nationalbudget are clear writings on the wall. ' ....  Annex 6 - 34 - Page 2 of 5 Uncontrolled and illegal loggingactivities in recent years have resulted in rapid depletion of the country's valuableforestry resources with little benefit to the government budget. While there are of course no precise data, our rough estimatessuggest that losses to the budget arising from illegal activities in forestry were well over $ 100 million in 1996, more than one third of total budgetary revenue collectedin that year. Forestry is not the only area of illegal activity. Corruptionis spread over a wide area, which includes: (1) concessions, such as monopolyrights and land leases, given to foreign investors withoutpayments to the budget; (2) tax and tariff exemptionsgranted to domestic and foreign companies, including those that arise from improperexemptions granted under the overly generous InvestmentLaw ; (3) noncollectionof taxes by tax officials ; and (4) nonpaymentof taxes on conmercial activitiesby the military, including leases of goverment land. This list is, by no means, exhausting.The amount of resources diverted from the budget by these activities could be even larger than the losses from the activities in forestry. of the total impact of corrupt activitiesare, by necessity,difficult and to Estimnates some extent conjectural, and we wantedto be deliberatelyconservativeso as not to exaggerate things. Our results are, nevertherless, alarming. Overall, the diversion of public resources has probablyreached the sarne amountas actualbudget revenue collections,or nearly 10 percent of GDP. Obviously, this trend has to be reversed to save the country's economy from serious damage. Such damage simplycannot be ignored by IFIs and donors who must take a longer-term view on economicviability. The IMF has clearly distanced itself from these practices in several messagesfrom the ManagingDirector of the two Primne Ministers, and our programs have consistentlybuilt in safeguards. T. .  Annex 6 -35- Page 3 of 5 At various stages Cambodia's ESAF program has been delayed and disbursement disrupted because of the non-observanceof these safeguards. In particular, the mid-term review under the second annual ESAF arrangementcould not be completedas schedule in December 1996, and the associateddisbursementof some $ 20 millionlapsed. The program for 1997, to be supportedby the third-year ESAF, is still on hold since agreed prior actions to safeguardagainst illegal activity in forestry have so far not been implemented,and there is evidenceof backsliding in other areas, notably tax administration. In the meantime, we are discussingremedial actionswith the authorities.First and foremost, these actions include measuresto improve forestry management. Despite the re- impositionof the ban on log exports late last year, the depletionof the country's most valuable natural resource continues at a rapid pace, with the direct involvementof the highest levels of goverment. This remains the single most critical issue in Cambodia. Credible government steps to implementits longstandingcommitmentsto stop illegal logging and log exports, establishan effectiveminotoring and control system, and to bring the full benefits from the exploitationof forestry resources into the budget remain a preconditionfor a resumptionof IMF financial support. We should not overlookthe efforts that have already been made and as a result, a structure for managing forestry is gradually being put in place. However the challengeis to make this administrativestructure effective, by keeping it free from improper and counter productiveinterference. The emphasisin IMF management's in the messages to the two Prime Ministers has been exactlyon this point. The IMF has endorsed governmentpolicies to ensure effectiveimplementationof the export ban, includingdestruction of all equipmentand materials used in illegal logging activities and seizure of illegal logs, but these procedureshave been only sporadically 11*' ' K  Annex 6 -36 - Page 4 of 5 enforced. Further, the governmenthas not yet been able to follow through with its plan to secure the services of an internationalfirm to assist its efforts to put in place an effective monitoring and control system for logging activities. To ensure the timely transfer to the budget of all proceeds from forestry, we have advisedthat the Ministry of Economyand Finance be given full responsibilityfor the financialmanagementof forestry contracts, but this has so far not been done and forestry continuesto provide little revenue to the budget. Second, and equally important, are measuresto contain corruption in non-forestry areas where, as mentionedearlier, serious governanceissues have arisen. Following through with policy commitrnentsby the govermentin these areas is also a preconditionof further IMF financial support. While we must understandthat Cambodia's weak institutional capacity limits the government's effectivenessin public resource management,the main problem has, again, been improper interference. A significantstrengtheningof policies to combat corruption is, therefore, feasible, provided there is cooperationand strong political support for such policies by both Prime Ministers. In this respect, our proposal to give the Ministry of Economy and Finance full financialcontrol over all contracts involvingstate assets is of critical importance. In addition to strengtheninggovernance, fiscal measures are urgently neededto put the budget on a sound footing over the medium term. The much needed increasesin social spending can only be financedthrough a significantfurther improvementin revenue mobilization (the revenue ratio of 9 percent of GDP is still among the lowest in the world).The 1997 budget is to achieve a major revenuecollectioneffort through enactment of new tax reform legislationand a strengtheningof tax administration,combinedwith the implementationof measuresto bring extrabudgetaryrevenue into the budgetaryprocess. Full implementationof the correspondingprovisionsof the Law on Taxationand approval 11, . [.~  Annex 6 -37 - Page 5 of 5 of strict implementigregulations for the law on Investment wouldbe an esseil patt of a newFundprogram.The revenueeffortwillhave to be combined to restrain withmeasures expenditures,in particular on the militaryandthe civilianwagebill, andto reorient andhealth,andbasicinfrastructure. expenditurestowardeducation Civilservicereform, fromlarge-scale whichhas suffereda setbackstemming purposes, newhiringfor political will have to be revitalized. I have spokencandidly thereis so muchat stake.The this morning,because international has so far spentwell over $ 3 billionto supportCambodia's community as an economically emergence state.It is essential viableand democratic that the complement government the effortsof donorswithdetermined actionsto and sustained containthemassivediversionof publicresourcesin forestryandotherareas,whicherode baseof the countryandjeopardizeits economic the productive future.As I have already pointedout, as longas there are no clearindications that determined effortsare beingmade to reversethe seriousdeterioration by the government theRMF in governance, will not resumeits financial support. thereare crucialpoliticalproblems NVhile in the immediate to be addressed future, there is alsoa vitaleconomic objective, which,I am sure,everybody presenthere shares: steersthroughthe pre-election that Cambodia of periodwithouta breakdown macroeconomic a fiutherseriouserosionof its economic stability,and without resource base. The IMF is readyto do its utmostto supportthegovernment's effortstoward achievingthisobjective.For this purpose,we are maintaining our dialoguewiththe authorities,at all levels.It is my sincerehopethat wayswillbe foundin the comingmonths that will makeit possibleto continue andto worktogether the IMPprogramwith Cambodia for lastingprogress. withthe goverment nr~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  Annex 7 -38 - Page 1 of 3 CAMBODIA CONSULTATIVE GROUP MEETING Paris, July 1-2, 1997 Statement on Recent EconomicDevelopments Kyle Peters, The World Bank Mr. Chairman,His Excellencies,DistinguishedDelegates; Lookingat broad economicindicators,Cambodia'seconomyhas performed strongly. GDP has grown at over 6% per year since 1992. Trade and foreign investmenthave surged, illustratingthat measuresto open the economyand to encourageprivate activity have had a very positiveeffect. Inflationhas been sharply reduced. Despiteturbulencein political and securitymatters,years of neglectand the loss of entrepreneurialskills and manpower,Cambodia's post civil war recoveryhas been remarkable. Macroeconomicperforrnancewas very favorableagain in 1996. Economic growthreached 6.5%. Inflationwas containedat single digits. The exchangerate remainedstable. And, cautious fiscalmanagementcontinuedto anchor macroeconomicstability. Cambodia's recent economicachievementsare indeedsignificant. But, there are concems that the current pace of economicgrowth will be difficultto sustainover the medium term, as it has been very narrowlybased. Theseconcems arisefrom several aspects of the recent pattern of economicgrowth. First, constructionand servicesin the major urban areashave providedthe primaryimpetusto growth. Second, growth has also been supportedby the unsustainableexploitationof Cambodia's natural resources,particularlyits forests. Third, in the five years since 1991,agriculturehas grownby less than three percent per year,virtuallythe sameas the population growthrate, which does not bode well for the bulk of the population and the poor who live in ruralareas. Fourth, foreigninvestment,while expanding rapidly from a small base, has been limitedand selective. And fifth,much of Cambodia's recent growth has been spurredby the initial liberalizationof markets and foreigntrade. Similarly,there are concernsregardingmacroeconomic stabilization. It has been sustainedthroughmethodsthat are likely to harmlong-termgrowth. An inadequaterevenue effort,resultingfrom too generoustax exemptionsand lax tax administration,has necessitateda severecompressionof current expenditures. This compressionhas fallen disproportionately on the social sectors and economic infrastructure,becauseof high defenseand securityoutlays,which haveconsistently exceededbudget targets.  39 - - Annex 7 Page 2 of 3 Recent economicdevelopments, therefore,show the fragilityof Cambodia's economicachievementsand demonstratethe importanceof implementingvigorously and without furtherdelay the Government'sreformprogram,as outlinedin the recentlycompletedPolicy FrameworkPaper for 1997-99. I will add what others have identifiedas an underlyingfoundationfor sustainedeconomicgrowth:the importance of transparencyand accountabilityin economicmanagementand good governance. Mr. Chairman, let me focus on what most observersof Cambodia's economy tend to select as the four basic reforrnchallenges. Thefirst is enhancingpublic resourcemobilization. This is essentialto fund priority developmentexpendituresand to signalto the donor comrnunitythat its efforts to assist Cambodiaare beingmet by an equal efforton the part of the Canbodian Govenmment. Despite significantimprovementfrom a very low base, Cambodia'sbudget revenuesare very low by intemationalstandards.The currenttax effort is roughly half of the average for low-incomecountries. The revenueshortfallin 1997is especially disturbing. Two steps must be taken with urgencyor the Government'sstabilization effort couldeasily and quickly unravel. First, the Law on Taxationmust be vigorouslyenforced. Second,the generoustax and duty exemptionsgrantedunder the Law on Investment,as well as other ad hoc exemptions,must be eliminated. Such ad hoc exemptionsnot only erode the tax base, but also raise concemsabout transparencyand accountabilityin economicmanagement. To providethe legal basis to remove these exemptions,the long-delayed implementingregulationsfor the Law on Investment must be approvedsoon. The second challengeis improvingthe efficiencyofpublic expenditure.The Govemment's success in macroeconomic stabilization,in the face of revenue shortfalls,has been largely achieved through compressingnon-defense, non-wage expenditures. Alreadyin 1997,spendingin non-defensecurrentexpenditureis half the target. Thus, while continuingfiscal discipline,the compositionof spending needs to be changedto supportdevelopmentpriorities,shiftingaway from defense towards the social sectors and economicinfrastructure,and away from salaries towardsmaterials and supplies. In addition,public investmentmust shift sharply and quickly toward rural developmentand the reductionof poverty,a foundationof East Asia's growth miracle. The third challengeis strengtheningthe institutionalcapacityto implement economicreforms and development programs.There are three aspectsto strengtheningCambodia's institutionsand capacityfor managingits own developmentprograms: * First, the civil servicereformeffort must be invigoratedand strict controlsplaced on the growthof the civil service. The Bank's just releasedWorldDevelopment Report notes that a well-functioning and efficientgovernnent is essential to sustained economicdevelopment. 1-T - -  - - 40 Annex 7 Page 3 of 3 * Second,since the high levels of defenseexpendituresare crowdingout essential govermnentexpendituresin the productiveand social sectors,the Govemment needs to implementits comprehensive militarydownsizingand rehabilitation program. * Finally, the enabling environmentfor the private sector needsto be improved. Many critical business,economic,and financiallaws are still absent,and those that have been recentlyenactedhave yetto be adequatelyenforced. Thefourth challengeis ensuringthe sustainabiliy of development.The key aspectof this is the sustainableexploitationof Cambodia'sforestryresources,as forests are Cambodia'smost significantnatural resource. The currentmismanagement of forestry resources is causinggrave concerns. Cambodia'sforests can no longerbe allowedto be exploitedunsustainablyat below-market prices. Even with the finalizationof the technical assistancestudies, there remainsa substantialagenda. The three key elementsare curbingillegal logging,obtainingadequaterent capture and channeling these resources transparentlyinto the budget,and ensuringthat concession managementyields sustainableharvestingpractices. Mr. Chairman,in conclusion,Cambodiahas made remarkableachievementsin restoring economicgrowth and stabilizingthe economy.However,continuedgrowth at these levels is not automaticor ordained. A modem,competitiveeconomywill requirea new round of reforms to enableCambodiato grow, and to lift its people out of poverty. Thankyou. 1~~~~~~~~~~~~~'~~~~~~~~~~~~ - r [~~~~~  Annex 8 -41 - Page 1 of 6 Statement by His Excellency, Mr. Shohei NAITO Ambassador of Japan to Cambodia, given at the Consultative Group Meeting Paris, I July 1997 Mr. Chairman, Your Excellency Mr. Keat Chhon, Minister of Economics and Finance, Distinguished Delegates, It is indeed a great pleasure to see you, Mr. Shirazi, as the chairman of the Second Consultative Group for Cambodia. I have fond memories of working with you last year in Tokyo. Your summation at the concluding session of the Tokyo Consultative Group has become an important historical guideline for dealing with economic cooperation with Cambodia. On behalf of the Delegation of Japan, I would like to reiterate our readiness to cooperate throughout this Consultative Group session so as to contribute to the success of this meeting. I would also like to express my delegation's appreciation to His Excellency, Minister Keat Chhon, for his statement on the macro-economic management of the Royal Government of Cambodia. We highly commend his Excellency for his dedication to the macro-economic stability of his country. The Cambodian economy is still in a period of rehabilitation. Support from the international community is indispensable in order to compensate for the weakness during this period of convalescence. It is also a time of transition, with the conversion of the system of economic management from one based on a centrally planned economy to one founded on market principles. The policy paper presented to us at this second Consultative Group of Cambodia has as its sub-title "Progress in Recovery and Reform". Recovery refers to the physical rebuilding of Cambodia's national L1 '  Annex 8 - 42 - Page 2 of 6 economywhichwas derailedduring the civil war. Reformrefers to the change in the methodof dealingwitheconomicmanagement. Neitherof these two challengeswill be easy for the peopleof Cambodia. Nor wil these be simpletasks for the RoyalGovernmentof Cambodia,whichis expectedto play a leadingrole in mobilisingthe capacityof the people. In order to encouragerecovery,the governmentmust reconstruct an infrastructureto encourageprivateinvestment. Creationof this investmentenvironmentis relativelysimpleas it consistsof physicaland visiblebenchmarks. Reform,on the other hand, not only calls for the modernisationof governmentinstitutions, but also entails a much more radical shift in approach. We can witnessthis phenomenon in many countriesundergoingtransition. One of the most salientexamplesof this transformation is seenin the realm of taxation. Governmentbudgetscannotexist withoutpublic revenue, and in socialisteconomies,the major sourcesof revenuecome from custom tariffs and profits from nationalcompanies. There is no uniformsystem for the collectionof taxes from domesticactivitiesor otherpublic revenue for the nationaltreasury. This impliesthat a changein the systemcannot be done simplyby transforming the institutions. It also requiresthe transformation of the mind-setof the people. This difficultprocesscannotbe accomplished by applyingtextbook prescriptions. Wisdomcomesfrom learningthroughthe day-to-day implementation of public financing. Strongpoliticalwill by the leaders is imperativethroughoutthis process. Thispoliticaldetermination shouldbe based upon a clear visionby the leadersof the nation's future, and must be backed by solid and true statesmanship.This politicalwill needsto be clearly conveyedto all governmentofficialsso that they might work together towardscommongoals. The currentsituationin Cambodia seemsto require much reflectionand deliberationon the part of those leaders who shoulderthis great responsibility. 1V.... . K  Annex 8 -43_ Page 3 of 6 Lookingback over recent years, a remarkableimprovementin the macro-economy of Cambodiaoccurredup to the end of 1996. However, a slow growth in public revenuefor the first half of 1997givesus a preliminaryalert. In an environment of politicaltensionand violence, messagesfrom the leadersare apt to becomeblurred. Cambodiacannot afford to take time-offfrom its importanttask of reconstruction. This matter is also the sourceof concernfor the international communitywhichshoulders40% of Cambodia'spublic expenditure. We donors are fully aware of the difficultiesthat Cambodiafacesand it is for this reasonthat we have been extendingsuch generoussupport. Where obstaclesare high, a solid determination to overcomethem is required. It is the government'srole to inspirethe nation to move forwardand to instill in the people a strong determination to meet the challengebefore them. The uniquenessof a two-headgovernmentcreatesits own particulardifficulties. But past achievements showthat these obstacles can be overcome. Yesterday,at the informalmeeting,Ministerof ForeignAffairs, Mr. Ung Huot, demonstrated the firm resolutionof the Royal Governmentof Cambodia. We hope that this is a fresh commitmentto redress the situationand that by the end of the year we may witnessan upwardtrend. I have dwelt sometime on the basicsof economicmanagement becausemy remarksunder AgendaItem I are based on these considerations. Mr. Chairman,let me now touchupon the revenueside of the public financing. The first preoccupation in Cambodiais politicalstability. Now that the date for the generalelectionis fixed, the government can focus on the administrationof a free and fair election. During the period preceding the election, it is the responsibilityof the governmentto securesound  Annex 8 - 44 - Page 4 of 6 economicmanagement. This is the anchorfor politicalstability. To this end, the RoyalGovernmentof Cambodiamust expandpublic revenueby consolidatingits resourcesand channellingthem in an effectiveand transparentmanner. First and foremostis the expansionof the tax base. The Royal Governmentof Cambodiainitiateda programmeof tax reformthis February with the introductionof a modemtax systemand a strengthened tax collectingcapacity. Despitethesemeasures,the actualgrowth of revenue derived from taxes from Januaryto May of this year was inferior to GDP growth. The budget-revenue-to-GDP ratio decreasedcompared to that of the sameperiod of last year. This is a matter of much concern as it could indicatethe malfunctioning of the tax collectionsystem. We urge the Royal Governmentof Cambodiato demonstrate a strong political commitmentto redress the tax collectionsystem. With regard to the controlof public resources,it is often pointed out that transparencymust be improved,particularlyin relationto the loggingissue. The forests of Cambodiaare amongthe most valuable naturalresourcesof the countryand a primaryelementfor sustainable economicdevelopment. The government adopteda vigorousforest control policy at the beginningof this year. We expectthat these measureswill be implemented so that the control mechanisms of public resourceswill becomemore transparent. There has been a recent proposalby the Ministerof Economyand Financeto reevaluatethe royaltiesfrom this sector. This initiativedeserveencouragement, since it is clearly time for the so-called"hiddencosts"to be given their due weight. Improvedtransparencywill increasethe chancesfor fair competitionand lead to better market-based procedures. Public expenditureis expectedto increasedue to Cambodia's recent accessionto ASEANand the 1998elections. In order to cope with in public these requirementsand to enhancethe level of self-sufficiency financing,the politicaldeterminationat the highestgovernment level is needed to expandpublic revenue. I, ' [  Annex 8 -45 - Page 5 of 6 With regard to privateinvestment,the Investment Law established in 1994 sets out a series of incentivesfor foreign investment. But these incentivesmust not deviatefrom the principleof fair taxation. In this respect, long-awaitedimplementing regulationsfor the applicationof the InvestmentLaw need to be adoptedand strictlyenforced. Many thingsneed to be done to improvethe investment enviromment: the constructionof economicand socialinfrastructure,the assuranceof securityand politicalstability,transparencyin the governmentdecision-making process, and improvedadministrative efficiency. In the financialsector,continuedefforts shouldbe encouraged to put private financialinstitutionsunder the effectivecontrolof the NationalBankof Cambodiathroughthe enforcement of the Central Bank Law. The Governmentalso needsto completethe establishment of the two-tierbanking system. Mr. Chairman,I wouldbe remiss if I concludedmy statement withoutmentioningthe expenditureside of the budget. But sinceI have alreadybeen speakingfor sometime now, I would like to say only a few words. The Delegationof Japan wishesto pay tribute to the leadershipof MinisterKeat Chhonand to his effortsto ensuretight fiscal expenditure. It is true that the requirementsare multitude:povertyalleviation, administrativereform, military demobilisation, etc. Nevertheless,the motto of the Ministerof Finance, "Livewithin thy means" must be upheld. This will be all the more importantin view of the upcoming elections. We must entrustMinisterKeat Chhonwith the job of being the guardianangel of fiscal discipline. Mr. Chairman,I have focusedmy remarkson a few fundamental issuesconcerningthe rehabilitationof Cambodia. We shouldnot be discouragedby what may appearto be overwhelming tasks. Cambodiais full of potential. The countryis rich in naturalresourcesand is now a memberof ASEAN,whichconsistsof someof the world's most dynamic economies. If the people of Cambodiaare wise enoughto make use of 11'T '-  Annex 8 -46 - Page 6 of 6 these gifts, the future will be extremelypromising. To that end, the Royal Governmentof Cambodiahas an importantresponsibilityin orchestratingthe determination andcapacityof the peopleof Cambodia. The Govermment of Japan will stand besideCambodiain supportingits efforts towardgood governance. Thank you. K~~  Annex 9 Page 1 of 7 CAMBODIA CONSULTATIVE GROUP MEETING: OPENING SESSION 1: MACROECONOMIC ISSUES PARIS, FRANCE JULY 1-2 STATEMENT BY DR PETER McCAWLEY DEPUTY DIRECTOR GENERAL AUSTRALIAN AGENCY FOR INTERNATIONAL DEVELOPMENT Mr Chairman On behalf of the Government of Australia,I would like to thank the World Bank and the Governmentof France for convening this Consultative Group Meeting on Cambodia. The fact that we have now moved towards a regular CG process for Cambodia is an indication of the commitmentof all parties to the establishment of a rigorous, outcome focused economic development forum. We are looking forward to participatingfully in what promises to be informativeand constructive discussions. The plight of the Cambodianpeople during the Khmer Rouge years moved the Australianpeople deeply. Australiahas played a vital role in the Cambodian Peace Accords and in the United Nations force, UNTAC, s:\camlaos\cam\cgmeet\sp-overv.doc 6:14PM 26/6/97 xT''''.  Annex 9 -48 - Page 2 of 7 which gave Cambodia the chance to make a new start after more than 20 years of conflict. Next month, along with Laos and Burma, Cambodiawill join ASEAN. Membershipof the expandedASEAN is Cambodia's best opportunity for the economic take-off that so many of its neighbourshave enjoyed in the past two decades. As a good friend and neighbour of Cambodia,we are anxious to see Cambodia make the most of this chance. Cambodia has the natural resources and the strategic location to be a prosperous and forward-lookingcommunity. What is lacking is a stable political framework, administrativecapability, modem infrastructureand skilled human resources to attract private investmentto achieve its demandingdevelopment goals. Cambodia will clearly require help from the intemational community,including Australia,to create an enabling environmentfor Cambodiato succeed in attracting its share of the highly competitive Asian market. Mr Chairman, Australia has been strongly committedto assisting Cambodia to emerge from this testing time in a strong position to play its important role in the further developmentof the Mekong Basin. s:\canilaos\cam\cgmeet\sp-overv.doc 26/6/97 6:14 PM K 1  Annex 9 -49 Page 3 of 7 The Australian Government acknowledgesthe progress made to date in stabilising the economy, in restoring economicgrowth, and also in undertaking policy reforms to transform the economyinto a market- oriented one. New financial policies have played a role in the elimination of deficit financing and fiscal discipline has been maintained. The 1997budget and the Financial Law, including tax reform measures passed on 9 January, are important steps in extending the Government's domestic revenue base and ensuring that all possible sources of revenue are appropriatelytapped. But fiscal revenues are still very low at only 7% of GDP and planned program expenditures in important developmentareas are not being met. For example, expenditures on health and education are running at only 32% of budget. Considerableeffort will be required to raise fiscal target of 14%by the year 2000. revenues to the Govermment's s:\camlaos\cam\cgmeet\sp-overv.doc 6:14PM 26/6/97  Annex 9 50- Page 4 of 7 The forestry sector deserves specific mention as a source of domestic revenue. Forests are one of Cambodia's most valuable resource. The Government's managementof forests is therefore a critical factor not only in determiningthe sustainabilityof Cambodia's economic development,but also in intemationalperceptionsof the effectivenessof the Government. Actions taken by the Governmentof Cambodia during 1996 with regard to the granting of export tax exemptionsand forest concessionshave raised concems about the Government's commitment to transparent managementand sustainableexploitationof forestry resources. We therefore urge the Governmentto accord due priority to reinforcing its efforts to regain control over logging activities. It is important that the efforts of the Finance Ministry to implementlicensing agreementsbe expedited and fully supported at the highest level of government. We are also concernedto clarify the CambodianGovernment's continued commitmentto fostering a climate that will see further foreign private investmentplaying a greater role. s:\camilaos\cam\cgmeet\sp-overv.doc 26/6/97 6:14 PM L- r~~~  Annex 9 -51 - Page 5 of 7 In this context,downsizingthe public serviceremains an important objectiveas it impacts on the capacityof the Governmentof Cambodia to addressbroader issuesrelating to upgradingthe performanceof agenciesincludingraising salariesof public servants,and govemrnment addressing bureaucraticinefficiencies. Cambodia's economicprospectsare also closely linked to political stability. The willingnessof aid donorsand foreign investorsto work in Cambodiawill weakenunlessthe coalitionpartnersare ableto resolve tension between them, ensure stability,and maintainan apoliticalpublic sector during the period leadingup to the nationalelections. Clearly,the reopeningof the NationalAssembly,the passageof lawsfor the holding of national elections,and the conductof a free election,open to all parties, with full acceptanceof the results by all will be importantin maintaininginvestor confidencein Cambodia. to good governanceare A stable politicalframeworkand commitment important in terns of the intemationaldonor community'sperceptionof the value of ongoingdevelopmentassistanceto Cambodia. In this of electionsnext May. context, we welcomethe 24 June announcement s:\camlaos\cam\cgmeet\sp-averv.doc 6:14PM 2616/97 U., V.. .... -I  -52 - Annex 9 Page 6 of 7 We also look forward to an early re-opening of the National Assembly to pass vital election legislation. We believe that specific action to alleviate poverty must remain a high priority. In this context, Australia supports the emphasis in the PIP on human resource development, especially improving health and education services and rural development. Australia has a particular commitment to these sectors and we are expanding our programs of support. We would also like to see the Cambodian Government increase the share of its budget that goes to health and education. In this regard, we strongly support Cambodia's plans to reduce defence and security spending from the curent 5 percent of GDP in 1996 to 3.5 percent of GDP in 1999 so as to allow for a substantial increase in outlays in priority social areas. The planned review of public expenditure to be conducted in 1997 is welcomed by Australia as an important planning mechanism for ensuring that capital spending is directed to human resource and rural sectors where the economic rates of return of projects are generally too low, and s:camlaos\cam\cgmeet\sp-overv.doc 26/6/976:14PM X., .  