Cambodia - Country assistance strategy

Document of The World Bank Report No: 20077-K1H MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ONNA COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE KINGDOM OF CAMBODIA February 7, 2000 Southeast Asia and Mongolia Country Unit East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Eftective January 3 1. 2000) Currency Unit Cambodian Riel (RI) RI I = US$0.00026 US$1 = RI 3,795 FISCAL YEAR January I-December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADB - Asian Develo ment Bank ASEAN - Association ofSoutheast Asian Nations AusAID - Australian Agency for International Development CAS - Country Assistance Strategy CARERE - Cambodia Areas Regeneration and Rehabilitation CDF - Comprehensive Development Framework CG - Consultative Group CIDA - Canadian International Development Agency DFID - Department for International Development (UK) EC - European Commission EDC - Electricite de Cambodge FDI - Foreign Direct Investment FIAS - Foreign Investment Advisory Service GDP - Gross Domestic Product IDA - International Development Association IDF - Institutional Development Fund IDP - Internally4displaced People IFC - International Finance Corporation ILO - International Labor.Organization IMF - International Monetary Fund IOM - International Organization for Migration LIL - Learning and Innovation Loan MEF - Ministry of Economy and Finance MIGA - Multilateral Investment and Guarantee Agency MOP - Ministry of PlanninR MWVA - Ministry of Women and Veterans' Affairs NBC - National Bank of Cambodia NGO - Nongovernmental Organization NPL - Nonperforming Loan ODA - Official Development Assistance PAP - Priority Action Program PASEC - Progamme d'appui au secteur education au Cambodge PER - Public Expenditure Review PPI - Private Participation in Infrastructure PRASAC - Programme d'appui au secteur agricole au Cambodge PRGF - Poverty Reduction and Growth Facility PRSP - - Poverty Reduction Strategy Paper RCAF - Royal Cambodian Armed Forces SIDA - Swedish International Development Agency SME - Small and Medium Enterprises SOE - State-owned Enterprise SWAP - Sector-wide Approach TA - Technical Assistance UNDP - United Nations Development Programme UNESCO - United Nations Scientific and Cultural Organizaticr UNHCR - United Nations High Commission for Refugees UNICEF - United Nations Children's Fund UNWFP - United Nations World Food Programme VAT - Value-added Tax WBI - World Bank Institute WHO - World Health Organization IDA IFC Vice-President Jean-Michel Severino, EAPVP Jemal-ud-din Kassum, CIOVP Country Director Ngozi Okonjo-lweala. EACSM Javed Hamid, CEADR Task Team Leader Natasha Beschorner. EACSM Wolfgang Bertelsmeier, CEAR3  - iii - CAMBODIA COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................. iv . THE DEVELOPMENT CONTEXT .I A. POLITICAL ECONOMY: THE CHALLENGE OF GOVERNANCE .I B. THE DIMENSIONS OF POVERTY: THE CHALLENGE OF ACCESS .4 C. SOURCES OF GROWTH: THE CHALLENGE OF OPPORTUNITY .9 D. RECENT E CONOMIC PERFORMANCE .11 II. THE DEVELOPMENT AGENDA AND MEDIUM-TERM PROSPECTS .................................................... 13 A. CAMBODIA'S DEVELOPMENT PRIORITIES ............................................................................... 13 B. MEDIUM-TERM DEVELOPMENT PROSPECTS AND THE EXTERNAL ENVIRONMENT .................................................... 13 III. TACKLING THE AGENDA: A PARTNERSHIP APPROACH .................................................................... 16 V. PROPOSED WORLD BANK GROUP ASSISTANCE PROGRAM .............................................................. 18 A. LESSONS FROM EXPERIENCE ............................................................................... 18 B. CAS CONSULTATIONS ............................................................................... 19 C. CAS OBJECTIVES AND APPROACH ............................................................................... 20 D. PROPOSED CAS PROGRAM AND ACTIVITIES ............................................................................... 22 E. CAS SCENARIOS ............................................................................... 27 F. MONITORING AND EVALUATION FRAMEWORK ............................................................................... 28 G. MANAGING RISKS ............................................................................... 29 STATISTICAL ANNEXES ANNEX 1. CAMBODIA AT A GLANCE ............................................................................... 31-32 ANNEX 2. SELECTED INDICATORS OF PORTFOLIO PERFORMANCE AND MANAGEMENT ................................................ 33 ANNEX 3. BANK GROUP PROGRAM SUMMARY ............................................................................... 34-35 ANNEX 4. SUMMARY OF NONLENDING SERVICES ............................................................................... 36 ANNEX 5. CAMBODIA SOCIAL INDICATORS ............................................................................... 37 ANNEX 6. CAMBODIA- KEY ECONOMIC INDICATORS ............................................................................... 38-39 ANNEX 7. CAMBODIA- KEY EXPOSURE INDICATORS ............................................................................... 40 ANNEX 8. STATEMENT OF IDA'S COMMITTED AND DISBURSED PORTFOLIO ................................................................ 41 ANNEX 9. CAS DIAGNOSTIC MATRIX ............................................................................... 