Annex 9 -53 - Page?7 of 7 the risks too high, to attract commercialinvestment. We are confident that the review process will assist the Governmentof Cambodiato take responsibilityfor prioritysetting and ensuringthat donor programs in large infrastructureactivitiesare not monopolisingfunds at the expense of rural developmentactivities. In conclusion,Mr Chairman,let me reiteratethat Australiais lookingto the CambodianGovernmentto continueits effortsin relationto good governance,revenuecollection,electionpreparations,fimctioningof the National Assemblyand maintainingthe Cambodianpeople's sense of security and confidencein their govemmentso that an economically strong and well-governedCambodia can be built, and so that the assistanceprovidedby Australiaand otherdonors can be effective. Thank you. s:\camlaos\cam\cgmect\sp-overv.doc 26/6/97 6:14 PM 11 , .... . F  Annex 10 - 54 - Page i of 3 U.S. Statement Cambodia Consultative Group Meeting Paris, July 1-2, 1997 On behalf of the U.S. Government, I would like to thank the World Bank and the Government of France for hosting the second Consultative Group meeting on Cambodia. It is a pleasure to meet with our Cambodian and intemational friends and colleagues in this most beautiful city. For the past 17 years, in concert with other members of the intemational donor community, the United States has strived to help Cambodia regain its former tranquility and resume the process of economic development. The United States was greatly encouraged by the progress made in the immediate aftermath of the UN-supervised elections. Since then the United States has joined Cambodia's many friends to provide substantial amounts of assistance and to include Cambodia in important bilateral programs. We acknowledge that progress has been made since the last CG meeting held in Tokyo about a year ago. The economy has continued its robust growth as a result of sound economic policies and a commitment to free market economics. This progress enabled the U.S. to extend Most Favored Nation (MFN) status and make Cambodia eligible for our system of generalized trade preferences (GSP). Similarly, recent economic progress has put Cambodia into a position to join ASEAN later this year. We hope that participation in international agreements such as these will have a positive long term impact on current political trends in Cambodia. Improvements have been made in other areas as well. In basic health, the Government has taken important steps to address the growing need for essential primary health services and a strengthened role for the private sector. We are committed to working with our partners in the Ministry of Health and the Cambodian private sector to build on this progress and help decrease current rates of infant, child, and maternal mortality significantly by the year 2000. We are also encouraged by recent steps the Government has taken to address the HIV/AIDS epidemic, including establishment of a national AIDS program in the Ministry of Health and the promulgation of national policies for HIV testing and counselling. 11' - -I  Annex 1 0 -55 - Page 2 of 3 In natural resources, we are encouragedthat the voice of the newly-established Ministry of Environmentis increasinglyheard in currentdebates over natural resources, balancing current uses against the need to conserve and plan for future generations. In this connection we applaud recent progress in halting the illegal cutting and export of logs, though much remains to be done. In education,we strongly support Governmentefforts to upgrade the quality of primary school teaching and establishmechanismsto increase participationby local communities. We view our contributionsin the sector as second in importanceonly to democracy and governancein terms of investmentin Cambodia's long-term future. In civil society, democracy and human rights organizationshave brought increasedpopular participationand heightened attentionto human rights. Active participationby these groups in the 1998 communal and parliamentaryelections will be critical to a smooth process and national acceptanceof the election results. Notwithstandingthis progress, serious issues remain in a number of sectors. For example, we note that the Governmenthas not followedthrough on its pledge at last year's CG meeting to increase the amount of resources going to the education and health sectors. Without a sustainedand increasedflow of public resources to these two critically important sectors, we are not optimisticthat the ambitious targets we have set with the Governmentfor Cambodia for raising the country's human developmentindicatorscan be realized. Illegal loggingpersists, with negative consequencesboth for the environment and for governmentaccountabilityand transparency. Not only are natural resources being used in an unsustainablemanner, very little if any of the public revenues from this industry are being used for urgent social needs such as basic health and primary education. For the near term we urge the Governmentto end unsustainableloggingand increase the transparencywith which it accounts for the revenues generated. For the longer term, we urge the Governmentto improve its monitoring of the natural resource base and expand the coverage of protected forests. The HIV/AIDS epidemic continuesto threaten dire economicand social consequencesif preventionand awareness activitiesare not reinforced and accelerated. We encourage Cambodia's leaders from all sectors to help in the fight to combat the spread of this deadly disease.  Annex 10 - 56 - Page 3 of 3 The United States and other intemationaldonors have investedlarge sums in portions of Cambodia's road network, only to see these roads deterioratefrom lack of maintenance. In some cases donors are rehabilitatingsections of road for the second or third time. The return on investment for road maintenanceis three to four dollars saved for every dollar spent, highlightingthe need for greater Governmentattention and investment. Most importantly,the lack of recent progress on electionspreparations, combinedwith violence, threats, and continuedhuman rights abuses, threaten to reverse the hard work and successthat has been achieved. It is heartbreaking that, as hopes rise that the decades-longbattle with the Khmer Rouge appears finally to be ending, talk of civil war and violence again clouds the thoughts of all Cambodians. We are encouragedby the Ministryof Interior's efforts to date developing an elections framework, and we are prepared to help finance a reasonablypriced and transparentprocess that leads to free, fair, and peaceful elections. We cannot move forward with effective assistanceprograms, however--eitherfor elections or in other areas--in the face of political polarization,fears of a return to violence, and the reductionin government effectivenessthat results. We call upon the political leaders in the country to set aside partisan politics and reaffirm their commitmentto the principlesof the Paris Agreemnent inc!udingpeace, democracy,and the rule of law for the benefit of all Cambodians. Thank you. m1'I- - r' '-'  Annex 11 -57 - Page 1 of 2 ASIAN DEVELOPMENTBANK STATEMENT ON MACROECONOMIC MANAGEMENT CONSULTATIVEGROUPMEETING- CAMBODIA PARIS,1-2JULY1997 Mr. Chairman,Excellencies, Distinguished Delegates. 1. On behalf of the Asian DevelopmentBank, we would like to thank the Govemmentof France,the World Bank, and the Royal Govemmentof Cambodiafor organizing this ConsultativeGroup Meeting.We also wish to congratulatethe Royal Government of Cambodia andtheWorldBankforthe reports whichtheyhaveprepared. 2. Cambodia's macroeconomic Performance during 1996 has been creditable. GDP grew by 6.5 percentdespitedamage to crop productioncausedby large scalefloods, thereby maintaining a trend growthrate of over 6 percentfor the 1990s.Prices have been relativelystablewith consumer priceinflationcontainedat 9 percent on final quarterbasis.This is a vastimprovement compared to annualpriceincreases of wellover 100percentin the early 1990s.The exchangerate has also remained stablewhileofficialforeignexchange reserves are now equivalent to abouttwo monthsof imports. However, despite thesepositiveindicators of macroeconomic performance, there are severalconcemswhich need to be urgently addressed. 3. In thefiscal area,totalrevenues are still below10 percentof GDP.At the same time, there are continuing pressures for excessive expenditures on defence,securityand civil service. This has constrainedthe ability of the Govemmentto undertake spendingon necessarypublic investments or the provisionof public goods and servicesexceptwhere extemalassistance is forthcoming. 4. Onthe revenue side,theMinistry of Economy and Finance has madestrenuous effortsto improvetax revenues. To this end, a comprehensive tax reformpackagehas been adoptedwith the enactment of theTaxationLawin February earlierthisyear.The Ministryhas also tried to ensurethat all nontax revenues, particularly receiptsfrom forestry and other naturalresources,are broughtwithin the purviewof the budget.A systemis also being developedfor inter-departmental exchange of taxpayer information.Despitethese efforts,off budget revenuecollectionby variousgovemment agencieshas persisted.Particularly, it is unfortunate that receiptsfrom the forestrysectorare still not accruingentirelyto the budget. There is also continuing revenueloss becauseof exemptions. As a consequence, there are largeshortfallsin revenuecompared to budget targets. 5. The Ministryof Economy and Financehas also attempted to exercisegreater controlover the management of publicresources,including all existingcommercial contracts, and public spendingwith the help of financialcontrollers who have now been assignedto variousline ministries. The processof PublicInvestment Programming has also now been integratedwith the budgetprocess.These measures and close monitoring have helpedto controlthe growthof publicexpenditure. Thefiscal deficithas accordingly been contained at about 6.5 percentof GDP. However, the pattemof expenditure remainsskewedin favor of defenceand securityspending. The1997budget is to be commended for attemptingto reduce the share of defenceand securityspending so that more resources are madeavailablefor - I I'- I  58 - - Annex 1 1 Page 2 of 2 socialspendingand publicinvestments. However, the resultsof such effortswill be limited without comprehensive civil serviceand militaryreform,includingenforcement of a cap on publicservicerecruitmentfor politicalreasons. 6. In the area of monetarypolic , the main challenge is the high level of dollarizationin the economy. Financial intermediation basedon the Rielis still verylimited.The high level of dollarzationimpliesa free foreignexchange marketand this probablyaccounts for the stabilityof the Riel.At thesametime,however, dollarizationhas impaired the abilityof the CentralBank to deployindirectinstruments in the conductof monetarypolicy.Reducing dollarizationwill requirea determined effortto reformthefinancialsector,startingwith reliable on-sitebankingsupervision, and promotion of publicconfidence in financialinstitutions. The Bank is exploring possible areasof assistanceto Cambodia in reforming the financialsector. 7. In the extemalsector,the stabilityof the exchangerate, a reserveposition adequate to covertwo months of importsanda debtservice ratioof only5.3 percentindicatea promisingbalanceof payments outlook.However, it is importantto note that underlying this stabilityis a verylargeinflowof extemal assistance,bothgrantsaswellas concessional loans. This financesa hugecurrentaccountdeficitof about15.6percentof GDP,whichreflectsthe largeresource gap betweenan investment rateof 20.7 percentanda national savingsrate of only 5.1 percent.In otherwordsCambodia's investment, andthe highgrowthwhichhas been led by this investment, is largelyfinancedby foreignsavings. The continued flow of extemal fundswill inevitably dependuponinternalpolitical stabilityand confidence of the intemational community andthe privateinvestors. 8. It will be evidentfrom this brief overviewof macroeconomic performance that Cambodia'smajor economicchallengesare all ultimatelytraceableto politicalconcems. Thoughthe importance of soundmacroeconomic management shouldnotbe underplayed, the most urgent issuesconfronting Cambodia today are political,not economic. The citizensof Cambodia and their wellwishersin the intemational aid community and the privateinvestors need the confidence to look forwardto a stablepoliticalenvironment as the countrymoves towardselections.They need the assurance that good govemance, accountability,and the rule of law will prevailso that the urgenttasks of development and povertyreductioncan continuewithoutinterruption. Thankyou. EY K  :3s AM 7197 JH Annex 12 .rc _ Page 1 cf 2 GROUPMEETING CONSULTATIVE FOR CAMBODIA Paris,July 1-2, 1997 Statement by Mr. GwynMorgan, Headof Delegation Commission for the European Mr. Chairman, Ladiesand Gentlemen, Excellencies, On behalfof the EuropeanCommission, I wishto thankthe WorldBank as organizers of this ConsultativeGroup Meetingand also the Government of Francefor its hospitable "accueil". The goodwilland long-termcommitment of the EC to Cambodiais not in question. This is best exemplifiedby the EuropeanCommunity-Cambodian Cooperation Agreement signedin Luxembourg on 29 April, 1997by H.E. KheatChhonon behalfof Cambodiaand by H.E. Hans Van Mierlo (Netherlands Ministerof Foreign Affairs and EU Council of Marin(European MinistersPresidentin Office)and Vice-President Commission). This Cooperation Agreement for EC-Cambodian providesthe framework cooperation in a wide array of sectors. The EuropeanCommunity-Cambodia CooperationAgreement containsa humanrightsclauseand theEC welcomesCambodia's to it. commitment The EC applaudsthe successfulimplementation on the ground in Cambodiaof its majorprogrammesespeciallyin the field of rural development and primaryeducation. The positiveattitudeof our Cambodianpartnersin the Govemrnment both in PhnomPenh and at provinciallevel has beenmuchappreciatedand has contributedgreatlyto the successof these prograrunes. In additionthe willingpartnership of the Cambodianauthorities in investigating and movingto eliminatefraudand falsecertification in the fieldof textileexportsto the European Unionis highlycommended. There aremanysuchpositiveelementsin our mutualpartnership.However, thereare areas of serious concernto the EC. Primaryconcernsare the inadequacyof measuresto eradicate illegal logging and to preserveCambodia's forest heritage;the loopholesand excessiveconcessions in tax collectionwhichdepriveCambodiaof revenuewhich is much needed;the grantingto StateInstitutionslike the militaryof privilegedaccessto commercial activities: In essence the overall accountabilityof the CambodianGovernmenthas to be enhanced. The announcementof the date of 23 May, 1998 for the holding of elections is sincerelywelcomed. The EC and all donor partnerswould welcome a loud and clear declarationby Cambodia'spoliticalleadersthat intemational observerswould be invitedto be in attendance at the electionprocess. Thiswouldalsobe an unmistakableindicationof the CambodianGovernment's commitment to freeand fairelections. m1'1 - H  Annex 12 - 60 - Page 2 of 2 cooperation The courseof EC-Cambodian by actionin wouldbe furtherstrengthened the aboveareasof concern. The European Commission between 1991-97 has provided more than 200 millionECUs of assistance to Cambodia. The EC will in 1997 consolidateits development assistancein ruraldevelopment, institution primaryeducation, building,health, demining,humanrights,the civil societyand goodgovernance.Additionalcommitments of some60 mnillionECUsin grantaidmaybe envisaged. The EC is also committedin 1997/98to the successfulestablishment of the electoral processleadingup to the 23 may, 1998pollingday. In this regardthe European Commission, with the full encouragementof the EU Member States, is currently e*amining the mechanisms for granting7 millionECUsto establishan electoralregisterto ensure proper participationin the elections by all Cambodian citizens. In addition, the European Commission in orderto showits frTm commitment to the presenceof internationalobservers at the May 1998electionshas set asidea further2 millionECUsforthis purpose. Between 1993 and 1996 the EC via the EuropeanHumnanitarian Office (ECHO), contributedemergency and humanitarian (mainlyin demining, assistance medicalprostheses, foodaid and help to displacedpersons) of some 12millionECUs. This humanitarianaidwill continueto be an important featureas in the past. Finally,Mr. Chainnan,let me expressmy beliefthat at this momentthe creationof a peacefuland stable society in Cambodiacalls for strongnerves on the part of donorsand Wongand sensitiveleadership by the Cambodian Government. liE r  Annex 13 -61 - Page 1 of 3 Joint Statement of United Nations Representatives to Cambodia' on the occasion of the second Consultative Group Meeting. Mr Chairman, Excellencies, Ladies and Gentlemen, The United Nations continues to play a prominent role in Cambodia, following its unusually large contributions to the welfare of the country through the 1979-81 humanitarian relief effort, UNBRO and UNTAC. The current challenges are first, to support Cambodia in its tansition from rehabilitation and dependency to capacity-development and self-reliance; and second, to help the country respond to the global calls to action, emananting from the international conferences of the 1990s. In 1996, collectively, we delivered some $88 million in grant cooperation to Cambodia, which includes S 60 million from associated donors. In our statement last year in Tokyo, we emphasised our principal focus on the alleviation of poverty and for placing development on a basis which is sustainable - in terms of both use of natural resources and indigenous capacity. We also expressed our support for Cambodia's own efforts to establish the Rule of Law, respect for human rights and a free market economy. Our focus and our support remain the same. While noting that poverty alleviation is the prime objective of the Royal Government in its Socio-economic Development Plan 1996-2000, and while recognizing that the defection of most of the Khmer Rouge has placed unexpected demands on the National Budget, we nonetheless regret that it does not appear to have been possible to shift the allocation of expenditure from non-productive military and police expenditures to development needs, such as education, vocational training, health and agriculture. We certainly trust that this will be given a high priority in future and become visible in actual public expenditures. We very much share the concern of others that the collection of revenue by the Treasury is falling short of targets. We are concerned at the negative impact on operational expenditure for socio-economic activities. The percentage of GDP going to the national budget is very low, even when compared with countries with similar per capita income. It is neither realistic nor reasonable to expect the intemational community to substitute with its taxes for revenue which should be collected within Cambodia itself. We were strongly reminded in Tokyo last year, that Cambodia is predominantly rural and agricultural and likely to remain so for some time to come. Yet much of the development of recent years has been in the cities - and especially in Phnom Penh. This imbalance has been recognized by the Royal Govemment and future outlays are designed to reverse this trend. We endorse this position and urge that investments in and support to education, vocational training, health and other services as well as physical infrastructure be extended to all parts of the country, to improve the lives of the people and to reduce the pressures of urban migration. In particular, we draw attention to the need to pursue the ongoing efforts at rural development and to share experiences and "best practices." FAO, ILO, UN Centre for Human Rights, UNDP, UNESCO, UNFPA, UNHCR, UNICEF, IFP, WHO 111  AD I re,: 1 -62 - Page -2 of 3 There is considerablescope for increasedand diversifiedagriculturalproduction.The small surplus achievedin rice productionin the past two seasons- despite extensiveflooding in 1996 - is a positive indicationof what the countrymay hope to achieve.However,this does not translateautomaticallyinto food securityfor all Cambodians. Accessto food is dependent not only on overall availablitybut also on markets,roads and purchasingpower. Nutrition rates are low, a recent survey showingthat half the childrenunder five are malnourished. Similarly, recent poverty mapping revealed 165 communes as severely food insecure, representingsome 850,000persons. The United Nations in Cambodiahas workedclosely together,as well as in collaboration with the World Bank and other national and intemational agencies, to support the establishment of a national poverty monitoring and analysis system in the Ministry of Planning.Throughannualhouseholdsurveys,it willbecomeprogressively moreclear where poverty is located both geographically and socially. The Census,planned for March 1998, will also provide much needed data to furtherinformthis process.This will in turn permit better targeting of poverty alleviationprogrammes.This must be matchedby a determined effortto mobilizeresourcesto fund and implementsuch programmes. Economicgrowth and enhancedrevenuecollectionwill be key to achievethesegoals. We reiterateour deepconcern,expressedlast year- and sharedby manyothers- at the largely unmanagedand unplannedexploitationof Cambodia'srich endowment of forestsand water. We note the progressmadesince lastyear,but we also note and sharethe continuedconcems listed in the report (availableto this Meeting)of the recent WB/UNDP/FAO mission to review the forest sector. In addition to assistanceto forest resources assessment,we are supportingefforts to ensure the sustainableuse of the unique Tonle Sap lake/riversystem, which is threatenedby a combinationof siltationcausedby deforestation, overfishing,and potentiallyby water pollution. We look to a concertednationalprogrammeto preservethis resource, while harvesting its renewable bounty for present and future generations. Its imminentrecognitionas a BiosphereReserveshouldencouragethis. People are both the agentsand the beneficiariesof development. As Cambodiapreparesfor its formal entry into membership of ASEAN, greater attention must be paid to the developmentof its humanresources,especiallyits womenand younggirls. The 1997Human Development Report lists Cambodia as the poorest of the ten actual and prospective members.Improvedand universalbasiceducation,adult literacycampaignsand demand-led skills and farmer trainingare neededto enable the upgradingof the labourforce for a more competitive environment.Half the population remains without access to health services, while accessto safe drinkingwater and sanitationis evenmore limited.The rate of increase in HIV/AIDSinfectionis estimatedto be amongthe highest in the world and will soon be reflected in higher mortality rates. Awarenessof risk is now widespread,but special and urgent programmes are needed to reach vulnerablegroups and to change behaviour.The trfficking of women and childrenfor prostitutionis particularlytragic in this context and we urge the Governmentto step up action to combat it, based on the findings of the National Assembly'sCommissionon HumanRightsand Reception of Complaints. The United Nations stands readyto supportthe RoyalGovernment with the extensionof its socioeconomic porgrammesinto those areas until recentlyunder the control of the Khmer  Anrex: 1] - 63 - Page 3 of 3 Rouge. This will, however,requiresupplementary resourcesto consolidatethe peace-building process. We look forwardto the elections,to be fully organizedand managedby Cambodians,with support from extemal sources.Time is now of the essenceand we urge that the necessary legislation be passed so that the processmay begin. In this respect,we look forwardto the resumptionof the functioningof the NationalAssembly.We support all national efforts to establish the rule of law with an independentjudiciaryand administration. Apart from their intrinsic benefits to the people, we believe that they are essential to attract and retain responsible long-term investors. We are directly concemed by the slow progress in administrativereform and civil service salaries,without which much of the public sector capacitydevelopmentwe supportwill be lost. The promotionof democraticinstitutionswhich can play an effectiverole in the social and economic developmentof the country, internationallytecognized free and fair elections, effective public administrationreform, a clear move from militaryto human development outlays, enhanced domestic revenue generation,and sustainable managementof natural resources- all of these are Cambodianimperatives they will also reassurethe in themselves: intemational conmmunity that Cambodiais well on the way to achievingself-relianceand assumingits full role in the regionas well as in the world. .. ~ ~~~~~ ~~~~ . . *  Annex 14 - 64 - Page 1 of 2 CONSULTATIVEGROUP MEETING FOR CAMBODIA 1 - 2 JULY 1997 BY NORWAY STATEMENT Mr.Chairman, Norwaywelcomesthe opportunity to participatein the Consultative GroupMeeting and I would like to commendthe Cambodian Government and the WorldBankfor their presentationsand the excellentdocumentation preparedfor this meeting. Developmentco-operation In its reportno.19 (1995/96)to the Storting(theNorwegiannationalassembly)A Changing World,the Government outlinedthe main elementsof the Norwegian policytowardsdevelopingcountries. The mainobjectivesof Norwegiandevelopment policyareto combatpovertyand contributeto lastingimprovement in living conditionsand qualityof life for peoplein developingcountries. We thus want to promotesocialand economic justice on national.regionaland globallevels.TheWhitePaper also stressesthe importance of humandevelopmentand institutionalstrengthening and capacitybuilding. In additionit is an aim in our development co-operationpolicyto contribute to a sound management of the environrment. Norwegiandevelopment co-operation supportsthe recipientcountries'own developmenteffortstowardseconomicgrowth,sustainabledevelopment, environmental protection,democratisation and respectof humanrights. We therefore welcomethe initiativestakenby the Cambodian Government in the National Programmeto Rehabilitateand Development Cambodia, wherethe over-riding objectiveis "to achievea fair,just and peacefulsocietythroughaccelerationin the rate of economicgrowthin order to raisethe livingstandardsof all Cambodians". We also agreewith the CambodianGovernment that environmental considerations shouldbe integratedinto the development and implementation of socialand economic polices. Norwegiansupportto Cambodiaoriginatesfrom severalbudgetlines,chnnelled through variousco-operationmechanisms.Thesebudgetlinesare Cambodia'sshare of the Norwegianregionalallocationfor Asia,the globalallocationsfor environment and otherglobalallocationslike commercial supportarrangements and fmancial schemesfor investment and privatesectordevelopment as well as the special allocationfor non-govermmental organisations. The objectivesfor Norwegiandevelopment co-operation with Cambodiais to contributeto strengthening the democraticdevelopment and improvingthe human rights situation;institutionbuilding,includingcompetence buildingin governmental institutions;and combatingpovertythroughruraldevelopment, mainlyfocusingon health and educationalaspects. Other possibleareasfor supportare mine clearance, education,environmental protectionand culturalactivities. in'  Annex 1A -65 - Page 2 of Norwegiandevelopment co-operation with Cambodianin 1996amountedto approx. NOK 37,6 mill kroner, aboutUSD 5,2 mill, of whichNOK 10.2mill (USD 1,4mill) was from the Regionalallocationfor Asia. For 1997,NOK 10mill (USD. 1.4)of this allocationis earmarkedfor Cambodia. Norwayis in the processof developingan aidprogrammein Cambodia,basedon the objectivesreferredto. As both the Norwegianand Cambodianadministrative capacityis limitedin this initialphase, multilateralorganisation and Norwegianand local non-governmental organisations representimportantchannelsand implementation mechanismsfor the Norwegiandevelopment assistance. As of today,Norwegiannon-governmental organisationsworkingin Cambodiaare focusingmainly on rural development and primaryeducation. The contactwith multilateralorganisationswas strengthened during 1996. ThroughWHOsupportis given to strengthenthe provincialhealthservices,throughUnicefNorwaysupportsa communitybasedrural development program,and throughUNDPsupportis givento educationaleducationas well as to a projectaimingat strengtheningthe competence and capacityin thejudicial system. TheNorwegianGovemment,Mr. Chairmanis lookingforwardto a continuedfruitful co-operation with other donorsin assistingthe CambodianGovernment in its development efforts. However,as alreadypointedout by Norway,aid programmes couldbe jeopardizedby continuedpoliticalinstability.In our view, it is of outmost importancethat internalstabilitybe restoredand the democraticinstitutions strengthendin Cambodia. It is also vital that freeand fair electionstake placeas soon as possible. Thankyou, Mr. Chairman |11' -  Amne-x14A -66 Page 1.of 2 Consultative Group Meeting for Cambodia Paris, July 1-2 1997 Session I Statement by the Danish delegation Mr. Chairman Excellencies Dear Colleagues On behalf of the Danish Government, I would like to join the pre- vious speakers in expressing our sincere thanks to the World Bank for chairing and hosting this meeting. The meeting confirms the transition of Cambodia from a state of recovery to a search for long-term development. During the last four to five years rapid changes in Cambodia have indicated an unmatched commitment by the Cambodian people to focus on future stability, development and prosperity, and regional coo- peration in an open market atmosphere. Changes toward economic, social and political stability and deve- lopment have been strongly rewarded by the international donor community. External assistance to Cambodia has doubled over the last five years to a level of almost two billion US Dollars in 1996 and the scope of assistance has now largely changed from hu- manitarian to developuent oriented activities. Sadly, incidents over the latest months have shaken the newly gai- ned stability of the country. It is strongly hoped that the latest troubles will not jepardize the overall development of the country and that Cambodia shortly will proceed along the established path of sustainable development. Also, it has been noted that Cambodia's economic performance in the first part of 1997 has not reached the set goals. In this re- gard, I would like to join those who have pointed out that it will be of crucial importance that appropriate measures are taken to increase state revenue through measures such as increased special taxes, customs revenue collections, revenues from log exports etc. For Cambodia to experience sustainable economic development a num- ber of important reforms are seen to be necessary. Denmark fully supports efforts to establish "Good Governance" in Cambodia. Good Governance - in its wider perspective - will contribute to increa- sed transparancy in government decision making, improvement in the human rights situation, as well as improved freedom of the press and security of politicians, civil groups and journalists. Since 1991, Denmark has contributed to the reconstruction of the Cambodian society within the frame of a transitional assistance programme. The programme which focuses on democratization; judici- ary reforms; human rights and free press initiatives will be ter- minated by the end of 1998. In this last phase, the programme is mainly focused on election support. However Danish grant assistan- T  tnnex. 7.4A -6 - Page 2 of 2 ce to Cambodia is expected to continue in the years to come within the frame of the special Danish Environmental and Disaster Relief Fund. Grants allocated through this fund will be allocated to im- prove sustainable use of natural ressources, environmental protec- tion and poverty alleviation for local communities. Mr. Chairman, It is a pleasure today to reconfirm the commitment of The Govern- ment of Denmark to support the efforts made by the Cambodian Go- vernment and its people towards the reconstruction and long-term development of Cambodia. -Il 1F.'  Ainriex 15 -68 - Page 1 .)f 3 CONSULTATIVE GROUPMEETING FOR CAMBODIA PARIS JULY 1-2 1997 SWEDISH STATEMENT Mr Chairman,Exellencies,DistinguishedDelegates, It is a great pleasure for Sweden to take part in this meeting and to see H.E. Keat Chhon heading the delegationof the Royal Governmentof Cambodia I would also like to express my appreciationto the World Bank for arrangingthis second Consultative Group meeting for Cambodiaand for the excellentdocumentation prepared for this meeting. The World Bank Report makes clear that Cambodiahas made significantprogress in stabilizingthe economy, in restoring economicgrowth, and also in undertaling policy reforms to transform the economyinto a market-oriented one. Sweden can concur with that view but also with the view expressed in the report that many challengesare still confronting Cambodia, such as a weak revenue effort, inefficientexpenditure allocation, and weak institutional capacity. It is evident that political tensions may jeopardize future developments.A constructive and successfiul cooperation between Cambodia and the donor conmunity assembledhere requires clearly more stable and secure politicalconditions. In this perspectivethe national elections, as was announced yesterday, on 23 May 1998 are of crucial importance. It is encouragingto note that the coalitionpartners agree that national elections shallbe held and that a date has been set. It is now vital that the necessary legislationis adopted expeditiouslyand that practical steps are taken to prepare the elections. We were encouragedby the statement of the RGC on this matter yesterday,The Swedish Govermment is ready to support the electionprocess while expectingthe RGC budget to sustain a substantialpart of the costs, which should be contained at a reasonablelevel. Elections are a national concernalthough certainly meriting international support. Swedenexpects the UN systemto have a coordinating role in the international support of the elections, includingobservers. I would also like to emphasizethat reinforcingand sustainingan orderly civil sociey that guarantees a minimumof respect and safety to the individuad is a prerequisitefor long tcrm social and economic development. In his report to the UN Commissionfor Human Rights of April 2, the Special Representativeof the Secretary General for Human Rights refers to the clear need of reform and strengtheningof the legal and judiciary system. He stresses a number of serious shortcomingsin the functioningof the legal system and emphasizesthe importance of conveningthe Supreme Councilof Magistracy. We are also concerned about Article 51 in the Civil ServiceAct which, as it stands now, in practice seemsto grant inpunity to civil service staff and military personnel, and would appreciate clarificationon developmentwith regard to the proposed amendment of Article 51. -Il , . ..... - ...  Annex 15 - 69 - Page 2 of 3 Let me againreferto the statementofthe SpecialRepresentative ofthe Secretary Generalfor HumanRightsand stressthat in theseandotherfields,furthereffortsmust be madeto promoteand securehuman rights in Cambodia. Wewouldliketo urge the RoyalGovernment of Cambodia to payparticular attentionto theseaspects, drawingalso on adviceand experience organizations. of international As referredto above,the WorldBankReporthighlights bothachievements madeand challengesfacingCambodia and we can to subscribe much of the analysis in the Report.Remarks willherethereforebe limitedto a fewaspectsthat the Swedish delegation importance. findto be of particular Newfiscalmeasuresfor increased resourcemobilization havebeenintroduced and should,if properly implemented, improvethe financialsituation.Presentbudgetary havehad negative difficulties for resourcesavailable implications for socialsectors. Thisis regrettable,as the socialsectorsare of vitalimportance for the long-term development prospectsof Cambodia. Thereneedsto be an increased emphasis on the socialsectorsin the government budgetand a considerable decrease in military expenditure,cashing in on the peacedividends" as suggested by theRoyal Government of Cambodia. Themajorpartof the armedforces,themselves occasionally shouldbe demobilized. a threat to stability, Preparations, suchas cost estimates and workplansfor demobiizations, shouldbe initiatedso thattheycanbe put intoactionat the propermomentafterthe elections in 1998. Membership in ASEANwilileadto decreased incomefromcustomsdutiesandtrade taxes.Thesesourcesmustbe substituted and it willthereforebe evenmoreimperative to collectall publicincome throughthe Ministry of EconomyandFinance, as emphasized by theWorldBank.Exemptions fromstipulated fees andtaxesshould thereforebe carefully scrutinized. capacity Reforms arealso neededwhenit comesto administration.Theinstitutional be strengthened. must obviously reformmustbe givena Thepublicadministration and moretransparent renewedimpetus,aimingat a streamlined administration. At the ConsultativeGroupmeeting in Tokyolastyearthe RoyalGovernment of Cambodia pledgeditselfto bringthe forest sectorundercontrol.Somepositive measures havealsobeentakensincethen.It is encouraging that exportof logsand largesizebeamshavebeenbanned, that a SteeringCommitte forthe Organization and Implementation of ForestPolicyhasbeenestablished and that reviewsof various aspectsof theforestpolicywillbe carriedout by international consultants.Theseand othermeasures mustbe pursuedin orderto ensurethat theactualharvesting is limited level.Regrettably to a sustainable the fellingseemsto continueat a non sustainable level,apparently sometimes withtheactiveparticipationor protectionof militaryunits. Thenecessity of a soundforestrypolicyis evident.Bothfinancial and the benefits and environmentalreasonsspeakin favourof furthermeasures bythe RoyalGovernment of Cambodia forestry to gainfirmercontrolof the forestryand to ensurea sustainable policy.  Annex 15 -7 0 - Page 3 of 3 Sweden is in broad agreementwith the orientation of the development policy of the Royal Govermment of Cambodia as it has been presented.Particularlywe would like to stress the importance of rural developmentin order to redress presenturban/rural imbalances.Health and education need, as already stressed, increased support from the government budget. Cambodia is since 1995 one of Sweden'slong term co-operation partners and a two year developmentco-operation agreementis in force since January 1997.The Cambodia-Swedishcooperation focuses on rural development,basic education,mine clearing and promotion of human rights. In will be reviewed at the end of 1998 in light of political developments. A general observation on our part is that gender equity consideration should be given more attention and should be integrated into developmentprogrammes and projects. Particular emphasisshould be givento gender equalityaspects of programmeswithin education and rural development. Finally,Mr Chairman,we note that Cambodiawill soon be a member of ASEAN. Cambodia may face some transitionalproblems as a new member,adjustingto the demands that membershipwill entail. We are, however, confident that a longer term participation in regional cooperation will be to the benefitof Cambodia.This, in combinationwith lessened politicaltensions, well-preparednational electionsand continued support from the internationalcommunity,will certainlyenhance the development prospects of Cambodia. Thank you, Mr. Chairman. n1~ F.-  Annex 16 -71- Page 1 of 2 Cambodia Consultative Group Meeting Paris. 1st - 2nd July 1997 GermanStatementon session1:Macro-Economic Issues Mr.Chairman, LadiesandGentlemen, Firstof all, I wishto join the previousspeakers in thanking the WorldBankfor organizing this conference, and the World Bankand the Cambodian delegation for preparation of usefuldocuments servingasbasisfor our discussions. This conference offers the opportunityto look back to achievements duringnearlyfour years of rule under the first freely electedCambodian Government and to discussthe mainchallenges andtasksto be solvedmainlyby thenewgovemment to be formedafter electionsnext year. Duringthe pastfour years certainly muchhas beenaccomplished, with substantial support frommanydonors,in restoring the civilsocietyandthe economic basis, in building-up an institutional frame-work and in improving the livingconditions of fortner refugees and the population in general. The remarkableaccomplishments reached in certain areas and the future prospectsare, however,over-shadowed by persistingpoliticaltensionand instabilityalthoughthe menacefrom the KhmerRouge seemsto be vanishing. I wishto expressthe deepconcernof my govemment aboutthe political crisis which became apparent in the recent past, and the wish that the parliamentary electionsin May1998are carried through in a fair andtransparent manner. Comingto the economic situationand prospects,I sharethe viewof the recentWorld Bank CountryMemorandum that Cambodia is nowat the cross-roads andthat the main task is to menageproperlythe transitionto a more self-sustained development. In this regard, intensified efforts to mobilize internal budgetaryresourcesare of utmost importance.The moderntax system introducedwith the new Law on Taxation in February 1997,is now decisively to be implemented, for whichi.a. improvements of the tax administrationare needed. Furthermore, we strongly support the WorldBankreportin its demandto strictlylimitthe extensive grantingof ad hoc exemptions, as it happened lastyearevenfor luxuryautomobile imports.Also,we urgethe Cambodian govemment to bring extrabudgetary revenues underthe controlof the competent Ministryof Economy and Finance,to improve the transparency and the parliamentary controlof the budget processandthe management of publicassets, andto adhereto strictdiscipline in public spending while shiftingtheexpenditures to civilianpurposes,to the extentpossible. Or - I'  Annex 16 -72- Page 2 of 2 A matterof deepconcemfor my govemment is the reportedlyongoing mismanagement of the forestryresources, mainlyin theformof uncontrolled loggingand log exports,over- exploitation,under-valuation of royalties and extra-budgetary use of the revenues. Withoutdecisiveimprovements in thisregardin thenearfuture,mygovemment willfind it difficulttojustifyfurthersupportof Cambodia withGerman taxpayer'smoneyvis-a-visthe increasingly criticalgermanparliament andpublicopinion. As in the case of forestry policy, in the area of administrative reforms previous expectationsand promises weredisappointed until now.My government sincerelyhopes that seriousactions are undertakenin the near futureto build a consensuson the objectives and concrete targets of this importantreform and to accelerate its As regardsthe militarydemobilization, implementationl. it seemsthat the preparatory workshavemadesubstantial progress in the recentpast.My government is preparedto supportthisprogramme with technicalaid. In conclusion, onecan notethat duringthe pastfouryearssubstantial progress has been madeunderdifficultconditions in the recovery andthereform of the Cambodian economy and society.Seriousdown-side risks, stemming mainlyfrom politicalinstability,intemal insecurily,weak Institutionsand other deficiencies in the frame-workconditionsare threateningthe achievements reachedand the prospects for furtherimprovements. It is, therefore,of utmostsignificance to betterobserve the rule of law and the principles of democracyand of good governancein order to bring about internal peace and confidence in a brighter of the population future. Thankyoufor your attention. (' *~ ~ f _. _ I  Annex 17 -- 73 - Page 1 of 3 CAMBODIACONSULTATIVEGROUP PARIS. 1-2 JULY 1997 STATEMENTBY THE UK DELEGATION Mr Chairman It is a great pleasurefor me to representthe United Kingdomat this important meeting. I would like to express my thanks to both the FrenchGovemment and to the World Bank for their hard work in ensuringthat the arrangements for the meetinghave gone so smoothly. The UK is proud to havebeen closely involvedin the UN processwhich helped to restore multi-partydemocracyto Cambodiain 1993. Since then, much progresshas been made towards stabilisingCambodia'seconomy, generatingreal economicgrowth and controllinginflation. Cambodia's accessionto ASEAN will presentnew opportunitiesand challenges. These significantachievementsneed to be nurturedcarefully,in an environmentof politicalstability and co-operation. Only then will they be able to deliver durablebenefits for the Cambodianpeople. But Cambodiaalso faces a number of seriousproblemswhich the Royal Govemmentmust tackle urgently if the countryis to take advantageof the opportunitiesthis favourablesituation affords. First, social and economicprogress risks being underminedby political instability. This not only affects securityand the effectivegovemmentof the country in the short term, but jeopardises progresstowards the next round of electionswhich we and most of Cambodia'sdevelopmentpartnerssee as a crucialtest of the country'sadherenceto democracy. It is particularly importantin a democraticcountrythat the NationalAssemblyshould function properly. Second, further progress is neededon the promotionand protectionof the rule of law and human rights. We welcomethe announcementthat national elections will be held on 23 May 1997. We urge the CambodianGovemment to finalise the preparation of the necessarylegislativeframeworkas soon as possible. It will be importantto ensure that these elections are demonstrably free and fair. Third, we recognisethe progresswhich has been made to improve transparencyin the forestrysector, and particularlyto curb illegal logging. However, there are still abuses in some areas which need to be tackled seriously by further measures. Failure to do so will denythe govemment importantrevenuesthat could be spent on improvedservicescritical for human development,and it will lead to environmentaldegradationthreatening the livelihoodsnot only of poor Cambodiansdependenton forest products, but farmers who need reliable stream flows. We supportthe n !~~~~~~~f  Annex 17 -74 - Page 2 of 3 rcomrmmdations of theWorldBank, UNDP andFAOthatan actionplanfor sectoral development andreform shouldbe drawnup,granting of conoessions shouldend untila satisfactory policyandregulatory framework is in place,exporttax exemptions shouldbe reconsidered, andtheDepartment of ForestryandWildlifegivenfull authority to implement its regulatory and administrativework.We callon theco - PrimeMinisters to demonstrate their politicalsupportfor thesemeasures. there area number Finally, of economicchallenges. TheRoyalGovemrnment needsto Intensify the baseof economic its effortsto broaden growthand reduceruralpoverty.Development whichexcludesthevastmajorityof the population is likelyto proveunsustainable andcouldleadto furtherpolitical instability. Whilethe outlook for economic growthis generally good,Cambodia remains overlydependent on officialextemal assistance to finance the fiscaldeficit. To breakthisdependence, Cambodia urgentlyneeds to makebetteruseof its owndomestic resources.Further strengthening of taxadministration,the eliminationof inequitable tax exemptions, anddetermined actionto bring extrarevenues intothe budget are crucial.Stronggrowthin GDPshouldbe matched by sustained increases in revenue; failure to achieve thiscouldbe perceived asweakness or evencorruption in government. Thecomposition of Government expenditure in Cambodia is alsoa concem. Fiscaldisciplinehasbeenmaintained, despite in revenue shortfalls and higherthan budgeted expendfture on securityanddefence, by compressing expenditure in healthandeducation andothersocial sectors vitalfor human development. Delays in publicadministrativereform andrecentrecruitment of morecivilservants suggest that improvedandaffordable publicservices remainyearsaway. Considerably moreprogress in all theseareasbe needed beforethe nextCG if the confidence of Cambodia'sdevelopment partners is to be maintained andcurrentlevelsof investment,includingof development areto assistance, continue. I shouldlikenowto tum to the UKdevelopment programme. assistance As mostof you willknow,as of I Maywe havea newGovernment in theUK. Its policies on intemational developmentare still underdiscussion, buti is clear that it willwishUKdevelopment assistanceto focusmoresharply on reducing poverty.Forthepresent, however,we do notexpectany rapidchange in the sizeor natureof our programme in Cambodia. At the 1992MinisterialConference on the Reconstruction andRehabilitation on Cambodia in Tokyo,the UKpledged of a totalof $30millionin support Cambodia's development. I amdelightedto report thatwe havenow exceeded that pledgein termsof actualspending - up to March1997,some $36 millionhas beenspent. X1 K  Annex 17 -75 - Page 3 of 3 Since the last CG in July 1996, we have committedand spent some $6 million in bilateral developmentassistancein our main priority areas of health, educationand urban povertyas well as mineclearanceand supportfor NGO programmes. The UK also providessubstantialsupportfor Cambodia through multilateralchannels includingthe EuropeanUnion,the Intemational DevelopmentAssociationand the Asian DevelopmentBank. For the future, we expectto spend at least $5 millionin 1997/98from bilateral souroes including supportfor NGO assistance. All of this will be new money not committedat last year's CG. As before, our bilateralaid will be in grant form. No debt burden will accrue. The main focus of our aid will continueto be human development; health, education and urban poverty: a) in health, our supportto strengthenhealth systemsis committeduntil the end of this year and a further phaseof support is under consideration. We will continue our supportfor malaria controluntil the new EuropeanUnion project is well established. We havejust committedthree years of funding to a major UNFPA reproductivehealth project,and we are consideringfurther support to social marketingof condoms b) in education, we havejust signed a formal agreementwith the Royal Govemmentto continue our efforts to enhance CambodianEnglishteaching capacity in secondaryschoolsfor three moreyears c) we will continue to addressurban poverty by co-financinga projectwith UNDP in PhnomPenh. Given our interest in the democraticprocessin Cambodia,we are also consideringways in which to supportthe forthcomingelections, in close co- ordinationwith other donors. More generally,we shall continue to supportefforts by donors to improveco- ordinationto ensure that official assistanceis focused on key prioritiesand that the various programmescomplementeach other. Indeed,many of our projects are managedin partnershipwith UN agencies. Mr Chairman,let me say in conclusionthat the future for Cambodiawill not be easy. But there is a great opportunityfor the countryto develop providingthe main challengesto which I have referredare urgentlyaddressed. The main responsibilityfor this restswith the Royal Govemment. But the UK will continue to play its part as a partnerin helping to build a more stable and prosperousCambodiain the future. ]fl''' -V''' [  I FLI Annex 18 - 76 - Page 1 Cooperotion Commiiese forCombodio br Cmboda omile de Coopirataon L' (-Ad ndIul Embuirt:,dunhil 1 I July 1997 Consultative Group Meeting pour le Cambodge Paris - July 1, 1997 Opening Remarks from the NGO Community Delivered by Mr. Thun Saray The NGO community in Cambodia, represented here by the Cooperation Committee for Cambodia, welcomes this opportunity to contribute to the second Consultative Group Meeting on Cambodia here in Paris. I am Thun Saray, the director of ADHOC, a human rights NGO. But I am here today as the elected representative of the NGO community in Cambodia, as well as the only Cambodian citizen at this meeting not affiliated with the Royal Government. In the prepared statement distributed in advance of this meeting, NGOs identified four priority themes as necessary to the long term, sustainable, and equitable development of Cambodia. These themes are relevant to many of the specific issues that confront the Royal Government and about which the international donor community is concerned at this meeting, and include: I1. Human resource development as the priority strategy towards development. 2. Political stability as a precondition to development. 3. Focus on the countryside. 4 Improve coordination between and among Government, donors and NGOs so that funds, energy and absorption are not lost. In the NGO statement, we have also offered two case studies from the health and education sectors, which are illustrative of some of the challenges facing the Royal Government and the donor community in the effective use of humanitarian aid. NGOs are committed to continuing to support the Royal Government's development objectives, and believe that the Government's framework for development is essential to the success of our own efforts to improve the lives of Cambodians. Therefore, the NGO community calls on the Roy4 Government to provide strong and unified leadership, without which we cannot hope for the just and sustainable development of Cambodia. NGOs havc experienced the political tension that has further divided Cambodians in recent weeks. We are concerned about increased violence, the uncertainty of the Cambodian public facing this instability, and the undoing of development work already underway. NGOs support a spirit of compromise that will allow Cambodians to live and work together peacefully to rebuild the country; and we believe it must extend from villagers to political leaders. NGOs have a long history of assistance to the Cambodian people. This assistance has been continuous, whatever the political circumstances of Cambodia. NGOs wish to take this opportunity to affirrm that as has been the case in the past and present, NGOs will continue to assist the Cambodian people in the spirit of humanitarian aid and solidarity. This commitment to the people of Cambodia remains firm, as does our belief that Cambodians can and must find solutions to the challenges that presently face the country. U1-' .. '' V' f'-  Annex 19 -77- Page 1 of 3 CONSULTATNE CAMBODIA MEETING GROUP 1-2July Paris, 1997 ADenda and Itnn 2: Priort Prowamms Neds Invesbment by Statement Mr.KEAT CHHON in-charge Sr.Minister and ofRehabilitation Devebpment of Economy Minister and Finance Government Royal ofCambodia Mr.Chairman, Excellencies and Ladies Gentlemen, 1. Wehave crculated toyoutheRoyal Governrents paper background forthismeeting.It ouflines ourpastprogress, and futureprogrammes, proposals and forthedevebpment strategies of Carnbodia It alsoprovides in theshort-term. a bstof py investmentsandfinanal needs forthe threyear period,1997-99.I willelaborate onthese. 2. As I mnentoned earier,ouroverall visionlong-termvisionaived at by complete agreement among all politicalparties is contained in our Nabonal Programme to Rehabilitateand Develop Cambodia (NPRD) prepared in 1994andupdated in 1995.Therapid progress wehave made since its preparation hasgiven ustheconfidence thatwehave nowmoved quicklyforwardon the recovery- continuum. rehabilitation-developmenr Accordingly,weprepared a Socio-Econoric Development Plan, 1996-2000 to setandachieve measurable andmeaningful targetstowards theNPRD realizing vision. Toreach these targets,wehave alsoadopted theprocess three-year of a rolling, Public Investment Programme which (PIP), is nowin its second year(1997-99). Both the SEDP andPIPhavebeen preparedthrough anintense andhighly participatory process andagreement of consultations between andamong andother rministries government agencies. ThePIPhasbeen adopted bythe Council of Ministers,whilethe SEDP has beenapproved by the National Assembly. Bothdocuments set Cambodian perceptionsandprorities andarebased onourconfidence andabsorptive in ourabilites capacitiestocarrythem through. 3. OurSEPD aims at rapdelirination anderadication of povertythrough thefour-prongedeffts economic of increasing progress withopportunity forall,of human development a social of providing safety net andtargeted programmes to upliftthevulnerable sectionsinto he mainstream,andof environmentalsustainability, meaning thesustainable management of ournaturalresources. Given that thequickestretums in broad-based growthina highly rural andagruian such society asours, lies in rural developmenl it places emphasis onthisaspect and 65% allots ofresources o therural sector. RuralDeveopment receives highpriority in ourefforts. Theemphasis is on ensuring Nighlevel by the people participation tmelves in identifying, contibuting to andcarrying out development andtheirfutureupkeep. activities I is intended to provide the nurturingandenabling undedying stuctureand environment for privateinitativeandefot, including thoseof individualfarmers in agricultue. 4. A well-established andmaintained infrastructure physical forIncmasing is essential equitable accessto goods,services andmarkets,forstimulating investmentand increases and in production trade.Wearetherefore importance placing on upgrading the main andmaintaining as roadarteries Furthemnore, wellas prvincialandruralroads. we areupgradingandenhancing of the availability 1* KM Chin's S5au ApibsI 2.FP CGAIMV,F - 1-24 A* 19a:. 1 1uv11 - ------  Annex 19 - 78 - Page 2 of 3 power in Phnom Penhandprovincial towns, alsothrough theuseofIPPs. supply Water in themain cities is alsobeingupgraded. 5. Agriculture is the mainstay of 85%ourpopulation. Ourefforts includeenhanced access to improved inputslikeseeds, fertlizers,aswellas,creditandextension services. Ruralcredit,which is nowlargely provided through thepiloteffortsof many NGOs willsoon beextended andwillbebrought under a mnoreorderly regulatoryframework to ensuresustainability. OnForestry, which is partof our heritageandsustainable futuresource of wealth,we arealready undertakingthe preparationof a detailed inventory. Wehave setin motion severalstudies todevelop a proper policy, forest to review all theconcessions already granted, andto monitor logging activitesand logexports.Wealsointend to modemize ourrubber plantabons andtoopen rnore forprivate areas invesbrent 6. Education andHealth receive toppriority in ourplansandefforts, fortogether theseprovidethe basics forsound human development Inboth sectors, theaccentisonincreasingequitable access and availability to allsectionsof thepeople and in enhancingthequality of services. Several projectsare already under way forthispurpose. Many primary schoolshavebeenrehabilitated including withprivate sector conbibutions and through theSocialFund. Likewise,manyoutreach health centres andreferral hospitals arebeing upgraded, bothphysically andwithstaffandequipment 7. Thereare several cross-sectoral efforts, ongoingand planned. Chiefamong theseare: enhanced participabon of wornenin the development process and in sharing in the benefits; environmentmanagement de-mining operatons,which isso crucial to reducing thehigh incidence of lifeandlimbsfrom ant-personnel mines andunexploded ordnance;improvingsocial services;andthe like. B. ThePIP for 1997-99,which istheannex tothegovernment docurmentbefore you,alsoincludes what wecategorize as special programmes becausetheyneed special menton andattention. These are necessary programmes to placethe country on a soundand accelerated sustainable developmental track. Weneed substantalfundsforthese programmes which, if cardedoutonlyfrom ourownrevenues, would leadto significant disruptonof economic stability. Demobilizaton andPublic Administration Reform, on bothof whichwehavecirculated separate briefs foryourconsideraton, likewise require critical support. Weconsider that thedemining programme hasreached its nomentum and mustbecontinued. 