42-50 ANNEX 10. CAS SUMMARY OF DEVELOPMENT PRIORITIES . ............................................................................ 51 ANALYTICAL ANNEXES ANNEX A. POVERTY PROFILE ............................................................................ 53 ANNEX B. GENDER PROFILE ............................................................................ 55 ANNEX C. LAND, LIVING CONDITIONS AND VULNERABLE GROUPS ASSESSMENT: CONSULTATIONS WITH POOR COMMUNITIES ............................................................................ 61 ANNEX D. DEBT SUSTAINABILITY ANALYSIS ............... ................................. . .......................... 79 ANNEX E. PRIVATE SECTOR ASSESSMENT ............................................................................ 85 ANNEX F. PORTFOLIO AND FINANCIAL MANAGEMENT ISSUES ............................................................................ 99 ANNEX G. CAS CONSULTATIONS AND CLIENT FEEDBACK SURVEY ........................................................................... 104 MAP IBRD NO. 28781   - Iv - Cambodia Country Assistance Strategy Executive Summary i. Background and Prospects. In many respects, these are hopeful times for Cambodia. The country is at peace, the economy is stabilizing, and recent economic performance is promising. Communities are slowly being rebuilt and the country's cultural heritage is being rediscovered. With its accession to ASEAN, Cambodia is redefining its political and economic position in the region. Yet Cambodia faces a formidable array of development challenges. This is a post-conflict country where many of the foundations for growth and development-physical, social, human, and economic-have been shattered and need to be put back in place. Annual per capita income is $290. Over one-third of the population live below the poverty line, 90 percent of them in rural areas. They lack voice and access to services and opportunities. Both human and physical capital have been depleted by decades of conflict, resulting in severe capacity constraints, and social indicators are among the worst in the region. Social capital, destroyed by conflict, also has to be restored, and trust in public institutions re-established. Allegations of corruption and impunity are widespread. The private sector, the driving force behind the country's economic recovery in rural and urban areas and essential for poverty-reducing growth, is constrained by limited and high-cost infrastructure, uncertain land and property rights, limited access to credit, and a weak and unpredictable regulatory framework. ii. Cognizant of these challenges, Cambodia's leaders have pledged to improve the lives of the Cambodian people: to attack poverty and restore social and economic infrastructure.! They are working to build a stable macroeconomic framework and have made encouraging progress in raising revenues. They have launched difficult reforms in the public sector-fiscal management, civil service restructuring, and military demobilization-and have agreed to have these reforms closely monitored by local and international donors. An IMF Poverty Reduction and Growth Facility (PRGF) was approved in October 1999 to support these reforms; a complementary IDA Structural Adjustment Credit (SAC) is being presented to the Board with this CAS. Quarterly govemment-donor consultations, chaired by the Prime Minister, and recent contractual arrangements with a reputable international non-governmental organization (NGO) to monitor progress in forestry reforms are important indicators of a willingness to engage at the highest levels. Dialogue with private businesses and civil society is increasing. iii. Cambodia has the potential to exploit diverse sources of growth: agriculture, natural resources, light industry, and culture/tourism. Its ability to exploit these hinges partly on tackling its physical and human resources constraints but primarily on the government sustaining the momentum of the reforms. Although the reforms may take years to accomplish, they are essential for mobilizing investment and savings and putting Cambodia on a sustainable growth path that will help to reduce poverty. Under the "full reform macroeconomic scenario," as supported by the PRGF and SAC, Cambodia has committed itself to pursuing structural reforms in public finance and public sector management and improving its fiscal discipline, while making steady progress in institutional capacity-building, governance, and anti-corruption measures. This would greatly enhance the effectiveness of aid and would stimulate private sector development, leading to a steady 6 percent growth rate. Under this scenario, Cambodia could move out of the category of least developed countries within a decade. Provided the private sector responds fully to this improved policy environment and the regional recovery continues, per capita income could increase to US$440 and the level of poverty fall below 20 percent by 2005. iv. CAS Preparation. This Country Assistance Strategy (CAS) has been shaped primarily by inputs from and interactions with the government and key stakeholders. The objectives and strategic approach outlined below were endorsed during extensive and unprecedented in-country CAS consultations. The CAS also draws on a substantial body of analytical work completed during the past year, including a Public Expenditure Review (FY99), a Poverty Assessment (FY00) and specially-prepared notes on Gender, and Land, Living Conditions and Vulnerable Groups, the latter based on consultations with poor communities. A 'Royal Government's Platform on the Second Term, 1998-2003.  - v - Private Sector Assessment has been prepared with IFC. A portfolio overview includes a detailed assessment of project financial management issues and constraints (see Analytical Annexes). Sector strategy notes on health, education, agriculture/rural development, transport, water supply, forestry, the environment, and cultural heritage were also prepared. In addition, the CAS incorporates the results of a Client Feedback Survey carried out in August-September 1999. v. CAS Objectives. This is the third Cambodia CAS, the first to be prepared jointly with IFC. It furthers the broad objectives of the previous strategies (the last CAS was discussed by the Board on February 20, 1997) that focused on stabilizing the economy, rebuilding basic physical and social infrastructure and limited strengthening of institutional capacity in the immediate post-conflict environment. The main objective of this CAS is to help the authorities build the foundations for sustainable development and poverty reduction for the medium to long term. These foundations are: (i) good governance including an efficient and accountable public administration and a credible legal and judicial framework that safeguards basic human and property rights; (ii) greater access for the poor to basic social services and economic opportunities; and (iii) a policy environment that encourages private investment and entrepreneurship.Over the next four years, coinciding with the present government's term in office, the Bank Group will support an integrated package of measures to strengthen governance, improve physical infrastructure, rebuild human and social capital, and promote the long-term development of the private sector, including rural income- generation. Interventions will be largely targeted to rural areas where the majority of the poor live, including increasing access and opportunities for women. Capacity-building elements will be integrated into all interventions, with an emphasis on knowledge transfer and the development of long-term skills and leadership abilities. vi. Strategic Partnership Approach. These are ambitious goals in Cambodia's still fragile post- conflict environment. They will be difficult to achieve by continuing to rely on the conventional project- oriented approach of previous strategies. A stronger partnership with the government and others in the development arena, including donors, civil society, and the private sector, built on the shared goal of poverty reduction, is essential. To reinforce this point, the government has also delivered a strong message to its partners to work together in a more disciplined fashion to support its reform program and to build the capacity of its institutions to reduce the burden of aid coordination and management. Strategic partnerships should also increase the efficiency of aid utilization. In a climate of diminishing official development assistance worldwide, Cambodia will need to reduce its dependence on aid, which now accounts for 9 percent of its GDP. vii. While building on the lessons and achievements of previous strategies, this CAS thus differs substantially in its approach. Partnership is the central theme and strategic instrument. The Bank Group will make concerted efforts to formalize strategic partnerships in policy dialogue, analytical work, and the development and implementation of sector strategies under the government's leadership. Our resources would then complement financing from other partners. The CAS therefore paves the way for a gradual transition from an individual project-based to a more concerted approach based on shared sector strategies and expenditure programs. Sector-wide approaches (SWAPs) will be explored in priority areas-governance, infrastructure, health, and possibly education, to pilot this partnership strategy. In the initial stage of the SWAPs, the government will take the lead in refining or formulating sector strategies, share these with all partners, and then prepare expenditure programs to support them. Partners could then finance "slices" of these expenditure programs through their projects. A lead donor would coordinate technical and financial support in each area. For example, IDA would play this role in some of the proposed SWAPs. In others, donors such as the Asian Development Bank (ADB), the World Health Organization (WHO), the UN Development Programme (UNDP), and bilateral donors would take the technical lead. In a second stage of the SWAPs, development partners would work towards harmonizing project processing and implementation procedures to lighten the burden on the government of administering projects. viii. Given the difficulties involved in developing these shared expenditure programs and particularly in harmonizing procedures, it is likely that only the initial stage of the SWAPs could be developed during this CAS period. Successive CASs would carry the approach further. Moreover, since it would be too ambitious  - vi - to initiate SWAPs in so many areas, carefully targeted project support will also be provided outside the SWAP arrangement in other areas deemed important to the CAS objectives of increasing access and opportunities for the poor, especially in rural areas, until the capacity exists to support SWAPs in most areas. Developing SWAPs allows the CAS to adopt some of the principles of the Comprehensive Development Framework (CDF) that are useful to Cambodia but which can be adapted to its particular circumstances of serious institutional