9. In demobilization, ourmaoreffort in theimmediate term,forwhich we already have assured donor support,isto start and complete theprocessoffullregistration ofalltheserving personnel. From thedatabase to beestablished,a pilotdemobilizaton scheme willcommence totestoutprinciples and strategies formoving veteransintousefui vocations and occupatons in civil society. A more complete demobilization willcommence thereafter andwillbecompleted in thecourse of 2-3years. Suchwork involves separationpayments and creatingconditions forproper reintegration at a costof neady S 72 rrillion. 10. In public administration reform, werecognize that meaningful progress canbemadeonlyafter theelections. therearesome Still, politically neutral aspects, canbecarried which outnow, including preparation of atechnically soundreformprogramme. 11. Inadditiontothese twoprogrammes,wealsohavea large expenditure looming ahead of usto freeand conduct fairelections. ontis isalso A brief you. before r K.t Chhon's Slabm.nt 2PIP Ape hbm CGAti, Pls: 1.2 Pap 2 .y 1997:  Annex 19 -79 - Page 3 of 3 12. We havealsocirculated made a briefon theachievements Fund, to daleby the Social as supported forn Wodd ini0ally Bank Thisscheme resources. hasbeen successfulandhasbeen conmended for its quality, efficiency by independent andcost-effeciveness reputed internationally auditors. 13. Theannex to our document envisagesinvestmentson the orderof USS1.313 billion for sectralandspecial programmes over 1997-99.Ofthisamount,weestimate thatUSS 620rrillionhas alreadybeencommitted andwillsoonbe commifted for ongoing or those projects under advanced stageof nego0ations.Thisamount financing includes fromthenationalbudget thathasto come as budgetsupportIn total,for theperiod 1997-99,we need about USS 1.352 dollars billion including budgetsupport, andUSS 1.472 with billion, balanceofpaymentsincluded. 14. BeforeI close, I would Development Iketothank theAsian Bankforhelping the us inpreparing SEPDandPIP. I nowlookforward you to providing you anyclarifications need. may you. Thank M' t4t Ct o's SWt A9b Ilfm Pat 1-2 2:tP CGUwIQt, Jie 1997 t'P 3  Annex 20 - 80 - Page 1 of 4 ASIANDEVELOPMENTBANK DISCUSSION PAPERON PUBUC CAMBODIA'S PROGRAM INVESTMENT 1997-1999 CONSULTATIVE GROUPMEETING- CAMBODIA 1.2JULY1997 PARIS, Excellencies,Distinguished Mr. Chairman, Delegates: 1. The Asian Development Bank would like to compliment the RoyalGovemment of Cambodia on successfully completing the preparation of the second rolling Public InvestmentProgram(PIP)coveringthe period 1997-1999. It buildson earlieradvancesmade in reformingthe Govemment's development planningand resourceallocation processes. The PIP is one of the most importanttools availableto the Govemmentin the managementof developmentin a marketbased economy.It is the instrument throughwhich the Govemment allocatescapitalinvestments in the publicsectorto compensate for areas of marketfailureand also create a moreconduciveenvironment for the growthof privateinvestment. 2. The Bankis also pleasedto note that the PIPpreparationprocessis now better integratedwith other aspectsof macroeconomic policy making in Cambodia,in particularthe budgetaryprocess.This integrationis no less important than the size and structureof the PIP for effective utilization of this tool. We hope this integrationof the PIP process with the budgetaryprocesscan be furtherconsolidated in future. It will also be importantto strengthen the PIP monioring and implementation process.Thesewill haveto be the main priorities in the next phaseof development of the PIPexercise.The Bankhas assistedthe Govemmentin the preparationof the first two PIPs, and we would be happy to continue our assistancein this importantarea of policymaking. 3. The key objectivesof this discussion paper are to reviewthe secondrolling PIP for the period 1997-1999and to defineprioritiesfor sustainedimprovement to the PIPprocess. Sizeand Composition of the PIP: 1997-99 4. The size of the new PIP is $1.28 billionwhich is allocatedto specificongoing, committedand pipelinehigh priorityprojectsacrossand withinsectors.This level of investment is consistentwith the economicprioritiesof the Govemmentand within the range of available domesticand extemal resources.However, the pace and successof PIP implementation will dependcriticallyon the successof further efforts to strengthendomesticbudget capacityand the technicalcapacityin implementing ministries. 5. The compositionof the PIP is as importantas Is size; perhapseven more so becauseof the need to ensurethat the allocation with the objectivesof achieving is consistent a 65:35 rural to urban investmentratio and the role of Govemmentin a marketeconomy. An effectivePIP should addressmarketfailureand create an enablingenvironment for promoting privateinvestmentthroughcomplementary publicinvestments. In otherwords, It should be a publicinvestmentprogramthat 'crowdsin' privateinvestmentinsteadof ucrowding out". 6. The PIP allocates 44 percent of planned public investment to economic infrastructure, which includestransport,communications, energy,water supplyand sanitation.  Annex 20 - 81 - Page 2 of 4 About 17.5 percent is allocated to transport including 14 percent for roads. The Bank welcomesthis emphasison the road sub-sector, as road development Is criticalto Cambodia's economy.It will allow the countryto take advantageof growingopportunitiesin regionaltrade and agricultureand rural development.About 9.5 percentis allocatedto water supply and sanitation.The availabilityof potablewater is moreurgent in rural areaswhere the bulk of the populationlive, and it is thereforeimportantto ensure that resourcesin this sub-sectorare equitablyallocatedto the ruralareas. 7. The energy sectorIs allocated12.7 percentof the total PIPallocation. This is in line with the objective of improvingthe quantity and reliabilityof power supply. However, greaterefforts in attractingmoreprivateinvestmentin this sectorare needed. 8. Only 4.7 percentof the total PIPis allocatedto communications, which reflects the increasing role of private participationand the focus of the Govemmenton further improvements framework in the legal and regulatory for communications. 9. Social infrastructure,coveringeducationand training, health and social and communityservices, has been allotted 44.1 percent of the PIP. Educationand training Is allocatedabout 13.5 percentof the total PIP.About 60 percentof this is designated for basic educationwhere the social and economicretums are the highest.This Is appropriate.The Bank is pleased that health has the largest allocationfor any single subsectorin the PIP, amounting to about 19.5 per cent of the total PIP.However, about40 percentof this allocation is for strengthening health services. It will be importantto ensure that the bulk of this componentis utilizedto strengthenbasichealthservicesin rural areas ratherthan expensive curativeservicesor simplyhealthdepartment services. administrative 10. On the whole, the PIP sector and sub-sectorallocationsreveal an improved focus on investing in those goods or serviceswhich the private sector will not provide or provide inadequately. The Bank welcomesthis emphasisbecause experienceshows that a key factor in sustaining growth and reducing poverty is exploitation of the comparative advantagesof the public and private sectors and maximization of the synergy betweenthe two. Development of the privatesectorwill also expandthe tax basefor govemrnment revenue and facilitate expansionof the provisionof public goods and development of physicaland social infrastructure,even without further increasesin extemal assistance.This in tum will facilitate the further growth of the private sector. This virtuous cycle of positive feedback effects between the public and private sectors should be explicit in the rationalefor public investments. Ratio RuraWUrban 11. The composition of PIP expenditures must also be assessedfrom the point of view of the need to focus on ruraldevelopmentThe First Socio-economic Development Plan 1996-2000 set a target of a 65/35ratio betweenrural and urbanprojectsto be achievedby the year 2000. This emphasisis appropriate because85 to 90 percentof the populationresidein rural communities, and becauseof the poor state of socialand physicalinfrastructure in rural areas. The second PIP marksan improvement in this regardover the earlierurbandominance of public expenditures. However, only about one-third of the current PIP projects are exclusivelyfor rural investments.Another 45 percent of planned investmentsstraddlethe urbantruraldivide but the distributionof the benefits of this large group of projectsbetween T C _  Annex 20 - 82 - Page 3 of 4 rural and urbanareas remainssomewhatunclear. Subsequent PIPs shouldbe framed so that the rural/urbandistributionof benefitswill be made moretransparentin orderto achievethe 65:35 target. 12. It is noted that agriculture,includingirrigation,extension,forestry,fisheriesand livestocktogether receive only about 4.7% of the total PIP.This Is about the same as the allocationfor communications. This is evidentlya groupof sub-sectors where suitableprojects may be available for higherallocations. developing In particular, integratedwater management projectsas distinctfrom the present set of stand alone irrigationprojectsmay be importantin view of Cambodia'schallengingtopology, pronenessto floods and the fragile Tonle Sap ecosystem. PIP Process 13. The PIP process has been further strengthened during the past year in the course of preparingthe second rolling PIPfor 1997-1999 through technicalassistancelinked training,both formaland on the job. PIPWorkshopshavebeen heldand selected to in-country Interventionsin line ministrieshave assisted in the developmentof capacity in identifying, costing,screeningand appraising investment proposals. 14. At the sametime, co-ordination has been considerably enhancedbetween the Ministry of Planning (MOP), Ministry of Economy and Finance (MEF), Council for the Development of Cambodia(CDC),and NationalBankof Cambodia(NBC)as well as between these centraleconomicagenciesand the line ministries throughthe PIP SteeringCommittee. This Committeesetsthe overalllevel of publicinvestment for the next three years,reviews the draft PIP and agrees on the final version to be submitted to the Council of Ministers for approval. In addition to its co-ordinatingrole, the PIP Steering Committee provides a vehicle for strengthening institutionaland technical linkages between macro and sectoral policy formulations, investment programming,budgeting and resource mobiliation. It is also noteworthythat except for defense and security spending,no program or project can be financed from the national budget unlessit has been formally processedin accordance with PIP proceduresand is included in the PIP. This process is obviously very importantfor effective overall economic management. The Bank is pleased with the significant achievements in the PIP processso far; and urges that the commitment to and the integrityof the processshouldcontinue. PIP Implementationand Monitoring 15. In view of its importancefor soundmacroeconomicmanagement, and effective managementof the developmentprocessin general,It is essential that the PIP process be maintainedand expanded to include regular analyses of PIP outcomesand their costs. Proceduresfor implementation and monitoringof public investmentsin Cambodiaare not adequate.At a minimum,projectmonitoring shouldrecordthe financialand physicalprogress of the project. When financial disbursements are not monitored in relation to project implementation, an incompletepicture of expenditureresults and there is a risk of projects beingapprovedwithouta clear understanding of the level of availablefunds and the status of competingdemandfor budgetresources. iv.... M.Ii , -.  Annex 20 - 83 - Page 4 of 4 16. To remedythis situation,the establishmentof a formal and structuredPIP monitoring and evaluation system which assesses both investrnentand policy impact is required. In designingsuch a system,proceduresshould be as simpleas possibleso as to facilitate their implementaton,operationand maintenance. The Bank is ready to assist the Govemment of such a system. with design and implementation Absorptive Capacity 17. The abilityof spendingministries to implement projectson timealso needsto be strengthened as the developmentof such capacityhas not kept pacewith the expansionof extemal assistance. With the increase,in particular,of projects involvingcivil construction, there is a need to ensure that implementation schedulesare realistic,so that expenditure profilescanbe better planned. Financingthe PIP 18. Finally,there is the question of resourceavailability.The critical constraintto PIP implementationis the scarcity of resources in the national budget. In addition to counterpartcapitalrequirements for extemallyassistedprojects,the PIP has major operating and maintenance cost implicationsfor all projects.To achievemaximum the PIP effectiveness, process needs to better identify these recurrentcosts and how they might be financed. Otherwise,domesticbudgetobligations will tend to be underestimated and thus under-funded. This underscores the need for continuedimprovement of budgetrevenue in the administration collectionand for further reformof the tax baseto supportessential expenditure obligationsof the Govemment. 19. The projected demandson the budget for PIP implementation increasesthe urgency of further rationalizing current expendituresand simultaneouslyincreasing the productivity of the public sector. In the absence of administrativereforms, current wage expenditureswill continue to crowd out essential non-wage operating and maintenance expenditures. 20. Regardingthe current PIP, the Govemment document points out that a major componentof it remainsunfunded.Largesums of additionalassistancewAll be requiredfrom the aid communityfor the period 1997-1999to enable implementation of unfunded and partiallyfunded priorityinvestmentsof the PIP.Extemalfinancingof publicsectorinvestment is envisagedonly by grants and/orsoft loans sincethe GovemmenVs economicreformprogram precludescommercialborrowing. However,the availabilityof such additionalassistancewill largely depend on progresstowards greater politicalstability and good govemancein the country. Progress on these issues is thus critical to provide comfort and confidence to Cambodia'sfriends in the internationaldonor communitywho wish to mobilize the much neededfinancialassistancefor the country. Thankyou. SMWTfTb26.0.97 -r  Annex 21 - 84 - Page 1 CAMBODIA CONSULTATIVE GROUP MEETING Paris, 1-2, 1997 Agenda Item 2: Special Programs World Bank Statement Guy Darlan Mr. Chairman, Ladies and Gentlemen, We have just heard two presentations on the main features of Cambodia's Public Investment Program. In my statement, I will focus on what the Royal Government calls the "Special Programs". These are fairly large, high priority programs for which immediate and full funding is necessary. And because of the considerable amounts involved, donor financing is sought. These programs are: public administration reform, military demobilization, and the Social Fund. Demining remains a high priority special program, but its funding needs for the coming year have already been secured. Concerning administrative reform, the ultimate objectives sought by the Royal Government have been well articulated. However, before the donor community can efficiently lend its support to the many sub-programs that the reform entails, the Government needs to clarify the concrete operational steps it intends to take to carry out the reform. In particular, the Government needs to put in place the operational plan and capacity to implement the reform over the period 1997-1998 during which local and national elections will be contested. Therefore, donor assistance can be provided only for a minimal program of preparatory activities--some of them ongoing--which includes: strengthening of the Government's capacity to manage the reform on a day-to-day basis; carrying out a census of civil servants; and preparing the computerized management information system necessary to implement the program. Regarding military demobilization, a detailed program, the Cambodian Veterans Assistance Program (CVAP), has already been prepared. The CVAP has received the support of three donors so far, but more resources will be necessary to carry the program to completion. In order to help secure those resources, the Government needs to commit to full implementation of the demobilization program, in phases, but without delay. Finally, the Govermnent is asking for additional resources to continue the Social Fund's assistance to rural communities. The implementation of the program has proceeded ahead of schedule. Social Fund management of its finances and its rural activities have received favorable reviews. Comnmunitydemand for Social Fund assistance far exceeds its current resources. Thus, unless additional donor financing is secured, the Social Fund will cease operations in the first half of next year. Thank you. ,1 .F K  Annex 22 -85 - Page 1 of 4 CAMBODIA CONSULTATIVE GROUP MEETING Paris, France July 1-2, 1997 Statement by International Finance Cgrmoration OveninR Remarks Kip Thompson Acting Manager Asia Department Internadonal Finance Corporation (IFC) Mr. Chairman and Distinguished Delegates: This is the first Consultative Group Meeting with the Royal Government of Cambodia in which the IFC is participating in an official capacity and on behalf of the Corporation, I would like to express our gratitude to the Government for having mvited us. We are very pleased to take our seat at this table as the private sector arm of the World Bank Group and we take this invitation as a strong indication of the Government's commitment to developing Cambodia's private sector and of the donors' interest in supporting the country's rapid transition to a market economy. For IFC in Cambodia, this past year has been a watershed. After a number of years discussing the prospect of Cambodia becoming a member of IFC, I am now pleased to report that on March 26, 1997, His Excellency Keat Chbon, on behalf of the Royal Government of Cambodia, signed IFC's Articles of Agreement, making Cambodia the 171st country to join IFC. We are extremely pleaed to have Cambodia as our newest member and shareholder, and we look forward to working closely with the Government to help develop the private sector in Cambodia. In addition, we would like to extend our sincere thanks to the Government of Australia for its assistance in funding Cambodia's membership in IFC. Today, I am also pleased to report that IFC has already approved its first investment in Cambodia. This investment will support the redevelopment of Cambodia's tourism industry by financing the S15 milion, 150-room, Angkor Novotel Hotel located in Siem Reap and catering to tourists visiting the nearby Angkor Wat monumenats. IFC will provide $7.5 million of whicb $5.25 million will be for its own account and S2.25 million will be for the account of a participant bank. We hope that out support for this project and for other private sector project will help to catalyze other mucb needed private sector investment in Cambodia. While IEC is attending this Meeting as a member of the donor community, I would like to emphasize that EFC is basically not a donor agency. Instead, we are primarily investors in private sector projects with the dual objectives of promoting ustuanable economic development and eamning a commercial rate of return. In this m1 ,  Annex 22 -86 - Page 2 of 4 role, we work closely with the private sector on a day-to-day basis, and experience which gives IFC a unique perspective among multilateral and bilateral aid agencies. It is in IFC's capacity as an investor that I will be making my comments today. IFC is relatively new to Cambodia and thus we cannot clairnto be an expert on private sector activity in the country. However, in the course of analyzing and preparing several investment and advisory projects to date, we have developed some experience and insights related to the investment environment in Cambodia It is with this background, and from the perspective of a development-oriented but commercially-minded investor which is committed to assisting Cambodia, that I would like to address a single topic today - the current climate for private investment in Cambodia. Climate for Private Investment In 1997, Cambodia presents a paradox to potential private investors-offering at the same time both an attractive and a challenging environment in which to do business. I will first consider some of the key attractions for private investors in Cambodia and then I will review some of the major challenges. Attractions Cambodia has a number of advantages whicb help to make it a potentially attractive destination for international and domestic investors. At the top of this list is the Government's free-market philosophy and strong support for the private sector. This is reflected in the very liberal investment enviroment providing a level playing field for foreign and domestic investors, a very competitive package of investment incentives and an effective one-stop service, in the Cambodian Investment Board, for approving investments. In addition to an investor friendly environment, the country offers investors: (i) a plentiful supply of low-cost labor; (ii) substantial untapped natural resources; (iii) numerous historical and natural tourist attractions; (iv) reasonably priced land with a relatively simple acquisition process when compared to the neighboring countries; (v) its strategic location in the center of S.E. Asia, one of the world's most dynamic economnic regions; and (vi) its preferential trading relationships including Most Favored Nation status with the U.S.A., Generalized System of Preferences eligibilitywith the European Union, Japan, Australia and Scandinavia, and its upcoming membership of ASEAN later this month. These relationships offer lucrative export markets for Cambodian products and attract additional investment into the country. Tbese fisctors help to make Cambodia a potentially attractive site for both foreign investors and for the country's own nascent private sector. Given the right environment, it is quite likely that a number of sectors of the economy will experience strong growth in the years to come, including export-oriented light manufacturing, agricultural processing and the service sector, including tourism, among others. In fact, such growth is already evident in the garment sector. |~~~ r  Annex 22 -87 - Page 3 of 4 However, to the internationaland domestic investor what is probably more apparentare the reasonsL21to invest in Cambodia rather than the reasonsto investin Cambodia. In this regard we must admitthat, in spiteof Cambodia'smanyattractions as an investmentdestination,until such time that the country properly addressesthe significantimpediments to long-termpnvate sector investmentwhichexist today, the country willnot be able to attract the kind of investment whichit needsfor sustainable private sector led growth. Someof the major constraints,in our opinion,are identified as follows: I. Political Instability:Unfortunately, the primaryimpediment to increased long- term private sector investment activityin Cambodiatoday is difficultfor anyonein this audienceto address;the perceivedpoliticalrisk of investingin Cambodiais amongthe highestin the world. Recent press reports of civilunrestin Cambodia havehighlighted this fact. Whilethere is no needto go into the detailsof this situation,sufficeit to say that until this perceived politicalrisk diminishes,Cambodiais unlikey to see major increases in long-term, private sector investmentfrom the long term investors the countrywould like to, andneeds to, attract. One major stepin addressingthis risk will of coursebe the timelyholdingof free and fair nationalelectionsto electa new, more stable goverrnent to replacethe presentlyperceivedshakycoalitionGovernment. Whilethis particularissue is difficultto resolve in the near term, there are a number of other issues which the Governmentcould address, and indeed should address, so as to: (i) support the private investment which is currently being implementedin spite of the perceivedpoliticalrisk; and (ii) prepare the groundwork for heightenedprivate investmentactivityover the mediumterm as politicalinstability decreases. 2. MacroeconomicStabilitvand Growth:Foreigninvestment is stronglyattracted by a stable and growing economy. Althoughthe Governmenthas made significant progress in stabilizing the economyand restoringeconomicgrowth over the last four years, these achievements were only possiblebecauseof the high level of foreignaid support. In the future, to achieve a more sustainablemacroeconomic stability and growththe Governmentmrustimproveits fiscalpositionsignificantly.Specifically, the Govemmentneeds to improve its tax collectionfrom wealthyindividualsand large, profitablecompanies,as well as its natural resources, particularlytimber. Without these revenuesthe Governmentwould not be able to make the necessaryinvestments in humanresources and infrastructure. I am sure that our colleaguesfrom the World Bank and the IMF will havemuchmore to say on this topic. 3. UncertainLegaland RegulatorvEnvironment/L.ck of 7lansparencv Given the country's recent past, it is no surprisethat Cambodia'slegal and regulatory ystem is less that perfect. However, if the Governmenttruly wants to attract long-term investmentinto the country,it must create and enforcea transparentlegal framework with clear rules of the game for private investors and lenders. This must include a proper framework for the enforceabilityof contracts and the taking of collateral securityby lenders. Approvingand implementing several of the draft laws which are cuTently pending as well as the Implementing Guidelinesfor the Foreign Investment 11--1  Annex 22 -88- Page 4 of 4 Law would go a long way in this regard and we suggest that this bouldbe a top priorityfor the Government. 4. Limited Physical Infrastructure:Many investorshave noted that the cost of doing business in Cambodiais high. To a large extent, this is true because of the limited physicalinfrastructure which exists in the country. For private investmentto flourishin Cambodia,the Govermnmet must findinnovativeways with whichto lower the cost of doing businessand to improvethe quality and reliability of public services. Wc at IFC feel that the Governmentshould, as fur as possible, look to the private sector for help in this regard,and we are availableto belp as appropriatewith policy adviceand financing for viableprojects. In closing,I would like to state that Iam sure that the Govenment is aware of the issues identifiedabove and, in many cases, is aredy consideringchnges which could improve the general investmentclimate. For its part, IFC looks fotward to assistingthe Governmentin anyway we canto addressthese issues,including informal discussions,formal technicalassistanceadvisoryactivities, and project financingand advice on a case-by-casebasis. Through our investment activities, we hope to demonstratethat Cambodiacan attract good, long-termprivate investmentand that such investmentcan transate into real economicbenefitsfor the people of Cambodia. While cognizantof the challenges, we are excitedabout the potentialfor private sector investmentin Cambodiaand look forward to working with the Governmentand the donor communityto contributeto the long-termsustinable growth of the Cambodian economy. Thankyou.  - 89 - Annex 23 CAMBODIACONSULTATVEGROUPMEETING Page I of 6 SESSION 2: PRIORITY PROGRAMS AND INVESTMENT NEEDS 1997-1999 PARIS,FRANCE JULY 1-2, 1997 BY TONYKEVIN STATEMENT TO CAMBODIA AMBASSADOR AUSTRALIAN Mr Chairman Cambodia'seconomyhas grownquite stronglysince 1991and the standardof livingfor manyurbanpeople,especiallythe elite and business low wage earners,petty traders sector,has risen considerably.However, and streetvendorshave facedhigherprices for basic commodities. Povertyremainsendemicin rural areaswhere85%of the country's populationlives. economicgrowth, and sustainable Withoutstrong,more diversified, which is so dependenton a stablepoliticalframeworkand a focussed whichwe all support- such as the the otherkey objectives administration, and so on - will be abolitionof poverty,humanresourcedevelopment quiteimpossibleto achieve. At present,morethan two-thirdsof nationalproductionis dependenton an unstableagriculturalsectorand on two economicactivities- construction are to development from which,contributions and commerce .7 ... m.1  - 90 - Annex 23 Palge 2 of 6 still limited. Growth inindustry, commerce and services has occurre6 largelyin urbanareas due to betteravailability in these of infrastructure areas,particularlyin PhnomPenh. Clearly,if Cambodiais to achieveits statedobjectiveof a just and peacefulsocietythroughacceleratedeconomicgrowth,it will haveto resolveserioustrade-offsbetweeninfrastructure demandin urbanand industrialareasand economicand socialinvestments in rural areas where most of the country'spovertyexists. It is of utmostimportanceto avoida wideningof the gap betweenthe predominantly rural poorand urbanrich. It is thereforeencouraging that the PIP processhas been establishedto in planningand prioritisation assist the government of development activities. It will help to strengthencoordination betweenministries.It will also help to ensure that resourceallocationis in harmonywith the Government'sSocialand EconomicDevelopment Program. We urge the Government to continueto refinethis process. In particular, we urgethat PIP prioritiesshouldbe reflectedwidtinthe nationalbudget formulationprocess. Thereare a few key elementsof the proposedPublicInvestnent Program for 1997-1999 that I wouldlike to highlightnow. Theseare: (a) PovertyReduction: We applaudthe RGC's statedgoal of eradicatingCambodia'swidespreadpovertyas its centraldevelopment task. As indicatedin the WorldBank's report on povertyundertakenin 1996,39% of Cambodia'stotalpopulationlive belowthe povrtyline with 111 V~~~~~~I  Annex 23 - 91 - e--f6 the highest number being in the rural sector. The PIP states some of t ee 0o RCG's strategiesin this regardincludingits aim to generatenew opportunities.However, employment with proposedmeasuresfor cutbacksin the publicserviceand the demobilisation of soldiers,added pressurewill inevitablybe placed on the RGCin addressingthose in poverty; we believethe PIP needsto go furtherin addressingspecific programsand measureswhichcan be undertakenas aprt of a longterm strategyto reducepoverty. Twokey areaswherethis must occurare (i) health and education. and (ii) addressing in improvingagriculture; (b) Agriculture: The agriculturesector,whichcontributes about45% must be of GDPand employssome 80%of Cambodia'sworkforce, nurturedto achievemoreequitabledevelopment acrossthe countrywhile maintainingvigorouslong-termgrowthof 8%. With 85%of the populationlivingin rural areas and 75%of the poor beingfarmerheaded households,we supportthe PIP's statedviewthat the key to sustained economicgrowth,povertyreductionand development of the rural economyis agiWculture; in this regard,we welcomethe increasedallocationin the PIP for agricultureand rural development.This havingbeen said, we believe there is scopewithinthe PIP to expandthe role of nuraldevelopment througha more detaileddevelopment projects,together of approporiate with a greaterfocus on areas suchas agricultural trainingand rural credit; in two majorprojectsinvolving with Australia'sdirectinvolvement researchand extensionrespectively, we wouldlike to see the development of morespecificprojectstargetting the rural sectorwhich to these activities. are complementary -11< ''''V -  Annex 23 - 92 - Page 4 of 6 with regardto these ODA can diminishthe strainon the government rural/urbaninvestmenttrade-offsby directlyfundingprojectsinthe rural sector suchas roads,schoolsand health facilitieswhichare unableto attractprivateinvestment.Moreover,carefullytargetedODA that in the mral sector,for example,in infrastructure investments improvesaccessto markets,and projectsto improveagricultural in investment for futurecommercial productivitycan lay the groundwork rural parts of the country. (c) Healthand Education:We note that the PIP has allocatedhigher levelsof fundingfor both healthand educationfor the next threeyear period. Whilewe welcomethis increasedemphasison these sectors,it is importantthat the proposedstrategiesare fully and effectively implemented. Cambodiais currentlyspendingabout2% of GDPon healthand education,comparedwith an averageof 5%of GDPfor low income for defenceand countries. In contrast,Cambodia'slevelof expenditures securityis two to three times higher. Overthe longerterm, this imbalancewill be detrimentalto balancedeconomicgrowthand poverty reduction. ODAcan also be usedto stimulateeconomicgrowthby supporting investmentin humancapitalat all levels. It is necessaryto builda core of highlytrainedindividualswho are responsiveto the needs of both the and who possessthe generalpopulationand the businesscommunity, skills necessaryfor the smoothworkingof a free marketeconomy. n 'iv  Annex 23 -93 - Page 5 of 6 TheWorldBank report on povertyalso indicatedthat Cambodians livingin households heads are morelikey to be poor, with uneducated with a povertyrate of 47%. Raisingeducationlevelsis obviously necessaryto imporovelivingstandardsand reducepoverty. It is important,therefore,that the allocationsfor educationindicatedin the PIP are given substance. Other issues: We stronglysupportCambodia'splans to reducedefenceand security spendingfromthe current5%of GDPto 3.5% of GDPin 1999so as to allowfor a substantialincreasein outlaysin prioritysocialareas. In this context,we welcomereportsof the imminentdemiseof the KhmerRouge as a militaryforcein Cambodiaand the opportunities that this will bring to renewedstabilityand the reconstruction of Cambodia. Australiawelcomesthe plannedreviewof publicexpenditure to be conductedin 1997. It will be an importantplanningmechanismfor ensuringthat capitalspendingis directedto humanresourceand rural sectorswhere economicrates of returnof projectsdo not attract commercial investment.It will also providea firmerbasisfor establishinga moreadequatebalancebetweensalariesand operational and maintenanceallocationsin the budget. We hope and expectthatthe reviewprocesswill assistthe Government to take greater of Cambodia for prioritysettingand povertyalleviation.We believeit responsibility will also help ensurethat the infrastructure sectoris not monopolising funds. nV --  Annex 23 - 94 - Page 6 of 6 of Mr Chairman,in conclusionwe wouldlike to urgethe Government Cambodiato continueits effortsto mobilisedomesticrevenues,reformits of public in themanagement publicinstitutions,and build confidence of the reformprocesswill ultimatelydepend resources. The sustainability on the country'scapacityto attractincreasingflowsof privatecapitaland reduce relianceon extemalfinancingfrom officialsources. In this of the reformprocesswill hingecriticallyon context,the sustainability and fair determinedeffortsto promotepoliticalstability,a consistent good govemanceand the ruleof law in Cambodia. administration, Thank-you. 11-v K  Annex 24 -95 - Page 1 of 3 Second session :Japanese Statement on "The Priority Programs and Investment Needs" 1. Remarks The Royal Government of Cambodia has prepared a social economic development plan that reflects clear development policies and strategies specifying priority areas, and has clarified the socio- economic development needs in accordance with this plan, and has planned official development assistance and investment needs over the next three years period. This demonstrates the Cambodian government's self-help efforts. Japan keenly appreciates this plan in that it carefully reviews and well reflects the latest priorities. 2. Comments (1) Regional Development This plan aims at expanding development efforts from urban areas into outlying regions and at realizing a 65% to 35% regional-to-urban development split. However, a stable status of public security, including removal of land mines, is necessary in order to utilize overseas assistance and private investment in regional areas. The Government of Japan expects that the Royal Government of Cambodia will continue efforts to maintain public peace and security, including in the regional areas, and to remove land mines. CMAC's steady activities for the removal of these mines are especially important, and the Government of Japan will continue its support for CMAC in the future. (2) Maintenance of Economic Infrastructure and the Social Sector Cambodia should work toward a well- balanced maintenance of its economic infrastructure and the social sector, and should thus accomplish economic growth as a result. However, the people themselves should be considered the focal point in the development process. Economic growth is the means to eradicate poverty, aiming at improving the nation's standard of living as a whole. Achieving economic growth is required for Cambodia to make effective use of donors' assistance and private sector investments over and above Cambodia's own self- help efforts. The total economic product, which has been enlarged through economic growth, should be distributed to 11' . ..  Annex 24 - 96 - Page 2 of 3 mdividuals through increased employment and income generation among the general population. This social development process should proceed while keeping an overall balance by properly addressing problems that crop up in the process of economic growth, including appropriate social safety measures for marginalized people and environmental protection measures. In this sense, the Government of Japan appreciates that the Royal Government of Cambodia has identified practical development goals, including education and health, which are emphasized in DAC's new development strategy. The Government of Japan also anticipates that the Royal Government of Cambodia will identify its own targets in decreasing the number of people living in poverty. (3) Private Sector Utilization Proper utilization of not only ODA but also private sector funds is essential for Cambodia's socio-economic development. Improvement of the overall enabling environment is needed in order to increase the flow of private investment. Soft approaches such as public security, macroeconomic stability, establishment of a suitable legal framework, proper investment laws and rules, and human resources development are equally as important as a hard approach that includes maintaining the economic and social infrastructure. The Government of Japan hopes that the Royal Government of Cambodia utilizes donors' assistance including Japanese ODA to bolster Cambodian's efforts to improve the enabling environment for private sector investments. The maintenance of economic infrastructure undertaken by the private sector, such as the BOT scheme, is now under way in Cambodia The Government of Japan is ready to support private sector initiatives in infrastructure development through the following schemes:(a) holding policy consultations needed for improving the overall environment, including the formulation of frameworks, such as development plans and the legal system;(b) utilizing ODA resources, including the implementation of feasibility studies and the dispatch of experts in order to support the project, ;and, (c) other schemes including the provision of trade insurance. 3. Conclusion The Government of Japan expects that the Royal Government of Cambodia |EV -  Annex 24 -97 - Page 3 of 3 will utilize international assistance efficiently, and that the Royal Government of Cambodia will thus be able to achieve the established goal by the year 2000 with some adjustments and improvement of this planL In order for this to happen, the Government of Japan proposes to monitor the degree of achievement in Cambodia's plan every year on the occasion of this CG, during which representatives from Cambodia and the international community gather. (END) n , . ... .. . r .. . , - 1.~~~~~~~-  Annex 25 -98 - Page I Cambodia- ConsultativeGrouDMeetina Paris. 1st - 2nd Julv 1997 German Statement on Session II: Priority Programsand InvestmentNeeds Mr. Chairman, Excellencies, Ladies and Gentlemen, The German Government welcomes very much the continued effort of the Cambodian Government to cast its prospective public investment activities into an ongoing rolling planning exercise. The PIP undoubtedlyhas the potential to develop into an important tool for the design also of bilateral cooperation programs- although improvements are still required as the World Bank's report rightly notes. We basically share the analysis and the conclusions drawn by the World Bank with regard to the investment priorities stated in the PIP. There is no need to repeat what has already been said in this regard. Therefore, I want to limit myself to highlighting a few aspects which are of specific concern from our point of view. - In view of the limited implementationcapacity of governmental institutions we strongly support the suggestion to encourage private sector involvement in Infrastructure development, wherever possible. This would not only give relief to scarce public resources but would also mobilise much needed private management know-how. - There is a definite need to adjust investment programs to financial and technical capabilities to maintain and operate the created facilities on a sustainable basis. Besides technical assistance, provision of adequate budgets for operation and maintenance is also essential. Donor support in this area may be justified for a transitional period. We do not, however, see, how major investment programs, for example in rural development, can be supported unless there is a clear perspective as to how the Government will cope with operation and maintenance in the medium term. The lack of progress in civil service reform and domestic resource mobilisation as discussed earlier during this meeting is not encouraging in this context. - A related concern are the still low to negligible counterpart contributionsto foreign-assisted projects. The perception that the PIP is still to a large extent "supply- or donor-driven" simply discribes the present reality, which is not surprising in a situation, where donors contribute not only 100% of investment financing but also a substantial share of recurrent costs. The necessary actions for change in this area are described in detail in the World Bank document as well as in the Policy FrameworkPaper and have been discussed earlier. - In conclusion, I would like to support the suggestion to base the next PIP to a larger extent on experiences with preceeding plans and to make it more consistent with what can be afforded in terms of recurrent budget requirements. We also welcome very much the intention to carry out a Public Expenditure Review. This will undoubtedly be another important input into a comprehensive planning and budgetting exercise. Thank you for your attention. J:\_LAKTE\KAM8ODSC\1ALLGKOR\CGO7.0OC  Annex 26 99g Page 1 of 3 CAMBODIA CONSULTATlIVE GROUP MEETING Paris, 1-2July1997 Agenda Item3:AidCoordination Issues Statement by Mr.KEAT CHHON Senior Minister in-charge ofRehabilittion andDevelopment Minister ofEconomyandFinance RoyalGovernment of Cambodia Mr.Chairman Excellencies Ladies andGentlemen, 1. HumanandSocial capital is thebedrockon which anydeveloprnent couldbesustained. The warof 1970/1975, thetraumatic and tragic eventsof 1975-79,followed by longintemationalisolation and neglecthaveleft Cambodia seriously handicapped, in termsof human skills,talentand competenceand,in terms of institutional structuresandtraditons.Capacitydevelopment, in all its dimnensions andaspects isthereforeacontinuingparamount need. 2. Weareovercoming ourcapacity constraintsin theshort-term by a large number of expatriate advisors andexperts provided through technicalassistance programmes of bilateralandmulti-lateral partners. These persons both perform daytodayfunctions in various ministries andagencies, andat thesame tirne,provide on-the-job training tocounterparts. Inthepast fewyears thereisa perceptible, albeit gradual,improvement in skills absorption bythegovernmnent staff. Theshiftis more pronounced in ministries such astheMinistry ofEconomy and Finance (MEF) where wehave reduced thenumber of experts. Wearenowsetting upa School ofFinance to continuously provide trainingto both officials of various departments oftheministry, aswel asforother ministries, agencies andprovincial officesin financial matters. In addition, allthe externally assisted projects havea built-in element of capacity building in thecountry as a necessary component Our goal isto gradually reduce ourdependence on external expertsin allbranches of government aswehave done in theMEF. This canbepossible only if all the external partners insistthat the experts provided by themthrough technical assistance assiduously work fortraining oftheircounterparts.I is not enough that visitng missions and teams give usvaluable advice, through volumes ofreportsandnotes asto what needs to bedone.They should equally tellushow to doit effectivelyand what assistance weshould access forthat purpose. 3. Inthelong-term,capacity building hastofocus oncreating proper institutionalstructures and insttutingproper mechanisms in thepublic sectorinorder toequip and orientit to serve theneeds of a stateapparatus in a market-oriented environment Theoverall objective is to provide an efficient effctve, dynarmic, transparent predictable andaccountable government apparatus. As I have said earlier in thermeeting,wepropose toprepare a technicallysound programme of administrative reformns in thenextyearand to haveit ready forthegovernment aftertheelections toconsider andactupon. A new, re-fashioned, public adrninistration set-up willalsocall forfittingtalentstojobsand,in arriving at an appropriatecivilservicewithbuilt-in recruitmenttraining,promotion andcompensation aspects. Meanwhile, wewillgoahead with politically neutralaspects ofsuch a programme suchascivilservice census. 4. Capacity building is equallynecessary in thefieldof extemal aidcoordinationandextemal resource management Our goal is toensure thatthiswork becomespartofandisfullyinternalized in Ar Kuf CAhn't Ss9ntn Agandn em 3 Aid Con*wfban CGUAbIing Pwis 1-2 Ju 1997Page1 11,. - .  Annex 26 - 100 - Page 2 of 3 allthe governmentstructures.Thework we havedone to andworking so far in relating withaid- agencies,has increased our understandingand appreciaton of the myriad and complexities requirementsfor the prioritization for aid mobilization of proposals, and for and negotiations, management of externally assisted programmesandprjects. Ourexperience hasenhanced our capacityandconfidenceoverthelastfewyears. 5. In Cambodia's context the need in particular, andconducted for a wellorchestrated aid- effortisself-evident, coordination giventheconsiderableamount investment ofprivate already pledged andexpected to come,andthelarge volume of ODA thathasbeen andwillcontinue flowing to be providedto Cambodia, through including NGOs and theconcessionalcredit bythemultilateral provided institubons. financial Only such through coordinatoncanweensure theoptimalandeffectveuseof scarceresources both andaccountability withinthecountryand agencies. totheaid-providing 6. Forthispurpose, a single,unified andhighlevelCouncil fortheDevelopment of Cambodia (CDC) hasbeen setupwith twodistnct divisions. TheCambodia Investment Board (CIB) coordinates andfacilittes private investrent, while theCambodia Reconstruction and Development Board (CRDB) ischarged with directing,coordinating and facilitatng assistance tothe public sector. While participating with theMinistry of Economy andFinance and the Ministry ofPlanning inleading theimplementation of the Public Investment Management System (PIMS), the CDC/CRDB's first responsibility is to coordinate internally within thegovernment in clearly identifying priorityinvestments andassistance needed fromexternal sources. Thisis done onthe basis of thegovernment policies and therolling, three-year PIP prepared annually bytheMinistry of Plan onthebasis ofsubmissions from, and in close coordination withthe ministies andagencies, including the central ministries and- theCRDB. The priorityinvestment programme contained in thegovernment paper before you represents theresults of these efforts andhasbeen cleared through inter-ministerialmeetings andat thehighest levelsin the govemment Secondly, CRDB is the firstpointof contact in the govemrnment for discussing and negotiating withindividual external agencies andpartners. It is responsible fordrafting andarriving at standard umbrella agreements with such partners in accordance withnational needs and concem and forpolicy dialogue withtheintematonal community. ThirdNy, CRD8 agrees witheach external partner ontheoverall sizeand portfolioofassistance and in directingsuch assistance to thesectors andareas where it is needed. Thisis done bypaying attention totheunfunded elements ofthepriority investment programme (asshown in theannex to thegovemment document before you). In addition, theCRDB alsoconducts annual reviews anddiscussions with therespectve extemal partner. Once assistance to anyparticular area orsector iscleared and agreed upon, thetechnical issues ofproject preparabon and agreements aretheresponsibility of respective ministres andagencies withthe assistance providers. TheCRDB willsitin onfinalnegotiations. Fourthly, CRDBisresponsible forthe preparations fortheCG meeting including thebackground document before you.Fifth,CRDB conducts periodic consultaons, individuallyand collectively,with different ministries andagencies tofacilitatesmooth implementation of programmes and proects.Sixth, CRDBalsoorganizes and conducts periodic in-country donor meetings for sharing of informaton and addressing donor concems. Thelastsuch meeting wason19 May.Seventh, theCRDB hascreated and maintains a database forallexternal assistance flowinginto Cambodia and prepares an annual Development Cooperation Report (DCR). Theonefor 1996/1997 hasalready been circulated toallofyou. 7. Since itsestablishment theCRDB in 1994, hasgrown and in itsstrength ofresponsibility. levels onceagain I would urgeall ourexternal to assist partners us by directing to ourpriority assistance needsandto contactCRDB firstbefore starting negotiations directlywithany oragency. lineministry Sement AWe1 Iem 3 AdCowdtmUnCGMVet, P8 Ur Y.t. CMhn's Auy 199TPog 2 1.-2 XW . __ _V_  Annex 26 - 101 - Page 3 of 3 8. totheCRDB, Inadditon rmechanism theaid-coordinabon in Cambodia consists also of periodic sectoralmneetngsorganized conducted and or agencies bythelineministries onprogrammes specific functons. totheir These efforts cross-sectoral include sometimes aswell. 9. Wehave theUnited alsorequested NabonsResidentCoordinatortohelp usthrough organizing donor meetings coordination the within so country, that concerns donor in relabonswith the Royal Govemmentand on could matters, procedural be brought jointly to ourattenton and for appropriate action. 10. Theaid-coordination machinery in Cambodia stages isstillin itsearly butis gettingincreasingly andmore established. firmly Thebest way to speedily thisprocess institutionalize is forallourbilateral and partners, multi-lateral NGOs, including to respectand abide bythemachinery wehave setupand us to help to assist themandourselves better.What may seem an unnecessarybureaucrabc hurdle nowis a necessary instrument andsustain for us to install to coordinate capacity internal aidand therebyto builda better Cambodia. Follow ourprocedures anddo helpus.And,if youhaveany suggestons onhow todothings better,please dotellus. 11. What I havedescribed aboveisalsoin thecontext of thegovernments commitment to befuRy transparent andaccountable. Inthisregard,because oftheenormous needsto be met and the lackof internal capacity to attend to every thing needed to be done, much of the and rehabilitation development assistance flowingto Cambodia in thepasthasbeen directlyimplerented by the aid providers outside the scope andscrutny of the national budget or thegovernment or the national assembly. Intheinterests ofimproved transparency and accountability, thecountry within and outside, ;i is importantthatin futurewesetupjointmonitoring committees consistng ofthe government and donor agency representatives review to periodically progress of implementation of suchprogrammes including auditoffinancialexpenditureand outputs arisingfrom them. you Thank attenbon. foryour Pop 3 1997: Agerd Ibm3 AidColdeion. CG Mftig, PS 1.2JMY SW.ment Ur KaalChon's 11'' ''' ' ' r -  Annex 27 -102 - Page 1 of 8 Aid Coordinationin Cambodia DiscussionPaper 1 Summary: The ConsultativeGToupand the In-ountry Aid CoordinationSystem - in conjunctionwith the PublicInvestment Manemcnt Systm of the Royal Government - are at present the two prncipal instrumentsfor aid coordinationwith respect to Cambodia.Their establishment is reflectiveof the need for more comprehensive and in- depth analysis and prioritizationof aid requirements, relativeto the emergingnational policy fiamework. Theinter-active and mutuallysupportedmecansm constihte a move away from generalneeds usessments and open-ended rsoue mobilisationthat prealed dring the carlier emergency phase. The oef these -aid ooordination mechanisms is criticallyreiant ont.he u.strgtheni1g of the national policy and managment fanmeworkthat is being pit -i place. The longer-term sustainability.of these mechanism lso dependson safihem s a clearly appropiately and providingadequate- laries and other incentivesto mo.tivat tic heo assigned t .them.Nevertheless,a. numberof more immediate improveente presented-inthis .paperthat could b agreedpon betwen the RoyalOovanment of Cambodiaand its interational p.artners. . -::-. ... .- . - .. .- .-- This paper has been pepared by the UNDP CountiryOffice in Cambodia(June 1997) to facilitate secondmeetingof die ConsultativeGroupon Canbodia, to be held in Paris, July discusions at the fortlhcomLng 1997. ,....111 m  Annex 27 - 103 - Page 2 of 8 I. Introduction Requirements and mechanisms for Aid Coordinationwith respeet to Cambodia have evolved drastically within less than half a decade(see box 1). It has now become imperativeto shift the emphasis away from extemally driven processes for donor coordination towards building up a capacityfor nationalaid management.Forthis to be effective,at leasgthe followingelements need to be in place: * Specificationof overall and sector priorities, financialand capital resource requirements and capacity developmentneeds, not only at the nationallevel but preferablyalso for provincial and local levels; * Delineationof institutionaland organizational arrangementsfor performingkey macro-economic managementfunctions,in particularplanning,budgeting,and investmentand technicalassistance programming;and, * A "minimum' capabilityto perform and managethe abovefunctions,as part of an overall system of national developmentmanagement.Selective functionsfor which no or insufficientnational capacity exists at presentmay warrantcontinuedgap-fillingor substitutionsupport, but only if a strategy for capacitydevelopmentis in place. Furthermore, a firm political commitmentto actually pursue and to further articulate the national development agenda is needed,which should be guided by a longer-termvision, not least in view of Cambodia's integrationinto ASEAN.However,for any national and donor-supported development efforts to be successful and durable, it is a sine qua non that real progressbe made in reforming administrativeand governancesystems,as part of a largerpackageof institutionalreform.This is to ensure not only effectivenessand sustainabilityin the implementationof the government's policy agenda, but also participationby other sectorsof society,and structuredways for involvingextemal partners. In the same vein, the move from coordination between donors towards aid integration and managementby national institutionsrequireswillingnessand disciplineby donors to comply withthe national priority setting, planning and budgeting processes and procedures governing project implementationand monitoring. In the case of Cambodia, the above specified elementary requirementsfor effective national aid management can only be met if supported by systematic and comprehensive improvements in technical and managerial capacity at all levels of developmentmanagement. Ongoing assistanceto development management, mainly from multilateraldonors, and concentratedon macro-economic management (including the handling of extemal aid resources), may need to be reviewed and expanded in order to more systematicallyaddress human resource development and systemic improvements. This discussionpaper is meantto identifya number of key issues- and to suggestpossibleactions for consideration between the Royal Govemment of Cambodia (RGC) and the international donor community - aimed at improving aid coordination and management,especially as this relates to coordinationwithin the RGCand the in-countryaid coordination system. II. National Policy andDevelopmentManagement Framework Over the last four years, the RGC has made significant progress in achieving macro-economic stability and in initiating a processof nationalrehabilitationand longer-termdevelopment.This has been significantlyfacilitatedby the establishmentor redesignof basic instrumentsand systems for managing the developmentprocess.Notwithstanding their proven utility, some of these instruments  Annex 27 -104 - Page 3 of 8 and systems are yet to be fully intenalized within governmentand to be made fully operational. Consistency (such as between the National Budget and the PIP) is yet to be fully ensured, Consultationand decision-making processesunderlyingthe preparationand use of these instruments do not adequately involve the provincial and lower administrtive levels, while provisions for consulting with other sectors of society are lacking.Furthermore,Governmentis still faced with a critical shortageof capacity in operotingand managingthese management systems and instruments. Nevertheless, a "holistic" and fornalised system of developmentmanagementis in the process of being establishedby the RGC, in support of achievingshortto mediumterm prioritiesand strategies for national rehabilitation and development,specified in several policy documents.The national policyand developmentmanagement frameworkis currentlycomprisedof the following: * The National Programmeto Rehabilitateand Develop Cambodia,the Policy FrameworkPaper (and its operationalinstrument,i.e. the Memorandum of Economicand FinancialPolicies), the 1996-2000 Socioeconomic Development Plan and its supportingsectoral strategies, and the Finance Law, which - taken together - constitute the national policy agenda. Apart from simplifying this multiplicity of policy documents, consideradon should now be given to developinga longer-ternn vision"that wouldreflect a nationalconsensuson futre opportunities and priorities, as well as a longer-term"compact"withdonors.Such a "vision" would guide the review of progress in implementingthe curfent short to medium term national development agenda and may thus be expected to contributeto the further articulationand opertionalisation of this agenda. * The Public Investment Programme(PIP) and the NationalBudget are the principal instruments for planning short-to-medium term publicexpenditureas well as donor support. Furthereffort is needed to synchronizemore systematically the preparationof these instrumentsto ensure mutual consistency.It is also recommended that donors be involvedin a more structuredmanner in the preparation of these instruments, as on average more than 90%. of the public investments continue to be fundedfrom externalsources.In terms of prioritysetdng, more attentionis needed to social and development expenditures,certainly at a time when security outlays should be expected to decrease. As regards funding, the RGC must effectivelycarry out its intention to increase the generation of public revenue from domestic sources and to improve the administrationand collectionof taxes.In order to bettertargetpublicexpenditureand to improve its effectiveness,it has been recommended to the RGC to considerinitiatinga PublicExpenditure Review (PER). Several multilateral donors have alreadyexpressedinterest in supportingsuch an initiative,includingIMF, WB, UNDPand UNICEF.A PER would complement,and itself stands to benefitfrom, the PovertyMonitoringand Analysisprojectthat has recentlybeen initiated,and which will later this year produce the results of the 1997 house-holdsurvey. The survey results will - inter alia - be utilised for updatingthe povertyprofile on Cambodiaand for producingthe first National HumanDevelopmentReport. * A Public Investment ManagementSystem (PIMvS) has been designed and is now being put in place at the level of central govermment. In essence the PIMS is meant to ensure fumctional linkages between planning, programming,budgeting and implementationof investmentand capacity developmentprojects; to delineateresponsibilitiesamong Governmentministries and agencies