constraints in a multiple donor-NGO environment. ix. In light of the above, a priority in this CAS is to expand the Bank Group's field presence. A full- fledged country office will be opened in FY01, with increased responsibilities for policy advice, monitoring the government's reform program, collaborating with development partners and coordinating SWAPS where IDA will act as the lead technical donor. The office will also gradually assume responsibilities for portfolio monitoring, and more extensive dissemination about the Bank Group's activities. x. The Proposed Assistance Program incorporates the activities of the entire Bank Group. We expect to maintain a presence in many sectors during this CAS period for several reasons. First, Cambodia is a post- conflict country with enormous needs. Second, given the substantial presence of other donors and non- governmental organizations, there is a strong demand from the government and other stakeholders for IDA to play a coordinating and catalytic role over the short term, at minimum, to participate in policy and strategy discussions. Further, through the proposed SAC, IDA has to be in a position to track public expenditure, in particular sectoral budget allocations and disbursements. However, the CAS takes due account of the activities and financial commitments of other development partners. The scale and scope of Bank Group involvement will vary by sector, especially where other partners are taking the lead in assisting the government with SWAP preparation. The focus of IDA lending will be on rural infrastructure and rural development, health and education, with some fast-disbursing support for public sector/expenditure reform. More limited lending is envisaged in the areas of govemance-anticorruption and legal/judicial reform-and in capacity-building. Analytical work will be oriented primarily towards the SWAPs and advice on governance issues. We will also assist the Govemment in preparing its national Poverty Reduction Strategy Paper (PRSP), in collaboration with the IMF, beginning with an interim paper in FY01, and with related analytical work, moving to support a full-scale PRSP in FY02. As donor coordination and the govemment's capacity to manage aid improves, and the impact of policy reforms is felt, the Bank Group's involvement will become much more selective, so that in the next CAS, our resources can be concentrated more narrowly, but within a coherent overall strategic context. xi. A base case IDA lending program of $270 million is envisaged during FYOO-03. IFC loans will be incremental and demand-driven. Conditions for the base case are the maintenance of a satisfactory macroeconomic framework; successful implementation and systematic monitoring of priority structural reforms supported by the PRGF and the SAC; the completion of a Governance Action Plan and the implementation of priority actions; and the design and initiation of a pilot demobilization program for the military, which forms part of a broader public sector reform program. Satisfactory portfolio performance is also essential. Accelerated progress in reforms would trigger a high case lending scenario of up to $350 million, with increased fast-disbursing assistance. Policy slippage, deterioration in governance and renewed political instability would trigger a low case in which lending would be limited to $60 million over the four- year period, but intensive dialogue and analytical work would continue. xii. Monitoring Outcomes. More consistent and rigorous monitoring of development assistance and progress in the govemment's reform program, is a guiding principle of the CAS, since it is focused on poverty-reduction outcomes. The CAS outlines a preliminary two-tier monitoring framework comprising: (a) a set of economic and social indicators (outcome indicators) consistent with global development goals established by the international community. They will be further refined by the government and its development partners in the context of the SWAPs and of the planned PRSP; and (b) intermediate milestones, or indicators directly related to the Bank Group's dialogue and program with the government that would contribute to the achievement of the above-mentioned development outcomes. Milestones would also be used for self-evaluation.  - vii - xiii. Risks. Although external risks are significant, particularly because of Cambodia's reliance on exports, the principal medium-term risks are endogenous. If the government's political commitment is not sufficient to pursue reforms when they threaten powerful vested interests, if the reforms are delayed because of weak institutional capacity, or if social unrestor political instability recur, then Cambodia's medium-term prospects will be severely compromised. Some of these risks can be mitigated by concerted support by donors and by continued policy dialogue and close monitoring, with greater involvement by civil society. Other risks to the CAS program include weak project financial management and practical difficulties in implementing the partnership strategy, including the SWAPs, due to resource and capacity constraints. xiv. Agenda/Issues for Board Discussion. * Is the proposed partnership approach, and in particular the sector-wide approach, realistic? * Are the proposed lending scenarios and triggers realistic? * Is the proposed monitoring framework appropriate?  