involved in performingthese functions; and, to ensure proper coordinationbetween goverwment agencies in establishinginvestmoent and technicalassistancepriorities. In order to make the PIMS mor effective,especiallyas it relatesto the management of aid resouces, the followingissueswould needto be addressed: * Further clarification of the respective roles and responsibilitiesof governmentministries and agencies and the involvementof donors in the system,especiallyas regards the linkagesbetween budget, socio-economic planning,investmentprogramming(PIP)and aid managementfunctions. T'his should enablethe RGC not only to sharpenits prioritysetting,but also betterto ensure the provision of requisite counterpart funds and future provision of operation and maintenance n~~~~~ - 1  - 106 - Annex 27 Page 5 of 8 diplomatic and donor representatives,the in-county coordinationsystem offers the opportunityfor more regular review of, and dialogueon, progressor lack of it. Boxl: Recent Aid Coordination Efforts witb respect to Cambodia Requircmerits and mtchanisms for coordinatingExtemalAssistce withrespectto Cambodiahave changed withina shoztperiod drastically of tnme. Following theOctober 1991ParisPeaceAccords, theUnited Nations Tranidtioal Authoritm C ia (UNTAC) wasestablished witha $2 billionbudgetforpeacekeeping and adntive repoibilities. includinga mandatefor coordinating rehabilitation support. b June1992, te Ministerl Conference on Rehabilitationand Reconstruction of Cambodia (MCRRC) was held in Tokyo.At this me6etng, U880 millionin pledgesweremade. Ihis exceeded byfarthe $595millionequested bythe SecrearyGanei jin bis April 1992 Appealfor Canbodia. The MCRRCalso established the famework for the InternationatCommitteefor the Reconstruction and Rehabilitation of Cambodia (ICORC).Annual ICORCconferences, co-chaired between FranceandJapan.wereheldinSeptember 1993, Mach 1994. and March 1995. At the last held lCORC meetingit was decidedto initiatea WB-ledConsultatiYe Group on Cambodia the firstCGmeeting tookplaceinTokyo, July 1996,chaired batwetnthe World Bankand Japan. Sincethe middleof 1995,an In-country AidCoordinationSystem (LACS) has beenput ai placeby the RDyal Government of Cambodia (RGC).TheIACSis comprised of severalelements (seebox2) that - if effectivelyutilised-wouldallowfor substantive dialoguesad monItoring between the RGCand donors, as wel as amongdonors themselves. Mostimportantly, it wouldfacilitate effectiveconversionof pledges made at extenal fora into detailedand coordinated comiunents, as well as joint monitoring of progmnunes being implemented. The IACSalso offersthe opportunity for the RGC and donorsto identifyand rmsolve opetional constrintsencountered inprogramme implementation. Overthe period 1992-96, an estmiatedamountof USS 2.5 billionwas pledged(oxcluding UNTAC) while,according to the ltest available daa, close to USS2billionwas tualy disbrsd. The CG and IACS- in conjunction withthe RGC'sPublicinvestment Management System - are at presentthe two principal instruments for aid coordination. Their esttblishmentis rellectiveof the need for more comprehensive and in-depthanalysis and prioritization of id requirtments - telativeto the nationalpolicyframework - and for monitoring of actualprogriametproject supportbeingprovided. These inter-activeand mutuallysupportive mechanisms constitutea moveawayfm jgeneral needs assessments and open-endedresourcemobilisationthatprevailed during the earlier emagencyphase. The effectiveness of aid coordination is critically relianton the hfiter sfthening of the overall national policyandmanagement frmmework (especiallythebudget and investnentplanning instruments), includingclarificatonof rolesandresponsibilities, procedures etc, onthedevelopment of tical and managerialcapabilities,andon theprovisionofadequate incentivesforstff mostdirectly involved. Although experience with the IACS has generally been encouraging,there is much scope for improving its functioning. Several, more immediateimprovementscan be suggested to make this systemmore effective. (i) The apex committee chaired by the vice-chairman of the CDC, exists to offer a forum for policy level dialogue and consultationbetweensenior officials of the RGC and senior resident heads of diplomaticand donor missions in a spirit of partnershipand collegial responsibility.As such, this forum would periodically review and monitor progress being achieved in implementingthe national policy frameworkand agreementsreachedat the CG, and determine any required measuresfor joint government-donor action.Furthermore,this forum was to direct and oversee the functioningof the other constituentelementsof the IACS. s-r - ~~~~~r.  Annex 27 - 107 - Page 6 of 8 In reality, however, few such meetings have been held, and then mostly preparatory to forthcoming external coordination meetings, and often convened at short notice. This has left donors ill prepared, or without having been able to obtain a mandate to enter into dialogue on key issues. Moreover, agendas for such meetings were usually extensive, leaving little time for dialogue; in a few instances, these meetings did yield useful exchanges on a number of issues (e.g. taxation and forestry). Undoubtedly, they have contributed to fostering better understanding of positions held by the different parties involved and of dilemmas being faced. Nevertheless, most of these meetings occurred without reaching clear conclusions or agreement on follow-up actions through other elements of the IACS, or otherwise. This forum could, fairly easily, be made more effective if the RGC and the major ODA donors would, once more, review and agree on its rationale, as well as a more regular schedule of more specific and issues oriented meetings. Agendas and preparations should then be made with more lead time. A monitoring system, recommended to be part of the PIMS, would help in ensuring that follow-up be made and periodically reviewed. (ii-a) Sectoral/thematicDrogrammin5! and monitor)nn between relevant governmentagenciesand donors. This element of the IACS, critical for coordinated and effective programming of pledges made at the CG (or otherwise), is also sub-optimal due to lack of clarity of purpose and absence of an agreed and forward calendar. Even when a calendar was prepared (such as for the early part of 1997), it could not be respected due to imperfect processes and delays with regard to Government internal review and decision-making 2. Furthermore, there is a need to spell out more clearly the respective organisational responsibilities of government agencies and donors involved in such meetings. Nevertheless, many such mectings have taken place, in almost all cases oriented towards programming (seldom towards monitoring), some formalised and well prepared, chaired by senior representatives of the RGC or lead-support donors, others more informal and often less well prepared. The main remedy for making this critical element of the IACS more effective lies in improving the functioning of the PIMS, especially as this relates to the budget and investment instruments. These two instruments, once fully developed and made compatible with one another, would guide the further articulation of sectoral priorities and resourc requirements, and would provide a more elaborate and operational framework for aid programming and monitoring. Meanwhile, it is recommended that CDC/CRDB, based on consultations with its inter-ministerial network, and guided by the core PIP - as agreed upon at the CG - determine priorities and a schedule for conducting programming/monitoring meetings in respect of key sectors and cross- sectoral domains. It is, furthermore, recommended that, for each of these priority sectors/domains, lead institutions on the part of the ROC and lead-support donors be identified and agreed upon. They would then jointly be required to ensure that substantive preparations (investment or master plans etc.) are completed on time, including specification of funding and resource mobilization requirements, and measures for follow-up and subsequent monitoring. Such action plan could then be reviewed and endorsed by the apex committee of the IACS. (ii-b) Ad hoc workinv vrous between relevant government agencies and donors concerned. These were meant to identify and resolve operational issues (e.g. incentives) and administrative, logistical, etc. bottlenecks (e.g. customs clearance, visa etc.) in programme implementation. Despite the fact that most donor-supported programmes, once these have become active, do encounter similar constraints, it is somewhat remarkable that this has not lead to any initiative as part of the IACS. Individual donors or groups of donors may, nonetheless, have resolved some of 2 Donor meetings we still pending to reviewmasterplans for which technicalprepntions were concluded several months ago,including civil aviation, and tourism. telecommunication Il H l' '  Annex 27 - 108- Page 7 of 8 these constraints,suchas the UN Agencieswho amongthemselves haveagreedon a harmonized policy on supplementarypayments, per diem and training allowances for Government counterparts.However,it would,obviously,be of more generalbenefit if such initiativescould be embraced and expandedto cover relevant govemmentauthoritiesand all donor partners concerned.This wouldalso avoidad hoc arrangements betweenindividual donorsandindividual governmententities, which, although facilitatingdeliveryin the short term, may prove to be unsustainable- or, worse, counter-productive- in terms of nationalcapacity development and durabilityof project outputs. It is, therefore,recommended that the CDC/CRDB initiatesconsultations with a selectedgroup of ODA providers(includingan NGO representative) in order to make a systematicinventory and prioritizationof such operationalconstraints,as well as to propose ways and means to resolvethese, including- if so required- the settingup of mixed RGC/donor workinggroups.In some cases proposed solutionsmay have to be reviewedat the level of the apex committee, especiallywhena commonapproachwouldbe warrantedor if proposed resolutionswould have major financialimplications. (iii) A forum for consultationamong donors. Several such meetingshave been held, at the initiative of both the UN Resident Coordinatoras well as individualdonors.Only in a few instanceshave these cncountersfulfilledtheir purpose,especiallymeetingsheld preparatoryto ICORC/CG. This forumwas to ascertainand, to the extentpossible,to reachconsensuson issues of policyor recurrentmattersof commoninterestor concern,andto provideviewsand adviceon the part of the donor community to the RGC,eitherthroughthe IACSapexcommittee or through the servicesof the UNResidentCoordinator. In most cases,however,lackof a clear agendaand the impromptunature of these meetingshaveyieldedno such outcome.This would seem to be due to two main factors.First, a reservedapproachby donors,given the unpredictablecountry environment, has - especiallyduringthe start-upof the IACS- often hampereda frankexchange of views. Furthermore,given the uncertaintiesand delays initially encounteredin donor programmingand implementation, the resultantpressureto deliver has often led to a tendency amongdonors"to go it alone", with a prevailing attitudeof 'getting the job done".As a result, these informal donor meetingswere mostly ad-hoc and served the purpose of information gathering(not at all times even achievinginformation sharing !), with little or no effecton the functioningof the IACSas a whole. Improvements in the functioningof "donor-donor meetings"may inducedonorsto operatewithin the emergingnationalpolicy and management framework - thus ensuringthat prioritiesare met, whilst avoidingoverlapand duplication - and, perhapsmost importantof all, may foster a more interactive and substantive dialogue among donors.This would, obviously,have a positive impacton the effectiveness of both the IACSand CG, and- more indirectly- the PIMS.Further thought needs to be given to the "formula"for promotingdonor-donorconsultation. Infornal encounters often do prove to be useful for a more frank exchangeof views. However,more formalmeetingsmay alsobe requiredto arriveat effective decision-making and follow-up. In conclusion, it may be expected that the actual functioningof the IACS will gradually improve, concurrentlywith the strengtheningof the RGC's policy and managementframework,and capacity developmentand adequate incentives in respect of governmentstaff most directly concerned with performingthese functions.A well functioning IACSwould,in turn, benefitthe effectivenessof the CG (in terms of both its preparationsand follow-up)and strengthenthe inter-relationship between the mechanisms for externaland in-countryaid coordination. Nevertheless, a numberof more immediate and concrete actions have been suggestedin this paper on which the RGC and the internationaldonor communitycould agree right away.Theseactions,moreover,are relatively easy to implement and could have a direct,positiveeffecton improvingaidcoordination with respectto Cambodia. 1W. ..  Annex 27 - 109 - Page 8 of 8 Box 2: The Cambodia in-Country Aid Coordination System EXTERNAL AID COORDINATION -( ICORC and Consultative Group Meeting mechanisms) IN-COUNTRY AID COORDINATION CDCwith DONORS and HeadsOf Missions (Dialogue, Implementationreview, and oversight) Programming & Moniitoring -7Operational Issues '12$ *'CDC/ Line Ministrie andDonors sectoral programming and monitoring -v Mixed Govtldonor ke -;I:T i Groups Issues Z1 ii' CONSULTATION AMONG MAJOROFFICIALDEVELOPMENT - '-. ;-- ASSISTANCE DONORS  Annex 28 - 110 - Page 1 of 2 CAMBODIA CONSULTATIVE GROUP MEETING Paris, 1-2 July 1997 Agenda Item 3: Aid Coordination Issues World Bank Statement Mr. Chairman Mr. Keat Chhon Ladies and Gentlemen The importanceinstitutionaland individualcapacitybuildingin Cambodiahas been stressed many times over in various fora includingthe last CG meetingheld in Tokyo in July 1996.Today, the governmentstatementand the UN ResidentCoordinatorhave again emphasizedthis issue. Unlikein many othercountries,this subjecthas been on the forefrontof issues in Cambodiabecauseof the destructionof institutionsand traditions and large scale loss of educated,trainedand skilledpeople duringa traumaticperiodin the country's history. Lack of adequatecapacityhas beenan all pervasivephenomenonin the public sector in the countrybut most of us in the countrycan vouch to the fast improvingsituationin the past two years. All of us need thereforeto pay specialand focusedattentionto this issue in all our efforts to assist Cambodia's socio-economic development.Providinglong and short-termexperts to virtually supplantand substitutethe roles of governmentfunctionariesis a rapid and immediatesolution as has been so far. However,as the headof the Cambodiandelegation has clearlypointed out time and again,externalagenciesshould use their experts increasinglyand specificallyfor counter-parttrainingand institutionbuilding. The Bank attachesparticular importanceto this subjectin all its assistanceprograms.We providedlong-termexpertsfrom the UNTACperiodto improvethe functioningof the Ministry of Economyand Finance.Today,most of such expertshave left and the improvedwork of budgetpreparationand monitoring,treasuryfunctions,and economic managementand monitoringare continuedmostlywith trained Cambodiancounterparts. The Bank is also assisting in establishinga FinanceSchoolas an institutionto provide training to Cambodianofficials in variousbranchesof governmentin financialaspectsof managementincludingin taxationand othermatters.Likewise,all other projects supportedby the Bank attend to training needsin the respectivesectors. Given the fact that Cambodiais highly dependenttodayon externalresources,aid- coordinationassumesadded significanceand has to do with buildinginternalcapacity. Proper aid-coordinationensures effectiveness of assistance,avoidsoverlapsand wasteful duplication,promotescoherenceand complementarity, and helps the recipient governmentto look at all aspectsof a situationin directing,receivingand using aid in a holistic manner. Aid-coordination capacityshouldthereforebe fully internalizedin and ownedby the recipientgovernment.The governmentshouldbe clearlyable to set its growthtargets, to envisionand enunciateclear policies and programsto reach these n - m-  Annex 28 - 111 - Page 2 of 2 targets, to preparefocused strategiesand projectsto achievethe targets,and to mobilize and allocate resourcesfor implementing the projectsas wellas monitortheir progressand perfornance. The Bank is glad to note that startingin 1995the governnent is gradually but surely building this internalcapacityas was mentionedin connectionwith the preparationof the Socio-EconomicDevelopmentPlan (SEPD)and the PIP. We would like to commendthe CambodiaReconstruction and DevelopmentBoard (CRDB)of the CIB for rapidlyacquiringcapacityfor aid mobilization,coordinationand monitoring. The Bank was gladto be able to supportthis effortwith a long-termadvisor till end of last year. Besides,the team providedby UNDPhas been doing a finejob on this front. Today,the CRDBis fully capableof collectingand analyzingdata and to producethe annualDCR. The Royal Government"s statementoutlinedthe variouslevelsand ways of aid- coordinationestablishedin Cambodia.We supportthe plea for all of us to supportthese measuresand follow the proceduresestablishedby the governmentin the interest of long- term capacityinstitutionalizationin Cambodia.In-countryaid-consultation and coordinationis carried out through periodicdonorconsultationslike the ones organized by CRDB in January and May this year. It wouldbe useful if theseconsultationsget systematizedand held oncea quarteror so. Besides such overarchingmeetings,sectoral informationsharingand aid-coordination meetingshave also been organizedby the governmentfrom time to time, like the one on road infrastructure(May 97), on Tonle Sap (June 97), on water supply (March97). These shouldcontinue. Many agencies also hold consultationmeetingwith a varietyof partnersand stake- holders including NGOsin developingtheir programsof assistance.The Bank consulted such partnersin developingits CountryAssistanceStrategylast year and does so in in which the Bank participates,holds monthly respect of all its projects.The UN systemn, meetings for informationsharingand varioustheme groupsorganizedby the systemhave wide-rangingparticipation. In terms of annual consultationsbetweendonorsand the governmentand for aid- discussion and mobilization,at the requestof the Royal Government and in consultation with other stake-holdersin the internationalcommunity,the Bank is glad to organizeand conductannual CG meetingssuch as the one now. Aid-coordinationis a difficulttask giventhe differingmandates,internalproceduresand time- horizons of differing partnersprovidingaid. However,the work of building capacityin this field has progressedwell in Canbodia and shouldbe furtherstrengthened. Let us all work for it. Thank you. 117_ C  Annex 29 - 112 - Page 1 of 4 Third Session: Japanese Statement on the "Aid Coordination Issues" 1. Aid Coordination by the Royal Government of Cambodia As the so- called "aid fatigue" of donor countries worsens, also the prevailing circumstances surrounding Japan's ODA have become more constrained, since it has been confirmed that the ODA budget is to be further reduced more than 10% in the next FY. It will therefore be necessary under such circumstances to utilize our limited financial assistance efficiently and effectively and without unnecessary overlapping. It is also necessary in this context to further improve the capability and capacity coordinating aid of the Council for the Development of Cambodia (CDC) as the principal assistance receiving body. The Government of Japan has, from a point of view of supporting Cambodia's self-help efforts, implemented various technical cooperation activities in order to improve Cambodia's capacity- coordinating aid. For example, long- term advisor- type specialists have been dispatched to Cambodia. and training has been provided to give guidance on the implementation procedures underlying Japan's economic and technical cooperation system. It will be increasingly important in the future to dispatch advisor- type specialists from various fields of expertise. 2. Aid coordination including that of Donor Countries The Government of Japan (GOJ) believes that aid coordination, including that of donors as well as that of Cambodia alone is important from the following two aspects. (1) Aid Coordination from the Viewpoint of the New Development Strategy First of all, aid coordination is important fromthe viewpoint of implementing the idea of partnership, which is a principle of the New Development Strategy of the OECD's Development Assistance Committee (DAC). Japan attaches priority to the implementation of the New g~~~~ .. -... 1  Annex 29 13- Pa-ge7- ot 4. Development Strategy in Cambodia, and this has been well received in Cambodia The Government of Japan thinks that it is more effective to arrange assistance at the local level, so that the requests received from the Royal Government of Cambodia can later be taken up directly by the local entity in charge of arranging assistance there. In this context, a local donors' meeting was held in Cambodia by the UNDP in February 1997 based on a proposal by the Government of Japan. The overall consensus was reached on the importance of donors having a commonly shared development vision, working in close cooperation and speaking with one voice. This perception was again confirmed. and many participants referred to the need of expanding assistance areas in each individual field, such as, for example, health care. Meaningful discussions regarding the desirable direction of development and the problems among donors in cooperating at the local level in Cambodia were also carried on. The Government of Japan thinks that it is important for the actual arrangement of assistance to Cambodia to promote a system of discussions among the donors and Cambodia at the local level as well as to implement the idea of the New Development Strategy in the future. (2)Aid Coordination from a viewpoint of Broader Development Secondly, it is important to arrange assistance programs covering a broader development of the greater Mekong Area The Government of Japan has supported Cambodia's national efforts of reconstruction and restoration, and, at the same time, the Government of Japan attaches importance to the broader development of the Greater Mekong area, including Cambodia Therefore there is a need to coordinate ODA programs under a broader area approach, and to share information on this kind of approach among donors. Moreover, aid coordination between Cambodia and Cambodia's neighbors is desirable. After the signing of the Cambodia Peace Agreement in Paris in 1991, the  Annex 29 - 114 - Page 3 of 4 Indo- China countries began to transform their economic systems away from planned economies toward market- oriented economies. They also began to interact more actively with other countries, such as the ASEAN members. In response to these developments, the Asian Development Bank (ADB) has held Conferences on Subregional Economic Cooperation since 1992. It has started discussion on a multi-framework for well-balanced and harmonized development, which promotes the movement of people and goods within this area as a single economic subregion. Last year, a task force of experts was established in Japan, and development scenarios for the realization of well- balanced, efficient development in this economic subregion, with the improvement of the infrastructure at its core, have been discussed. The Government of Japan regards the Indochina countries along the Mekong River as the "Great Mekong Area", as a report published in August 1996 indicates. It is quite important to realize a harmonized and balanced development in the Greater Mekong Area The following measures are necessary in order to realize this objective: (a) improvement of infrastructure crossing international borders of countries and regions; (b) priority support for Cambodia and Laos;and, (c) environmental conservation in the areas along the Mekong River. In order to improve the transportation networks which connect the north and south and the east and west with central Indochina, Japan will extend assistance measures to projects, such as "Project for Rehabilitation of the National Route 6 and 7"and "Project for Construction of a Bridge over the Mekong River", to connect Cambodia with Viet Namn We also will provide support for the "Project for Rehabilitation of Sihanoukville Port", which is a key point in the north- south transportation network. The development of - f..-.  Annex 29 - 115 - Page 4 of 4 the Sihanoukville port is a joint project in which Japan has implemented the master plan(M/P) and the feasibility study(F/S) of the port, France has implemented the M/P and F/S of the city, and the USA has maintained Route 4, which connects Sihanoukville with Phnom Penh. This project is a successful model of the voluntary Aid coordination that was proposed by the Government of Japan in the Forum for Comprehensive Development of Indochina 3. Conclusion Finally, public peace and order must be secured, in order to implement smoothly any assistance programs provided by donors. Japan's economic cooperation site was attacked in May 1997, as well as last year. These incidents have obstructed the smooth implementation of assistance. Hence it is strongly recommended that the Royal Government of Cambodia increases its efforts for smooth implementation of assistance programs, including maintaining public peace, order and security. [END]  Annex 30 -116- Page I of 2 CONSULTATIVE CAMBODIA IEETIG GROUP 1-2 Pais, 1997 Jtuy ftm4:FRancdna Aaenda Ruiruents by Statement KEAT Mr. CHHON in-charge Sr.Minister andDeveoprment ofRehabiltation Minister and of Economy Finance Government Royal ofCambodia Mr.Chairrnan Excellencies and Ladies Gentlemen, 1. We had an intense dayof comprehensive yesterday discussions on manyaspects of Cambodia'ssocio-econornic programmes progress, andneeds. TheCambodian deeply delegation i appreciates of comoplete thespirit candor in thedeliberations andtheconstructive commentsreceived. Wehave takenfulland note careful ofyourremarks and and suggestions willdoourutmost toaddress them. 2. Ourneeds for extemalsupport aresummarized in the government paper"Socio-Econornic Requirements Developrment, andProposals". Aswenoted yesterday, ourbudget revenues havebeen growingquiterapidlyandareslated toincrease further intheyears to come because of measureswe haveundertaken recently.At thesame time,ourneeds have alsogrown. In thepast fewyears,our revenues current have notbeen adequate tomeet ourrecurrent needs forstaff defense salaries, and securtyand operaffonalexpenses across theboard. Theshorifall inthecurrent account and almost our entrebudget needs forcapitalexpenditurehave been metby budget support fromthe contributions financial multilateral insttubonsand from some bilateral partners. We had estfmated thattherewouldbe surplus a current in 1997 butnowwefeelthatit maynotquite happen. Ourefforts willcontfnueto increase ourbudget revenues,by increasing revenue collections, by getting allpublicrevenuesinto thebudget,andby overall vigilanceand pursuit.Still, because of our tremendous andgrowing needs, including our anticipated localexpenditures for the forthcoming elecions, the needsfor public besides administration, theotheron-going programmes likedemining andthe Social Fund, we will to need continue external supportforourcapital investments andtechnical assistance requirements. 3. Asyou willnote onpage 8 ofthe annex toourdocument (thevery lastpage),wehave estimated thatwewould need a totalofUSS 1.472 billionasextemal assistance forthethree year period,1997- 99.Thistotalamount includes andtechnical all capital assistance, ourcounterpart funds for such assistance which areincluded in thebudget budget supportbalance of parments support,and funds programmes for special such as demobilization andpublic administrationreform. Funds for budget estimated support, at $ 182 million includetheamount needed forinvestments thatklw through the budget aswellas anestimated USS 42million forthepreparations forand theconduct ofelectionsin 1997-98.Totheextent thatanyamount fortheelectionsis directlycontibutedfromexternal sources, thebudgetsupport would come down. 4. Wealso estimatethat, amount outof thetotal of USS 1.472 approximately billion, $ 619million standsalreadycomrittedforongoing projectsornewonesforwhichagreementsarebeing concluded. we estimate In addition, thatwe would be ableto securebudget of $ 120miNion support from and multilateral partners, bilateral although wehave notreached so far.Anamount anyagreemfents of CAhon's W KAMf Agenda Sttement 4:Fkwncq Iten Requtawnst CG Meet, P.is 1-2 Pae1 J* 1997 D1;1-  Annex 30 - 117 - Page 2 of 2 $40n nt alsoexpected ofpaymt sWpotmto F a ie laR asbWance yeWs suce frm fle Ste year arrangement ESAF which ftisyear. ends 5. I sholdaddt ecost ofte projectrwhkch VAwhibalVWl asisaiceIs shown afu Myuned we agreed uponcosts,thosecot forprojects shomn fndedor unfunded aspartly wecurrent rough which estimates, willneed once toberevised aidagenies areidenfHied and negotiations commence. 6. Thetotal amount of USS1.472 billionforthreeyears,1997-99, into$ 490 translates rrilionper year,wNch is wel wihinthe rangeof assistance extended D us so far.Youwill note tomthe 199611997 Development Cooperation Report (DCR) that$ 482milion wasdeliveredas assistance to Cambodia bybilateralandmultilateral partners in 1996;theNGOs spent anadditional amount ofS 36 fromtheircorefunds. rrillion Wenowproject $ 490rmillion as needs peryear againstS 519rmillion pledged for1996 at theCG-type meeting in Tokyolastyear.Thedifferenceis marginal and arises in partfromoursharpening of ourestimates forsome of theprojects, andalsoin partbecause of our expectationthatourrevenues willincrease and covermore ofourrecurrentexpenses. ( 7. LadiesandGentermen, thecounties andorganizations yourepresent and thosethatarenot present here,have been verygenerous in givingusreadyadvice andassistanceforCambodia's rapid development and rehabilitionin thepast liveyears.However, owing tocapacity constraints imposed onusby ourtragic history,many ofthese prograrnmes and projectshavegenerally been and identified implemented directlybytheaid-providers.The timehasnowarTived forCambodia to becomele maitre d'ouvrage" andinsure theownership oftheprocess ofidentification, and prioritization inplementation to be in the hands of the Cambodian authorities.Thanks in a largemeasure to yourassistance and because of ourowndetermination and perseverance,wehave now acqured adequate knowledge and capacityinthepastfewyears thisresponsibility. tofulfill 8. Weseek yourcontinued goodwill and assistance in thetruespirit of parbership fortheorderly developmnent of Cambodia. Your helpwillnotonlybeaninvestment for Cambodia. Indeed,because developmentisthesurestantidoteto,andpromoterandassurer ofpeace,stability, and security overall prosperity, your investrnent willhelppreventthere-emergence ofconflicts, andwillfuelgrowthintrade, comrerceand interaction in theregionandwith oftheworld. therest 9. Please make pledgesof yourassistancebothin total terms, amounts including thatmight have beenalreadycommrited, forthethree yearperiod, 1997-99, and if andwhere possible, for specifically oneoralloftheschemres identified asspecial such efforts, aspublic sector demobilization, reforms, the Social Fund andtheelections,Once thepledgesarernade, wewillstart discussions individually with youonthe programmes andprojects youcouldbestsupport in consonance withyourowninternal mandateand priorites. 10. I look forwardtoyourpledges $ 490 totaling rrilionperyear forthenext years, three 1997-99. I wil behappytoprovide anyclarifications youneed. Thank you. Af KutCMon's Agnbd Stubwnnt 4 Frwehq Item Rqwunwis CGae.g, Pws: 1-2At 1t997 Pop2  Annex 31 - 118 - Page 1 of 2 CAMBODIA CONSULTATIVE GROUP MEETING Paris, July 1-2,1997 Statementon ExternalFinancingRequirements Kyle Peters The World Bank Mr. Chairman,Excellencies,Ladies and Gentlemen The World Bank--inclose collaborationwith the IMF--hasprepareda mediumterm economicscenarioto illustratethe growthprospectsof the Cambodianeconomy and to estimate the requirementsfor extemal assistance. This scenario and the associatedfinancial supportare predicatedon the implementation of the reformprogramoutlined in the Government'sPolicy FrameworkPaper for 1997-99. This scenario,therefore, would requirecontinuedprogressin consolidatingmacroeconomic stability, combinedwith an accelerationof economic reforms and significantimprovements in the transparencyand accountabilityof economicmanagement,particularlyin the fiscal accounts. The high levels of past donor supportand the willingnessof the donorsaround this table to support Cambodiais clear, as long as such supportis met by strongGovernmentactionsto raise domestic resourcesand channel theseresourcesinto sustainabledevelopmentactivities. As many speakershave noted,decisive and timely economicreformwould enable Cambodiato sustain its currenthigh rate of growth.This would requirea substantialincreasein domestic savingsand investment. Governmentsavingswould needto improvesignificantlyas a result of enhancedtax efforts and increasednon-taxrevenue,especiallyfrom forestry,as sustainablemanagementpracticestake hold. The extentof improvementin govermment savings, however, would be limited in the near term, as the implementationof administrativereform would require additionalexpendituresfor departure packagesand trainingprograms. As a result, under this high reform scenario,foreignsavingswould needto finance a declining, still but major, share of investmentover the next few years. External financingrequirements,therefore,under this high reform scenarioremain substantial. With the maintenanceof politicaland economnic stabilityand a re-invigoratedreform program, an increasingproportion of Cambodia's externalfinancing requirementscouldbe met by inflowsof foreign direct investment.However,evenwith this increase in private capitalflows and an increasein domesticresourcemobilization,disbursements of officialassistancein the formnof grants and concessional loans at about the same level as in 1996would still be needed in 1997-98. During 1992-96,includingthe last CG meetingin Tokyo, the intemationalcommunity has pledgedsignificantofficialassistance(aboutUSS2.5 billion)which has been committedand reformeffort is consistentwith the is substantiallydisbursed.Therefore,if the Goverrnment's ' 1'I '''- V''  Annex 31 - 119 - Page 2 of 2 high reformscenario, maintainingthe level of officialdisbursementswould requirecommitments of officialasistAnceof about USS455million per yeaw during1997-99.Evenif the Government makes a concertedeffortto increasedomesticresourcemobilization,domesticsavingsand budgetaryrevenueare likely to rise only slowly.As a result, officialassistancewould still need to cover some recurrentexpenditures,domesticcounterpartfunds, and the foreignexchangecosts of the public investmentprogram. Therefore,in the near term, there would remain a needfor some of the official assistance(about US$ 60 million)to be givenin the form of balance-of- payments and budgetarysupport,but I would like to stressthat this budgetsupportwould be justified only if Cambodia's own efforts at domesticresourcemobilizationare strengthened. Theseprojectedrequirementsof officialassistanceexcludethe financialsupportthat would be required for the electionsin 1998. Severaldonorshave indicatedthat they would also provide support for the elections. Mr. Chairman,now let me turn to the WorldBank'sassistanceprogram. In our fiscal year 1997,two IDA creditswere extendedto the Goverunment of Cambodia. Thesewere a Disease Controland Health DevelopmentProjectfor aboutUS$ 30 millionand an Agricultural Productivity ImprovementProject for about US$ 27 million. In February 1997,the Board discussedand approvedthe first full CountryAssistanceStrategy(or, CAS) for Cambodia. The CAS outlined our strategyand objectivesin Cambodiafor the fiscalyears, 1997-1999. The broad strategicobjectivesof the Bank's countryprogramare to supportCambodia's socialand rural development,the reconstructionand rehabilitationof Cambodia's basic infrastructure,and to support Cambodia's reformprogram. This supportwill be in the form of IDA credits, economic and sectorwork, and technicalassistance,includingthe involvementof the Bank EconornicDevelopmentInstitute (or, ED1). In fiscal year 1998,the WorldBank is preparingtwo IDA credits,totaling aboutUS$ 50 million,for the approvalof the Bank's Board of Directors. The first will be a Water Supply Rehabilitationcredit for aboutUS$ 30 million,which will supportthe rehabilitationof water supply and distributionsystemsin Phnom Penh and Sihanoukville. The second project will be a Rural Development Project for aboutUS$ 20 million. The CAS envisagesa "high case" scenarioof US$ 75 millionper year. The high case is predicatedon the Governmentimplementinga strongpackage of reforms, in addition to maintainingmacroeconomic stability. The high casewould entail a StructuralAdjustment Credit. The amountand timing of this adjustmentcredit woulddependon the strengthand timing of the Government'sreformpackage. Thank you. h,- -  Annex 32 - 120 - Page 1 of 5 Fourth Session : Japanese Statement on the "Financing Requirements and Pledging Session" 1. Basic Policy The Government of Japan wiII actively support reconstruction and development efforts by Cambodia mainly in the fields of economic infrastructure, agriculture, basic human needs such as medical treatment and health, and human resources development. The Government of Japan will take into account the following issues in providing assistance measures to Cambodia. First of all, the Government of Japan fully supports the NewDevelopment Strategy adopted by the OECD's Development Assistance Committee (DAC) as guidance for implementing ODA to developing countries, hence, the Government of Japan attaches high priority to the implementation of the NewDevelopment Strategy especially in Cambodia prior to the Asian developing countries. With the New Development Strategy in mind, the most high-level comprehensive mission will be dispatched in order to discuss a middle- and long- term assistance policy, including priority areas. Secondly, in addition to assistance in the improvement of physical infrastructure, the Government of Japan will positively consider cooperation in "soft" fields , such as assistance for the legal system, as well as cooperation in "hard' fields, such as assistance for maintenance of infrastructure. In order to support the promotion of a market- oriented economy in Cambodia, a mission will be dispatched to consider cooperation programs that effectively combine acceptance of trainees, dispatch of experts, and provision of equipment in the field of legal systems. Thirdly, cooperation measures will be implemented that pay attention to the development of harmonious relations between the public and private sectors. The system of dispatch of advisor- type experts from the private V .. .I  Annex 32 -121 - Page 2 of 5 sector was established through harmonious relations between the public and private sectors, in order to respond to the diversiSed assistance needs of developing countries. As a follow- up to the mission that was dispatched by "Keidanren7 (Japan Federation of Economic Organizations) in July last year, experts recommended by Keidanren will be dispatched to take part in the Shihanoukville Industrial Park Construction Plan this year and an Trade and Investment Promotion Seminar will also be held this year. The Government of Japan hopes that the Royal Government of Cambodia will fully utilize the experts' know- how and experience for the economic management of the country. Fourthly, since the Government of Japan regards development not only in Cambodia, but also for the entire Indochina area from a broader context, as important and the Government of Japan will also implement assistance based on this viewpoint. Fifthly, the Government of Japan currently implements cooperation measures i limited areas, such as the area around Phnom Penh, the Government of Japan are deeply concerned about the recent situation that the public peace is getting worse even in Phnom Penh. In order to expand the physical scope of the areas in which cooperation measures are implemented, it will be essential to secure public peace and order, including implementing measures for land mine removal. It is strongly expected that the Royal Government of Cambodia will undertake serious efforts to this effect. The Government of Japan will be ready to consider extending yen loans, taking into account the economic situation, debt repayment capability and other related issues, in response to assistance needs that cannot be addressed properly under the grant aid scheme. 2. Substance of Assistance in FY1997/1998 In line with the above- mentioned policy, the Government of Japan in  Annex 32 122 - Page 3 of 5 pledges in FY1997/98 the total amount of no less than Y 8 billion for development assistance, and US$1 million in support of the removal of land mines. (1) Grant Aid Grant aid in FY 1997/98will be either implemented or considered for the following projects: To improve the fundamental infrastructure of Cambodia: Rehabilitation of the National Roads Route 6 and 7, Construction of a Bridge over the Mekong River , Rehabilitation and Upgrading of Electricity Supply Facilities in Phnom Penh, Improvement of the Siem Reap Airport, and Rehabilitation of the Sihanoukville Port; As basic human needs field: the Improvement of Water Supply Facilities in Phnom Penh; As agricultural fields : Improvement of the Facilities of ColmnatageSystems, which make use of Mekong River water, and provision of Food Aid. The implementation of grass- roots grant aid , which is directly useful to the people in Cambodia, will also be actively implemented . It is estimated that approximately no less than Y6 billion in grant aid will be provided in order to realize the above- mentioned projects. (2) Technical Cooperation and Development Study Further cooperation in FY 1997/98 is planned in technical cooperation and development study. The total amount currently estimated is about Y2 billion. Since human resources development is most important for the economic development of Cambodia, the Government of Japan will positively implement technical cooperation as follows: Accept 123 trainees mainly in the fields of public administration, agriculture, health and medical treatment, and legal systems; Dispatch 21 individual experts mainly in the fields of aid coordination, T F. ..... . .. . . - I  Annex 32 - 123 - Page 4 of 5 agriculture, and education; Dispatch 43 Japan Overseas Cooperation Volunteers (JOCV); Invite 30 youth, under the Japan- Cambodiafriendship Program; Provide Polio vaccine and equipment, such as special equipment related to WID; and Continue implementation of a project- type technical cooperation of the Maternal and Child Health Project. Furthermore, Japan will contribute about US$1.67 million to UNDP in order to implement a tripartite cooperation arrangement for settling refugees , and for the development of agricultural regions. This tripartite activity is conducted jointly by experts from Japan and ASEANcountries. Eight development study projects will be implemented in FY 1997/98, including a new project for bridge Reconstruction and Improvement. (3) WID Considering the important role that Cambodian women play in the economic and social development process, the Government of Japan has implemented cooperation activities in the field of Women in Development (WID) at a steady pace. Last year Japan supported the Indochina WID Seminar, and the national Workshop in Cambodia. As a follow- up to these meetings, the project on Micro- Enterprises Development,which is intended for women entrepreneurs in the area, is now under consideration (4) Measures for the Removal of Land Mines The removal of land mines in Cambodia is necessary for the country's economic development and welfare improvement of the general public. The Government of Japan intends to give as much support as possible to any mine removal measures. Thus, the Government of Japan will contribute - r~  Annex 32 -124 - Page 5 of 5 about US$1 million to the CMACin FY 1997/98. 3. Conclusion The Government of Japan intends to implement the above-mentioned assistance during this fiscal year. However, whether these projects and programs can actually be realized depends on how seriously Cambodia will work on improving its domestic situation towards the elections of the next year. The support system of the international community will be retrograded if domestic political stability cannot be secured. In particular, the recent political instability is a dangerous factor, which could reduce to nothing the progress achieved so far by the joint peace and reconstruction efforts of the Royal Government of Cambodia, the Cambodianpeople, and the support of the international community. The Government of Japan strongly desires the Cambodian government's utmost efforts in order to prevent such undesirable results. We hope that this will be reported to both Prime Ministers upon your return to Cambodia. As mentioned before, the overall environment surrounding econoniic cooperation in Japan is very severe as the budget for economic cooperation will be reduced by more than 10%next FY. It is therefore even more important than ever that Cambodia utilize the economic cooperation extended by Japan effectively and efficiently, that sufficient results be achieved, and that the public be well informed about these efforts and achievements. Hence, further endeavors on the effective utilization of assistance and public relations regarding ODAare fully expected. [END] -1 r.. . . - 1' _.., -  Annex33 - 125 - Page 1 of 5 CAMBODIACONSULTATIVE GROUP MEETING SESSIONIV: PLEDGING STATEMENT BY PETER McCAWLEY AUSTRALIANAGENCYFOR INTERNATIONALDEVELOPMENT PARIS, FRANCE JULY 1-2 Mr Chairman Australiais now in the final year of a fouryear $A92millionaid pledge to Cambodia. We are pleasedwith our successin meetingthis pledge. In the first three years of the pledgewe have expended$A70million,fully meetingthe nominalallocationof about $23millionper year. We anticipatethat a further$A22.3millionwill be disbursedin 1997/98, completingin full our remainingpledgecommitment withinthe agreed periodendingJune. Estimatedtotal aid flowsto Cambodia(including regionaland humanitarian funding)in 1997-98are $A32.1million. All funds are providedas grantaid. Australiaconsidersthat its aid programis the principalmeansthrough which it can help Cambodiareemergeas a viableregionalentity.Given decadesof war and civilunrest,the reconstruction will take of Cambodia time and effort. Australiahas alwaysacknowledged considerable that it is "in for the longhaul". But we firmlybelievethat Australianaid to Cambodiashouldcontinueonly so long as it can be deliveredeffectively to serve the obvioushumanitarian people. needsof the Cambodian Within this context - and speaking as a friendof Camnbodia - it is impoTtant joins with otherdonorsat this that I mentionthat Australia  Annex 33 - 126 - Page 2 of 5 currentpoliticaland security meetingin havingspecialconcernsaboutthe takesthe view that a situationin Cambodia.TheAustralianGovernment for economic stablepoliticalframeworkis an essentialprerequisite and that the continued development, supportof the intemational communitycannotbe takenfor grantedunlessthe politicaland security situationis normalised. Australianassistance to poverty reflectsa fum commitment to Cambodia alleviation,participative and promoting development humanrights. In the Australianaid responseto the needsof the majorityof the population, programis increasingits focuson rural areas. Assistanceis deliveredto health,educationand training,good the prioritysectorsof agriculture, and infrastructure.It also includessupportto the Cambodian governance, Mines ActionCentrefor mines clearanceand awarenesstraining activities. As we have heard overthe courseof this meeting,the Government's and rural strategyaccordshigh priorityto agricultural development abouthalf as the agriculturesectorcontributes particularly development, of Cambodia'sGDP, employssome 80%of the labourforce. It is for this reason that agricultureis the largestsectorin Australia'sbilateralaid researchand Agricultural programto Cambodia. Australiais supporting with extensionto diversifyand increasecropproductionin collaboration RiceResearchInstituteand througha majorprojectto the International extensionservice. nationalagricultural developa sustainable Australiastronglysupportsthe emphasisin the PIPon humanresource especiallyimproving development, healthand educationservices.  Annex 33 - 127 - Page 3 of 5 The health situationin Cambodia remainspoor, causedlargelyby lack of accessto healthservices.The Cambodian government has made significant progresssince 1995in developinga nationalhealth policyand programprioritiesfor an equitable, affordableand sustainable health system. Australiais supporting the Government to implement its reform programthrough a $AI5 millionfiveyear projectto strengthen Cambodia'sinstitutional capacityto provideeffectivehealtheducation and good qualitypublichealth servicesdownto the villagelevel. We are also supportinga rangeof NGO activitiesfocusingon primaryhealth servicedelivery,water supplyand sanitation, HIV/AIDSeducationand hospitalengineering. Australiais also supportingCambodiain its effortsto builda core of highlytrainedindividualswho are responsiveto the needsof both Government and privatesector. In the formalsector,Australiais assistingwith the development of a nationalhighereducationstrategy, establishinga crediblehigh school examinations system,and providing Englishlanguagetrainingto Ministiyofficials. Over 50 studentsare currentlystudyingin Australiaon full scholarships in fields suchas agricultureand fisheries,engineering, health,economics, administration and education. Australiais also supporting vocationaleducation, adult literacyand skillstrainingthrougha varietyof NGO activities. We see a very closerelationship betweenthe growthof prosperityand stabilityin Cambodiaand good govemanceand humanrights. Cambodia'sinstitutional structuresand administrative capacitymust be re-established as quicklyas possible. In this context,Australiais 11. -. F  Annex 33 -128- Page 4 of 5 supportingthe operationof the Councilfor the Development of Cambodia as the aid and investmentcoordinating body. It is assistingin planning for the orderlydemobilisation of excesssoldiersand will provide continuingsupportfor preparations for the next elections. Early in 1997, Australiacommenced a majornew projectto assistthe CriminalJustice Systemin Cambodia. Thisprojectwill focuson supportfor the effective implementation of proceduresfor police,courts and prisons. All AusAID projectsprovideassistancewiththe reestablishment of institutional structures. A numberof smallactivities,includinghumanrightstraining are also funded. We are contributingto muchneededinfrastructure development, Australiaby replacingand rehabilitating 1 bridgesalongNational Routes5 and 6. In addition,Australiaprovidingsignificant levelsof supportfor the CambodianMineActionCentre. Variousothersmallactivitiesare implementedby the AustralianEmbassyin PhnomPenh including:a SmallActivitiesSchemeto supportlocal aid initiatives,particularly CambodianNGOs;and a HumanRightsFund. Mr Chairman,in additionto the $A22.3millionpledgefor jointly programmed activitiesin 1997/98, Australiawill also providefoodaid, emergencyassistance,fundingfor regionalprograms,and supportfor NGO activitiesin Cambodia,mainlyin the area of landmineclearance. Thiswill bring the total aid flowsto Cambodiain 1997/98 to $A32.1 million(equalto aboutSUS24. 1 millionat currentexchangerates). 1v  Annex 33 - 129 - Page 5 of 5 Throughall of these variousprograms,Australiaaims to promote sustainableeconomicand socialdevelopment and soundlong-term growthwith equity. We will continueclosedialoguewith Cambodiato ensurethat our aid reachesthe mostvulnerablegroupsand that it is built on the principlesof cooperationand partnership. In detenniningAustralia'sfutureaid programto Cambodia, the Australiangovernment willlook at a numberof indicators includinggood govemance,revenuecollection,electionpreparations, functioning of Parliamentand the Cambodianpeople's sense of confidence in their Govemment. Thankyou.  Annex 34 -130 - Page 1 U.S. Pledge Statement Cambodia Consultative Group Meeting Paris, July 1-2, 1997 I am honored to represent the United States Government at this second Consultative Group meeting on Cambodia. The U.S. Government views this as an important opportunity to reiterate, in concert with other donors, our support for the establishment of a free market economy, a fully participatory democracy, and the rule of law in Cambodia. The intemational community has a substantial stake in Cambodia, beginning with the reconstruction activities of the late 1980s and early l990s and moving into the current emphasis on long term, sustainable development. Since 1986 the U.S. Govermnent has provided more than $274 million in USAID bilateral support, $40 million in humanitarian assistance through military channels, and over $500 million through the United Nations system. Currently we support programs in democracy and governance, primary education, maternal-child health, rural economic growth, HIV/AIDS prevention, environmental protection, and assistance to war and mine victims. In view of the substantial progress that has been made in each of these areas, I am pleased to announce that we intend, subject to continued allocation of funds by the U.S. Congress, to maintain our current annual assistance level of $35-38 million. This assistance will be provided on a grant basis. However, I must also note the growing concern with which both the current administration and the U.S. Congress view current political trends in Cambodia. This concern is based on the possibility that these trends, if continued, will disrupt and even reverse the progress that has been achieved to date on issues of cental importance to the average Cambodian citizen. These include improvements in essential health services and primary education, sustainable use of the natural resource base, and transparency in government, including concrete progress toward the holding of free and fair elections in 1998. We call upon the Royal Government of Cambodia to take all necessary steps to ensure progress in these areas in order to assure continued international support for assistance to Cambodia. 11.~~ . -  Annex 35 - 131 - ASIANDEVELOPMENT BANK Statement on Financial Requirements (Pledging Session) Consultative Group Meeting- Cambodia Paris, 1-2July 1997 Mr. Chairman,Distinguished Ladiesand Gentlemen Delegates, 1. We have earlier noted that despite manyconstraints,substantialachievements on the macro-economicfront have been made. However,several critical concems cloud the economic horizon. These are political but have a major bearing on the sustainabilityof economic progress in the country. As a friend and partner in the country's development process, we would like to note a couple of such concerns. First, as underscored by our President in his joint meeting with the two Prime Ministers in late May this year, political stability and security are essential prerequisitesfor sustainable economic developmentin Cambodia. Second, we would like to emphasizethat politicalstabilitymust be reinforcedby good govemance and effective public resource management. Tax collection should be strengthened, specially recognizingthat the practice of ad hoc tax exemptions is a major deterrent in fostering confidencein the Govemment.Revenuesfrom forestry resourcesneed to be fully reflected in the national budget.It is crucialfor the Govemmentto demonstrateits determinationand capabilityto managetheseissuesin a transparent manner. 2. Tuming to Bank's operationsin Cambodia,our operationalstrategyfocuses on four priority areas: (i) rehabilitationand reconstructionof physical infrastructure,particularly road and power sectors, (ii) capacitybuildingand policy supportto facilitate the transition and developmentto a market-based economy,(iii) developmentof human resourcebase with an emphasis on primary education and basic health services, and (iv) natural resource management including sustainable forest management and coastal resources protection. Geographically, the Bank's strategycalls for a rural emphasis, securityconditionspermitting. The strategy also takes into accountsubregionalcooperation with neighboringcountries. 3. Since the resumptionof its operationin 1992,the Bank has provided9 loans for a total amount of $248 million. Bank supporthas been providedto priority sectors including inigation, road, powergenerationand distribution, watersupplyand sanitation,basic education and health. In addition, the Bank has providedtechnicalassistanceon a grant basis totaling some $39 million for projects with primary focus on capacity building at major Govemment institutions. 4. Subjectto satisfactoryperformance on projectimplementation and progresson the policy and govemanceissues discussedearlier, the Bank intends to continue Its strong supportto Cambodiaand pledges an annual lendingamountof about $90 million during each of the next three years. These will be at ADF, or concessional terms. In addition, the Bank plans to provide technical assistancegrants of about $9 million annually. Over 60% of such grants will be focused on capacity building efforts in project implementationand policy analyses. Thank you.  Annex 36 - 132 - Page 1 of 2 ConsultativeGroup for Cambodia 112July 1997 Paris GermanPledging (AGENDA Statement ITEMIV) Mr. Chairman, Ladiesand Gentlemen, Since the accessionof the Germangovemment to the Paris Treaties,we have resumed development co-operationwith Cambodiaand have committedconsiderable funds to the countrywithinthe framework aid efforts. We havealsotakenpart in all donor of intemational conferencesfor Cambodiasince then. The German govemmentand the Cambodian govemment haveagreed to concentratetheir co-operationon the followingthreefocalareas: - supportfor economic including reforms, the privatesector, strengthening - promotionof human resourcedevelopment, especially with regardto educationand health; - protection and sustainable use of natural resources and promotion of rural development,includingruralinfrastructure. Sincebilateralofficialdevelopment co-operationwas resumed in 1992,the FederalRepublic of Germany hasprovidedCambodia with considerable support, so that in this periodfundsto the tune of more than DM 125 millionhavebeen committed, i.e. about US S 73 million,of whichmorethan DM70 millionwas for financial co-operation, DM44 millionfor technical co- operationandmorethan DM 10 millionfor food security measures.We havealso beenable to provideall new commitments, includingthoseunderfinancialco-operation, in the form of grants. Moreover,in 1994 the Federal Republicof Germanycancelleddebts owed by Cambodiaas a result of earlier loans underfinancialco-operation to the tune of DM 16.4 million. Thelast roundof govemment negotiations on development co-operationwith Cambodiatook place in Germany in September1996. The next roundis scheduled for Septemberof this year and will take place in PhnomPenh. Consulations to preparethe negotitions were heldin Aprilof this year. The Germangovemment intendsto makea two-yearcommitment at this year'sgovemment negotiations, pledgingan amountof DM 22.0 millionto coverco- X1 ~~~~~~~~F..  