I. THE DEVELOPMENT CONTEXT A. POLITICAL ECONOMY: THE CHALLENGE OF GOVERNANCE 1. Cambodia is at peace. Political stability has been restored and democratic institutions are being rebuilt. This removes the biggest obstacle to poverty reduction-armed conflict-and has created an unprecedented opportunity for economic reform and social progress. After elections in June 1998, a new coalition government comprising the two major parties-the Cambodian People's Party and Funcinpec- took office in November 1998, led by Prime Minister Hun Sen. H.R.H. Prince Ranariddh, leader of Funcinpec, is the President of the National Assembly. Mr. Sam Rainsy leads the opposition Sam Rainsy Party. The next elections are scheduled for no later than May 2003. Cambodia has regained international recognition, having been given a seat at the United Nations in December 1998 and having been formally admitted to ASEAN in April 1999. Relations with neighboring Lao PDR and Vietnam are also being strengthened. A trial of former Khmer Rouge leaders is envisaged; the format of the trial is still under discussion. Civil society is becoming increasingly visible and engaged; there are now over 400 non- governmental organizations (NGOs) throughout the country. Relations between the various branches of government, democratic organizations, and civil society are complex and still being defined. For the key players, the challenge is to move away from the politics of confrontation to more constructive and participatory debate on social and economic issues. For the government, this entails recognizing political dissent as an effective part of the democratic process, and hence an opportunity, rather than a threat; for the Opposition, it means constructive engagement. 2. The next political milestone will be the commune elections, tentatively scheduled for late 2000 or early 2001. The government plans to bring public services closer to the people by deconcentrating ministerial functions to provincial authorities and decentralizing decision-making to communes. A three- tiered administrative structure comprising central government, provincial administration, and rural communes is to be established. Local government laws (Commune Administration and Commune Elections) are being drafted to create 1,600 commune councils countrywide. These councils are to be given formal responsibility for defining local development needs and the legal mandate to plan and implement projects and levy taxes. A parallel decentralization of budget responsibilities to provincial governors is also envisaged. These measures, if implemented as planned, would be a radical departure from the current administrative system under which local authorities are directly appointed and supervised by the central government, and the budget is directly administered by the Ministry of Economy and Finance (MEF). Decentralization, while desirable, entails some risks, as the functions of the central administration are still being consolidated. Despite the progressive provisions of the Constitution, women are still underrepresented at all formal levels of decision-making, as in many developing countries. Nationwide, fewer than 10 percent of all elected leaders are women. Under the proposed laws, however, each commune will be required to have a minimum number of women standing for election. 3. While conflict has ended, Cambodia's institutions of governance are still weak. This issue overshadows almost all of Cambodia's development problems. The caliber of public administration is poor as a consequence of the destruction of Cambodia's educational system and its educated elite in the 1970s and of years of political uncertainty. In its current condition, the administration is unable to deliver basic goods and services effectively. The civil service is overstaffed 2with about 160,000 civilian staff at the last count in 1995. Technical and managerial skills are weak, particularly in the areas of implementation planning and financial management. Functional responsibilities, formal accountabilities, and integrity structures are barely defined. Real wages in the public sector ($20/month on average) have fallen sharply in recent years as public sector employment has expanded rapidly beyond the capacity of national budget resources to pay salaries. Absenteeism is prevalent, largely because these wages are well below the poverty line or below sustainable household incomes (estimated at $200-300/month), although civil servants are by no means the poorest of the poor (see the next section). As a result, civil service productivity has deteriorated, and rent-seeking is widespread. It is not uncommon to find that a great deal of the technical and administrative work is being done by expatriates (including dual-nationality Cambodians from the diaspora) or local staff receiving salary 2 The overstaffing is in part a consequence of political reconciliation in 1993 due to the addition of political appointees from coalition partners and also due to the automatic recruitment of university graduates.  -2 - supplements from donors through project implementing agencies that have proliferated in the past several years. * Public administration is particularly weak at the provincial level, reflecting low staff skills, lack of budget resources and, in the case of some institutions, the most basic facilities3 At present, a large proportion of local planning is undertaken with the support of donors and NGOs, for example, under the CARERE/Seila program in Northwest Cambodia, which is supported by UNDP, or the PRASAC program, which is supported by the European Commission (EC).4 These are being considered as possible models for decentralization.