Annex 36 - 133 - Page 2 of 2 operation in 1997 and 1998. The focal areas covered by our project commitments for this period will probably be education, health and family planning, and also rural development. In connection with our envisaged commitment for 1997 and 1998, however, we are working on the assumption that the Cambodian govemment will further intensify Ks efforts to combat illegal logging and protect natural resources. Moreover, the German government expects improvementswith regard to the transparency of govemment decisions and the fight against comuption. Finally, one last comment: our involvement in the forthcoming local and national elections in Cambodia will take the form of training measuresfor the electoralcommissions. Thank you. X~ . V  Annex 37 - 134 - Page 1 of 2 session IV Statement by the Danish delegation Denmark's contributionto the rebuildingof the Cambodian society is steadily growing, with a primary focus on regional and environmentalissues, human rights, free press, democracy and support for the upcoming elections. Since the Cambodia peace accord was signed in 1991, Denmark (Danida)has supportedthe reconstruction of Cambodia through a substantialtransitionalassistanceprogramme,expected to amount to a total of 345 mio. DKK or approximatly55 mio. USD. The transitionalassistanceprogrammewill run in Cambodia until 1998. In accordancewith the recommendations made by the UN Conference on the Environmentand Developmentin Rio in 1992, the Danish Governmenthas set up a special Environmentaland Disaster Relief Fund (EDRF). In this regard, it is expected that the Danish grant assistance to Cambodia will increase in the years to come. In May this year, a Memorandum of Understandingconcerningenvironmental assistancewas signed between our two governments,indicating the strong Danish commitmentto the sustainabledevelopmentof Cambodia. The programme will focus on the sustainableuse of natural resourcesand environmental protection in Cambodia.Poverty alleviation and support for local communitieswill play a key role in the activitiesunder the programme.For the first six years planning period, the programme is expected to amount to almost USD 20 mio. in grant assistance. The first EDRF project agreementon "CapacityBuilding in the Coastal Zones of Cambodiamhas already been signed between the Royal Government of Cambodia and the Governmentof Denmark. Hopefully, this will be the first of a number of activitiesto follow in the near future. ~~~~~Ir V~~~~~~~~~~~~~~~~  Annex 37 - 135 - Page 2 of 2 The rapid development in the region also leads to a number of increasing, and complex, environmental issues of a transboundary nature and significance. This rapid economic development and growth requires exploration of natural resources with effects across national boundaries. A forward- looking policy preempting conflicts over natural resources is a prerequisite for sustainable economic development and poverty alleviation in South East Asia. Thus, in addition to country specific activities and programmes, the Danish environmental assistance in South East Asia will be based on strengthened regional activities. Activities under the regional programme, covering Lao PDR, Cambodia and Vietnam (the lower Mekong region) are expected to amount to up to USD 100 mio. during the first six year planning phase. Mr. Chairman, on behalf of the Government of Denmark, I wish to express the hope that these new opportunities will provide a platform for a further strengthened and mutually fruitful cooperation in the future between Cambodia and Denmark. In conclusion, Mr. Chairman, I am pleased to announce that in order for Denmark to continue to take an active role in the reconstruction of Cambodia disbursement of USD 2.9 mio. will be made available for 1997. 117  - 136 - Annex 38 Page 1 of 2 Consultative Group Meeting for Cambodia Paris, 1-2 July 1997 Belgian Statement Mr. Chairman, First of all, on behalf of the Belgian Administrationfor DevelopmentCooperation (BADC), I would like to thank the CambodianGovernmentand the World Bank for the outstanding documentsand usefull informationwe receivedduring this conference. Together with the other developmentpartners of Cambodiawe had the opportunityto get better acquaintedwith the recent socio-economicdevelopmentsof Cambodia, to hear the Government's strategyand to see how the communityof developmentpartners deals with the developmentneeds. Reading the documentsfrom the CambodianGovernmentand the World Bank, the Belgian Governmentis impressedwith the progressachieved during the last years of macro- economic stability,economic liberalizationand market reform, but at the sametime, it shares the concerns expressed by most of the delegationsduring the morning sessions. The CambodianGovermnentis now facing new challengesby setting an ambitiousgoal to reduce poverty significantlyand enhance economicand social welfare, and by entering as a new member the ASEAN-organisationin a few weeks. The emphasisof the Belgian cooperationis put on poverty alleviation,conflictprevention and society building with related projects in the field of basic health, agricultureand education, small and medium-sizedentreprises, gender issues, social economics and small basic infrastructure. To strenghten and concentrate our efforts, the numberof countries and multilateral institutionswe are cooperatingwith, will be reduced. At the same time some few new project countries will be taken into account. I am glad that I can confirm here that Cambodiais consideredas one of these new project countries. A cooperationsection will be opened in Phnom Penh before the end of the year. The cooperationbetween Belgium and Cambodiais rather young. iLT  Annex 38 -137 - Page 2 of 2 On the contrary technical assistanceto the former Mekong Committeehas been provided since a long time. Belgiumhas (co-)financedseveral studies and has contributedsince 1991 to the Navigation ImprovementProgramme in the form of expert services. As to the bilateral cooperationwith Cambodia, BADC offers commodityaid for a total amount of 50 mio BEF in the form of the supply of electrical equipmentfor Phnom Penh, as well as technical assistanceand training regarding these deliveries. Furthermore BADC contributes in two ways to the CMAC-DeminingProgranmme: - a contribution in kind of about 45 million BEF through the technical assistanceof Belgian qualifiedexplosive ordnancedemolitionpersonnel; - a contribution in cash of 30 million BEF to the UNDP-TrustFund for CapacityBuilding in DeminingOperationsin Cambodia. Since 1993, Belgium has also provided food aid for an amountof about 2 mio US $. As to indirect aid, Belgiumcontributes to some multilateralprojects such as the WHO projects and the FAO projects in the field of preservationof the ecologicalsystem and reforestationof the Tonle Sap Forest, as well as the environmentalprotectionof the Angkor-region. Belgium also contributes to some NGO-projectsof which the health project for the SIem Reap area of MedecinsSans Frontieres, is the most important. In the future, oppportunitiesof cooperation,asfor examplean integratedproject in an area still to be defined, could be considered,but no budgethas yet been decided as the cooperation section in Phnom Penh still has to be installedlater this year. Regarding a possible support to the organisationof the forthcomingelections,the Belgian strategy will be in line with the strategy of the European Union and the other develoment partners. This support might take the form of a contributionto a joint action.  Annex 39 - 138- Page 1 of 2 CAMBODIA CONSULTATIVE GROUP MEETING FYOR PARIS 1-2 JULY 1997 SWEDISH PLEDGING STATEMENT As I said in the general discussion yesterday, Swedish assistance to Cambodia is covered by a two-year agreement in force from January 1997. It focuses on rural development, basic education, mine clearing and promotion of human rights. The long term objective is poverty alleviation. As we see it, this objective can only be achieved under basic conditions of human rights and justice, and reasonable political stability. The preconditions for the Cambodia-Sweden development cooperation will be reviewed at the end of 1998, considering not only the election process, but also progress in important areas such as mobilization of domestic revenue, promotion of human rights and rule of law, demobilization of armed forces and introduction of administrative reform. Swedish assistance is channelled through UNDP, IJnicef, ILO and other organisations, considered efficient under present conditions. It helps to keep the number of interfaces low, to the benefit of Cambodia's hard pressed management staff. Sweden has committed 160 million Swedish kronor (app 21 musd) for the Cambodia program for 1997 and 1998. Main areas in the present country program are: * rural development in 5 provinces (Carere project through LTNDP,Rural roads through ILO), * basic education through Unicef, * mnine clearance, mainly through the UN Trust Fund for support of CMAC, * training of civil service staff and support to research and development through the Cambodia Development Resource Institute Under consideration: * support to Acleda rural credits through UNDP and ILO * support to Development of Rural Road Maintenance capacity through 11O * support to the elections through UN Trust Fund * drinking water policy development through IBRD and UNDP * continued suppport to Carere rural development project * continued support to basic education through Unicef. * support to the envisaged demobilization project Tr . .,  Annex 39 - 139 - Page 2 of 2 Outsidethe regularCambodiaprogramand financedby additionalfunds,Sweden promotes humanrights and democracythrough a contributionto the UN Centre for HumanRights. We also back SwedishNGOsthat cooperatewith Cambodianpartners. with the HDA A second balanceof payrnentssupport in co-financing maybe considered,dependingon the politicaldevelopmentat large and on Cambodiataking necessaryaction in economicreformand revenuemobilization. 1T V  Annex 40 - 140 - Page 1 of 2 CAMBODIA CONSULTATIVE GROUP MEETING Paris, France July 1-2, 1997 Statement bv International FbnanceCorporation edgiS Kip Thompson Acting Manager Asia Department InternationalFinance Corporation (IFC) Mr. Chairman and DistinguishedDelegates: Thank you for another opportunity to address this meeting. As discussed in IFC's opening statement, the Corporation is primarily not a donor agency. As such, we are usually not in a position to indicate how much assistance we expect to provide to Cambodia in the coming years. However, I would like to take this opportunity to provide you with a brief overview of IFC's proposed activities in Cambodia. In general, IFC would support private sector development in Cambodia by working in five key areas: First, we will strive to help Cambodia to attract and implement larger, international standard projects, such as the recently approved Angkor Novotel Hotel, by providing long-term, commercial financing for such projects. By supporting viable private sector projects and by catalyzing investments from other sources without relying on goverrnment guarantees, we hope to demonstrate that good, long-term, private investmentscan be made in Cambodia. Second, we will continue to play an active role in advising the Government on some broader issues related to the development of the country's private sector. In this regard, we will continue to provide the Government with both formal and informal technical assistance and advice on issues related to private sector development. For example, we are currently initiating the second phase of our work for the National Bank of Cambodia to help prepare the Foreign Trade Bank for privatization. Third, we expect to support smaller private sector projects with long-term financing through the IFC Small Enterprise Fund which was recently establishedfor a number of challenging countries, including Cambodia. This fund was established to increase IFC's ability to finance smaller companieswhich was limited under our IF -- ,. ..  Annex 40 - 141 - Page 2 of 2 regular investment program. It has also enabled us to dedicate more IFC staff resources to Cambodia, which should help us to identify and develop attractive private sector projects. Fourth, we will also help develop small and medium sized businesses in Cambodia through the IFC-managed, donor funded Mekong Project Development FacUity (MPDF) which recently established to work in Cambodia, Laos and Vietnam, MPDF will assist entrepreneursin developing viable business plans and will provide technical assistance and training to enterprises, financial institutions and local consulting firms. IFC is also contributing$5.0 million to MPDF's five- year, $25.0 millionbudget. Finally, through the Foreign InvestmentAdvisory Service (FIAS), which is jointly sponsored by the World Bank and IFC, we hope to extend technical assistance to the Government to help it better attract foreign direct investment. Presently, FIAS is proposing a study to review the current incentive system for attracting foreign investment to Cambodia and to monitor the implementation of approved foreign investmentprojects. Once again, thank you for the opportunityto address this meeting. fin .  Annex 41 - 142 - Page 1 of 4 CAMBODIACONSULTATIVE GROUPMETING Paris, July 1-2,1997 ConcludingRemarksby the Cbairman Mr. Javad K. Shirazi The World Bank Your Excellencies, Delegates,Ladies and Gentlemen. Many delegates haveremarked that our discussionshave been unusuallyfrank over these two days, a conclusionI welcomeand endorse. My attemptto summarize what has been said here cannot capturethe full range of views, nor the careful construction of your interventions. I am encouragedin my task, however, by the convergence of views on the key issues, which will serve here as a way to organize what I have heard from you over our five sessionsof discussions. Consideringthe difficult conditionsin Cambodiaover the last year,including floods and many pressuresto expand expenditures,delegateswere uniformly impressed with macroeconomicmanagementand the economy's growth performance. The constancy and disciplineof fiscalmanagementin particularcontainedinflationary pressures in 1996 and reducedinflationin 1997. The exchangerate remained stable, and the current account deficitwas financedwithoutjeopardizingCambodia's future creditworthiness. In this stabilizedenvironment,the economy continuedto grow rapidly, reaching nearly 7% last year. Such a performancedeservesthe accolade "remarkable" when compared to other countries facing similar circumstancesof post - conflict reconstructionand recovery. Recalling the discussionsof last year's CG meeting,delegatesbroadly observedthat the Government'sperformancein severalareas had proved disappointingcomparedto the expectationsgeneratedin Tokyo. Shortfallswere stressed for the followingareas: * effective steps to improve fiscalmanagement,specificallymeasuresto improve revenue performance,havenot been forthcoming,with adverse implicationsfor social sectorprograms; * managementof Cambodia's forestryresourceshave not yet produced tangible results in the controlof logging activities; • civil servicereform and military demobilizationhave not progressed beyond initialplanning and conceptualization;and • and the expected improvementsin transparencyand accountabilityin economicmanagementhave not materializedand in some respects govemance has deteriorated. These shortfalls,delegatesobserved,threaten to dilutethe gains from successful stabilizationand growth, erode the chancesfor sustainedlong term T- . .I  Annex 41 - 143 - Page 2 of 4 development, andto undermine the goodwillof the intemational community toward Canbodia. In this context, severaldonorshighlighted the reformsin tax policy and forestry management which the Governmenthad committedto undertake,but so far not carried out, as prior actions for the third year IMF programunder ESAF. Donors urgedthe Governmentto implementthese reforms speedily to pave the way for a resumption of the ESAF process. Delegates acknowledgedthat politicalfactors have played and will play a pivotal role in Cambodia's economicand social performance. Although it is NOT our custom at these meetingsto address political issues,delegateswidely expressed disquiet over rising political tensionsand episodesof conflict that threatenedto undermine political and economicstability. Political stability and physical securityare key prerequisitesfor development. Tbey shape investor expectations and donor outlooks, and set the overall enabling environment for private sector led growth. Thus, delegateswelcomedthe announcements by the CambodianDelegationconcerningthe scheduling of national elections for next May and the plans to resumeNational Assemblysessions. Delegates acknowledgedthat sustainingmacroeconomnic and political stability will be highly challengingtasks in the year leading to elections,and that this will place heavy but unavoidabledemandson Cambodia's leadership. The stakes are high, but Cambodia's leadershipcannot afford to take time off from the task of national reconstruction and economnic management. Let me turn now to the major economicthemes of our discussions. Delegates were unanimous in their call for a revitalizationof the reform process. In that regard, an issue of strong interest to delegateswas fiscal management,specificallythe deteriorating performancein revenuemobilization. That single statistic - declining revenue effort - carries with it many implicationsand concerns. It was also noted that sound macro management,includingrevenuescollectedand channeled to public programs, is an anchor of political stability. Delegatesalso noted that declining revenueperformance would raise donor concernsthat their resources would only substitute for Cambodia's own revenues,and entrench its dependenceon increasinglyscarce donor assistance. At the same time decliningrevenueswould raise doubts among investors about growth prospects, and compel the contraction of vital expenditures in the econornicand social sectors,an already visible result. Delegates singled out severalcontributingcauses for the revenueshortfall: underpriced logging concessionsand illegal logging;other monopoly rights and land leases given without payment to the budget; grantingof tax exemptions;and lax tax enforcemnent and collections. This weak governanceand transparencyreceived wide ranging and concemed commentfrom delegates,due to the scale of the problem and its negative impact on expenditures. Somedelegatesexpressedthe view that, if left unaddressed, issues relating to corruptionand lack of transparencywould affect negatively future donor assistance. Xl ., -...... .. _ ._,.1  Annex 41 - 144 - Page 3 of 4 Therewas broad consensuson some of the measures necessaryto improve the situation in the near term and to fulfill expectations from the Tokyo CG. First, the Law on Taxation must be vigorously enforced. Second, the generous tax exemptions granted under the Law on Investment, as well as other ad hoc exemptions, must be eliminated. To provide the legal basis to remove these exemptions, the long delayed implementing regulations for the Law on Investmentmust be approved. At issue again is the question of political comxnitmnent to enforce Cambodia's revenue and tax systems and to channel revenues to priority development programs. The Government indicated its determination to deepen the tax base and to achieve 1997 targets for tax collection by the end of the year. A second area of concem is the management of natural resources, in particular the unsustainable exploitation of Cambodia's forestry resources. The Government noted that some progress had been achieved since the last CG meeting in Tokyo. The National Committee on Forest Policy Reform had been established. The mobilization of technical assistance to help the Government better manage forestry resources is nearly completed, and there is growing awareness in the Royal Government that improved forestry management will yield concrete and immediate benefits to Cambodia's budget, economy, and environment. While welcoming the intentions of the Government, delegates viewed these actions as delayed and short of the high expectations generated at the Tokyo CG last year. Delegates called for more effective controls over illegal logging and for full market pricing in logging concessions. In addition, closer monitoring of logging practices and the strict enforcement of more sustainableharvesting practices would be practical near term steps to bring uncontrolled and illegal logging into a sustainable framework. The Government indicated its intention to address these tasks and to transmit the urgency of donor concerns to higher authorities. Delegates raised other issues of note. The framework of aid coordination was judged to be developing well in Cambodia, due to the Government's creation of coordinating bodies at the national and sectoral level. Delegates supported the strengthening of Canbodia's aid coordination capacities, reaching down to the local level, so that ultimately, the Governmentwould assume full responsibility for this crucial function. The Govermmentexpressed its intention to improve the effectiveness of aid through better monitoring and auditing of foreign assisted projects. In regard to the CG process itself, delegates strongly supported the continuation of the annual meetings. They offered their compliments to the Cambodian Govemment for its professional approach to the CG meeting. As in 1996, delegates again expressed their interest in the acceleration of agricultural productivity, improved rural social and economicservices, and better maintenance of the growing rural transport network. The Government has articulated the high priority of rural developmentand poverty reduction, which delegates were eager to support in their assistance programs. However, delegates registered the need to translate these developmentpriorities into concrete programs and expenditures. i- F r -  Annex 41 - 145 - Page 4 of 4 Regarding financialsupport for Cambodia'sreconstructionand development efforts, donors "pledged"about USS450 million,with one donorindicating, whileits aidwill be substantial, it doesnot wishto providea precisemagnitude at this time. Manydelegatesindicatedthat politicaland economic developments in Cambodia in the comingyearwill havea bearingon theextentto whichthese indications of aid flowswouldbe realized. In conclusion, let me saythat I havebeen struckby thetwo differentmessages fromdelegates:one of hope and continuedsupport;and the otherof disappointment over slow,or lack of, progressin severalkey policyareasand uneaseaboutrising politicaltensions. This message,althoughdivided,is complementary. It reinforces the suggestionthat Cambodia standsat a crossroads, not onlyin chartingits futurebut also in maintaining strongintemational supportfor its efforts. This forthcoming CGcycle willbe a decisiveonein that regard,as it unfolds over the eventfulyearbeforeus. I knowthat I speakfor all delegates in urgingthe Government at thehighestlevelsto undertake the reformsand commitments discussedherein Paris,so that Cambodia will be assuredof its rightfulplace in SoutheastAsiaandeamthe strongand continuingsupportfromCambodia's internationaldevelopment partners. Thankyou. mu-r -r  Annex 42 146 - Page 1 of 2 U 7W97 2:09 PM - _5 £ I The World Bank European Office: 66, avenue d'Iena, 75116 Paris, France Contacts: Raymond Toye - (33 1) 40 69 30 28 Graham Barrett (1) 202- 458-0344 Donors Call for Revitalized Reform Effort in Cambodia Press Statement following the Second Consultative Group Meeting for Cambodia, Paris July 1-2, 1997. Paris, July 2 -- The Royal Governmentof Cambodia and its aid donors concluded today the second Consultative Group (CG) meeting for Cambodia. This first such meeting was held in Tokyo in July 1996. The Cambodiandelegation was led by His Excellency Keat Chhon, Senior Minister in charge of Rehabilitation and Development, Minister of Economy and Finance. The meeting was chaired by Mr. Javad K. Shirazi, East Asia and Pacific Region, the World Bank. While welcoming strong macroeconomicperformance over the past year and progress in implementing some reforms, donors called upon the Governmentto revitalize the reform process. Slippage in implementationof key reforms was a widely vocalized concern of the delegates. The donors commended the Royal Government for its success in the last few years in generating strong economic growth and in stabilizing the economy. The economy's performance in 1996 was impressive; growth accelerated to about 7 percent; inflation was kept in single digits; and the exchange rate remained stable. These achievements, donors noted, came under difficult economic and political conditions. However, donors expressed concern that there had been shortfalls in carrying out the reform expectations generated at last year's CG meeting held in Tokyo. In particular, concerns were expressed about the weak performancein revenue mobilization, the slow progress toward implementing sustainable forestry practices, and in improving transparency and accountability in economic management. Donors recognized that current political conditions in Cambodia are having a direct effect on the implementation of the reform program. Thus, delegates welcomed the earlier announcements by the Cambodian delegation concerning the scheduling of national elections in May 1998 and the resumption of National Assembly sessions. The donors expressed their hope that the encouraging announcements from the Government delegation would yield a more stable environment which would be conducive to implementation of reformns and the continuationof economicprogress.  Annex 42 - 147 - Page 2 of 2 The Government reconfirmed its commitment to accelerate implementation of key reforms in revenue mobilization, expendituremanagement, sustainable forestry practices and administrative reforn. Donors welcomed these assurances, expressing the urgency of rapid implementation and follow through on existing commnitments.It was also noted that improved govemance and controls on corruption would be essential elements for the revitalization of reform. At the closing session, donors endorsed the Govemment's reconstruction and development objectives. In support of that program, a total of US$450 million was pledged by the donors for 1997/98. This amount of official developmentassistance does not include the financial support provided by NGOs. Many delegates indicated that political and economic developments in Cambodia in the coming year will have a bearing on the extent to which these indications of aid flows would be realized. In this context, the delegates noted Cambodia's political leadership has a critical role in the reform process. In his concluding remarks, Minister Keat Chhon welcomed the financial pledges by the donors for 1997/98, and assured the delegates that the concerns expressed a( the meeting are reflected in the Government's own policy documents, and that it will intensify its efforts to deepen and accelerate reforms. In regard to the CG process itself, delegates strongly supported the continuation of annual meetings for Cambodia. The Second Consultative Group meetingfor Cambodia was heldfrom July 1-2, 1997, at the World Bank's European Office, Paris. The meeting was attended by the delegations from Australia, Belgium, Cambodia, Canada, China, Denmark, France, Germany, Japan, the Netherlands, Norway, the Republic of Korea, the Russian Federation, Sweden, the United Kingdom, and the United States. The international organizations participating in the meeting included the Asian Development Bank, the European Union, the International Finance Corporation, the International Monetary Fund, the United Nations Development Program, and the World Bank. Representativesfrom the A,SEAN(represented by Malaysia), NGOs, and the OECDparticipated as observers.  - 148 - Annex 43 Page 1 of 2 Banquet Mondiale 6-.. hE-ropden TdIAphon*t Ii 40693000 BANQUET INTERNATIONALE POUR LA RECONSTRUCTION ET LE OeVELOPPEMENT 751,a Pa, *.anc. YTjc*V 40651 F ASSOCIATION INTERNATIONALE DE OtVELOPPEMENT Paris, July 2, 1997 HRH Prince Norodom Ranariddh H.E. Samdech Hun Sen First Co-Prime Minister Second Co-PrimeMinister Royal Government of Cambodia Royal Govermnentof Carnbodia Phnom Penh, Kingdom of Cambodia Phnom Penh, Kingdom of Cambodia Dear Co-Prime Ministers, I would like to thank you for your letter of June 16 in which you outlined some of the steps that Cambodia is taking to address the concerns of the international donor community. We have today concludedthe second meeting of the Consultative Group on Cambodia and the participants specificallyrequested that. as Chairman. I should bring to your attention the major conclusionsof this important meeting. I am sure that H.E. Keat Chhon, who ably led the Cambodiandelegation, will report to you in detail on the meeting. In this regard, I attach for your information a copy of the Chairman's concluding statement, which was adopted at the meeting. Let me highlight some of the major conclusions. The delegates uniformly recognizedthat Cambodia has faced daunting economic challenges and a complex political situation, and were genuinely impressed with the able efforts of the Government to sustain strong economic growth and low inflation. The delegates congratulated the Government for remarkable progress made in reconstruction under difficult conditions. They also welcomedthe Royal Government's announcementthat it will hold national elections in May 1998 and resume shortly National Assembly sessions. However, it is also my task to convey to you the deep sense of concem that permneated the discussions at the meeting. As developmentpartners of Cambodia, the donors particularly focused on three concems. First, steps to improve the revenue effort have yet to be satisfactorily implemented. Second, management of Cambodia's forestry resources have not yet produced tangible results in the control of logging activities. And, third, the expected improvementsin transparency and accountability in economic managementhave not materializedand, in some respects. governancehas deteriorated. in .  Annex 43 - 14~- Page 2 of 2 Thus, the meeting conveyed two distinct but mutually reinforcing messages: the first one centered on hope and continued support for Cambodia's reconstruction and development effort; and the second was one of disappointmentover slow or non-progress in certain reform areas and unease about rising political tensions. It was also the view of the meeting that progress on both of these fronts and more broadly, on revitalization of reforms, could only be secured through your personal conmuitmentsand leadership. As one prominent delegate observed, "the Cambodian leadership cannot afford to take timneoff from the task of national reconstruction." Accordingly, while the meeting elicited pledges of about US$ 450 million for 1997/98, delegates noted that it would be increasingly difficult for them to justify to their own governments and taxpayers this level of assistance without the Cambodian Government taking firmn and timely steps to deal with the major issues raised by the donor conmnunityand sunmmarized in the Chairman's concluding statement. The meeting felt that your strong leadership and commitment were required to maintain macroeconomic stability and address, in a firm manner, Cambodia's pressing development problems, particularly in the fothcomingyear leading up to the elections. With assurances of my highest consideration, Javad Khalilzadeh-Shirazi Chairman Cambodia Consultative Group Meeting, 1997 .. v. - .... K